Scudder
Income
Fund
Annual Report
December 31, 1997
Pure No-Load(TM) Funds
Seeks 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.
SCUDDER (logo)
<PAGE>
Scudder Income Fund
- --------------------------------------------------------------------------------
Date of Inception: 4/24/28 Total Net Assets as of Ticker Symbol: SCSBX
12/31/97: $695.3 million
- --------------------------------------------------------------------------------
o The environment for fixed income investors was generally favorable in 1997.
Scudder Income Fund earned an 8.66% total return for the 12-month period ended
December 31, 1997.
o A healthy U.S. economy, benign inflation, and worries over the Asian crisis
caused bonds to rally from May through the end of the year.
o The Fund pursued a barbelled maturity strategy for most of the year,
emphasizing securities with long and short maturities.
o In the second half of the year, Fund strategy shifted to longer maturities to
take advantage of rising bond prices.
o The Fund maintained its 4 star rating from Morningstar for its risk-adjusted
performance among 1,371 taxable bond funds as of December 31, 1997.^1
Table of Contents
3 Letter from the Fund's President 19 Notes to Financial Statements
4 Performance Update 23 Report of Independent Accountants
5 Portfolio Summary 24 Tax Information
6 Portfolio Management Discussion 25 Shareholder Meeting Results
10 Glossary of Investment Terms 28 Officers and Trustees
11 Investment Portfolio 29 Investment Products and Services
15 Financial Statements 30 Scudder Solutions
18 Financial Highlights
^1 Source: Morningstar. Ratings are subject to change monthly and are
calculated from the Fund's 3-, 5-, and 10-year average annual returns in
excess of 90-day Treasury bill returns with appropriate fee adjustments,
and a risk factor that reflects Fund performance below 90-day T-bill
returns. In an investment category, the top 10% of funds receive 5 stars
and the next 22.5% receive 4 stars. In the taxable bond category, the Fund
received a 4 star rating for the three-year period, a 3 star rating for the
five-year period, and a 4 star rating for the ten-year period among 1371,
771, and 323 funds, respectively. Past performance is no guarantee of
future results.
2 - Scudder Income Fund
<PAGE>
Letter from the Fund's President
Dear Shareholders,
The environment for domestic equity investors, which had been so favorable
for most of the last seven years, became unsettled in the second half, as
concern mounted over slowing corporate profit growth rates and the currency
crisis in Asia. Increasingly, investors began to see the value of the relatively
steady income and price stability of fixed income investments. The Fund
especially benefited as interest rates declined and bond prices rose from May
through the end of the year.
In our last few reports to shareholders we have discussed the importance of
a fixed income component as part of a well balanced investment program. As a
current shareholder of Scudder Income Fund, I suspect you are already familiar
with these benefits, which have become particularly valuable in this period of
increased volatility for equity securities. Your Fund's manager discusses the
market environment and recent investment strategy in more detail beginning on
page 6.
As you may know, the Fund's investment adviser has changed its name to
Scudder Kemper Investments, Inc. from Scudder, Stevens & Clark, Inc., reflecting
the acquisition of a majority interest in Scudder by Zurich Insurance Company,
and the combining of Scudder's business with that of Zurich Kemper Investments,
Inc. In addition, the Fund has added two members to its management team
effective January 1, 1998 -- portfolio managers Kelly Babson and Robert Cessine.
We think their extensive knowledge and expertise will be an asset to the Fund.
For those of you who are interested in new Scudder products, we introduced
a new industry sector fund in November, Scudder Financial Services Fund, one of
Scudder's Choice Series sector funds. This Fund seeks long-term growth by
investing in financial services companies in the U.S. and abroad. In addition,
two other Choice Series funds will be launched on March 2: Scudder Health Care
Fund, seeking long-term growth from health care companies located around the
world, and Scudder Technology Fund, pursuing long-term growth by investing in
companies that develop, produce, or distribute technology. For further
information on these new funds, please call 1-800-225-2470.
Thank you for your continued investment in Scudder Income Fund. If you have
any questions about your account, please call Scudder Investor Relations at the
toll-free number above, or visit our web site at http://funds.scudder.com.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President,
Scudder Income Fund
3 - Scudder Income Fund
<PAGE>
PERFORMANCE UPDATE as of December 31, 1997
- ----------------------------------------------------------------
FUND INDEX COMPARISONS
- ----------------------------------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/97 $10,000 Cumulative Annual
- ---------------------------------------
SCUDDER INCOME FUND
- ---------------------------------------
1 Year $ 10,866 8.66% 8.66%
5 Year $ 14,333 43.33% 7.46%
10 Year $ 23,872 138.72% 9.09%
- ---------------------------------------
LB AGGREGATE BOND INDEX
- ---------------------------------------
1 Year $ 10,967 9.67% 9.67%
5 Year $ 14,345 43.45% 7.48%
10 Year $ 24.057 140.57% 9.17%
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
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
- ----------------------
'87 $10,000
'88 $10,891
'89 $12,279
'90 $13,301
'91 $15,604
'92 $16,655
'93 $18,751
'94 $17,921
'95 $21,244
'96 $21,969
'97 $23,872
LB AGGREGATE BOND INDEX
Year Amount
- ----------------------
'87 $10,000
'88 $10,789
'89 $12,357
'90 $13,461
'91 $15,614
'92 $16,771
'93 $18,406
'94 $17,869
'95 $21,170
'96 $21,935
'97 $24,057
The unmanaged 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>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------
NET ASSET VALUE... $ 12.41 $ 12.89 $ 12.82 $ 13.91 $ 13.48 $ 13.71 $ 12.32 $ 13.61 $ 13.15 $ 13.46
INCOME DIVIDENDS.. $ 1.07 $ 1.06 $ 1.03 $ .92 $ .93 $ .87 $ .76 $ .86 $ .81 $ .79
CAPITAL GAINS AND
PAID-IN CAPITAL
DISTRIBUTIONS..... $ -- $ -- $ 0.06 $ .14 $ .40 $ .57 $ .02 $ .09 $ .09 $ .01
FUND TOTAL
RETURN (%)........ 8.91 12.75 8.32 17.32 6.74 12.58 -4.43 18.54 3.41 8.66
INDEX TOTAL
RETURN (%)........ 7.88 14.53 8.96 16.00 7.40 9.75 -2.92 18.47 3.63 9.67
</TABLE>
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased.
