Scudder
Income
Fund
Annual Report
December 31, 1998
and the one-month
period ended
January 31, 1999
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
12/31/98: $805.9 million
- --------------------------------------------------------------------------------
o Interest rates generally declined and bond prices rose over the year with
long-term U.S. Treasury securities providing the best performance, especially
during the third quarter.
o Scudder Income Fund's 6.11% total return for the 12-month period ended
December 31, 1998 reflected an emphasis on defensive corporate bond issues.
o The Fund maintained its four-star rating from Morningstar for its
risk-adjusted performance among 1,488 taxable bond funds as of December 31,
1998.^1
Table of Contents
3 Letter from the Fund's President 25 Notes to Financial Statements
4 Performance Update 29 Report of Independent Accountants
6 Portfolio Summary 30 Tax Information
8 Portfolio Management Discussion 31 Shareholder Meeting Results
12 Glossary of Investment Terms 32 Officers and Trustees
13 Investment Portfolio 33 Investment Products and Services
21 Financial Statements 34 Scudder Solutions
24 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 1,488,
987, and 368 funds, respectively. Past performance is no guarantee of
future results.
2 - Scudder Income Fund
<PAGE>
Letter from the Fund's President
Dear Shareholders,
Interest rates fell throughout much of the world in 1998, prompted by
sluggish economies and strong deflationary forces. In the United States, the
picture was somewhat different, with robust economic growth of 3.7%.
Nonetheless, a "growth without inflation" environment contributed to generous
price gains for many domestic bond investors over the year. The surprise of the
Russian currency and hedge fund crises in the third quarter further supported
the domestic bond market, but also reminded investors of the risks inherent in
investing -- risks that have been there all along.
As we ponder another year of strong performance for the stock and bond
markets, and what 1999 may hold for investors, the importance of diversification
cannot be overstated. This straightforward principle is particularly important
in these times when we have had nearly eight consecutive years of strong
domestic equity returns. Investors can be easily lulled into believing that 20%
or higher equity returns every year are normal. In fact, long-run equity returns
have been about half that amount. While the U.S. stock market may record another
period of strong performance, we believe that investors would benefit from
adequate exposure to several asset classes, such as fixed income, small-cap, and
international equities, and that such diversification will provide solid return
with lowered risk.
The new year is a good point at which to review your portfolio allocations.
We suggest that you take this opportunity to consider ways to improve portfolio
diversification that is consistent with your long-term objectives. If you would
like to discuss your current asset allocations, and ways that you can better
manage and monitor your portfolio, please call us at 1-800-225-2470.
For those of you who are interested in new Scudder products, we recently
introduced two funds which employ portfolio strategies that are designed to
minimize tax consequences to investors: Scudder Tax Managed Growth Fund -- which
seeks long-term growth of capital through equity investments in medium- to
large-sized U.S. companies, and Scudder Tax Managed Small Company Fund -- which
focuses on small-cap stocks. For further information on these new funds, please
call Scudder Investor Relations at the number above.
As part of a larger effort to create efficiencies and reduce the costs of
producing Scudder Fund regulatory materials, such as shareholder reports and
prospectuses, the fiscal year end for Scudder Income Fund changed from December
31 to January 31. As a result, going forward you will receive the Fund's
semiannual report in September (as of July 31) and the annual report in March
(as of January 31).
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President,
Scudder Income Fund
3 - Scudder Income Fund
<PAGE>
Performance Update as of January 31, 1999
- ----------------------
Fund Index Comparisons
- ----------------------
Total Return
- ---------------------------------------------------
Period Ended Growth of Average
1/31/1999 $10,000 Cumulative Annual
- ---------------------------------------------------
Scudder Income Fund
- ---------------------------------------------------
1 Year $ 10,604 6.04% 6.04%
5 Year $ 13,348 33.48% 5.95%
10 Year $ 23,170 131.70% 8.77%
- ---------------------------------------------------
LB Aggregate Bond Index
- ---------------------------------------------------
1 Year $ 10,806 8.06% 8.06%
5 Year $ 14,114 41.14% 7.13%
10 Year $ 24,058 140.58% 9.17%
- ---------------------------------------------------
- ------------------------------
Growth of a $10,000 Investment
- ------------------------------
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
CHART DATA:
LB Aggregate Bond Index Scudder Income Fund
----------------------- -------------------
'89 10000 10000
'90 11157 10959
'91 12455 12208
'92 14076 13871
'93 15620 15379
'94 17048 17358
'95 16652 16496
'96 19474 19386
'97 20105 19961
'98 22263 21849
'99 24058 23170
Yearly periods ended January 31
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
- ---------------------------------
Yearly Periods Ended January 31
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
ILLUSTRATING THE FUND TOTAL RETURN (%) AND
INDEX TOTAL RETURN (%)
CHART DATA:
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999(a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value $ 12.69 $ 12.98 $ 13.64 $ 13.73 $ 14.00 $ 12.51 $ 13.70 $ 13.18 $ 13.59 $ 13.36
- ------------------------------------------------------------------------------------------------------------------------------------
Income Dividends $ 1.06 $ 1.03 $ .92 $ .93 $ .87 $ .76 $ .86 $ .81 $ .79 $ .79
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Gains and Paid-In Distributions $ -- $ .06 $ .14 $ .40 $ .57 $ .02 $ .09 $ .09 $ .01 $ .24
- ------------------------------------------------------------------------------------------------------------------------------------
Fund Total Return (%) 9.58 11.40 13.62 10.87 12.87 -4.96 17.52 2.97 9.46 6.04
- ------------------------------------------------------------------------------------------------------------------------------------
Index Total Return (%) 11.56 11.62 13.02 10.97 9.14 -2.32 16.94 3.26 10.73 8.06
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All performance is historical, assumes reinvestment of all dividends and capital
gains, and is not indicative of future results. Investment return and principal
value will fluctuate, so an investor's shares, when redeemed, may be worth more
or less than when purchased. If the Adviser had not maintained the Fund's
expenses, the total return for the one year period would have been lower.
(a) On August 10, 1998, the Board of Trustees of the Fund changed the fiscal
year end from December 31 to January 31.
4 - Scudder Income Fund
<PAGE>
Performance Update as of December 31, 1998
- ----------------------
Fund Index Comparisons
- ----------------------
Total Return
- ---------------------------------------------------
Period Ended Growth of Average
12/31/98 $10,000 Cumulative Annual
- ---------------------------------------------------
Scudder Income Fund
- ---------------------------------------------------
1 Year $ 10,611 6.11% 6.11%
5 Year $ 13,508 35.08% 6.20%
10 Year $ 23,258 132.58% 8.81%
- ---------------------------------------------------
LB Aggregate Bond Index
- ---------------------------------------------------
1 Year $ 10,867 8.67% 8.67%
5 Year $ 14,204 42.04% 7.27%
10 Year $ 24,232 142.32% 9.25%
- ---------------------------------------------------
- ------------------------------
Growth of a $10,000 Investment
- ------------------------------
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
CHART DATA:
LB Aggregate Bond Index Scudder Income Fund
----------------------- -------------------
'88 10000 10000
'89 11453 11275
'90 12476 12213
'91 14472 14328
'92 15544 15293
'93 17060 17218
'94 16562 16455
'95 19622 19507
'96 20331 20172
'97 22298 21919
'98 24232 23258
Yearly periods ended December 31
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
- ---------------------------------
Yearly Periods Ended December 31
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
ILLUSTRATING THE FUND TOTAL RETURN (%) AND
INDEX TOTAL RETURN (%)
CHART DATA:
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value $ 12.89 $ 12.82 $ 13.91 $ 13.48 $ 13.71 $ 12.32 $ 13.61 $ 13.15 $ 13.46 $ 13.24
- ------------------------------------------------------------------------------------------------------------------------------------
Income Dividends $ 1.06 $ 1.03 $ .92 $ .93 $ .87 $ .76 $ .86 $ .81 $ .79 $ .79
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Gains and Paid-In Distributions $ -- $ .06 $ .14 $ .40 $ .57 $ .02 $ .09 $ .09 $ .01 $ .24
- ------------------------------------------------------------------------------------------------------------------------------------
Fund Total Return (%) 12.75 8.32 17.32 6.74 12.58 -4.43 18.54 3.41 8.66 6.11
- ------------------------------------------------------------------------------------------------------------------------------------
Index Total Return (%) 14.53 8.96 16.00 7.40 9.75 -2.92 18.47 3.63 9.67 8.67
- ------------------------------------------------------------------------------------------------------------------------------------
</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. If the Adviser had not maintained the Fund's
expenses, the total return for the one year period would have been lower.
