This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
Scudder Income Fund
Annual Report
December 31, 1994
* Offers opportunities for a high level of income consistent with the
prudent investment of capital.
* A pure no-load(tm) fund with no commissions to buy, sell, or exchange
shares.
CONTENTS
2 Highlights
3 Letter from the Fund's President
4 Performance Update
5 Portfolio Summary
6 Portfolio Management Discussion
10 Investment Portfolio
14 Financial Statements
17 Financial Highlights
18 Notes to Financial Statements
22 Report of Independent Accountants
23 Tax Information
25 Officers and Trustees
26 Investment Products and Services
27 How to Contact Scudder
HIGHLIGHTS
* Interest rates rose sharply in 1994, contributing to bond price
declines across all maturities. In this challenging investment
environment, Scudder Income Fund provided a total return of -4.43% for
the year ended December 31, 1994.
* Scudder Income Fund provided a 30-day net annualized yield of 7.15%,
up from 5.93% on December 31, 1993. During 1994, Scudder Income Fund
distributed a total of $0.76 per share in income dividends and $0.02
per share in capital gains.
* The Fund's management team shifted assets from mortgage-backed
securities to U.S. government bonds earlier in the year, but then
rebuilt mortgage-backed holdings later in the year as home
refinancings slowed and income from these securities stabilized.
* The Fund currently features a mix of short- and long-term holdings to
provide a combination of high relative income, investment flexibility,
and a measure of price stability.
* The Fund's average effective maturity declined to below 10 years in
1994.
LETTER FROM THE FUND'S PRESIDENT
Dear Shareholders,
The United States Federal Reserve raised interest rates six times in
1994 in an effort to bring economic growth down to a more sustainable
level. Investors, generally underestimating the scope and speed with which
interest rates rose, sent prices lower on a broad range of fixed-income
securities, resulting in the worst bond market since the 1920s. The Orange
County bankruptcy and Mexican peso crisis added to the bond market's woes.
The rise in interest rates poses a classic challenge for income funds:
to provide shareholders with the higher income now available from bonds
while protecting against an inordinate amount of price erosion. Although
the worst is probably over, interest rates may rise somewhat further in
1995. However, in the year ahead, we believe a combination of factors,
including the Federal Reserve's tightening efforts, will keep the economy
and inflation on a moderate course, which should ease the upward pressure
on rates. These developments ultimately should be viewed as favorable for
the financial markets, and we expect investors to begin focusing on
positive long-term fundamentals rather than short-term uncertainties.
Additional increases in interest rates may, of course, spark periods
of difficult adjustment for fixed-income markets. At times like these, it
is more important than ever to have a sound investment plan that can
weather market storms. The past year has demonstrated that virtually all
financial instruments, whether conservative or aggressive, are susceptible
to poor performance. But experience tells us that over the long term,
investors who have participated in the stock and bond markets have
accumulated far more wealth than those who have chosen to protect their
savings above all else.
If you have questions about your Fund or your investments, please
contact a Scudder Investor Relations representative at 1-800-225-2470. Page
27 provides more information on how to contact Scudder. Thank you for
choosing Scudder Income Fund to help meet your investment needs.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President,
Scudder Income Fund
Scudder Income Fund
Performance Update as of December 31, 1994
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
Scudder Income Fund
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $ 9,557 -4.43% -4.43%
5 Year $14,595 45.95% 7.85%
10 Year $25,230 152.30% 9.70%
LB Aggregate Bond Index
- --------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $ 9,708 -2.92% -2.92%
5 Year $14,464 44.64% 7.66%
10 Year $25,847 158.47% 9.96%
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly periods ended December 31
Scudder Income Fund
Year Amount
- ----------------------
84 10000
85 12180
86 13976
87 14079
88 15333
89 17287
90 18726
91 21968
92 23449
93 26399
94 25230
LB Aggregate Bond Index
Year Amount
- ----------------------
84 10000
85 12210
86 14074
87 14462
88 15602
89 17869
90 19471
91 22586
92 24258
93 26623
94 25847
The Lehman Brothers (LB) Aggregate Bond Index is a market
value-weighted measure of treasury issues, agency issues,
corporate bond issues and mortgage securities. Index returns
assume reinvestment of dividends and, unlike Fund returns,
do not reflect any fees or expenses.
- -------------------------------------------------------------------
Returns and Per Share Information
- -------------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly periods ended December 31
- ----------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
------------------------------------------------------------------------------
Net Asset Value... $12.82 $13.41 $12.40 $12.41 $12.89 $12.82 $13.91 $13.48 $13.71 $12.32
Income Dividends.. $ 1.29 $ 1.22 $ 1.10 $ 1.07 $ 1.06 $ 1.03 $ .92 $ .93 $ .87 $ .76
Capital Gains
and Paid-In Capital
Distributions..... $ -- $ -- $ -- $ -- $ -- $ .06 $ .14 $ .40 $ .57 $ .02
Fund Total
Return (%)........ 21.80 14.75 0.74 8.91 12.75 8.32 17.32 6.74 12.58 -4.43
Index Total
Return (%)........ 22.10 15.26 2.76 7.88 14.53 8.96 16.00 7.40 9.75 -2.92
</TABLE>
Performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results.
Investment return and principal value will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than when purchased.
Portfolio Summary as of December 31, 1994
- ---------------------------------------------------------------------------
Diversification
- ---------------------------------------------------------------------------
Corporate Bonds 31%
U.S. Gov't & Agencies 22%
Cash Equivalents 14% As home refinancings slowed,
U.S. Gov't Agency the portfolio's share of mortgage-
Pass-Thrus 14% backed securities increased as their
Foreign Bonds - U.S. yields improved.