4 - Scudder Income Fund
<PAGE>
PORTFOLIO SUMMARY as of December 31, 1997
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DIVERSIFICATION
- ---------------------------------------------------------------------------
Corporate Bonds 38%
Cash Equivalents 18%
U.S. Gov't Agency Pass-thrus 17%
U.S. Treasury Obligations 13%
Asset Backed Securities 8%
Foreign Bonds -
U.S. $ Denominated 5%
Other 1%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
The Fund's emphasis on corporates
and de-emphasis on mortgages was
a significant contributor to
performance for much of the year.
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QUALITY
- ---------------------------------------------------------------------------
AAA* 55%
A 11%
BBB 15%
BB 7%
B 10%
NR 2%
- --------------------------------------
100%
- --------------------------------------
*Category includes cash equivalents
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
The portfolio maintained its high
average quality rating of AA.
- ---------------------------------------------------------------------------
EFFECTIVE MATURITY
- ---------------------------------------------------------------------------
Less than 1 year 23%
1 - 5 years 18%
5 - 8 years 22%
8 - 15 years 12%
Greater than 15 years 25%
- --------------------------------------
100%
- --------------------------------------
Weighted average effective maturity: 10 years
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Duration was kept close to the
Fund's benchmark index until the
fourth quarter when it was
lengthened to take advantage of
declining interest rates.
For more complete details about the Fund's investment portfolio,
see page 11. A monthly Investment Portfolio Summary and quarterly Portfolio
Holdings are available upon request.
5 - Scudder Income Fund
<PAGE>
Portfolio Management Discussion
An Interview with Stephen A. Wohler
Lead Portfolio Manager,
Scudder Income Fund
Q: How would you characterize the environment for fixed income investors for the
12-month period ended December 31, 1997?
A: Overall, this has been a good period for bond investors, as a combination of
solid economic growth and low inflation generally caused bond yields to decline,
and (due to the inverse relationship of yields to prices) bond prices to rise.
The yield on the benchmark U.S. Treasury bond reflected this environment,
beginning the year at 6.64%, peaking at about 7.20% in April, and declining to
5.92% by the close of the period. Bond holders received not only interest, but
also some price appreciation over the year. And, we think any year that
investors receive more than just the interest is a pretty good year.
Q: The first half of 1997 was significantly different than the second half. Tell
us what factors influenced the bond market early in the year.
A: In the first half of the year, the U.S. economy was operating at nearly
breakneck speed. Gross domestic product (GDP) (a widely recognized measure of
economic growth) chimed in at 4.9% for the first quarter and 3.3% in the second
quarter, well above its normal level. The reports of strong growth had bond
investors and the Federal Reserve (Fed) worried. If growth is too strong, the
thinking goes, inflation will accelerate. Inflation, as you know, is bad news
for bonds because it reduces an existing bond's net yield. As a result of the
growth worries, the Fed attempted to slow the economy by raising the Fed funds
rate (a key short-term interest rate) by one quarter of one percent in March,
sending bond prices lower. Because such actions by the Fed typically are
followed by additional rate changes in the same direction, bond investors
remained concerned about the possibility of further rate hikes during the second
quarter.
Q: The 30-year Treasury bond yield peaked above 7% in April and proceeded to
decline for the rest of the year. What changed?
A: A number of factors cooled interest rates. The subsequent rate hikes by the
Fed that many expected never materialized, primarily because the economy
appeared to be slowing from the rapid pace set during the first half of the
year. In addition, economic reports continued to show no signs of a pickup in
inflation. Many analysts questioned these reports because it's been a long time
since we have had a period of strong growth without accelerating inflation. As
the year progressed, further evidence suggested that technology and productivity
improvements were responsible for much of the "growth without inflation"
scenario. Finally, corporations were beginning to see the payoff from years of
investment in technology and computer systems. In addition, the currency crisis
which began with the devaluation of the Thai baht in July, spread to other
Southeast Asian countries, resulting in serious damage to the currencies and
financial markets there during the second half of the year.
Q: How did this affect the U.S. bond market?
A: Well, the crisis sent many foreign investors looking for a safe haven and a
stable currency. U.S. bonds were a popular choice, especially given the recent
6 - Scudder Income Fund
<PAGE>
strong performance of the dollar. The crisis also had implications for U.S.
multinational corporations with earnings dependent on trade with Asia or
operations in the region. While the actual effects on profits are still being
sorted out, Asia's difficulties cast further doubt on the ability of many U.S.
companies to sustain profit growth rates. U.S. stock market investors didn't
like the implications, which resulted in sharp declines in August and October.
With any lingering concerns about accelerating inflation diminished, the U.S.
bond market continued to rally.
Q: What about the shrinking federal budget deficit? Has it had a positive effect
on the bond market?
A: The shrinking deficit is having a significant long-term effect on the bond
market. With a strong economy, the Treasury has been awash in tax receipts.
Higher tax receipts mean less borrowing by the federal government and,
subsequently, a shortage of bonds. The size of Treasury auctions has declined,
and with fewer new securities offered, the demand for income-earning
dollar-based assets has been more than sufficient.
Q: How did the Fund perform over the 12-month period ended December 31, 1997?
A: The Fund returned 8.66%, which is essentially in line with the 9.67% return
of the unmanaged Lehman Aggregate Bond Index. The Fund's total return reflects
an increase in its net asset value from $13.15 on December 31, 1996 to $13.46 on
December 31, 1997, an income distribution of $0.79 per share and a capital gain
distribution of $0.01 per share.