5 - Scudder Income Fund
<PAGE>
Portfolio Summary as of January 31, 1999
- ---------------
Diversification
- ---------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
Corporate Bonds 54%
U.S. Treasury Obligations 22%
U.S. Government Agency Pass-Thrus 9%
Asset Backed Securities 7%
Cash Equivalents 6%
Other 2%
---------------------------------------------
100%
---------------------------------------------
Asset weightings reflect management's emphasis on
diversification among the corporate, government, and
mortgage sectors of the bond market.
- -------
Quality
- -------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
U.S. Government & Agencies 33%
AAA* 8%
AA 8%
A 19%
BBB 13%
BB 13%
B 4%
NR 2%
---------------------------------------------
100%
---------------------------------------------
*Category includes cash equivalents
The Fund's position in government bonds increased slightly
in January.
- ------------------
Effective Maturity
- ------------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
Less than 1 year 1%
1 - 5 years 35%
5 - 8 years 30%
8 - 15 years 16%
Greater than 15 years 18%
---------------------------------------------
100%
---------------------------------------------
Weighted average effective maturity: 9.13
years
Management further increased its weighting in
intermediate-term bonds during the one month period.
For more complete details about the Fund's investment portfolio, see page 13. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
6 - Scudder Income Fund
<PAGE>
Portfolio Summary as of December 31, 1998
- ---------------
Diversification
- ---------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
Corporate Bonds 56%
U.S. Treasury Obligations 26%
Asset Backed Securities 9%
U.S. Government Agency Pass-Thrus 4%
Cash Equivalents 3%
Other 2%
---------------------------------------------
100%
---------------------------------------------
Emphasis on the corporate bond sector was increased over the
year based on its higher yields and management's belief that
the sector is undervalued.
- -------
Quality
- -------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
U.S. Government & Agencies 30%
AAA* 11%
AA 7%
A 19%
BBB 14%
BB 14%
B 4%
NR 1%
---------------------------------------------
100%
---------------------------------------------
*Category includes cash equivalents
Overall portfolio quality remained high with an average
rating of A, as the highest quality securities tended to
provide the best total returns.
- ------------------
Effective Maturity
- ------------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
Less than 1 year 5%
1 - 5 years 33%
5 - 8 years 28%
8 - 15 years 13%
Greater than 15 years 21%
---------------------------------------------
100%
---------------------------------------------
Weighted average effective maturity: 9.33
years
Management concentrated on intermediate-term (3-7 year
maturity) corporate bonds in the second half, which were
believed to provide most of the returns of long-term bonds
with significantly reduced price volatility.
For more complete details about the Fund's investment portfolio, see page 17. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
7 - Scudder Income Fund
<PAGE>
Portfolio Management Discussion
We spoke with Stephen Wohler, lead portfolio manager of Scudder Income Fund,
regarding the market environment and the Fund's performance for the 12-month
period ended December 31, 1998. Highlights of that discussion are listed below.
Q: Bond yields declined and prices rose for most of the Fund's fiscal year, but
the path to lower rates was far from smooth. How would you characterize the
environment for bond investing in 1998?
Overall, the environment has been favorable for bond investors. Economic growth
continued at a healthy pace, without sparking higher inflation -- which can be a
threat to bond prices. Another positive has been the federal budget surplus.
Federal borrowing normally crowds out other issuers and drives up yields, but
the surplus has led to smaller and fewer auctions by the Treasury department.
These factors helped set the stage for generally declining yields and rising
bond prices, with the benchmark 30-year Treasury bond yield declining from 5.9%
to 5.1% over the year.
However, it was not a straight line to lower yields. The devaluation of the
Russian currency, the collapse of hedge fund Long Term Capital Management, and
the subsequent unwinding of other hedge fund transactions rocked the bond
markets in August. Many investors were concerned that the meltdown in Russia
might spread to other markets, exposing a number of financial institutions --
such as banks in Europe and the U.S. -- to trading losses. In this environment,
liquidity dried up and investor confidence was shaken.
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE:
The Interest Rate Picture
December 1990 through December 1998
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
6.9 6.72 6.49 5.69
6.93 6.71 6.46 5.70
12/96 6.64 6.42 6.21 5.48
7.1 6.92 6.77 5.93
6.79 6.51 6.38 5.66
6.41 6.11 6.00 5.46
12/97 5.92 5.75 5.71 5.60
5.93 5.65 5.62 5.48
5.63 5.45 5.47 5.29
5.256 4.972 4.71 4.849
12/98 5.150 4.603 4.233 4.176
5.092 4.646 4.542 4.519
- ----------------------------------------------------------------------
LINE CHART FOOTNOTE:
The benchmark 30-year Treasury bond yield declined over the 12-month period as
bond prices generally rose.
Q: How did investors react?
The events caused a dramatic flight to quality during the August-September
period. Global investors bought the highest quality and most liquid issues --
specifically U.S. Treasury securities. This prompted a powerful rally in the
Treasury bond market, with the yield on the 30-year Treasury dipping as low as
4.7%. The Federal Reserve, which is charged with keeping the U.S. economy in
balance, cut short-term rates three times over the September-November period in
an effort to ease concerns and restore liquidity to the markets. By the end of
the year, the federal funds rate had dropped from 5.50% to 4.75%, providing the
calming effect the markets needed. During the fourth quarter, Treasuries gave
back two-thirds of their gains from
8 - Scudder Income Fund
<PAGE>
the third quarter as recession fears abated, helping corporate bonds outperform
Treasuries for the first time in 1998.
Q: How did the Fund perform for the 12-month period ended December 31, 1998?
The Fund returned 6.11%, which compares to the 8.67% return of our benchmark,
the unmanaged Lehman Brothers Aggregate Bond Index. This index has significant
weighting in the government sector (46% of the index), which was the best
performing area of the bond market in 1998. The Fund's overweighting in
corporate bonds relative to this index contributed to its underperformance
relative to the index for the year. However, the same overweighting in
corporates helped the Fund outperform the index in the fourth quarter.
Q: With bond market volatility higher than average in 1998, how did this affect
different sectors?
As I've already noted, Treasuries were the best performing asset class. We
expect this in a declining rate environment because Treasuries typically are the
most reactive to changes in overall interest rates and are not affected by
changes in credit quality. However, they were also the most volatile. We
maintained an underweight position in Treasuries throughout the year (26% of
assets at the end of December) based on our conviction that corporate bonds have
been and will continue to be an attractive asset class over the long term.
Corporates generally provide higher yields than Treasuries with comparable
maturities, and we believe corporates are currently undervalued. While
Treasuries can provide outstanding returns in a declining rate environment, the
market was unsettled, raising the likelihood of getting whipsawed by wild price
gyrations. We believe our diversified, long-term approach can provide attractive
returns with less price risk than trying to make short-term bets on a single
sector.
Q: What areas are you favoring in the corporate sector?
As economic growth decelerated over the year, we became more defensive in our
approach by increasing our emphasis on intermediate-term non-cyclical issues.
When we say non-cyclicals, we are talking about companies that typically are not
affected by an economic slowdown, such as cable, media, and consumer non-durable
companies. We added some telecommunications issues, such as Qwest and Sprint,
which, we believe, stand to benefit from rapid growth in the demand for
communications infrastructure, and Chancellor Media, a growing TV and radio
operator. We also added other non-cyclicals, including Xerox and Safeway, a
supermarket chain, to our corporate holdings. We believe these companies have
solid financial positions and the potential to perform well in the slower growth
environment we expect in 1999.
Q: Earlier this year you added several positions in the oil sector based on the
rock bottom prices for oil and attractive company valuations. With the price of
oil declining further in the second half of the year, how did these positions
perform?
These issues underperformed other sectors of the corporate bond market. However,
we still held them as of the end of the year. They have attractive yields,
9 - Scudder Income Fund
<PAGE>
THE PRINTED DOCUMENT CONTAINS A TABLE HERE
TABLE TITLE:
Bond Market Performance
1998 Total Returns
- -------------------------------------------------------
Aggregate 8.69%
Asset-backed 7.76%
Corporate 8.57%
High yield 1.60%
Mortgage-backed 6.96%
Treasury 10.03%
- -------------------------------------------------------
Source: Lehman Brothers
- ----------
reasonable valuations, and favorable business fundamentals. Over the long-term,
we think they will add value to the portfolio.
Q: The high yield bond sector was hurt by the "flight to quality" in the third
quarter. How did you manage the portfolio's holdings in this area?