$ Denominated 9%
Collateralized Mortgage
Obligations 5%
Asset-Backed Securities 5%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
Quality
- --------------------------------------------------------------------------
AAA * 60%
AA 10% The Fund focuses on high-quality
A 15% issues, with more than two-thirds
BBB 15% of the portfolio invested in bonds
---- rated AA or better
100%
====
Weighted Average Quality: AA
* Category includes cash equivalents
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
Effective Maturity
- --------------------------------------------------------------------------
Less than 1 year 23%
1 to 5 years 26% Nearly half the portfolio is invested
5 to 8 years 10% in bonds with less than five years to
8 to 15 years 18% maturity, an increase from 40% a year
Greater than 15 years 23% ago.
----
100%
====
Weighted average effective maturity: 9 years
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
For more complete details about the Fund's Investment Portfolio,
see page 10.
A monthly investment portfolio summary is available upon request.
Scudder Income Fund
Performance Update as of December 31, 1994
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
Scudder Income Fund
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $ 9,557 -4.43% -4.43%
5 Year $14,595 45.95% 7.85%
10 Year $25,230 152.30% 9.70%
LB Aggregate Bond Index
- --------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $ 9,708 -2.92% -2.92%
5 Year $14,464 44.64% 7.66%
10 Year $25,847 158.47% 9.96%
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly periods ended December 31
Scudder Income Fund
Year Amount
- ----------------------
84 10000
85 12180
86 13976
87 14079
88 15333
89 17287
90 18726
91 21968
92 23449
93 26399
94 25230
LB Aggregate Bond Index
Year Amount
- ----------------------
84 10000
85 12210
86 14074
87 14462
88 15602
89 17869
90 19471
91 22586
92 24258
93 26623
94 25847
The Lehman Brothers (LB) Aggregate Bond Index is a market
value-weighted measure of treasury issues, agency issues,
corporate bond issues and mortgage securities. Index returns
assume reinvestment of dividends and, unlike Fund returns,
do not reflect any fees or expenses.
- -------------------------------------------------------------------
Returns and Per Share Information
- -------------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly periods ended December 31
- ----------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
------------------------------------------------------------------------------
Net Asset Value... $12.82 $13.41 $12.40 $12.41 $12.89 $12.82 $13.91 $13.48 $13.71 $12.32
Income Dividends.. $ 1.29 $ 1.22 $ 1.10 $ 1.07 $ 1.06 $ 1.03 $ .92 $ .93 $ .87 $ .76
Capital Gains
and Paid-In Capital
Distributions..... $ -- $ -- $ -- $ -- $ -- $ .06 $ .14 $ .40 $ .57 $ .02
Fund Total
Return (%)........ 21.80 14.75 0.74 8.91 12.75 8.32 17.32 6.74 12.58 -4.43
Index Total
Return (%)........ 22.10 15.26 2.76 7.88 14.53 8.96 16.00 7.40 9.75 -2.92
</TABLE>
Performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results.
Investment return and principal value will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than when purchased.
Portfolio Summary as of December 31, 1994
- ---------------------------------------------------------------------------
Diversification
- ---------------------------------------------------------------------------
Corporate Bonds 31%
U.S. Gov't & Agencies 22%
Cash Equivalents 14% As home refinancings slowed,
U.S. Gov't Agency the portfolio's share of mortgage-
Pass-Thrus 14% backed securities increased as their
Foreign Bonds - U.S. yields improved.
$ Denominated 9%
Collateralized Mortgage
Obligations 5%
Asset-Backed Securities 5%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
Quality
- --------------------------------------------------------------------------
AAA * 60%
AA 10% The Fund focuses on high-quality
A 15% issues, with more than two-thirds
BBB 15% of the portfolio invested in bonds
---- rated AA or better
100%
====
Weighted Average Quality: AA
* Category includes cash equivalents
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
Effective Maturity
- --------------------------------------------------------------------------
Less than 1 year 23%
1 to 5 years 26% Nearly half the portfolio is invested
5 to 8 years 10% in bonds with less than five years to
8 to 15 years 18% maturity, an increase from 40% a year
Greater than 15 years 23% ago.
----
100%
====
Weighted average effective maturity: 9 years
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
For more complete details about the Fund's Investment Portfolio,
see page 10.
A monthly investment portfolio summary is available upon request.
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
In 1994, Scudder Income Fund experienced one of the most challenging
years in its long history. Bond markets in the United States and abroad
were roiled throughout the year as interest rates continued to climb. The
weak bond market set the stage for a decline in the Fund's net asset value
from $13.71 on December 31, 1993, to $12.32 on December 31, 1994. The price
decline was partially offset by a total of $0.76 per share in income
dividends and $0.02 per share in capital gain distributions during the
year. Combined, distributions and price change produced a -4.43% total
return for 1994, slightly ahead of the -4.64% Lipper average for corporate
high-quality and general U.S. government bond funds. Lipper Analytical
Services, Inc. is an independent analyst of investment performance.
The Fund's negative one-year return stands in contrast to its strong
record over longer periods. Over the past three, five, and 10 years, the
Fund reported average annualized total returns of 4.72%, 7.85%, and 9.70%,
respectively, consistently better than the Lipper average.
(BAR CHART TITLE) Scudder Income Fund Versus Corporate High-Quality and
U.S. Government Bond Funds
(Average annual total returns for periods ended
December 31, 1994)
(CHART DATA)
<TABLE>
<CAPTION>
Scudder Lipper
Income Fund Average
<S> <C> <C>
1 Year -4.43% -4.64%
(234 funds)
3 Years 4.72 3.84
(153 funds)
5 Years 7.85 6.80
(124 funds)
10 Years 9.70 8.95
(42 funds)
<FN>
Performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results.
</FN>
</TABLE>
(CALLOUT NEXT TO CHART) - Scudder Income Fund outperformed the Lipper
average for the one-, three-, five-, and ten-year periods ended December
31.