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE:
The Interest Rate Picture
December 1990 through December 1997
LINE CHART DATA:
30-year 10-year 5-year 1-year
Treasury Treasury Treasury Treasury
-------- -------- -------- --------
12/90 8.25% 8.07% 7.68% 6.76%
8.23 8.04 7.73 6.25
8.42 8.24 7.91 6.31
7.81 7.46 6.91 5.40
12/91 7.40 6.70 5.93 4.09
7.96 7.53 6.93 4.52
7.79 7.13 6.28 4.05
7.38 6.36 5.33 3.06
12/92 7.39 6.69 6.04 3.59
6.92 6.03 5.23 3.28
6.68 5.78 5.05 3.43
6.04 5.39 4.78 3.38
12/93 6.34 5.79 5.20 3.60
7.13 6.78 6.24 4.42
7.63 7.34 6.96 5.50
7.82 7.60 7.28 5.95
12/94 7.89 7.83 7.83 7.17
7.43 7.20 7.07 6.50
6.63 6.21 5.97 5.62
6.49 6.16 6.02 5.64
12/95 5.96 5.58 5.40 5.15
6.68 6.34 6.09 5.39
6.90 6.72 6.49 5.69
6.93 6.71 6.46 5.70
12/96 6.64 6.42 6.21 5.48
7.10 6.92 6.77 5.93
6.79 6.51 6.38 5.66
6.41 6.11 6.00 5.46
12/97 5.93 5.75 5.71 5.48
The Treasury bond yields trended lower from May through the end of the year
resulting in a rally in bond prices.
Q: What was your investment strategy?
A: We managed the portfolio actively throughout the 12 months, seeking to
capitalize on shifts in relative valuation among the Treasury, mortgage, and
corporate bond sectors. Given the uncertainties surrounding the level of
economic growth and inflation over the first half of the year, we maintained a
neutral portfolio duration compared to the Fund's benchmark, the Lehman
Aggregate Bond Index. Instead, we focused on sector allocations. We
de-emphasized mortgage securities (which typically have intermediate term (3-5
year) maturities), and
7 - Scudder Income Fund
<PAGE>
increased our "barbelled" maturity strategy by adding to holdings at the short
and long ends of the maturity spectrum. The barbelled strategy made a neutral
contribution to performance during the first half of the year.
As the Asian crisis deepened and reports of accelerating inflation remained
nonexistent, we lengthened the portfolio's duration slightly to take advantage
of declining interest rates and rising bond prices. At the end of the period,
the Fund's duration was 4.9 years, up from 4.6 years six months ago and slightly
above the 4.8 year duration of a year ago.
Q: How were portfolio assets allocated?
A: The Fund's portfolio was well diversified, with representation from many
different segments of the fixed income market. The only area that we slightly
overweighted was REITs (real estate investment trusts). REITs performed in line
with other financial issues for most of the year, but held back performance
somewhat in the fourth quarter. Their weakness was offset by strong performance
from several corporate issues, especially Time Warner and TCI.
Q: Corporate bonds comprised the largest sector of the portfolio. How did they
perform?
A: Corporates were good issues to hold during the first nine months of the year.
However, they underperformed during the last quarter as rates declined and
Treasuries (the most interest rate sensitive issues) shot up. In the first half
of the year we trimmed our holdings of investment grade corporate bonds in favor
of selected high yield bonds, which performed quite well. High yield bonds
benefited from the strong economy and solid
8 - Scudder Income Fund
<PAGE>
demand from investors seeking a yield advantage in today's relatively low rate
environment. These bonds typically offer some of the highest yields, reduced
exposure to changes in interest rates, and diversification. We were selective in
our additions here, preferring to "cherry pick" bonds issued by established
companies with viable operations that we believed had the potential for credit
quality upgrades. Even with limited holdings of high yield bonds, the Fund still
maintained its high average quality rating of AA .
Q: In your June 30 report, you were underweighting mortgages. Did you continue
this theme over the last six months?
A: We continued to de-emphasize mortgages over the last six months of the year,
as rates declined and individuals continued to refinance mortgages. As you
probably know, refinancing has become increasingly easy such that every time
rates drop, mortgage securities are immediately repaid and replaced with lower
yielding issues. This activity has limited the upside potential of many mortgage
securities.
Q: What is your outlook?
A: We expect interest rates to trend downward in the months ahead. Inflation
remains low, and slowing corporate profit growth and uncertainty in Asia provide
few reasons to expect rising interest rates. In this environment, we plan to
continue with our diversified approach, while emphasizing securities that can
add incremental value to the Fund's consistent long term record.
Scudder Income Fund:
A Team Approach to Investing
Scudder Income Fund is managed by a team of Scudder Kemper Investments, Inc.
(SKI) 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 a large staff of
economists, research analysts, traders, and other investment specialists who
work in our offices across the United States and abroad. We believe our team
approach benefits Fund investors by bringing together many disciplines and
leveraging SKI's extensive resources.
Lead Portfolio Manager Stephen A. Wohler joined the team in 1994 and is also
responsible for implementing the Fund's strategy. Steve has over 17 years'
experience managing fixed-income investments and has been with SKI since 1979.
William M. Hutchinson, Portfolio Manager, has been responsible for the Fund's
day-to-day operations and overall investment strategy since he joined SKI in
1986. Bill has over 20 years of investment experience.
9 - Scudder Income Fund
<PAGE>
Glossary of Investment Terms
BOND RATING Many corporate bonds are rated according to
their likelihood of default by nationally
recognized statistical rating organizations
(NSROs) such as Moody's Investor Service,
Fitch Investor Service, or Standard and
Poor's Corporation. Bonds with high quality
ratings are considered among the most
financially sound and enable the issuer to
issue the bond at a lower interest rate than
lower-rated issuers.
COUPON The interest rate the bond issuer promises to
pay to the bondholder until maturity,
expressed as an annual percentage of face
value. As an example, a bond with a 10%
coupon and a $1,000 face value pays $100 a
year.
DURATION A measure of the portfolio's sensitivity to
changes in interest rates. If an investment
portfolio has a duration of 4.9 years and
interest rates decline by 1% from present
levels, the value of the portfolio would rise
by about 4.9%, and vice versa.