The high yield corporate bond sector began the year with a bang, but
significantly underperformed in the third quarter. The Fund held about 18% of
the portfolio in high yield corporate bonds as of the end of the period, a
weighting that we maintained throughout most of the year. This position, which
emphasized the higher quality end of the high yield spectrum, seemed to make
sense for the first half of the year given the environment of strong economic
growth. However, the Russian and hedge fund debacles in the third quarter
shocked the markets into fearing a recession was at hand. We have been selective
in our high yield holdings, but the flight to quality left behind most of these
issues.
Q: You've been underweighted in mortgage securities for most of the year. Why?
In a declining rate environment, mortgages tend to be unattractive investments,
although lower rates are great if you own a home. I suspect that many of our
shareholders have recently taken advantage of the declining rate environment to
refinance to a lower rate mortgage. Of course, when you refinance, the older,
higher rate mortgage goes away and a newer, lower rate mortgage is issued. Over
most of the year, we were selling our limited holdings of higher coupon
mortgages. Many had "call" features allowing the issuer to redeem them prior to
maturity and most are subject to prepayment risk. Despite our underweighting
over most of the year, we began building up the Fund's mortgage position near
the end of the period because we believed this sector has stabilized and offers
many attractive opportunities.
Q: Managing duration, or the portfolio's sensitivity to changes in interest
rates, is key to fund performance. What was your approach last year?
Overall, we didn't make any large duration bets, but took an incremental
approach to managing duration. During the first six months of the year we
gradually increased the portfolio's duration from 4.9 to 5.5 years based on our
expectations for a declining rate environment. (A longer duration in a declining
rate environment increases the portfolio's exposure to changes in interest
rates, and thus can lead to improved price gains.) By the end of the third
10 - Scudder Income Fund
<PAGE>
quarter, we had reduced duration to about 5.15 years, but in the final quarter
of the year, it rose to 5.3 years as we focused on adding intermediate-term
corporate issues to the portfolio. We like the intermediate-term bonds (bonds
with maturities from 3-7 years) because we think they offer most of the yield of
long bonds with significantly reduced price volatility.
Q: What is your outlook for 1999?
While a recession is possible in the first half of 1999, we think a slowdown is
the more likely scenario. Given this outlook, we expect to continue to emphasize
defensive issues in the corporate sector of the portfolio, while remaining
underweighted in Treasuries. In particular, we think the cable, media, and
non-durables sectors are attractive, and the portfolio's heavy weightings in
these areas should be resistant to downside risk. Since the Fed and the market
will probably take their direction from the slowing economy, we may consider
shortening duration further to take advantage of further declines in short-term
interest rates. In addition, we may also increase our significantly
underweighted position in mortgage-backed securities. In the meantime, we intend
to continue to manage the Fund with a diversified approach by capitalizing on
attractive opportunities in the corporate, government, and mortgage sectors of
the bond market.
Scudder Income Fund:
A Team Approach to Investing
Scudder Income Fund is managed by a team of Scudder Kemper Investments, Inc.
(the "Adviser") professionals, each of whom plays an important role in the
Fund's management process. Team members work together to develop investment
strategies and select securities for the Fund's portfolio. They are supported
by the Adviser's large staff of economists, research analysts, traders, and
other investment specialists who work in our offices across the United States
and abroad. We believe our team approach benefits Fund investors by bringing
together many disciplines and leveraging our extensive resources.
Stephen A. Wohler, Lead Portfolio Manager, joined the team in 1994 and is also
responsible for implementing the Fund's strategy. Mr. Wohler has over 18
years' experience managing fixed-income investments and has been with the
Adviser since 1979. Kelly D. Babson, Portfolio Manager, joined the Adviser in
1994 as a portfolio manager and has 17 years of experience in the fixed income
field, including 14 years of high-yield management. Robert S. Cessine,
Portfolio Manager, joined the Adviser in January 1993, and is responsible for
the Fund's investment strategy including duration management, asset
allocation, security selection and trading.
11 - 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
Fitch Investors Service, Moody's Investors Service,
or Standard and Poor's Corporation. Bonds with high
quality ratings are considered among the most
financially sound and liquid, and enable the issuer
to issue the bond at a lower interest rate than
lower rated issuers.
CALL PROTECTION The length of time during which a security cannot be
redeemed by its issuer. Treasury securities
generally are not callable, and corporate and
municipal securities generally cannot be called
within 10 years. Non-callable bonds or bonds with
many years until their call date are attractive to
many investors because they provide the assurance
that a bond will not be redeemed unexpectedly.
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 $100 a
year.
DURATION A measure of the portfolio's sensitivity to changes
in interest rates. If an investment portfolio has a
duration of 5 years and interest rates decline by 1%
from present levels, the value of the portfolio would
rise by about 5%, and vice versa.
FED FUNDS RATE An important short-term interest rate charged by
banks with excess reserves at the Federal Reserve
district bank to other banks needing overnight loans
to meet reserve requirements. Distinct from the
"Discount Rate" which is the rate the Federal
Reserve charges member banks for loans. Banks set
their rates at a level above the Discount Rate.
30-DAY SEC YIELD The standard yield reference for bond funds since
the SEC required all bond funds to quote yields
based on a prescribed formula. This yield
calculation reflects the 30-day average of the net
annualized income earnings capability of every
holding in a given fund's portfolio, assuming each
is held to maturity.
(Sources: Scudder Kemper Investments, Inc; Barron's Dictionary of
Finance and Investment Terms)
12 - Scudder Income Fund
<PAGE>
Investment Portfolio as of January 31, 1999
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements 5.7%
- ------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 1/29/1999 at 4.72%,
to be repurchased at $46,751,382 on 2/1/1999, collateralized by a $46,378,000 -------------
U.S. Treasury Bond, 3.625%, 1/15/2008 (Cost $46,733,000) ................................ 46,733,000 46,733,000
-------------
U.S. Treasury Obligations 22.1%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note, 5.625%, 12/31/2002 .................................................... 15,000,000 15,520,350
U.S. Treasury Note, 5.5%, 5/31/2003 ....................................................... 10,000,000 10,339,100
U.S. Treasury Note, 3.875%, 1/15/2009 ..................................................... 16,000,000 16,140,000
U.S. Treasury Bond, 10.75%, 8/15/2005 ..................................................... 55,000,000 73,252,850
U.S. Treasury Bond, 9.375%, 2/15/2006 ..................................................... 15,000,000 19,108,650
U.S. Treasury Bond, 7.25%, 5/15/2016 ...................................................... 21,000,000 25,570,860
U.S. Treasury Bond, 6.25%, 8/15/2023 ...................................................... 6,000,000 6,740,640
U.S. Treasury Bond, 3.625%, 4/15/2028 ..................................................... 15,750,000 15,787,869
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury Obligations (Cost $182,650,780) 182,460,319
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Pass-Thrus 8.5%
- ------------------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association Pass-thru, 7.5%, 11/15/2027 ...................... 5,825,029 6,016,148
Federal National Mortgage Association, 8.0%, with various maturities to 2/1/2013 .......... 23,463,197 24,119,669
Federal National Mortgage Association, 6.5%, 2/25/2028 (c) ................................ 40,000,000 40,362,400
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Government Agency Pass-Thrus (Cost $70,449,100) 70,498,217
- ------------------------------------------------------------------------------------------------------------------------------
Foreign Bonds-- U.S. $ Denominated 3.3%
- ------------------------------------------------------------------------------------------------------------------------------
Hutchison Whampoa, Ltd., 7.5%, 8/1/2027 ................................................... 9,750,000 7,936,793
ICI Investments, 6.75%, 8/7/2002 .......................................................... 10,000,000 10,050,000
PacifiCorp Australia, 6.15%, 1/15/2008 .................................................... 9,000,000 9,245,700
- ------------------------------------------------------------------------------------------------------------------------------
Total Foreign Bonds-- U.S. $ Denominated (Cost $28,825,200) 27,232,493
- ------------------------------------------------------------------------------------------------------------------------------
Asset Backed 7.3%