The Negative Impact of Rising Interest Rates
The most significant factor affecting the bond markets in 1994 was the
persistent rise in interest rates. The rate increases, which had started
slowly in October 1993, accelerated in February 1994, when the Federal
Reserve began a series of increases in short-term rates designed to slow
the economy to a more sustainable pace. Investors remained focused on the
prospect of higher inflation, however, and bond prices fell throughout the
spring months. At the same time, hedge funds and other highly leveraged
accounts sold large blocks of holdings to cover newly increased borrowing
costs, pushing bond prices lower. The weak U.S. dollar also negatively
affected the bond market. Early in the year, the dollar fell significantly
against the deutschemark and reached historic lows against the yen. A weak
dollar typically raises concerns of inflation through more expensive
imported goods.
Portfolio Strategy Emphasizes Short and Long Maturities
Throughout 1994, we managed the Fund to provide a competitive level of
income while also striving to reduce share price declines. A key part of
our strategy was the active management of portfolio maturities. Although
the Fund has the flexibility to invest in bonds of any maturity, the
majority of its assets historically have been invested in intermediate and
longer-term securities.
During the year, we concentrated the Fund's holdings on both short and
long maturities. In doing so, we helped the Fund capture the relatively
high income of longer-term bonds with a measure of the price stability and
investment flexibility of short-term securities. On December 31, 49% of the
portfolio was invested in bonds with less than five years to maturity,
while 23% was in bonds with effective maturities of more than 15 years. The
decline in our holdings of longer-term bonds from 37% at the start of the
year reflects our desire to safeguard the Fund's share price from the
effects of rising rates. In all, the portfolio's average effective maturity
was reduced from 12 years on December 31, 1993, to 9.3 years on December
31, 1994.
We also favored corporate non-callable bonds during the year (bonds
that cannot be redeemed at the option of the issuer). Non-callable bonds
allow us to maintain a more consistent level of income in the portfolio
when rates are falling, since they cannot be redeemed before maturity.
However, we believe non-callables are also attractive in the current
environment of rising rates, due to their intrinsically stable qualities
and favorable valuations.
In the first half of 1994, we increased the percentage of Treasury
securities in the Fund to help add stability in an uncertain bond market.
By the beginning of September, Treasuries accounted for 33% of the
portfolio, compared with 18% at the end of 1993. By the end of 1994,
however, the position in Treasuries was reduced to 22%. We used the
proceeds from the sale of these bonds to increase our holdings in
mortgage-backed securities, reflecting their improved prospects and
superior yields.
Considerable negative attention has been focused on derivatives
(financial instruments whose value is derived from or based on an
underlying security or asset). We are pleased to report that your
management team's limited use of carefully selected and widely recognized
derivatives helped protect the Fund against price declines related to
rising interest rates. Specifically, we sold futures contracts in 10-year
U.S. Treasury notes and 30-year U.S. Treasury bonds, which helped offset
price declines among our bond holdings. At the time, these transactions
represented approximately nine percent of the value of the portfolio.
(BAR CHART TITLE) Mortgage-Backed and Treasury Securities
(As a percentage of portfolio assets)
(CHART DATA)
<TABLE>
<CAPTION>
Mortgage-backed Treasury
securities securities
<S> <C> <C>
12/31/93 17% 18%
8/31/94 6 33
12/31/94 19 22
</TABLE>
(CALLOUT NEXT TO CHART) - Toward the end of the year, the Fund's share of
mortgage-backed securities had increased significantly, reflecting their
improved prospects and high relative yields.
A High-Quality, Flexible Portfolio
Scudder Income Fund is designed to offer investors a high-quality
investment vehicle. At least 75% of portfolio assets must be invested in
bonds rated A or higher. As of December 31, the Fund's average quality
rating was AA, with 60% of the portfolio rated AAA or invested in U.S.
government and agency issues.
The Fund does not invest in non-investment-grade "junk" bonds, although it
may hold as much as 25% of its assets in bonds of BBB quality, the lowest
investment-grade category. As of December 31, 15% of the portfolio was in
bonds of BBB quality. (Bonds are rated by Standard & Poor's, Moody's
Investors Service, or Fitch analysts.) In doing so, we focused on
higher-yielding corporate bonds of companies that in our opinion have
favorable underlying business prospects and may increase in value as a
result.
Looking Ahead
In 1995, we expect U.S. growth to continue at a moderate pace,
particularly in the first half of the year. We also believe that the bulk
of the Federal Reserve's efforts to control inflation and the pace of
economic activity by raising interest rates is behind us. However, upward
pressure may remain on rates due to the overall pace of global expansion
combined with the shortage of available investment capital, which has
caused capital-hungry nations to compete for cash by maintaining high
interest rates. That said, however, long-term interest rates could begin to
decline if economic growth slows later in the year. We will be watching
closely to determine the prevailing economic trends as 1995 unfolds. In
this uncertain environment, we believe Scudder Income Fund will be well
positioned to offer investors a high-quality choice for solid current
income and competitive total returns. As always, we encourage you to take a
long-term perspective when evaluating your Fund's performance.
Sincerely,
Your Portfolio Management Team
/s/William M. Hutchinson /s/Stephen A. Wohler
William M. Hutchinson Stephen A. Wohler
Scudder Income Fund:
A Team Approach to Investing
Scudder Income Fund is managed by a team of Scudder investment
professionals who each play an important role in the Fund's management
process. Team members work together to develop investment strategies and
select securities for the Fund. They are supported by Scudder's large staff
of economists, research analysts, traders, and other investment specialists
who work in Scudder's offices across the United States and abroad. We
believe our team approach benefits Fund investors by bringing together many
disciplines and leveraging Scudder's extensive resources.