FED FUNDS RATE An important short term interest rate charged
by banks with excess reserves at the Federal
Reserve district bank to other banks needing
overnight loans to meet reserve requirements.
Distinct from the "Discount Rate" which is
the rate the Federal Reserve charges member
banks for loans. Banks set their rates at a
level above the Discount Rate.
GDP, PPI Gross Domestic Product and the Producer Price
Index are commonly referenced measures of the
health of the U.S. economy. Too strong
economic growth can lead to accelerating
inflation (the Consumer Price Index [CPI] is
a measure of inflation); weak growth can lead
to a recession.
30-DAY SEC YIELD The standard yield reference for bond funds
since the SEC required all bond funds to
quote yields based on a prescribed formula.
This yield calculation reflects the 30-day
average of the net annualized income earnings
capability of every holding in a given fund's
portfolio, assuming each is held to maturity.
(Sources: SKI; Barron's Dictionary of Finance and Investment Terms)
10 - Scudder Income Fund
<PAGE>
Investment Portfolio as of December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements 6.3%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreement with Salomon Brothers dated 12/31/97 at 6.7%,
to be repurchased at $43,313,116 on 1/2/98, collateralized by a ------------
$46,085,000 U.S. Treasury Bill, 10/15/98 (Cost $43,297,000) ........................... 43,297,000 43,297,000
------------
Commercial Paper 11.8%
- ------------------------------------------------------------------------------------------------------------------------------
Ciesco L.P., 6.02%, 1/9/98 .............................................................. 20,000,000 19,973,333
Ford Motor Credit Co., 6.13%, 1/2/98 .................................................... 30,000,000 29,994,900
JP Morgan, 5.8%, 1/8/98 ................................................................. 31,000,000 30,965,039
- ------------------------------------------------------------------------------------------------------------------------------
Total Commercial Paper (Cost $80,933,272) 80,933,272
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations 13.3%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bond, 6.25%, 8/15/23 ...................................................... 10,000,000 10,300,000
U.S. Treasury Note, 6.875%, 7/31/99 ..................................................... 13,000,000 13,231,530
U.S. Treasury Note, 5.875%, 11/15/99 .................................................... 22,000,000 22,078,980
U.S. Treasury Note, 5.625%, 12/31/99 .................................................... 10,000,000 9,995,300
U.S. Treasury Note, 6.25%, 1/31/02 ...................................................... 20,000,000 20,356,200
U.S. Treasury Note, 6.25%, 2/15/07 ...................................................... 5,000,000 5,159,350
U.S. Treasury Separate Trading Registered Interest and Principal,
Principal only, 11/15/18 .............................................................. 35,000,000 9,978,500
- ------------------------------------------------------------------------------------------------------------------------------
Total U. S. Treasury Obligations (Cost $89,065,755) 91,099,860
- ------------------------------------------------------------------------------------------------------------------------------
U. S. Government Agency Pass-thrus 14.1%
- ------------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association, 8% with various maturities to 12/1/09 ............ 13,665,549 14,062,534
Federal National Mortgage Association, 7% with various maturities to 8/1/26 ............. 58,647,792 59,271,419
Government National Mortgage Association Pass-thru, 10% with various
maturities to 2/15/25 ................................................................. 11,508,326 12,797,949
Government National Mortgage Association Pass-thru, 7.5% with
various maturities to 11/15/27 ........................................................ 9,892,911 10,134,001
- ------------------------------------------------------------------------------------------------------------------------------
Total U. S. Government Agency Pass-thrus (Cost $93,660,029) 96,265,903
- ------------------------------------------------------------------------------------------------------------------------------
Collateralized Mortgage Obligations 2.7%
- ------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., 7.78% with various maturities to 9/1/24 ------------
(Cost $18,588,110) .................................................................... 17,782,347 18,588,065
------------
Foreign Bonds - U. S.$ Denominated 5.0%
- ------------------------------------------------------------------------------------------------------------------------------
Fage Dairy Industry SA, 9%, 2/1/07 ...................................................... 14,000,000 13,615,000
Hutchison Whampoa, Ltd., 7.5%, 8/1/27 ................................................... 10,000,000 8,950,000
ITT Publimedia BV, 9.375%, 9/15/07 ...................................................... 2,000,000 2,100,000
Petroleos Mexicanos S.A., 8.85%, 9/15/07 ................................................ 5,000,000 4,937,500
State Development Institute of Hungary, 10.5%, 8/31/00 .................................. 4,425,000 4,856,438
- ------------------------------------------------------------------------------------------------------------------------------
Total Foreign Bonds - U. S.$ Denominated (Cost $35,360,213) 34,458,938
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 - Scudder Income Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
Asset Backed 8.2%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automobile Receivables 1.5%
Premier Auto Trust Asset Backed Certificate Series 1996-3 A4, 6.75%, 11/6/00 ............ 10,000,000 10,106,200
------------
Credit Card Receivables 3.5%
Advanta Corp. Series 1997-1 A4, 7.65%, 5/25/27 .......................................... 8,000,000 8,300,000
Sears Credit Account Master Trust, Series 1995-A4, 6.25%, 1/15/03 ....................... 15,500,000 15,514,415
------------
23,814,415
------------
Home Equity Loans 0.0%
Fleet Financial Home Equity Trust Series 1991-2A, 6.7%, 10/15/06 ........................ 244,176 244,710
------------
Manufactured Housing Receivables 3.2%
Green Tree Financial Corp. Series 1995-1 B2, 9.2%, 6/15/25 .............................. 8,071,000 8,801,804