- ------------------------------------------------------------------------------------------------------------------------------
Automobile Receivables 1.2%
Premier Auto Trust Asset Backed Certificate, Series 1996-3 A4, 6.75%, 11/6/2000 ........... 10,000,000 10,090,600
-------------
Credit Card Receivables 2.4%
Advanta Corp. Series 1997-1 A4, 7.65%, 5/25/2027 (b) ...................................... 8,000,000 8,331,250
MBNA Master Credit Card Trust, 5.8%, 12/15/2005 ........................................... 10,000,000 10,168,700
Sears Credit Account Master Trust, Series 1995-A4, 6.25%, 1/15/2003 ....................... 1,291,672 1,292,072
-------------
19,792,022
-------------
Manufactured Housing Receivables 2.7%
Green Tree Financial Corp. Series 1997-1 B2, 7.76%, 3/15/2028 ............................. 4,250,000 3,640,557
Green Tree Financial Corp. Series 1998-2 B1, 7.17%, 1/15/2029 ............................. 5,000,000 4,743,750
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 - Scudder Income Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Green Tree Financial Corp. Series 1998-2 B1, 7.36%, 10/1/2020 ............................. 5,000,000 4,741,602
Merrill Lynch Mortgage Investors Inc., "B", Series 1991-D, 9.85%, 7/15/2011 ............... 8,500,000 8,529,155
-------------
21,655,064
-------------
Equipment Lease Receivables 1.0%
PBG Equipment Trust, Series 1A, 6.27%, 1/20/2012 .......................................... 8,528,138 8,644,036
- ------------------------------------------------------------------------------------------------------------------------------
Total Asset Backed (Cost $60,348,870) 60,181,722
- ------------------------------------------------------------------------------------------------------------------------------
Corporate Bonds 50.9%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 2.9%
Borden Inc., 7.875%, 2/15/2023 ............................................................ 5,000,000 4,435,000
Tricon Global Restaurants, 7.65%, 5/15/2008 ............................................... 9,500,000 10,070,000
Westpoint Stevens, Inc., 7.875%, 6/15/2005 ................................................ 9,500,000 9,761,250
-------------
24,266,250
-------------
Consumer Staples 4.0%
Bass America Inc., 6.625%, 3/1/2003 ....................................................... 9,500,000 9,795,925
Kellogg Co., 5.75%, 2/2/2001 .............................................................. 10,000,000 10,071,000
Safeway Inc., 6.05%, 11/15/2003 ........................................................... 6,000,000 6,051,060
The Great Atlantic & Pacific Tea Company, Inc., 7.7%, 1/15/2004 ........................... 7,000,000 7,035,000
-------------
32,952,985
-------------
Health 0.4%
Tenet Healthcare Corp., 8.625%, 1/15/2007 ................................................. 3,000,000 3,135,000
-------------
Communications 3.6%
MCI Communications Corp., 6.125%, 4/15/2002 ............................................... 8,900,000 9,031,987
Qwest Communications International, 7.5%, 11/1/2008 ....................................... 10,000,000 10,600,000
Sprint Capital Corp., 6.125%, 11/15/2008 .................................................. 10,000,000 10,235,400
-------------
29,867,387
-------------
Financial 10.2%
Bank United Capital Trust, 10.25%, 12/31/2026 ............................................. 4,250,000 4,250,000
Capital One Bank, 6.57%, 1/27/2003 ........................................................ 5,000,000 4,994,500
Commerce Bancorporation, 11.75%, 6/6/2027 ................................................. 6,200,000 6,510,000
First Union Institutional Capital II, 7.85%, 1/1/2027 (b) ................................. 14,000,000 15,388,800
First USA Bank, 5.85%, 2/22/2001 .......................................................... 9,750,000 9,843,308
General Electric Capital Corp., 6.02%, 5/4/2001 ........................................... 9,000,000 9,090,000
GS Escrow Corp., 7%, 8/1/2003 ............................................................. 7,000,000 7,000,000
Home Savings of America, 6%, 11/1/2000 .................................................... 10,000,000 10,051,300
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 - Scudder Income Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lehman Brothers Holdings, Inc., 7.25%, 10/15/2003 ......................................... 7,000,000 7,274,610
Prudential Insurance Co., 6.375%, 7/23/2006 ............................................... 10,000,000 10,239,500
-------------
84,642,018
-------------
Media 10.6%
Cablevision Systems Corp., 7.875%, 2/15/2018 (b) .......................................... 10,000,000 10,656,600
Chancellor Media Corp., 8%, 11/1/2008 ..................................................... 6,000,000 6,465,000
Cox Communications, Inc., 6.85%, 1/15/2018 (b) ............................................ 9,000,000 9,457,920
News America Holdings Inc., 9.25%, 2/1/2013 ............................................... 10,000,000 12,665,200
Outdoor Systems, Inc., 8.875%, 6/15/2007 (b) .............................................. 10,000,000 10,725,000
TCI-Communications, Inc., 8%, 8/1/2005 .................................................... 11,250,000 12,745,688
Time Warner Inc., 9.125%, 1/15/2013 ....................................................... 12,000,000 15,370,080
Time Warner Inc., 6.875%, 6/15/2018 ....................................................... 9,000,000 9,512,280
-------------
87,597,768
-------------
Service Industries 1.4%
Allied Waste North America, 7.375%, 1/1/2004 .............................................. 3,500,000 3,570,000
Morgan Stanley Dean Witter & Co., 5.625%, 1/20/2004 ....................................... 8,000,000 7,998,080
-------------
11,568,080
-------------
Durables 2.9%
Martin Marietta Corp., 6.5%, 4/15/2003 .................................................... 8,000,000 8,225,280
McDonnell Douglas Finance Corp., Medium Term Note, 6.75%, 12/23/2003 (b) .................. 10,000,000 10,473,300
Newport News Shipbuilding Co., 8.625%, 12/1/2006 .......................................... 5,000,000 5,412,500
-------------
24,111,080
-------------
Manufacturing 2.7%
Apache Corp., 7.7%, 3/15/2026 ............................................................. 2,000,000 2,085,420
Federal-Mogul Corp., 7.375%, 1/15/2006 .................................................... 5,000,000 4,945,250
Graham Packaging Co., 8.75%, 1/15/2008 .................................................... 5,150,000 5,253,000
Xerox Corp., 5.5%, 11/15/2003 ............................................................. 10,000,000 10,128,990
-------------
22,412,660
-------------
Technology 1.0%
Raytheon Co., 6%, 12/15/2010 .............................................................. 8,000,000 8,024,000
-------------
Energy 5.6%
Anadarko Petroleum Corp., 7%, 11/15/2027 (b) .............................................. 11,600,000 11,271,603
Barrett Resources Corp., 7.55%, 2/1/2007 (b) .............................................. 6,700,000 6,407,880
Lomak Petroleum, Inc., 8.75%, 1/15/2007 ................................................... 5,000,000 4,450,000
Louisiana Land & Exploration Co., 7.65%, 12/1/2023 ........................................ 5,000,000 5,330,900
Petroleum Geo-Services, 6.625%, 3/30/2008 ................................................. 8,000,000 7,841,360
</TABLE>
The accompanying notes are an integral part of the financial statements.
15 - Scudder Income Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Pioneer Natural Resources Co., 7.2%, 1/15/2028 ............................................ 6,500,000 4,598,750
Texas Eastern Transmission Corp., 10%, 8/15/2001 .......................................... 5,500,000 6,079,150
-------------
45,979,643
-------------
Construction 0.4%
Nortek, Inc., 9.125%, 9/1/2007 ............................................................ 3,250,000 3,388,125
-------------
Transportation 1.5%
Allied Holdings Inc., 8.625%, 10/1/2007 ................................................... 4,000,000 4,070,000
Continental Airlines Inc., 6.795%, 8/2/2018 ............................................... 8,000,000 8,112,800
-------------
12,182,800
-------------
Utilities 3.7%
Houston Light & Power Capital Corp., 8.257%, 2/1/2037 ..................................... 6,500,000 6,922,500
Niagara Mohawk Power Corp., 7.375%, 7/1/2003 .............................................. 13,000,000 13,511,290
Public Service Co. of Colorado, 6%, 4/15/2003 ............................................. 10,000,000 10,259,100
-------------
30,692,890
- ------------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost $411,548,598) 420,820,686
- ------------------------------------------------------------------------------------------------------------------------------
Other 2.2%
New Jersey Economic Development Authority, 7.425%, 2/15/2029 .............................. 3,500,000 4,086,600
Riverside Loan Trust I, 7.438%, 7/16/2008 ................................................. 15,000,000 14,013,570
- ------------------------------------------------------------------------------------------------------------------------------
Total Other (Cost $18,500,000) 18,100,170
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $819,055,548) (a) 826,026,607
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $819,284,767. At January 31,
1999, net unrealized appreciation for all securities based on tax cost was
$6,741,840. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $17,209,076 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$10,467,236.
(b) At January 31, 1999, these securities, in part or in whole have been
segregated to cover when-issued or forward delivery pools.
(c) When issued or forward delivery pools included.
