SCUDDER
INVESTMENTS(SM)
[LOGO]
-------------------------------
BOND
-------------------------------
Scudder Income Fund
Semiannual Report
July 31, 2000
For investors seeking a high level of income consistent with the prudent
investment of capital.
A no-load fund with no commissions to buy, sell, or exchange shares.
<PAGE>
Contents
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4 Letter from the Fund's President
6 Performance Update
8 Portfolio Summary
9 Portfolio Management Discussion
14 Glossary of Investment Terms
16 Investment Portfolio
21 Financial Statements
24 Financial Highlights
26 Notes to Financial Statements
34 Shareholder Meeting Results
35 Officers and Trustees
36 Investment Products and Services
38 Account Management Resources
2
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Scudder Income Fund
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Class AARP ticker symbol AINCX fund number 163
Class S ticker symbol SCSBX fund number 063
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Date of o The bond market provided a mixed performance over the
Inception: six months ended July 31, 2000, with a strong showing
4/24/28 by the Treasuries market balanced by underperformance
in other sectors of the bond market.
Total Net
Assets as o In an unstable environment, the fund benefited from a
of 7/31/00 -- focus on liquid, higher-quality issues.
Class AARP: o Management continues to find opportunities in corporate
$184 million bonds, mortgage-backed securities, and asset-backed
issues, areas of the market that it believes offer
Class S: attractive value in relation to Treasuries.
$647 million
3
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Letter from the Fund's President
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Dear Shareholders,
During the second half of the 1990s, the strong performance of the U.S. stock
market dimmed the attractiveness of bonds' steady returns. As investors watched
the Nasdaq index surpass new milestones on what seemed to be a monthly basis,
the temptation to jump into technology stocks was sometimes irresistible. But as
the events of the first half of 2000 demonstrated, bonds still hold an important
place in investors' portfolios. In a period in which stocks experienced
significant volatility and actually lost ground (as measured by the S&P 500
Index), most diversified bond portfolios produced positive returns. More
notably, bonds also provided added stability to the portfolios of investors who
maintained a diversified approach during the stock market's winter rally.
We believe that the lesson of this year is that no matter what is taking place
in the financial markets, it is essential for investors to stay focused on their
goals and ensure that their investments are appropriately suited for their
needs. Unless you plan to devote your energies to investing every day, we think
that you will benefit from taking a long-term approach that includes exposure to
several asset classes. This includes domestic and international stocks,
small-caps, fixed income, and money market funds. As a shareholder of Scudder
Income Fund, you already hold a key
4
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element of a diversified portfolio. The fund's management team seeks to provide
attractive quarterly income and relative share price stability by investing in a
diversified portfolio of government, corporate, mortgage-backed, and
asset-backed issues of varying maturities. This approach helped dampen share
price volatility in a period of unusual fluctuations for both stocks and bonds.
For more information on where the fund's portfolio managers have found
opportunities in the bond market, please turn to the Portfolio Management
Discussion beginning on page 9.
Thank you for your continued investment in Scudder Income Fund. For current
information on the fund or your account, visit our Web site at www.scudder.com.
There you'll find a wealth of information, including fund performance, the most
recent news on Scudder products and services, and the opportunity to perform
account transactions. You can also speak with the one of our representatives by
calling 1-800-SCUDDER (1-800-728-3337).
Sincerely,
/s/Lin Coughlin
Linda C. Coughlin
President
Scudder Income Fund
5
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Performance Update
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July 31, 2000
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Growth of a $10,000 Investment
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THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART DATA:
Yearly periods ended July 31
Scudder Income LB Aggregate
Fund -- Class S Bond Index*
'90 10000 10000
'91 10925 11070
'92 12405 12707
'93 13735 14000
'94 13580 14011
'95 14790 15428
'96 15606 16280
'97 17083 18035
'98 18140 19451
'99 18228 19932
'00 18983 21120
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Fund Index Comparison
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Total Return
Growth of Average
Period ended 7/31/2000 $10,000 Cumulative Annual
------------------------------------------------------------------------------
Scudder Income Fund -- Class S**
------------------------------------------------------------------------------
1 year $ 10,432 4.32% 4.32%
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5 year $ 13,063 30.63% 5.49%
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10 year $ 20,245 102.45% 7.31%
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LB Aggregate Bond Index*
------------------------------------------------------------------------------
1 year $ 10,596 5.96% 5.96%
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5 year $ 13,690 36.90% 6.48%
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10 year $ 21,120 111.20% 7.76%
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* 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.
** If the Adviser had not maintained expenses, total returns would have
been lower.
On July 28, 2000, existing shares of the Fund were redesignated as
Class S shares. The total return information provided is for the Fund's
Class S shares.
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.