Green Tree Financial Corp. Series 1997-1 B2, 7.76%, 3/15/28 ............................. 4,250,000 4,295,820
Merrill Lynch Mortgage Investors Inc., "B", Series 1991-D, 9.85%, 7/15/11 ............... 8,500,000 8,855,895
------------
21,953,519
- ------------------------------------------------------------------------------------------------------------------------------
Total Asset Backed (Cost $54,560,229) 56,118,844
- ------------------------------------------------------------------------------------------------------------------------------
Corporate Bonds 38.0%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Staples 1.3%
Borden Inc., 7.875%, 2/15/23 ............................................................ 5,000,000 5,030,900
Polymer Group, Inc., 9%, 7/1/07 ......................................................... 4,000,000 4,000,000
------------
9,030,900
------------
Health 0.5%
Tenet Healthcare Corp., 8.625%, 1/15/07 ................................................. 3,000,000 3,097,500
------------
Financial 15.7%
American Health Properties, Inc. (REIT), 7.5%, 1/15/07 .................................. 3,000,000 3,126,780
Bank United Financial Corp., 10.25%, 12/31/26 ........................................... 4,500,000 4,635,000
Bay View Capital Corp., 9.125%, 8/15/07 ................................................. 2,500,000 2,575,000
Commerce Bancorporation, 11.75%, 6/6/27 ................................................. 6,200,000 6,572,000
ERP Operating L.P. Note (REIT), 7.57%, 8/15/26 .......................................... 2,200,000 2,339,172
First Union Capital II, 7.85%, 1/1/27 ................................................... 15,000,000 15,515,250
Ford Motor Credit Co., 6.25%, 2/26/98 ................................................... 5,000,000 5,001,300
Ford Motor Credit Co. Global Note, 5.625%, 12/15/98 ..................................... 10,000,000 9,964,000
Highwoods/Forsyth L.P. (REIT), 7%, 12/1/06 .............................................. 8,000,000 8,055,200
People's Heritage Bank, 9.06%, 2/1/27 ................................................... 6,750,000 7,450,313
Security Capital Industrial Trust (REIT), 7.81%, 2/1/15 ................................. 4,500,000 4,704,300
Spieker Properties, Inc. (REIT), 7.875%, 12/1/16 ........................................ 5,000,000 5,373,550
Spieker Properties, Inc. (REIT), 7.5%, 10/1/27 .......................................... 5,000,000 5,061,250
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 - Scudder Income Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Susa Partnership L.P. (REIT), 8.2%, 6/1/17 .............................................. 10,000,000 10,892,100
US West Capital Funding Inc., 7.9%, 2/1/27 .............................................. 15,000,000 16,415,100
------------
107,680,315
------------
Media 5.0%
Lamar Advertising Co., 8.625%, 9/15/07 .................................................. 3,000,000 3,071,250
Outdoor Systems, Inc., 8.875%, 6/15/07 .................................................. 5,000,000 5,225,000
Tele-Communications, Inc., 8%, 8/1/05 ................................................... 11,000,000 11,787,930
Time Warner Inc., 9.125%, 1/15/13 ....................................................... 12,000,000 14,289,240
------------
34,373,420
------------
Service Industries 1.3%
SC International Services, Inc., 9.25%, 9/1/07 .......................................... 4,000,000 4,120,000
ServiceMaster L.P., 7.45%, 8/15/27 ...................................................... 5,000,000 5,195,650
------------
9,315,650
------------
Durables 1.8%
Tracor, Inc., 8.5%, 3/1/07 .............................................................. 12,000,000 12,120,000
------------
Manufacturing 1.7%
Mead Corp., 7.55%, 3/1/47 ............................................................... 11,000,000 11,791,230
------------
Technology 3.6%
Amphenol Corp., 9.875%, 5/15/07 ......................................................... 3,000,000 3,150,000
International Business Machines Corp., 7%, 10/30/45 ..................................... 15,000,000 15,364,650
Loral Corp., 8.375%, 6/15/24 ............................................................ 5,000,000 5,872,800
------------
24,387,450
------------
Energy 3.6%
Barrett Resources Corp., 7.55%, 2/1/07 .................................................. 5,500,000 5,690,465
Chesapeake Energy Corp., "B", 8.5%, 3/15/12 ............................................. 5,900,000 5,885,250
Ensco International Inc., 7.2%, 11/15/27 ................................................ 2,750,000 2,774,778
Lomak Petroleum, Inc., 8.75%, 1/15/07 ................................................... 10,000,000 10,100,000
------------
24,450,493
------------
Construction 1.1%
Nortek, Inc., 9.125%, 9/1/07 ............................................................ 3,500,000 3,552,500
Synthetic Industries, Inc., Series B, 9.25%, 2/15/07 .................................... 4,000,000 4,200,000
------------
7,752,500
------------
Transportation 0.8%
Atlantic Express, Inc., 10.75%, 2/1/04 .................................................. 5,000,000 5,312,500
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 - Scudder Income Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Utilities 1.0%
Houston Light & Power Capital Corp., 8.257%, 2/1/37 ..................................... 6,750,000 7,099,110
------------
Miscellaneous 0.6%
Allied Holdings Inc., 8.625%, 10/1/07 ................................................... 4,000,000 4,059,999
- ------------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost $248,169,366) 260,471,067
- ------------------------------------------------------------------------------------------------------------------------------
Other 0.6%
- ------------------------------------------------------------------------------------------------------------------------------
------------
New Jersey Economic Development Authority, 7.425%, 2/15/29 (Cost $3,500,000) ............ 3,500,000 3,834,530
------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $667,133,974) (a) 685,067,479
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $667,133,974. At December 31,
1997, net unrealized appreciation for all securities based on tax cost was
$17,933,505. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $19,152,439 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$1,218,934.
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.
The accompanying notes are an integral part of the financial statements.