For the month ended January 31, 1999, purchases and sales of investment
securities (excluding short-term investments and direct U.S. Government
obligations) aggregated $128,343,298 and $102,150,892, respectively.
Purchases and sales of direct U.S. Government obligations aggregated
$33,589,688 and $57,686,719, respectively.
Included in the portfolio are investments in mortgage or asset-backed
securities which are interests in separate pools of mortgages or assets.
Effective maturities of these investments may be shorter than stated
maturities due to prepayments.
The accompanying notes are an integral part of the financial statements.
16 - Scudder Income Fund
<PAGE>
Investment Portfolio as of December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements 0.6%
- ------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 12/31/1998 at 5%,
to be repurchased at $4,499,498 on 1/4/1999, collateralized by a $3,148,000 -------------
U.S. Treasury Bond, 8.875%, 8/15/2017 (Cost $4,497,000) ................................. 4,497,000 4,497,000
-------------
Short-Term Notes 2.5%
- ------------------------------------------------------------------------------------------------------------------------------
American Express Credit Corp., 5.71%, 1/4/1999 ............................................ 10,000,000 10,000,000
Household Finance Corp., 5.713%, 1/7/1999 ................................................. 10,000,000 10,000,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Notes (Cost $20,000,000) 20,000,000
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations 25.9%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note, 5.875%, 11/30/2001 .................................................... 20,000,000 20,675,000
U.S. Treasury Note, 5.625%, 12/31/2002 .................................................... 19,000,000 19,632,320
U.S. Treasury Bond, 10.75%, 8/15/2005 ..................................................... 55,000,000 73,356,250
U.S. Treasury Bond, 9.375%, 2/15/2006 ..................................................... 27,000,000 34,416,630
U.S. Treasury Bond, 7.25%, 5/15/2016 ...................................................... 29,000,000 35,130,890
U.S. Treasury Bond, 6.25%, 8/15/2023 ...................................................... 7,000,000 7,823,620
U.S. Treasury Bond, 3.625%, 4/15/2028 ..................................................... 15,750,000 15,654,382
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury Obligations (Cost $207,323,704) 206,689,092
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Pass-Thrus 4.0%
- ------------------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association Pass-thru, 7.5%, 11/15/2027 ...................... 6,643,294 6,848,771
Federal National Mortgage Association, 8.0%, with various maturities to 2/1/2013 .......... 24,711,870 25,417,993
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Government Agency Pass-Thrus (Cost $32,333,444) 32,266,764
- ------------------------------------------------------------------------------------------------------------------------------
Foreign Bonds -- U.S. $ Denominated 3.4%
- ------------------------------------------------------------------------------------------------------------------------------
Hutchison Whampoa, Ltd., 7.5%, 8/1/2027 ................................................... 9,750,000 7,887,263
ICI Investments, 6.75%, 8/7/2002 .......................................................... 10,000,000 10,075,000
PacifiCorp Australia, 6.15%, 1/15/2008 .................................................... 9,000,000 9,174,600
- ------------------------------------------------------------------------------------------------------------------------------
Total Foreign Bonds-- U.S. $ Denominated (Cost $28,825,200) 27,136,863
- ------------------------------------------------------------------------------------------------------------------------------
Asset Backed 8.7%
- ------------------------------------------------------------------------------------------------------------------------------
Automobile Receivables 1.3%
Premier Auto Trust Asset Backed Certificate, Series 1996-3 A4, 6.75%, 11/6/2000 ........... 10,000,000 10,096,800
-------------
Credit Card Receivables 2.6%
Advanta Corp. Series 1997-1 A4, 7.65%, 5/25/2027 .......................................... 8,000,000 8,321,249
MBNA Master Credit Card Trust, 5.8%, 12/15/2005 ........................................... 10,000,000 10,164,063
Sears Credit Account Master Trust, Series 1995-A4, 6.25%, 1/15/2003 ....................... 2,583,339 2,584,139
-------------
21,069,451
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17 - Scudder Income Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Manufactured Housing Receivables 3.7%
Green Tree Financial Corp., 7.36%, 10/1/2020 .............................................. 5,000,000 4,743,555
Green Tree Financial Corp. Series 1995-1 B2, 9.2%, 6/15/2025 .............................. 8,071,000 7,961,915
Green Tree Financial Corp. Series 1997-1 B2, 7.76%, 3/15/2028 ............................. 4,250,000 3,694,180
Green Tree Financial Corp. Series 1997-6 B1, 7.17%, 1/15/2029 ............................. 5,000,000 4,728,320
Merrill Lynch Mortgage Investors Inc., "B", Series 1991-D, 9.85%, 7/15/2011 ............... 8,500,000 8,534,510
-------------
29,662,480
-------------
Equipment Lease Receivables 1.1%
PBG Equipment Trust, Series 1A, 6.27%, 1/20/2012 .......................................... 8,737,385 8,812,789
- ------------------------------------------------------------------------------------------------------------------------------
Total Asset Backed (Cost $70,086,859) 69,641,520
- ------------------------------------------------------------------------------------------------------------------------------
Corporate Bonds 52.6%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 3.0%
Borden Inc., 7.875%, 2/15/2023 ............................................................ 5,000,000 4,430,450
Tricon Global Restaurants, 7.65%, 5/15/2008 ............................................... 9,500,000 9,880,000
Westpoint Stevens, Inc., 7.875%, 6/15/2005 ................................................ 9,500,000 9,642,500
-------------
23,952,950
-------------
Consumer Staples 4.5%
Bass America Inc., 6.625%, 3/1/2003 ....................................................... 9,500,000 9,581,985
J. Seagram & Sons Inc., 6.625%, 12/15/2005 ................................................ 10,000,000 9,958,000
Kellogg Co., 5.75%, 2/2/2001 .............................................................. 10,000,000 10,100,000
Safeway Inc., 6.05%, 11/15/2003 ........................................................... 6,000,000 6,041,160
-------------
35,681,145
-------------
Health 0.4%
Tenet Healthcare Corp., 8.625%, 1/15/2007 ................................................. 3,000,000 3,135,000
-------------
Communications 3.7%
MCI Communications Corp., 6.125%, 4/15/2002 ............................................... 8,900,000 9,035,458
Qwest Communications International, 7.5%, 11/1/2008 ....................................... 10,000,000 10,400,000
Sprint Capital Corp., 5.7%, 11/15/2003 .................................................... 10,000,000 10,035,700
-------------
29,471,158
-------------
Financial 9.9%
Bank United Capital Trust, 10.25%, 12/31/2026 ............................................. 4,250,000 4,250,000
Commerce Bancorporation, 11.75%, 6/6/2027 ................................................. 6,200,000 6,510,000
First Union Institutional Capital II, 7.85%, 1/1/2027 ..................................... 14,000,000 15,283,100
First USA Bank, 5.85%, 2/22/2001 .......................................................... 9,750,000 9,840,383
General Electric Capital Corp., 6.02%, 5/4/2001 ........................................... 9,000,000 9,064,800
GS Escrow Corp., 7.125%, 8/1/2005 ......................................................... 9,250,000 9,104,775
</TABLE>
The accompanying notes are an integral part of the financial statements.