Lead Portfolio Manager William M. Hutchinson has been responsible for
the Fund's day-to-day operations and overall investment strategy since he
joined Scudder in 1986. Bill has over 20 years of investment experience.
Stephen A. Wohler, Portfolio Manager, joined the team in 1994 and is also
responsible for implementing the Fund's strategy. Steve has over 15 years'
experience managing fixed-income investments and has been with Scudder
since 1979.
<PAGE>
<TABLE>
SCUDDER INCOME FUND
INVESTMENT PORTFOLIO as of December 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
13.5% COMMERCIAL PAPER
----------------------------------------------------------------------------------------------------
22,800,000 American Express Credit Corp., 5.85%, 1/3/95. . . . . . . . . . 22,800,000
19,313,000 Household Finance Corp., 5.9%, 1/3/95 . . . . . . . . . . . . . 19,313,000
22,800,000 Household Finance Corp., 5.82%, 1/5/95 . . . . . . . . . . . . 22,800,000
------------
TOTAL COMMERCIAL PAPER (Cost $64,913,000) . . . . . . . . . . . 64,913,000
------------
21.5% U.S. GOVERNMENT & AGENCIES
----------------------------------------------------------------------------------------------------
1,800,000 Resolution Trust Corp., Zero Coupon, 1/15/08 . . . . . . . . . 637,920
3,800,000 Resolution Trust Corp., Zero Coupon, 7/15/08 . . . . . . . . . 1,294,166
2,800,000 Resolution Trust Corp., Zero Coupon, 1/15/09 . . . . . . . . . 911,456
3,800,000 Resolution Trust Corp., Zero Coupon, 7/15/09 . . . . . . . . . 1,188,488
3,300,000 Resolution Trust Corp., Zero Coupon, 1/15/10 . . . . . . . . . 990,231
3,300,000 Resolution Trust Corp., Zero Coupon, 7/15/10 . . . . . . . . . 951,357
7,950,000 U.S. Treasury Bond, 7.875%, 2/15/21 . . . . . . . . . . . . . . 7,850,625
35,000,000 U.S. Treasury Note, 5.5%, 9/30/97 . . . . . . . . . . . . . . 33,036,850
14,000,000 U.S. Treasury Note, 5.75%, 8/15/03 . . . . . . . . . . . . . . 12,166,840
13,000,000 U.S. Treasury Note, 6.875%, 7/31/99 . . . . . . . . . . . . . . 12,512,500
35,000,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 5/15/09 (8.026% (b)) (c) . . . . . . . 11,295,550
27,000,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 8/15/09 (8.042% (b)) . . . . . . . . . 8,524,440
8,000,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 2/15/16 (8.088% (b)) . . . . . . . . . 1,498,880
33,000,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 5/15/16 (8.087% (b)) . . . . . . . . . 6,062,760
30,000,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 8/15/18 (8.073% (b)) . . . . . . . . . 4,625,700
------------
TOTAL U.S. GOVERNMENT & AGENCIES
(Cost $106,508,109) . . . . . . . . . . . . . . . . . . . . . 103,547,763
------------
14.4% U.S. GOVERNMENT AGENCY PASS-THRUS
----------------------------------------------------------------------------------------------------
54,300 Federal Home Loan Mortgage Corp. Participation
Certificate, 11.5%, 7/1/99 . . . . . . . . . . . . . . . . . . 57,032
24,881,663 Federal National Mortgage Association,
7.5%, 10/1/24 . . . . . . . . . . . . . . . . . . . . . . . . 23,233,252
23,000,000 Federal National Mortgage Association,
9%, 1/1/99 . . . . . . . . . . . . . . . . . . . . . . . . . . 23,115,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
24,173,436 Government National Mortgage Association,
8%, 7/15/24 . . . . . . . . . . . . . . . 23,108,112
------------
TOTAL U.S. GOVERNMENT AGENCY PASS-THRUS
(Cost $70,481,430) . . . . . . . . . . . 69,513,396
------------
5.3% COLLATERALIZED MORTGAGE OBLIGATIONS
---------------------------------------------------------------------------
13,938,255 Federal Home Loan Mortgage Corp. Separate
Trading Registered Principal Only, 5/1/99
(5.552% (b)) . . . . . . . . . . . . . . 10,993,799
15,000,000 Prudential Home Mortgage Securities Co.,
1993-4 Series A3, 7%, 2/25/24 . . . . . . 14,475,000
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $27,270,222) . . . . . . . . . . . 25,468,799
------------
9.1% FOREIGN BONDS - U.S. $ DENOMINATED
---------------------------------------------------------------------------
2,000,000 British Columbia Hydro & Power, Series GG,
15%, 4/15/11 . . . . . . . . . . . . . . 2,261,240
1,000,000 British Columbia Hydro & Power, Series FH,
15.5%, 7/15/11 . . . . . . . . . . . . . 1,161,350
1,000,000 British Columbia Hydro & Power, Series FF,
15.5%, 11/15/11 . . . . . . . . . . . . . 1,180,460
7,500,000 KFW International Finance Inc. guaranteed
note, 9.5%, 12/15/00 . . . . . . . . . . 7,911,525
10,000,000 Kingdom of Thailand, 8.7%, 8/1/99 . . . . 10,058,200
1,000,000 Province of Ontario debenture, 15.75%,
3/15/12 . . . . . . . . . . . . . . . . . 1,191,160
4,425,000 State Development Institute of Hungary,
10.5%, 8/31/00 . . . . . . . . . . . . . 4,734,750
16,554,000 United Mexican States Tesobonos,