6
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--------------------------------------------------------------------------------
Returns and Per Share Information
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THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
ILLUSTRATING THE SCUDDER INCOME FUND -- CLASS S TOTAL RETURN (%) AND
LB AGGREGATE BOND INDEX* TOTAL RETURN (%)
Yearly periods ended July 31
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 1997 1998 1999** 2000**
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Total
Return (%) 10.20 15.67 12.01 -1.12 9.78 5.84 10.45 6.60 .49 4.32
------------------------------------------------------------------------------------
Index Total
Return (%) 10.70 14.79 10.18 .08 10.11 5.53 10.78 7.85 2.47 5.96
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Net Asset
Value ($) 13.09 13.91 14.22 12.79 13.18 13.02 13.44 13.53 12.56 12.19
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Income
Dividends
($) 1.04 .92 .92 .80 .81 .84 .80 .78 .80 .83
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Capital
Gains
Distributions
($) -- .25 .35 .51 -- .09 .10 -- .24 --
------------------------------------------------------------------------------------
</TABLE>
7
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Portfolio Summary
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July 31, 2000
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Diversification
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Management reduced the
Corporate Bonds 47% fund's weighting in
U.S. Treasury Obligations 20% corporate issues, and
U.S. Government Agency boosted its holdings in
Pass-Thrus 17% other sectors of the
Repurchase Agreements 4% bond market, such as
Government National Treasuries and
Mortgage Association 3% mortgage-backed
Asset Backed Securities 3% securities.
Collateralized Mortgage
Obligations 2%
Foreign Bonds -- U.S.$
Denominated 2%
Other 2%
------------------------------------
100%
------------------------------------
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Quality
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The fund's weighting in
U.S. Government and government and agency
Agencies 44% issues increased from
AAA* 6% 31% of net assets on
AA 8% January 31, 2000.
A 13%
BBB 17%
BB 8%
B 3%
NR 1%
------------------------------------
100%
------------------------------------
* Category includes cash
equivalents
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Effective Maturity
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Management raised the
Less than 1 year 5% fund's weighting in both
1 < 5 years 31% shorter- and longer-term
5 < 8 years 15% issues, while reducing
8 < 10 years 33% its holdings in
Greater than 10 years 16% intermediate-term bonds.
------------------------------------
100%
------------------------------------
Weighted average effective
maturity: 8.8 years
For more complete details about the Fund's investment portfolio, see page 16. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
8
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Portfolio Management Discussion
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July 31, 2000
In the following interview, portfolio manager Robert S. Cessine discusses
Scudder Income Fund's strategy and the market environment in the six-month
period ended July 31, 2000.
Q: During a period in which the attention of most investors was focused on the
gyrations of the global equity markets, long-term Treasury bonds generally
posted a strong performance. On the other hand, shorter-term Treasuries did not
produce impressive returns. What was the cause for this divergence within the
bond market?
A: The bond market's recent performance has been the direct result of investors'
shifting expectations regarding the direction of interest rates, as well as
changes in the balance of supply and demand in the market. With regard to the
performance of long-term government bonds, the primary factor was the Treasury's
buyback program, which is designed to reduce outstanding debt by curtailing
issuance and taking existing bonds off investors' hands. Seeing the potential
for a significant reduction in supply, investors moved into longer-term bonds
(where the Treasury was focusing its buyback efforts), driving up prices and
sending yields plummeting. From January 31 to April 10, for instance, the yield
on the 10-year Treasury note fell from 6.67% to 5.77%.
At the same time, however, shorter-term government bonds were experiencing the
pressure associated with the Federal Reserve's interest rate increases. At the
start of 2000, the Federal Funds rate stood at 5.50%. But the combination of
continued strong growth, a shrinking pool of available workers, rising energy
prices, and a roaring stock market compelled the Fed to take aggressive action
to slow growth to a more manageable pace. Consequently, interest rates were
boosted by a quarter-point on February 2 and March 21, and by a half-point on
May 16. These rate hikes exerted pressure on shorter-term bonds over most of the
period, causing what is known as an "inverted yield curve." Ordinarily,
long-term bonds carry higher yields than short-term issues in order to
compensate investors for tying up their money over a longer period. In a state
of
9
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inversion, however, shorter-term bonds carry higher yields than longer-term
issues. While this anomaly has often served as the precursor to a recession,
this particular instance was largely due to the Treasury's buyback program.
During the final weeks of the reporting period, a series of economic reports
suggested that -- contrary to expectations -- growth in the U.S. was beginning
to slow. Although it remains to be seen whether the initial cooling of the
economy is just a breather or the beginning of a long-term trend, the bond
market reacted positively because the likelihood of aggressive Fed action became
more remote. This notion was reinforced when the Fed opted to leave interest
rates unchanged at its June 28 meeting. These developments sparked a rally in
government bond prices during the summer months, with the ten-year note moving
from a high of 6.56% on May 18 to 6.03% by the close of the period. (Bond yields
move inversely to their prices.)
Q: How did these factors affect the performance of bonds outside of the Treasury
sector?