14 - Scudder Income Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of December 31, 1997
<TABLE>
<CAPTION>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investments, at market (identified cost $667,133,974) .............. $685,067,479
Cash ............................................................... 18,856
Interest receivable ................................................ 10,342,316
Receivable for Fund shares sold .................................... 1,596,772
Other receivables and assets ....................................... 473,223
----------------
Total assets ....................................................... 697,498,646
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Payable for Fund shares redeemed ................................... 1,329,635
Payable for daily variation margin on closed futures contracts ..... 46,260
Accrued management fee ............................................. 351,753
Other payables and accrued expenses ................................ 515,281
----------------
Total liabilities .................................................. 2,242,929
---------------------------------------------------------------------------------------------
Net assets, at market value $695,255,717
---------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Net unrealized appreciation on investments ......................... 17,933,505
Accumulated net realized loss ...................................... (1,907,168)
Paid-in capital .................................................... 679,229,380
---------------------------------------------------------------------------------------------
Net assets, at market value $695,255,717
---------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($695,255,717 / 51,662,855 outstanding shares of beneficial ----------------
interest, $.01 par value, unlimited number of shares authorized) ... $13.46
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15 - Scudder Income Fund
<PAGE>
Statement of Operations
year ended December 31, 1997
<TABLE>
<CAPTION>
Investment Income
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Income:
Interest ............................................................ $ 44,304,949
-----------------
Expenses:
Management fee ...................................................... 3,750,067
Services to shareholders ............................................ 3,048,479
Custodian and accounting fees ....................................... 148,997
Trustees' fees and expenses ......................................... 36,929
Reports to shareholders ............................................. 130,514
Auditing ............................................................ 44,928
Legal ............................................................... 19,999
Registration fees ................................................... 62,781
Other ............................................................... 25,605
-----------------
7,268,299
----------------------------------------------------------------------------------------------
Net investment income 37,036,650
----------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments
- ------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ......................................................... 840,210
Futures ............................................................. (133,605)
-----------------
706,605
Net unrealized appreciation (depreciation) during the period on
investments ......................................................... 14,225,433
----------------------------------------------------------------------------------------------
Net gain on investments 14,932,038
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 51,968,688
----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16 - Scudder Income Fund
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended December 31,
Increase (Decrease) in Net Assets 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Operations:
<S> <C> <C>
Net investment income ...................................... $ 37,036,650 $ 34,599,797
Net realized gain from investment transactions ............. 706,605 5,099,598
Net unrealized appreciation (depreciation) on investment
transactions during the period ........................... 14,225,433 (20,219,372)
--------------- ---------------
Net increase in net assets resulting from operations ....... 51,968,688 19,480,023
--------------- ---------------
Distributions to shareholders:
From net investment income ................................. (37,423,384) (35,051,118)
--------------- ---------------
From net realized gains .................................... (443,613) (3,898,759)
--------------- ---------------
Fund share transactions:
Proceeds from shares sold .................................. 288,306,064 167,697,618
Net asset value of shares issued to shareholders in
reinvestment of distributions ............................ 33,681,717 34,318,821
Cost of shares redeemed .................................... (219,353,257) (182,294,031)
--------------- ---------------
Net increase in net assets from Fund share transactions .... 102,634,524 19,722,408
--------------- ---------------
Increase (decrease) in net assets .......................... 116,736,215 252,554
Net assets at beginning of period .......................... 578,519,502 578,266,948
Net assets at end of period (including undistributed net --------------- ---------------
investment income of $618,802 at December 31, 1996) ...... $695,255,717 $578,519,502
--------------- ---------------
Other Information
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period .................. 43,994,954 42,499,531
--------------- ---------------
Shares sold ................................................ 21,674,473 12,592,757
Shares issued to shareholders in reinvestment of
distributions ............................................ 2,533,020 2,612,478
Shares redeemed ............................................ (16,539,592) (13,709,812)
--------------- ---------------
Net increase in Fund shares ................................ 7,667,901 1,495,423
--------------- ---------------
Shares outstanding at end of period ........................ 51,662,855 43,994,954
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17 - Scudder Income Fund
<PAGE>
Financial Highlights
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
1997(a) 1996(a) 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning ----------------------------------------------------------------------------------------------
of period ......................... $13.15 $13.61 $12.32 $13.71 $13.48 $13.91 $12.82 $12.89 $12.41 $12.40
----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ............... .80 .80 .83 .84 .90 .95 .93 1.03 1.05 1.07
Net realized and unrealized gain
(loss) on investments ............. .31 (.36) 1.41 (1.45) .77 (.05) 1.22 (.01) .49 .01
Total from investment ----------------------------------------------------------------------------------------------
operations ........................ 1.11 .44 2.24 (.61) 1.67 .90 2.15 1.02 1.54 1.08
----------------------------------------------------------------------------------------------
Less distributions:
From net investment income .......... (.79) (.81) (.86) (.76) (.87) (.93) (.92) (1.03) (1.06) (1.07)
From paid-in capital ................ -- -- -- -- -- -- -- (.06)(b) -- --
From net realized gains on
investment transactions ........... (.01) (.09) (.03) -- (.45) (.40) (.14) -- -- --
In excess of net realized gains ..... -- -- (.06) (.02) (.12) -- -- -- -- --
----------------------------------------------------------------------------------------------
Total distributions ................. (.80) (.90) (.95) (.78) (1.44) (1.33) (1.06) (1.09) (1.06) (1.07)
----------------------------------------------------------------------------------------------
Net asset value, end of ----------------------------------------------------------------------------------------------
period ............................ $13.46 $13.15 $13.61 $12.32 $13.71 $13.48 $13.91 $12.82 $12.89 $12.41
----------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (%) .................... 8.66 3.41 18.54 (4.43) 12.58 6.74 17.32 8.32 12.75 8.91
Ratios and Supplemental Data
Net assets, end of period
($ millions) ...................... 695 579 578 463 509 457 403 302 272 245
Ratio of operating expenses to
average daily net assets (%) ...... 1.18 .98 .99 .97 .92 .93 .97 .95 .93 .94
Ratio of net investment income to
average daily net assets (%) ...... 6.00 6.01 6.35 6.43 6.32 7.05 7.13 8.21 8.23 8.53
Portfolio turnover rate (%) ......... 61.9 66.9 128.3 60.3 130.6 121.3 109.6 48.0 63.2 19.6
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) 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 International Revenue Code section 4982.
18 - Scudder Income Fund
<PAGE>
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 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 original 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. Money market investments purchased with an original
maturity of sixty days or less are valued at amortized cost. All other
securities are valued at their fair value as determined in good faith by the
Valuation Committee of the Board of Trustees.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian,
receives delivery of the underlying securities, the amount of which at the time
of purchase and each subsequent business day is required to be maintained at
such a level that the market value, depending on the maturity of the repurchase
agreement, is equal to at least 100.5% of the repurchase price.