U.S. Dollar Linked, 8/17/95 . . . . . . . 15,183,329
------------
TOTAL FOREIGN BONDS - U.S. $ DENOMINATED
(Cost $43,299,702) . . . . . . . . . . . 43,682,014
------------
4.8% ASSET-BACKED SECURITIES
---------------------------------------------------------------------------
AUTOMOBILE RECEIVABLES 1.0% 5,000,000 Capital Automobile Receivable Asset Trust,
Series A-6, 4.9%, 2/15/98 . . . . . . . . 4,918,750
------------
CREDIT CARD RECEIVABLES 1.5% 7,000,000 Standard Credit Card Trust, Series 1991-1A,
8.5%, 8/7/97 . . . . . . . . . . . . . . 7,061,250
------------
HOME EQUITY LOANS 0.5% 2,265,680 Fleet Financial Home Equity Trust,
6.7%, 10/16/06 . . . . . . . . . . . . . 2,199,835
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
SCUDDER INCOME FUND
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANUFACTURED HOUSING
RECEIVABLES 1.8% 8,500,000 Merrill Lynch Mortgage Investors Inc.,
"B", 9.85%, 7/15/11 . . . . . . . . . . . . . . . 8,701,875
------------
TOTAL ASSET-BACKED SECURITIES
(Cost $22,621,920) . . . . . . . . . . . . . . . 22,881,710
------------
31.4% CORPORATE BONDS
-----------------------------------------------------------------------------------
CONSUMER STAPLES 8.2% 5,000,000 Borden Inc., 7.875%, 2/15/23. . . . . . . . . . . . 3,659,200
15,000,000 Coca Cola Enterprises, Inc., 8.5%, 2/1/22 (c) . . . 14,706,000
2,450,000 Grand Metropolitan Investment Corp.,
8.125%, 8/15/96 . . . . . . . . . . . . . . . . . 2,454,582
5,000,000 RJR Nabisco Inc. Medium-Term Note,
5.25%, 9/15/95 . . . . . . . . . . . . . . . . . 4,902,450
15,000,000 RJR Nabisco Inc., 8.625%, 12/1/02 . . . . . . . . 13,912,950
-----------
39,635,182
-----------
COMMUNICATIONS 0.8% 4,000,000 Pacific Northwest Bell Telephone Co.
debenture, 7.5%, 12/1/96 . . . . . . . . . . . . . 3,990,440
-----------
FINANCIAL 2.8% 15,000,000 HSBC Finanz Nederland B.V., 7.4%, 4/15/03 . . . . . 13,725,000
-----------
MEDIA 4.3% 10,000,000 News America Holdings Inc., 9.25%, 2/1/13 . . . . . 9,727,700
12,000,000 Time Warner Inc., 9.125%, 1/15/13 . . . . . . . . 10,811,280
-----------
20,538,980
-----------
DURABLES 7.7% 10,000,000 Boeing Co., 6.875%, 10/15/43 . . . . . . . . . . . 7,870,200
12,000,000 Ford Motor Co., 8.875%, 1/15/22 . . . . . . . . . . 12,118,800
5,000,000 Ford Motor Credit Co., 6.25%, 2/26/98 . . . . . . . 4,710,150
2,000,000 Ford Motor Credit Co., 8.25%, 5/15/96 . . . . . . . 2,005,340
10,000,000 McDonnell Douglas Corp., 9.75%, 4/1/12. . . . . . . 10,541,000
-----------
37,245,490
-----------
MANUFACTURING 4.0% 10,000,000 Dow Chemical Co., 9%, 4/1/21 . . . . . . . . . . . 10,100,200
10,000,000 Nova Corp. of Alberta, 7.875%, 4/1/23 . . . . . . . 9,069,500
-----------
19,169,700
-----------
TECHNOLOGY 1.9% 10,000,000 Loral Corp., 8.375%, 6/15/24 . . . . . . . . . . . 9,242,800
-----------
ENERGY 0.6% 6,000,000 Halliburton Co., Zero Coupon, 3/13/06 . . . . . . . 2,985,000
-----------
TRANSPORTATION 0.4% 820,000 Missouri Pacific Railroad Co. Equipment Trust,
Series 21, 14.125%, 3/15/96 . . . . . . . . . . . 883,566
770,000 Missouri Pacific Railroad Co. Equipment Trust,
Series 21, 14.25%, 3/15/97 . . . . . . . . . . . 869,114
-----------
1,752,680
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UTILITIES 0.7% 3,000,000 Internorth Inc. Note, 9.625%, 3/15/06 . . . . . . . . . . 3,189,780
-----------
TOTAL CORPORATE BONDS (Cost $162,649,024) . . . . . . . . 151,475,052
-----------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 100.0%
(Cost $497,743,407) (a) . . . . . . . . . . . . . . . . 481,481,734
===========
</TABLE>
(a) The cost for federal income tax purposes was $497,743,407. At
December 31, 1994, net unrealized depreciation for all securities
based on tax cost was $16,261,673. This consisted of aggregate
gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $3,214,797 and
aggregate gross unrealized depreciation for all securities in
which there was an excess tax cost over market value of
$19,476,470.
(b) (Unaudited) Bond equivalent yield to maturity; not a coupon rate.
(c) At December 31, 1994 these securities, in part, have been pledged
to cover initial margin requirements for open futures contracts.
<TABLE>
AT DECEMBER 31, 1994, OPEN FUTURES CONTRACTS SOLD SHORT WERE AS FOLLOWS (NOTE A):
<CAPTION>
Aggregate Market
Futures Expiration Contracts Face Value ($) Value ($)
------- ---------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C>
10 Year U.S.
Treasury Notes Mar. 1995 268 26,738,963 26,783,250
30 Year U.S.
Treasury Bonds Mar. 1995 133 13,031,519 13,187,781
------ ---------- ----------
401 39,770,482 39,971,031
====== ========== ==========
Total net unrealized depreciation on open futures contracts sold short. . . . (200,549)
===========
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 will be shorter than stated maturities due
to prepayments.