18 - Scudder Income Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Home Savings of America, 6%, 11/1/2000 .................................................... 10,000,000 10,062,300
Lehman Brothers Holdings, Inc., 6.125%, 7/15/2003 ......................................... 5,000,000 4,925,100
Prudential Insurance Co., 6.375%, 7/23/2006 ............................................... 10,000,000 10,175,000
-------------
79,215,458
-------------
Media 11.7%
Cablevision Systems Corp., 7.875%, 2/15/2018 .............................................. 10,000,000 10,180,300
Chancellor Media Corp., 8%, 11/1/2008 ..................................................... 6,000,000 6,120,000
Cox Communications, Inc., 6.85%, 1/15/2018 ................................................ 9,000,000 9,495,000
News America, Inc., 7.25%, 5/18/2018 ...................................................... 10,000,000 10,216,800
Outdoor Systems, Inc., 8.875%, 6/15/2007 .................................................. 10,000,000 10,650,000
TCA Cable TV, Inc., 6.53%, 2/1/2028 ....................................................... 9,500,000 9,674,040
TCI-Communications, Inc., 8%, 8/1/2005 .................................................... 11,250,000 12,665,138
Time Warner Inc., 9.125%, 1/15/2013 ....................................................... 12,000,000 15,191,520
Time Warner Inc., 6.875%, 6/15/2018 ....................................................... 9,000,000 9,428,040
-------------
93,620,838
-------------
Service Industries 0.4%
Allied Waste North America, 7.375%, 1/1/2004 .............................................. 3,500,000 3,517,500
-------------
Durables 4.5%
Loral Corp., 8.375%, 6/15/2024 ............................................................ 10,000,000 12,138,300
Martin Marietta Corp., 6.5%, 4/15/2003 .................................................... 8,000,000 8,213,600
McDonnell Douglas Finance Corp., Medium Term Note, 6.75%, 12/23/2003 ...................... 10,000,000 10,433,700
Newport News Shipbuilding Co., 8.625%, 12/1/2006 .......................................... 5,000,000 5,281,250
-------------
36,066,850
-------------
Manufacturing 1.9%
Graham Packaging Co., 8.75%, 1/15/2008 .................................................... 5,150,000 5,175,750
Xerox Corp., 5.5%, 11/15/2003 ............................................................. 10,000,000 10,062,720
-------------
15,238,470
-------------
Energy 6.0%
Anadarko Petroleum Corp., 7%, 11/15/2027 .................................................. 13,500,000 13,026,015
Barrett Resources Corp., 7.55%, 2/1/2007 .................................................. 6,700,000 6,331,500
Chesapeake Energy Corp. "B", 8.5%, 3/15/2012 .............................................. 5,900,000 3,976,600
Lomak Petroleum, Inc., 8.75%, 1/15/2007 ................................................... 5,000,000 4,600,000
Louisiana Land & Exploration Co., 7.65%, 12/1/2023 ........................................ 5,000,000 5,263,050
Ocean Energy Inc., 8.375%, 7/1/2008 ....................................................... 3,750,000 3,506,250
</TABLE>
The accompanying notes are an integral part of the financial statements.
19 - Scudder Income Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Pioneer Natural Resources Co., 7.2%, 1/15/2028 ............................................ 6,500,000 4,517,500
Texas Eastern Transmission Corp., 10%, 8/15/2001 .......................................... 5,500,000 6,084,430
-------------
47,305,345
-------------
Construction 0.4%
Nortek, Inc., 9.125%, 9/1/2007 ............................................................ 3,250,000 3,339,375
-------------
Transportation 1.7%
Allied Holdings Inc., 8.625%, 10/1/2007 ................................................... 4,000,000 4,060,000
Atlantic Express, Inc., 10.75%, 2/1/2004 .................................................. 4,500,000 4,545,000
Continental Airlines Inc., Series 1997-1A, 7.461%, 4/1/2015 ............................... 4,935,867 5,172,295
-------------
13,777,295
-------------
Utilities 4.5%
Houston Light & Power Capital Corp., 8.257%, 2/1/2037 ..................................... 6,500,000 7,020,000
Niagara Mohawk Power Corp., 7.375%, 7/1/2003 .............................................. 13,000,000 13,211,250
Niagara Mohawk Power Corp., 7.625%, 10/1/2005 ............................................. 5,000,000 5,181,250
Public Service Co. of Colorado, 6%, 4/15/2003 ............................................. 10,000,000 10,125,900
-------------
35,538,400
- ------------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost $414,556,959) 419,859,784
- ------------------------------------------------------------------------------------------------------------------------------
Other 2.3%
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey Economic Development Authority, 7.425%, 2/15/2029 .............................. 3,500,000 4,108,650
Riverside Loan Trust I, 7.438%, 7/16/2008 ................................................. 15,000,000 14,297,934
- ------------------------------------------------------------------------------------------------------------------------------
Total Other (Cost $18,500,000) 18,406,584
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $796,123,166) (a) 798,497,607
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $796,133,166. At December 31,
1998, net unrealized appreciation for all securities based on tax cost was
$2,364,441. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $15,912,293 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$13,547,852.
For the year ended December 31, 1998, purchases and sales of investment
securities (excluding short-term investments and direct U.S. Government
obligations) aggregated $563,949,853 and $463,473,519, respectively.
Purchases and sales of direct U.S. Government obligations aggregated
$555,893,522 and $443,252,094, respectively.
The aggregate face value of futures contracts opened and closed for the
year ended December 31, 1998 was $2,082,573,378.
Included in the portfolio are investments in mortgage or asset-backed
securities which are interests in separate pools of mortgages or assets.
Effective maturities of these investments may be shorter than stated
maturities due to prepayments.
The accompanying notes are an integral part of the financial statements.
20 - Scudder Income Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
January 31,
1999 December 31,
Assets (Note D) 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments, at market (identified cost $819,055,548 and
$796,123,166 respectively) .................................. $ 826,026,607 $ 798,497,607
Cash .......................................................... 12 683
Receivable for investments sold ............................... 31,177,674 --
Interest receivable ........................................... 12,165,286 13,786,806
Receivable for Fund shares sold ............................... 931,607 3,808,237
Other receivables and assets .................................. 7,756 8,118
---------------- ----------------
Total assets .................................................. 870,308,942 816,101,451
Liabilities
- ------------------------------------------------------------------------------------------------------------------------------------
Payable for investments purchased ............................. 40,995,877 4,525,000
Payable for when-issued and forward delivery pools ............ 40,242,188 --
Payable for Fund shares redeemed .............................. 2,357,771 5,227,879
Accrued management fee ........................................ 16,399 --
Other payables and accrued expenses ........................... 967,852 419,262
---------------- ----------------
Total liabilities ............................................. 84,580,087 10,172,141
---------------------------------------------------------------------------------------------------
Net assets, at market value $ 785,728,855 $ 805,929,310
---------------------------------------------------------------------------------------------------
Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ........................... 5,049,957 1,022,643
Net unrealized appreciation (depreciation) on
investments ................................................. 6,971,059 2,374,441
Accumulated net realized gain (loss) .......................... (2,887,766) (1,633,954)
Paid-in capital ............................................... 776,595,605 804,166,180
---------------------------------------------------------------------------------------------------
Net assets, at market value $ 785,728,855 $ 805,929,310
---------------------------------------------------------------------------------------------------
Net Asset Value
- ------------------------------------------------------------------------------------------------------------------------------------
---------------- ----------------
Net Asset Value, offering and redemption price per share $13.36 $13.24
(outstanding shares of beneficial interest, $.01 ---------------- ----------------
par value, unlimited number of shares authorized) ........... 58,833,586 60,884,669
</TABLE>
The accompanying notes are an integral part of the financial statements.