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.
Futures Contracts. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of an item at a
specified price on a specific date (settlement date). During the year ended
December 31, 1997, the Fund purchased interest rate futures to manage the
duration of the portfolio and sold interest rate futures to hedge against
declines in the value of portfolio securities.
Upon entering into a futures contract, the Fund is required to deposit with a
financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying security, and
are
19 - Scudder Income Fund
<PAGE>
recorded for financial reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction, the Fund will realize a gain
or loss equal to the difference between the value of the futures contract to
sell and the futures contract to buy. Futures contracts are valued at the most
recent settlement price.
Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out a
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly with changes in the value of the
securities or currencies hedged. When utilizing futures contracts to hedge, the
Fund gives up the opportunity to profit from favorable price movements in the
hedged positions during the term of the contract.
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. The Fund accordingly paid no federal income taxes and no federal
income tax provision was required. In addition, from November 1, 1997 through
December 31, 1997, the Fund incurred approximately $242,000 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 December
31, 1998.
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 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.
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, 1997, purchases and sales of investment
securities (excluding short-term investments and direct U.S. Government
obligations) aggregated $300,292,671 and $200,552,686, respectively. Purchases
and sales of direct U.S. Government obligations aggregated $79,803,042 and
$118,890,856, respectively.
The aggregate face value of futures contracts opened and closed during the year
ended December 31, 1997 was $2,480,419,652.
20 - Scudder Income Fund
<PAGE>
C. Related Parties
Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, formed a new global investment organization by combining
Scudder's business with that of Zurich's subsidiary, Zurich Kemper Investments,
Inc. As a result of the transaction, Scudder changed its name to Scudder Kemper
Investments Inc. ("Scudder Kemper" or the "Adviser"). The transaction between
Scudder and Zurich resulted in the termination of the Fund's Investment
Management Agreement with Scudder. However, a new Investment Management
Agreement (the "Management Agreement") between the Fund and Scudder Kemper was
approved by the Fund's Board of Trustees and by the Fund's Shareholders. The
Management Agreement, which is effective December 31, 1997, is the same in all
material respects as the corresponding previous Investment Management Agreement,
except that Scudder Kemper is the new investment adviser to the Fund.
Under the Management Agreement with Scudder Kemper, 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 Management Agreement. The
management fee payable under the Management 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. For the year ended
December 31, 1997, the fee pursuant to these agreements amounted to $3,750,067,
which was equivalent to an annual effective rate of .61% 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 December 31, 1997, the amount charged to the Fund by SSC aggregated
$787,239, of which $65,400 is unpaid at December 31, 1997.
Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans invested in the Fund. For the year ended December 31,
1997, the amount charged to the Fund by STC aggregated $1,641,229, of which
$162,040 is unpaid at December 31, 1997.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
December 31, 1997, the amount charged to the Fund by SFAC aggregated $91,363, of
which $7,208 is unpaid at December 31, 1997.
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 Funds will be charged expenses that exceed the estimated savings to
each respective Underlying Fund. These estimated savings result from the
elimination of separate shareholder accounts which either currently are or have
potential to be invested in the Underlying Funds. For the year ended December
31, 1997, the Special Servicing Agreement expense charged to the Fund amounted
to $437,527.
21 - Scudder Income Fund
<PAGE>
The Trust pays each Trustee not affiliated with the Adviser an annual retainer,
divided equally among the series of the Trust, plus specified amounts for
attended board and committee meetings. For the year ended December 31, 1997,
Trustees' fees and expenses aggregated $36,929.
22 - Scudder Income Fund
<PAGE>
Report of Independent Accountants
To the Trustees of Scudder Portfolio Trust 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, 1997, 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, 1997 by correspondence with the custodian. 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, 1997, 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 23, 1998
23 - Scudder Income Fund
<PAGE>
Tax Information
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$443,613 as a capital gain dividend for its year ended December 31, 1997.
24 - Scudder Income Fund
<PAGE>
Shareholder Meeting Results
A Special Meeting of Shareholders (the "Meeting") of Scudder Income Fund (the
"Fund") was held on October 24, 1997, at the office of Scudder Kemper
Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two International
Place, Boston, Massachusetts 02110. At the Meeting, as adjourned and reconvened,
the following matters were voted upon by the shareholders (the resulting votes
for each matter are presented below). With regard to certain proposals, it was
recommended that the Meeting be reconvened in order to provide shareholders with
an additional opportunity to return their proxies. The date of the reconvened
meeting at which the matters were decided is noted after the proposed matter.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
24,473,428 807,496 563,326 1,103,741
2. To elect Trustees.
Number of Votes:
----------------
Trustee For Withheld
------- --- --------
Henry P. Becton, Jr. 25,169,514 674,736
Dawn-Marie Driscoll 25,166,017 678,233
Peter B. Freeman 25,166,380 677,870
George M. Lovejoy, Jr. 25,164,248 680,002
Dr. Wesley W. Marple, Jr. 25,144,761 699,489
Daniel Pierce 25,154,160 690,090
Kathryn L. Quirk 25,163,336 680,914
Jean C. Tempel 25,169,920 674,330
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise. (Approved on December 2, 1997).
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
23,374,892 1,498,776 1,396,199 848,332
25 - Scudder Income Fund
<PAGE>
4. To approve certain amendments to the Declaration of Trust. Sufficient
proxies had not been received by December 2, 1997 to approve the
amendments to the Declaration of Trust. Management has determined not to
continue to seek shareholder approval for this item.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
24,623,607 1,181,230 1,465,030 848,332
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
----------------
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<S> <C> <C> <C> <C>
5.1 Diversification 22,344,958 1,036,284 1,359,267 1,103,741
5.2 Borrowing 22,245,315 1,137,881 1,357,313 1,103,741
5.3 Senior securities 22,326,589 1,053,747 1,360,173 1,103,741
5.4 Concentration 22,300,948 1,078,891 1,360,670 1,103,741
5.5 Underwriting of securities 22,314,569 916,519 1,509,421 1,103,741
5.6 Investment in real estate 22,329,966 907,107 1,503,436 1,103,741
5.7 Purchase of physical commodities 22,299,452 941,489 1,499,568 1,103,741
5.8 Lending 22,319,531 917,617 1,503,361 1,103,741
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's independent
accountants.