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
SCUDDER INCOME FUND
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $497,743,407)
(Note A) . . . . . . . . . . . . . . . . . . . . . . $ 481,481,734
Cash . . . . . . . . . . . . . . . . . . . . . . . . . 1,193
Receivables:
Interest . . . . . . . . . . . . . . . . . . . . . . 6,450,148
Fund shares sold . . . . . . . . . . . . . . . . . . 759,324
Daily variation margin on open futures contracts
(Note A) . . . . . . . . . . . . . . . . . . . . 75,063
Other assets . . . . . . . . . . . . . . . . . . . . . 4,166
-------------
Total assets . . . . . . . . . . . . . . . . . . 488,771,628
LIABILITIES
Payables:
Investments purchased . . . . . . . . . . . . . . . $23,251,563
Fund shares redeemed . . . . . . . . . . . . . . . . 1,861,148
Accrued management fee (Note C) . . . . . . . . . . 240,689
Other accrued expenses (Note C) . . . . . . . . . . 189,829
------------
Total liabilities . . . . . . . . . . . . . . . . 25,543,229
-------------
Net assets, at market value . . . . . . . . . . . . . . $ 463,228,399
=============
NET ASSETS
Net assets consist of:
Undistributed net investment income . . . . . . . . $ 1,253,937
Unrealized depreciation on:
Investments . . . . . . . . . . . . . . . . . . . (16,261,673)
Futures contracts . . . . . . . . . . . . . . . . (200,549)
Accumulated net realized loss . . . . . . . . . . . (13,469,305)
Shares of beneficial interest . . . . . . . . . . . 376,011
Additional paid-in capital . . . . . . . . . . . . . 491,529,978
-------------
Net assets, at market value . . . . . . . . . . . . . . $ 463,228,399
=============
NET ASSET VALUE, offering and redemption price per
share ($463,228,399 -:- 37,601,071 outstanding
shares of beneficial interest, $.01 par value,
unlimited number of shares authorized) . . . . . . $12.32
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . $ 36,388,536
Expenses:
Management fee (Note C) . . . . . . . . . . . $ 3,047,819
Services to shareholders (Note C) . . . . . . 1,287,393
Trustees' fees (Note C) . . . . . . . . . . . 38,828
Custodian fees . . . . . . . . . . . . . . . 171,654
Reports to shareholders . . . . . . . . . . . 121,824
State registration . . . . . . . . . . . . . 28,140
Auditing . . . . . . . . . . . . . . . . . . 47,389
Legal . . . . . . . . . . . . . . . . . . . . 22,479
Other . . . . . . . . . . . . . . . . . . . . 25,082 4,790,608
-----------------------------
Net investment income . . . . . . . . . . . . 31,597,928
-----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) from:
Investment transactions . . . . . . . . . (15,985,969)
Foreign currency related transactions . . (540,566)
Futures contracts . . . . . . . . . . . . 5,184,495 (11,342,040)
------------
Net unrealized depreciation during the
period on:
Investments . . . . . . . . . . . . . . . (43,979,953)
Futures contracts . . . . . . . . . . . . (209,099) (44,189,052)
-----------------------------
Net loss on investments . . . . . . . . . . . (55,531,092)
-----------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS . . . . . . . . . . . . . $(23,933,164)
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
SCUDDER INCOME FUND
- ---------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
INCREASE (DECREASE) IN NET ASSETS 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income . . . . . . . . . . . . . . . $ 31,597,928 $ 31,529,325
Net realized gain (loss) from investment
transactions . . . . . . . . . . . . . . . . . . (11,342,040) 13,435,201
Net unrealized appreciation (depreciation)
on investment transactions
during the period . . . . . . . . . . . . . . . . (44,189,052) 13,397,176
------------ -------------
Net increase (decrease) in net assets
resulting from operations . . . . . . . . . . . (23,933,164) 58,361,702
------------ -------------
Distributions to shareholders:
From net investment income ($.76 and $.87 per
share, respectively) . . . . . . . . . . . . . . (28,504,095) (30,639,657)
------------ -------------
From net realized gains from investment
transactions ($.45 per share) . . . . . . . . . . -- (15,942,420)
------------ -------------
In excess of net realized gains ($.02 and
$.12 per share, respectively) . . . . . . . . . . (770,819) (4,209,205)
------------ -------------
Fund share transactions:
Proceeds from shares sold . . . . . . . . . . . . . 146,572,410 144,091,467
Net asset value of shares issued to
shareholders in reinvestment of distributions . . 24,501,727 45,018,053
Cost of shares redeemed . . . . . . . . . . . . . . (163,297,477) (144,531,723)
------------ -------------
Net increase in net assets from Fund share
transactions . . . . . . . . . . . . . . . . . . 7,776,660 44,577,797
------------ -------------
INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . (45,431,418) 52,148,217
Net assets at beginning of period . . . . . . . . . 508,659,817 456,511,600
------------ -------------
NET ASSETS AT END OF PERIOD (including
undistributed net investment income of
$1,253,937 and $326,521, respectively) $463,228,399 $ 508,659,817
============ =============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period . . . . . 37,090,412 33,861,272
------------ -------------
Shares sold . . . . . . . . . . . . . . . . . . . . 11,195,296 10,218,534
Shares issued to shareholders in
reinvestment of distributions . . . . . . . . . . 1,951,688 3,226,881
Shares redeemed . . . . . . . . . . . . . . . . . . (12,636,325) (10,216,275)
------------ -------------
Net increase in Fund shares . . . . . . . . . . . . 510,659 3,229,140
------------ --------------
Shares outstanding at end of period . . . . . . . . 37,601,071 37,090,412
============ ==============
</TABLE>
The accompnaying notes are an integral part of the financial staements.
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER
PERFORMANCE INFORMATION FROM THE FINANCIAL STATEMENTS.