21 - Scudder Income Fund
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
For the One
Month Ended
January 31, Year Ended
1999 December 31,
Investment Income (Note D) 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income:
Interest ...................................................... $ 4,701,651 $ 53,224,188
--------------- ----------------
Expenses:
Management fee ................................................ 410,286 4,553,752
Services to shareholders ...................................... 454,621 5,026,260
Custodian and accounting fees ................................. 30,309 143,096
Trustees' fees and expenses ................................... 3,668 37,552
Reports to shareholders ....................................... 70,713 198,081
Auditing ...................................................... 41,020 49,008
Legal ......................................................... 1,680 21,090
Registration fees ............................................. 23,492 79,010
Other ......................................................... 836 24,868
--------------- ----------------
Total expenses before reductions .............................. 1,036,625 10,132,717
Expense reductions ............................................ (379,295) (2,586,543)
--------------- ----------------
Expenses, net ................................................. 657,330 7,546,174
---------------------------------------------------------------------------------------------------
Net investment income 4,044,321 45,678,014
---------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ................................................... (1,400,330) 14,712,431
Futures ....................................................... -- (408,002)
--------------- ----------------
(1,400,330) 14,304,429
--------------- ----------------
Net unrealized appreciation (depreciation) during the
period on investments ....................................... 4,596,618 (15,559,064)
---------------------------------------------------------------------------------------------------
Net gain (loss) on investments 3,196,288 (1,254,635)
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations $ 7,240,609 $ 44,423,379
---------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
22 - Scudder Income Fund
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the One
Month Ended
January 31, Years Ended December 31,
1999
Increase (Decrease) in Net Assets (Note D) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations:
Net investment income .................................... $ 4,044,321 $ 45,678,014 $ 37,036,650
Net realized gain (loss) from investment
transactions .......................................... (1,400,330) 14,304,429 706,605
Net unrealized appreciation (depreciation) on
investment transactions during the period ............. 4,596,618 (15,559,064) 14,225,433
---------------- ---------------- ----------------
Net increase (decrease) in net assets resulting
from operations ....................................... 7,240,609 44,423,379 51,968,688
---------------- ---------------- ----------------
Distributions to shareholders:
From net investment income ............................... -- (44,503,457) (37,423,384)
---------------- ---------------- ----------------
From net realized gain (loss) ............................ -- (14,183,125) (443,613)
---------------- ---------------- ----------------
Fund share transactions:
Proceeds from shares sold ................................ 33,147,329 334,489,016 288,306,064
Net asset value of shares issued to shareholders
in reinvestment of distributions ...................... 1,359 53,731,519 33,681,717
Cost of shares redeemed .................................. (60,589,752) (263,283,739) (219,353,257)
---------------- ---------------- ----------------
Net increase (decrease) in net assets from Fund
share transactions .................................... (27,441,064) 124,936,796 102,634,524
---------------- ---------------- ----------------
Increase (decrease) in net assets ........................ (20,200,455) 110,673,593 116,736,215
Net assets at beginning of period ........................ 805,929,310 695,255,717 578,519,502
Net assets at end of period (including undistributed
net investment income of $5,049,957, $1,022,643 ---------------- ---------------- ----------------
and $0, respectively) ................................. $ 785,728,855 $ 805,929,310 $ 695,255,717
---------------- ---------------- ----------------
Other Information
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period ................ 60,884,669 51,662,855 43,994,954
---------------- ---------------- ----------------
Shares sold .............................................. 2,505,854 24,661,783 21,674,473
Shares issued to shareholders in reinvestment of
distributions ......................................... 107 4,016,366 2,533,020
Shares redeemed .......................................... (4,557,044) (19,456,335) (16,539,592)
---------------- ---------------- ----------------
Net increase (decrease) in Fund shares ................... (2,051,083) 9,221,814 7,667,901
---------------- ---------------- ----------------
Shares outstanding at end of period ...................... 58,833,586 60,884,669 51,662,855
---------------- ---------------- ----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
23 - 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>
For the One
Month Ended
January 31,
1999(a) Years Ended December 31,
(Note D) 1998(a) 1997(a) 1996(a) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------
Net asset value, beginning of period ................... $ 13.24 $ 13.46 $ 13.15 $ 13.61 $ 12.32 $ 13.71
--------------------------------------------------------------------------
Income from investment operations:
Net investment income .................................. .07 .81 .80 .80 .83 .84
Net realized and unrealized gain (loss) on
investments .......................................... .05 .00(c) .31 (.36) 1.41 (1.45)
--------------------------------------------------------------------------
Total from investment operations ....................... .12 .81 1.11 .44 2.24 (.61)
--------------------------------------------------------------------------
Less distributions:
From net investment income ............................. -- (.79) (.79) (.81) (.92) (.78)
From net realized gains on investment
transactions ......................................... -- (.24) (.01) (.09) (.03) --
--------------------------------------------------------------------------
Total distributions .................................... -- (1.03) (.80) (.90) (.95) (.78)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net asset value, end of period ......................... $ 13.36 $ 13.24 $ 13.46 $ 13.15 $ 13.61 $ 12.32
--------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (%) ....................................... .91**(b) 6.11(b) 8.66 3.41 18.54 (4.43)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ................. 786 806 695 579 578 463
Ratio of operating expenses to average daily
net assets (%) ....................................... .95* .99 1.18 .98 .99 .97
Ratio of operating expenses, before expense
reductions, to average daily net assets (%) .......... 1.50* 1.33 -- -- -- --
Ratio of net investment income to average daily
net assets (%) ....................................... 5.85* 5.98 6.00 6.01 6.35 6.43
Portfolio turnover rate (%) ............................ 20.6** 125.7 61.9 66.9 128.3 60.3
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Amount is less than one half of $.01.
* Annualized
** Not annualized
24 - 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 is equal to at least the repurchase price.
Options. An option contract is a contract in which the writer of the option
grants the buyer of the option the right to purchase from (call option), or sell
to (put option), the writer a designated instrument at a specified price within
a specified period of time. Certain options, including options on indices, will
require cash settlement by the Fund if the option is exercised. During the year
ended December 31, 1998, the Fund purchased put options on futures as a hedge
against potential adverse price movements in the value of portfolio assets. In
addition, during the year ended December 31, 1998, the Fund purchased call
options on futures to manage duration. During the period ended January 31, 1999,
the Fund did not invest in options.
If the Fund writes an option and the option expires unexercised, the Fund will
realize income, in the form of a capital gain, to the extent of the amount
received for the option (the "premium"). If the Fund elects to close out the
option it would recognize a gain or loss based on the difference between the
cost of closing the option and the initial premium received. If the Fund
purchased an option and allows the option to expire it would realize a loss to
the extent of the premium paid. If the Fund elects to close out the option it
would recognize a gain or loss equal to the difference between the cost of
acquiring the option and the amount realized upon the sale of the option.
The gain or loss recognized by the Fund upon the exercise of a written call or
purchased put option is adjusted for the amount of option premium. If a written
put or purchased call option is exercised, the Fund's cost basis of the acquired
security or currency would be the exercise price adjusted for the amount of the
option premium.
The liability representing the Fund's obligation under an exchange traded
written option or investment in a purchased option is valued at the last sale
price or, in the absence of a sale, the mean between the closing bid and asked
price or at the most recent asked price (bid for purchased options) if no bid
and asked prices are available. Over-the-counter written or purchased options
are valued using dealer supplied quotations.
25 - Scudder Income Fund
<PAGE>
When the Fund writes a covered call option, the Fund foregoes, in exchange for
the premium, the opportunity to profit during the option period from an increase
in the market value of the underlying security or currency above the exercise
price. When the Fund writes a put option it accepts the risk of a decline in the
market value of the underlying security or currency below the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum exposure
to purchased options is limited to the premium initially paid. In addition,
certain risks may arise upon entering into option contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out an
option contract prior to the expiration date and, that a change in the value of
the option contract may not correlate exactly with changes in the value of the
securities or currencies hedged.
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, 1998, 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. During the period ended January
31, 1999, the Fund did not invest in futures.
Upon entering into a futures contract, the Fund is required to deposit with a
financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction, the Fund will realize a gain
or loss equal to the difference between the value of the futures contract to
sell and the futures contract to buy. Futures contracts are valued at the most
recent settlement price.
Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out a
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly with changes in the value of the
securities or currencies hedged. When utilizing futures contracts to hedge, the
Fund gives up the opportunity to profit from favorable price movements in the
hedged positions during the term of the contract.
When-issued and Forward Delivery Securities. The Fund may purchase securities on
a when-issued or forward delivery basis, for payment and delivery at a later
date. The price of such securities, which may be expressed in yield terms, is
fixed at the time the commitment to purchase is made, but delivery and payment
take place at a later time. At the time the Fund makes the commitment to
purchase a security on a when-issued or forward delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. During the period between purchase and settlement, no payment is
made by the Fund to the issuer and no interest accrues to the Fund. At the time
of settlement, the market value of the security may be more or less than the
purchase price. The Fund will establish a segregated account in which it will
maintain cash and liquid debt securities equal in value to commitments for
when-issued or forward delivery securities.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. The Fund accordingly paid no federal income taxes and no federal
income tax provision was required. In addition, from November 1, 1998 through
December 31, 1998, the Fund incurred approximately $1,500,000 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 year ended January 31, 1999.
26 - Scudder Income Fund
<PAGE>
At January 31, 1999, the Fund had a net tax basis capital loss carryforward of
approximately $2,700,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until January 31,
2007, the expiration date.
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. Related Parties
Under the Management Agreement (the "Agreement") with Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"), the Adviser directs the
investments of the Fund in accordance with its investment objectives, policies,
and restrictions. The Adviser determines the securities, instruments, and other
contracts relating to investments to be purchased, sold or entered into by the
Fund. In addition to portfolio management services, the Adviser provides certain
administrative services in accordance with the Agreement. The management fee
payable under the Agreement is equal to an annual rate of 0.65% 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. Effective March 2, 1998, the Adviser has
agreed to maintain the annualized expenses of the Fund at not more than 0.95% of
average daily net assets until April 30, 1999. Accordingly, for the year ended
December 31, 1998, the Adviser did not impose a portion of its management fee
aggregating $2,586,543 and the amount imposed aggregated $1,967,209, which was
equivalent to an annual effective rate of 0.26% of the Fund's average daily net
assets. For the period ended January 31, 1999, the Adviser did not impose a
portion of its management fee aggregating $379,295 and the amount imposed
aggregated $30,991, which was equivalent to an annual effective rate of 0.04% of
the Fund's average daily net assets.