Number of Votes:
----------------
For Against Abstain
--- ------- -------
24,876,264 326,225 641,761
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary power
to vote on a particular matter.
26 - Scudder Income Fund
<PAGE>
This Page
intentionally
left blank.
27 - Scudder Income Fund
<PAGE>
Officers and Trustees
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General
Manager, WGBH Educational
Foundation
Dawn-Marie Driscoll
Trustee; President, Driscoll
Associates
Peter B. Freeman
Trustee; Corporate Director and
Trustee
George M. Lovejoy, Jr.
Trustee; President and Director,
Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business
Administration, Northeastern
University, College of Business
Administration
Kathryn L. Quirk*
Trustee, Vice President and
Assistant Secretary
Jean C. Tempel
Trustee; Director, General
Partner, TL Ventures
Kelly D. Babson*
Vice President
Jerard K. Hartman*
Vice President
William M. Hutchinson*
Vice President
Thomas W. Joseph*
Vice President
Valerie F. Malter*
Vice President
Thomas F. McDonough*
Vice President, Secretary and
Treasurer
John R. Hebble*
Assistant Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
28 - Scudder Income Fund
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Investment Products and Services
The Scudder Family of Funds+++
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Money Market
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Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Premium Shares*
Managed Shares*
Scudder Government Money Market Series --
Managed Shares*
Tax Free Money Market+
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Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**
Tax Free+
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Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited Term Tax Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**
U.S. Income
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Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund
Global Income
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Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
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Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
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Scudder Balanced Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
U.S. Growth
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Value
Scudder Large Company Value Fund
Scudder Value Fund
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Growth
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Worldwide
Scudder Global Fund
Scudder International Growth and Income Fund
Scudder International Fund
Scudder Global Discovery Fund
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Retirement Programs
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Traditional IRA
Roth IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)
Education Accounts
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Education IRA
UGMA/UTMA
Closed-End Funds#
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The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal Fund, Inc.
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +++Funds within categories are listed
in order from expected least risk to most risk. Certain Scudder funds may not be
available for purchase or exchange. +A portion of the income from the tax-free
funds may be subject to federal, state, and local taxes. *A class of shares of
the Fund. **Not available in all states. +++ +++A no-load variable annuity
contract provided by Charter National Life Insurance Company and its affiliate,
offered by Scudder's insurance agencies, 1-800-225-2470. #These funds, advised
by Scudder Kemper Investments, Inc., are traded on the New York Stock Exchange
and, in some cases, on various other stock exchanges.
29 - Scudder Income Fund
<PAGE>
Scudder Solutions
<TABLE>
<CAPTION>
Convenient ways to invest, quickly and reliably:
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<S> <C> <C>
Automatic Investment Plan QuickBuy
A convenient investment program in which money is Lets you purchase Scudder fund shares
electronically debited from your bank account monthly to electronically, avoiding potential mailing delays;
regularly purchase fund shares and "dollar cost average" money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from a previously designated bank
fewer when it's higher, which can reduce your average account.
purchase price over time.
Automatic Dividend Transfer Payroll Deduction and Direct Deposit
The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).
Dollar cost averaging involves continuous investment in securities regardless of price
fluctuations and does not assure a profit or protect against loss in declining markets.
Investors should consider their ability to continue such a plan through periods of low price
levels.
Around-the-clock electronic account service and information, including some transactions:
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Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- http://funds.scudder.com
1-800-343-2890
Scudder Electronic Account Services: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.
Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
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Automatic Withdrawal Plan QuickSell
You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you previously designated.
DistributionsDirect
Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.
For more information about these services, call a Scudder representative at 1-800-225-5163
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30 - Scudder Income Fund
<PAGE>
Mutual Funds and More -- Brokerage and Guidance Services:
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Scudder Brokerage Services Scudder Portfolio Builder
Offers you access to a world of investments, A free service designed to help suggest ways investors like
including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global,
over 6,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
500 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder
shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load
Brokerage account already reserved for them, with Scudder funds but want ongoing professional assistance in
no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly
Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for
individuals investing $100,000 or more.
Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.
Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Services, Inc., Adviser.
For more information about these services, call a Scudder representative at 1-800-225-5163
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Additional Information on How to Contact Scudder:
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For existing account services and transactions Please address all written correspondence to
Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds
P.O. Box 2291
For establishing 401(k) and 403(b) plans Boston, Massachusetts
Scudder Defined Contribution Services -- 02107-2291
1-800-323-6105
Or Stop by a Scudder Investor Center
For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of
additional applications and prospectuses, or for the Scudder Investor Centers. Check for an Investor Center near
answers to investment questions you -- they can be found in the following cities:
Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco
[email protected] Boston New York
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32 - Scudder Income Fund
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc., is one of the largest and most experienced
investment management oganizations worldwide, managing more than $200 billion in
assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts. It is one of the ten largest mutual fund companies in the
U.S.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 79
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Group. As a result, Zurich's subsidiary, Zurich Kemper Investments,
Inc., with 50 years of mutual fund and investment management experience, was
combined with Scudder. Headquartered in New York, Scudder Kemper Investments
offers a full range of investment counsel and asset management capabilities,
based on a combination of proprietary research and disciplined, long-term
investment strategies. With its global investment resources and perspective,
the firm seeks opportunities in markets throughout the world to meet the needs
of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Group. The Zurich Group is an internationally recognized leader in
financial services, including property/casualty and life insurance, reinsurance,
and asset management.
This information must be preceded or accompanied by a
current prospectus.
Portfolio changes should not be considered recommendations
for action by individual investors.
SCUDDER
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