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period . . . . $13.71 $13.48 $13.91 $12.82 $12.89 $12.41 $12.40 $13.41 $12.82 $11.70
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income . . . .84 .90 .95 .93 1.03 1.05 1.07 1.08 1.22 1.29
Net realized and
unrealized gain (loss)
on investments . . . . . (1.45) .77 (.05) 1.22 (.01) .49 .01 (.99) .59 1.12
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations . . . . . . . (.61) 1.67 .90 2.15 1.02 1.54 1.08 .09 1.81 2.41
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment
income . . . . . . . . . (.76) (.87) (.93) (.92) (1.03) (1.06) (1.07) (1.10) (1.22) (1.29)
From paid-in capital. . . . -- -- -- -- (.06)(a) -- -- -- -- --
From net realized gains
on investment
transactions . . . . . . -- (.45) (.40) (.14) -- -- -- -- -- --
In excess of net
realized gains . . . . . (.02) (.12) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions . . . . (.78) (1.44) (1.33) (1.06) (1.09) (1.06) (1.07) (1.10) (1.22) (1.29)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period . . . . . . $12.32 $13.71 $13.48 $13.91 $12.82 $12.89 $12.41 $12.40 $13.41 $12.82
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) . . . . . . (4.43) 12.58 6.74 17.32 8.32 12.75 8.91 .74 14.75 21.80
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions) . . . . 463 509 457 403 302 272 245 242 249 172
Ratio of operating
expenses to average
daily net assets (%) . . . .97 .92 .93 .97 .95 .93 .94 .94 .88 .91
Ratio of net investment
income to average
daily net assets (%) . . . 6.43 6.32 7.05 7.13 8.21 8.23 8.53 8.37 9.12 10.57
Portfolio turnover
rate (%) . . . . . . . . . 60.3 130.6 121.3 109.6 48.0 63.2 19.6 33.7 24.1 29.9
<FN>
(a) Distribution made (as a result of foreign currency related gains on the disposition of foreign bonds) in order to avoid
the payment of a 4% federal excise tax under Internal Revenue Code section 4982.
</FN>
</TABLE>
<PAGE>
SCUDDER INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
Scudder Income Fund (the "Fund") is a diversified series of Scudder Portfolio
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 a
diversified, open-end management investment company. The policies described
below are followed consistently by the Fund in the preparation of its financial
statements in conformity with generally accepted accounting principles.
SECURITY VALUATION. Portfolio debt securities with remaining maturities greater
than sixty days are valued by pricing agents approved by the officers of the
Fund, which 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. Short-term investments having a 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.
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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. In connection with portfolio
purchases and sales of securities denominated in a foreign currency, the Fund
may enter into forward foreign currency exchange contracts ("contracts").
Additionally, the Fund may enter into contracts to hedge certain other foreign
currency denominated assets. Contracts are recorded at market value. Certain
risks may arise upon entering into these contracts from the potential inability
of counter-parties to meet the terms of their contracts. Realized and
unrealized gains and losses arising from such transactions are included in net
realized and unrealized gain from investment and foreign currency related
transactions.
FUTURES CONTRACTS. The Fund may enter into interest rate and securities index
futures contracts for bona fide hedging purposes. During the year ended
December 31, 1994, to hedge against the negative effects of rising interest
rates, the Fund sold U.S. Treasury Futures contracts. Upon entering into a
futures contract, the Fund is required to deposit with a broker an amount
("initial margin") equal to a certain percentage of the purchase price
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, for book purposes, 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
from the contingency of imperfect market conditions.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code 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 federal income tax
provision was required.
At December 31, 1994, the Fund had a net tax basis capital loss carryforward of
approximately $11,478,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until December
31, 2002, the expiration date.
<PAGE>
SCUDDER INCOME FUND
- --------------------------------------------------------------------------------
In addition, from November 1, 1994 through December 31, 1994, the Fund incurred
approximately $1,805,000 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 ended December 31, 1995.
DISTRIBUTION OF INCOME AND GAINS. Distributions of net investment income are
made quarterly. 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.
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 foreign denominated
investments, post-October loss deferrals and futures. 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. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. 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, 1994, purchases and sales of investment
securities (excluding short-term investments and U.S. Government obligations)
aggregated $157,610,740 and $173,401,318, respectively. Purchases and sales of
U.S. Government obligations aggregated $106,891,125 and $81,297,355,
respectively.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The aggregate face value of futures contracts opened and closed during the year
ended December 31, 1994 was $184,424,093 and $203,717,454, respectively.
C. RELATED PARTIES
- ------------------------------------------------------------------------------
Under the Investment Management Agreement (the "Agreement") with Scudder,
Stevens & Clark, Inc. ("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 0.65%
on the first $200,000,000 of 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. The Agreement
provides that if the Fund's expenses, exclusive of taxes, interest, and
extraordinary expenses, exceed specified limits, such excess, up to the amount
of the management fee, will be paid by the Adviser. For the year ended
December 31, 1994, the fee pursuant to the Agreement amounted to $3,047,819,
which was equivalent to an annual effective rate of .62% of the Fund's average
daily net assets.
Scudder Service Corporation ("SSC"), a wholly-owned subsidiary of the Adviser,
is the transfer, dividend paying and shareholder service agent for the Fund.
For the year ended December 31, 1994, the amount charged to the Fund by SSC
aggregated $1,131,464, of which $101,853 is unpaid at December 31, 1994.
The Fund pays each Trustee not affiliated with the Adviser $4,000 annually,
plus specified amounts for attended board and committee meetings. For the year
ended December 31, 1994, Trustees' fees aggregated $38,828.