On September 7, 1998, Zurich Insurance Company ("Zurich"), majority owner of the
Adviser, entered into an agreement with B.A.T Industries p.l.c. ("B.A.T")
pursuant to which the financial services businesses of B.A.T were combined with
Zurich's businesses to form a new global insurance and financial services
company known as Zurich Financial Services. Upon consummation of the
transaction, the Fund's Management Agreement with Scudder Kemper was deemed to
have been assigned and, therefore, terminated. In December 1998, the Board of
Trustees and the shareholders of the Fund approved a new
27 - Scudder Income Fund
<PAGE>
investment management agreement with Scudder Kemper, which is substantially
identical to the former Management Agreement, except for the dates of execution
and termination.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
year ended December 31, 1998, the amount charged to the Fund by SSC aggregated
$863,333, of which $68,414 is unpaid at December 31, 1998. For the period ended
January 31, 1999, the amount charged to the Fund by SSC aggregated $69,112, all
of which is unpaid at January 31, 1999.
Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans invested in the Fund. For the year ended December 31,
1998, the amount charged to the Fund by STC aggregated $2,727,704, of which
$251,955 is unpaid at December 31, 1998. For the period ended January 31, 1999,
the amount charged to the Fund by STC aggregated $255,934, all of which is
unpaid at January 31, 1999.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
December 31, 1998, the amount charged to the Fund by SFAC aggregated $94,878, of
which $7,961 is unpaid at December 31, 1998. For the period ended January 31,
1999, the amount charged to the Fund by SFAC aggregated $8,196, all of which is
unpaid at January 31, 1999.
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, 1998, the Special Servicing Agreement expense charged to the Fund amounted
to $987,346. For the period ended January 31, 1999, the Special Servicing
Agreement expense charged to the Fund amounted to $89,320.
The Fund pays each Trustee not affiliated with the Adviser an annual retainer
plus specified amounts for attended board and committee meetings. For the year
ended December 31, 1998, Trustees' fees and expenses aggregated $37,552. For the
period ended January 31, 1999, Trustees' fees and expenses aggregated $3,668.
C. Line of Credit
The Fund and several Scudder Funds (the "Participants") share in a $850 million
revolving credit facility for temporary or emergency purposes, including the
meeting of redemption requests that otherwise might require the untimely
disposition of securities. The Participants are charged an annual commitment fee
which is allocated pro rata based on assets among each of the Participants.
Interest is calculated based on the market rates at the time of the borrowing.
The Fund may borrow up to a maximum of 33 percent of its net assets under the
agreement.
D. Year End Change
On August 10, 1998, the Board of Trustees of the Fund changed the fiscal year
end from December 31 to January 31.
28 - Scudder Income Fund
<PAGE>
Report of Independent Accountants
To the Trustees of Scudder Portfolio Trust and Shareholders of Scudder Income
Fund:
In our opinion, the accompanying statements of assets and liabilities, including
the investment portfolios, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Scudder Income Fund (the "Fund") at
January 31, 1999 and December 31, 1998, the results of its operations, the
changes in its net assets, and the financial highlights for each of the periods
indicated therein, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at January
31, 1999 and December 31, 1998 by correspondence with the custodian and brokers,
provide a reasonable basis for the opinion expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
February 26, 1999
29 - Scudder Income Fund
<PAGE>
Tax Information
By now shareholders for whom year-end tax reporting is required by the IRS
should have received their Form 1099-DIV and tax information letter from the
Fund.
The Fund paid distributions of $0.08 per share from net long-term capital gains
during its year ended December 31, 1998, of which 100% represents 20% rate
gains.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$4,750,000 as capital gain dividends for its year ended December 31, 1998, of
which 100% represents 20% rate gains.
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 account, please call 1-800-225-5163.
30 - Scudder Income Fund
<PAGE>
Shareholder Meeting Results
A Special Meeting of Shareholders (the "Meeting") of Scudder Income Fund (the
"Fund") was held on December 15, 1998, at the office of Scudder Kemper
Investments, Inc., Two International Place, Boston, Massachusetts 02110. At the
Meeting the following matters were voted upon by the shareholders (the resulting
votes for each matter are presented below).
1. To approve a new Investment Management Agreement for the Fund with Scudder
Kemper Investments, Inc.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
31,998,233 784,085 856,761 0
2. To approve the revision of the Fund's fundamental lending policy.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
29,170,045 1,212,100 1,090,228 2,166,706
- --------------------------------------------------------------------------------
* 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.
31 - 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; Executive Fellow,
Center for Business Ethics,
Bentley College
Peter B. Freeman
Trustee; Corporate Director
George M. Lovejoy, Jr.
Trustee; President and Director,
Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business
Administration, Northeastern
University
Kathryn L. Quirk*
Trustee, Vice President and
Assistant Secretary
Jean C. Tempel
Trustee; Managing Partner,
Technology Equity Partners
Kelly D. Babson*
Vice President
William M. Hutchinson*
Vice President
Thomas W. Joseph*
Vice President
Valerie F. Malter*
Vice President
Ann M. McCreary*
Vice President
Stephen A. Wohler*
Vice President
Thomas F. McDonough*
Vice President and Secretary
John R. Hebble*
Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
32 - Scudder Income Fund
<PAGE>
Investment Products and Services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Prime Reserve Shares*
Premium Shares*
Managed Shares*
Scudder Government Money Market Series --
Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series --
Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**
Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited Term Tax Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**
U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund
U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Equity
- -------------
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund++
Scudder International Growth Fund
Scudder Global Discovery Fund***
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Preferred Series
- ----------------
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small
Company Fund
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal Fund, Inc.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money. +++Funds within categories are listed in order from
expected least risk to most risk. Certain Scudder funds may not be available for
purchase or exchange. +A portion of the income from the tax-free funds may be
subject to federal, state, and local taxes. *A class of shares of the Fund.
**Not available in all states. ***Only the Scudder Shares of the Fund are part
of the Scudder Family of Funds. ++Only the International Shares of the Fund are
part of the Scudder Family of Funds. +++ +++A no-load variable annuity contract
provided by Charter National Life Insurance Company and its affiliate, offered
by Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder Kemper Investments, Inc., are traded on the New York Stock Exchange and,
in some cases, on various other stock exchanges.
33 - Scudder Income Fund
<PAGE>
Scudder Solutions
<TABLE>
<CAPTION>
Convenient ways to invest, quickly and reliably:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Investment Plan QuickBuy
A convenient investment program in which money is Lets you purchase Scudder fund shares
electronically debited from your bank account monthly to electronically, avoiding potential mailing delays;
regularly purchase fund shares and "dollar cost average" money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from a previously designated bank
fewer when it's higher, which can reduce your average account.
purchase price over time.*
Automatic Dividend Transfer Payroll Deduction and Direct Deposit
The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).
* Dollar cost averaging involves continuous investment in securities regardless of price
fluctuations and does not assure a profit or protect against loss in declining markets.
Investors should consider their ability to continue such a plan through periods of low price
levels.
Around-the-clock electronic account service and information, including some transactions:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- www.scudder.com
1-800-343-2890
Personal Investment Organizer: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.
Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Plan QuickSell
You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you previously designated.
Distributions Direct
Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
34 - Scudder Income Fund
<PAGE>
Mutual Funds and More -- Brokerage and Guidance Services:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Brokerage Services Scudder Portfolio Builder
Offers you access to a world of investments, A free service designed to help suggest ways investors like
including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global,
over 8,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
800 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder
shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load
Brokerage account already reserved for them, with funds but want ongoing professional assistance in
no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly
Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for
individuals investing $100,000 or more.
Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.
Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Services, Inc., Adviser.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
Additional Information on How to Contact Scudder:
- ------------------------------------------------------------------------------------------------------------------------------
For existing account services and transactions Please address all written correspondence to
Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds
P.O. Box 2291
For establishing 401(k) and 403(b) plans Boston, Massachusetts
Scudder Defined Contribution Services -- 02107-2291
1-800-323-6105
Or Stop by a Scudder Investor Center
For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of
additional applications and prospectuses, or for the Scudder Investor Centers. Check for an Investor Center near
answers to investment questions you -- they can be found in the following cities:
Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco
[email protected] Boston New York
</TABLE>
35 - 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 $230 billion in
assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 79
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Group. As a result, Zurich's subsidiary, Zurich Kemper Investments,
Inc., with 50 years of mutual fund and investment management experience, was
combined with Scudder. Headquartered in New York, Scudder Kemper Investments
offers a full range of investment counsel and asset management capabilities,
based on a combination of proprietary research and disciplined, long-term
investment strategies. With its global investment resources and perspective,
the firm seeks opportunities in markets throughout the world to meet the needs
of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Group. The Zurich Group is an internationally recognized leader in
financial services, including property/casualty and life insurance, reinsurance,
and asset management.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
SCUDDER
[LOGO]