<PAGE>
SCUDDER INCOME FUND
REPORT OF INDEPENDENT ACCOUNTANTS
- ----------------------------------------------------------------------------
TO THE TRUSTEES AND SHAREHOLDERS OF SCUDDER INCOME FUND:
We have audited the accompanying statement of assets and liabilities of Scudder
Income Fund, including the investment portfolio, as of December 31, 1994, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the ten years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder Income Fund as of December 31, 1994, 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 ten years in
the period then ended, in conformity with generally accepted accounting
principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
February 8, 1995
<PAGE>
TAX INFORMATION
- --------------------------------------------------------------------------------
By now shareholders to which year-end tax reporting is required by the IRS
should have received their Form 1099-DIV and tax information letter from the
Fund. For corporate shareholders, none of the income dividends paid during the
Fund's fiscal year ended December 31, 1994 qualified for the dividends received
deduction.
In many states the amount of income you received from obligations of the U.S.
Government is exempt from your state income taxes. The percentage of the Fund's
1994 ordinary income which includes net short-term capital gains and was
derived from direct obligations of the U.S. Government was 18.34%.
Please consult a tax adviser if you have questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at 1-800-225-5163.
OFFICERS AND TRUSTEES
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dudley H. Ladd*
Trustee
David S. Lee*
Vice President and Trustee
George M. Lovejoy, Jr.
Trustee; Chairman Emeritus, Meredith & Grew, Incorporated
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University
Jean C. Tempel
Trustee; Director, Executive Vice President and Manager, Safeguard
Scientifics, Inc.
Jerard K. Hartman*
Vice President
William M. Hutchinson*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President, Secretary and Assistant Treasurer
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Coleen Downs Dinneen*
Assistant Secretary
*Scudder, Stevens & Clark, Inc.
INVESTMENT PRODUCTS AND SERVICES
The Scudder Family of Funds
Money market
Scudder Cash Investment Trust
Scudder U.S. Treasury Money Fund
Tax free money market+
Scudder Tax Free Money Fund
Scudder California Tax Free Money Fund*
Scudder New York Tax Free Money Fund*
Tax free+
Scudder California Tax Free Fund*
Scudder High Yield Tax Free Fund
Scudder Limited Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder Massachusetts Limited Term Tax Free Fund*
Scudder Massachusetts Tax Free Fund*
Scudder Medium Term Tax Free Fund
Scudder New York Tax Free Fund*
Scudder Ohio Tax Free Fund*
Scudder Pennsylvania Tax Free Fund*
Growth and Income
Scudder Balanced Fund
Scudder Growth and Income Fund
Income
Scudder Emerging Markets Income Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder International Bond Fund
Scudder Short Term Bond Fund
Scudder Short Term Global Income Fund
Scudder Zero Coupon 2000 Fund
Growth
Scudder Capital Growth Fund
Scudder Development Fund
Scudder Global Fund
Scudder Global Small Company Fund
Scudder Gold Fund
Scudder Greater Europe Growth Fund
Scudder International Fund
Scudder Latin America Fund
Scudder Pacific Opportunities Fund
Scudder Quality Growth Fund
Scudder Value Fund
The Japan Fund
Retirement Plans and Tax-Advantaged Investments
IRAs
Keogh Plans
Scudder Horizon Plan+++* (a variable annuity)
401(k) Plans
403(b) Plans
SEP-IRAs
Profit Sharing and Money Purchase Pension Plans
Closed-end Funds#
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc.
The Latin America Dollar Income Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder World Income Opportunities Fund, Inc.
Institutional Cash Management
Scudder Institutional Fund, Inc.
Scudder Fund, Inc.
Scudder Treasurers Trust(tm)++
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. +A portion of the income from
the tax-free funds may be subject to federal, state and local taxes. *Not
available in all states. +++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, Stevens & Clark, Inc., are traded on various stock exchanges.
++For information on Scudder Treasurers Trust(tm), an institutional cash
management service that utilizes certain portfolios of Scudder Fund, Inc.
($100,000 minimum), call: 1-800-541-7703.
HOW TO CONTACT SCUDDER
Account Service and Information
For existing account service and transactions
SCUDDER INVESTOR RELATIONS
1-800-225-5163
For account updates, prices, yields, exchanges and redemptions
SCUDDER AUTOMATED INFORMATION LINE (SAIL)
1-800-343-2890
Investment Information
To receive information about the Scudder funds, for additional
applications and prospectuses, or for investment questions
SCUDDER INVESTOR RELATIONS
1-800-225-2470
For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105
Please address all correspondence to
THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291
Or stop by a Scudder Funds Center
Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you_they can be
found in the following cities:
Boca Raton
Boston
Chicago
Cincinnati
Los Angeles
New York
Portland, OR
San Diego
San Francisco
Scottsdale
For information on Scudder Treasurers Trust(tm), an institutional cash
management service for corporations, non-profit organizations and trusts
which utilizes certain portfolios of Scudder Fund, Inc.* ($100,000
minimum), call: 1-800-541-7703.
For information on Scudder Institutional Funds,* funds designed to meet the
broad investment management and service needs of banks and other
institutions, call: 1-800-854-8525.
Scudder Investor Relations and Scudder Funds Centers are services
provided through Scudder Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees
and expenses. Please read it carefully before you invest or send
money.
Celebrating 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment
counsel firm in the United States. Since its birth, Scudder's pioneering
spirit and commitment to professional long-term investment management have
helped shape the investment industry. In 1928, we introduced the nation's
first no-load mutual fund. Today we offer 36 pure no load(tm) funds,
including the first international mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication
to research and fundamental investment disciplines have helped Scudder
become one of the largest and most respected investment managers in the
world. Though times have changed since our beginnings, we remain committed
to our longstanding principles: managing money with integrity and
distinction, keeping the interests of our clients first; providing access
to investments and markets that may not be easily available to individuals;
and making investing as simple and convenient as possible through friendly,
comprehensive service.