A: The inversion of the Treasury curve proved to be a negative for
non-government issues, as did rising short-term interest rates and market
participants' concerns over credit quality. Corporate bonds, mortgage-backed
securities, and asset-backeds all underperformed government bonds over the full
six-month period. However, the recent improvement in the interest rate outlook
-- as well as a flattening of the yield curve from its state of extreme
inversion -- helped stabilize these sectors. In general, shorter-duration
corporate bonds (or those with less interest rate sensitivity) beat
longer-duration corporates, high quality bonds outperformed those of lesser
quality, and liquid issues bested non-liquid issues. The fund was positioned to
take advantage of these disparities, which proved helpful to performance.
10
<PAGE>
Q: How did the fund perform during the reporting period?
A: During the six-month period ended July 31, 2000, the Class S shares of the
fund posted a total return of 3.97%, which trailed the 5.27% return of its
unmanaged benchmark, the Lehman Brothers Aggregate Bond Index. Although the
Class S shares underperformed the fund's benchmark, it beat the average return
of funds in the "corporate debt funds -- A rated" category over the one-, five-,
and ten-year periods, as calculated by Lipper Analytical Services.^1 As of July
31, the Class S shares' net annualized yield stood at 6.72%.
Q: How is the portfolio positioned in terms of its sector weightings?
A: The fund continues to hold a large weighting in corporate bonds, which make
up almost half of the portfolio. About a quarter of this position is in high
yield debt, with a concentration in stronger credits that are rated just below
investment grade. Within the corporate sector, the fund is overweighted in bonds
issued by companies in the telecommunications, media, and energy groups, where
we see the possibility for the most impressive earnings results. The portfolio
is also underweight in utilities and overweight in financials, a combination
that proved beneficial to performance. On the down side, the fund's telecom
position offered more of a mixed performance due to doubts about the earnings
outlook for many companies in the sector.
The fund also continues to hold a large position in government bonds, which was
very helpful to performance. We believed that for most of the reporting period,
the risk-reward trade-off in this area (or the potential returns expected for
bonds of a given duration
^1 Lipper Analytical Services, Inc. is an independent analyst of
investment performance. Performance includes reinvestment of dividends
and capital gains. For the period ended July 31, 2000, the Class S
shares of Scudder Income Fund's Lipper ranking was 81 out of 172 funds
for the one-year period, 55 out of 112 for the five-year period, and 19
out of 41 for the ten-year period. Past performance is no guarantee of
future results.
11
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level) was very favorable in relation to other sectors of the bond market. By
the end of the period, however, asset-backed and mortgage-backed securities
became increasingly attractive on a risk-reward basis, leading us to add to
portfolio holdings in these sectors.
Q: What has been your target duration during the period?
A: The fund's duration (or interest rate sensitivity) has been neutral to that
of the benchmark -- at a level of approximately 4.75-5.25 years -- for the
better part of the past six months. We have achieved this by concentrating fund
holdings in both long- and short-term bonds at the expense of intermediate-term
issues, a positioning known as a "barbell strategy." Given the size of the
budget surplus and the rate at which the debt is being retired, we prefer to
have the fund's duration exposure in longer-term bonds rather than
intermediates. Structuring the portfolio in this manner proved beneficial to
performance overall, particularly in the periods when the inversion of the yield
curve was most pronounced.
Q: What is your outlook for the bond market from here?
A: We believe that the bond market will remain on hold for the near term until
investors gain a better sense of whether the Fed's actions will indeed bring
about a "soft landing" for the U.S. economy. We feel that in the mean time,
fixed income investors will remain highly sensitive to short-term stimuli such
as economic reports and comments from the Fed. Investors will also be closely
watching the upcoming elections, since an end to the split government (in which
Congress and the White House are controlled by different parties) could put the
sustainability of the budget surplus into question. Despite these short-term
factors, we believe that the investment backdrop will remain supported by sound
economic growth, robust corporate profits, sound sector fundamentals, and
attractive valuations.
12
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Given the unsettled nature of the current market environment, we believe that it
is wise to maintain a high level of diversification among liquid, higher-quality
issues. We will also continue to use our extensive research and trading
capabilities to capitalize on pricing exaggerations in the bond market. Finally,
it is likely that we will seek opportunities to increase the fund's position in
asset-backed and mortgage-backed securities, two areas that we believe offer
attractive value in relation to Treasuries. We feel that this approach will
enable the fund to produce favorable risk-adjusted returns as we move through
the second half of the year.
13
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Glossary of Investment Terms
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Asset-Backed Bonds or notes backed by loan paper or accounts receivable
Securities originated by banks, credit card companies, or other
providers of credit and often "enhanced" by a bank Letter of
Credit or by insurance coverage provided by an institution
other than the issuer.
Diversification The spreading of risk by investing in several asset
categories, industry sectors, or individual securities. An
investor with a broadly diversified portfolio will likely
receive some protection from the price declines of an
individual asset class.
Duration A measure of bond price volatility. Duration can be defined
as the approximate percentage change in price for a 100
basis point (one single percentage point) change in market
interest rate levels. A duration of 5, for example, means
that the price of a bond should rise by approximately 5% for
a one percentage point drop in interest rates, and fall by
5% for a one percentage point rise in interest rates.
Inverted Yield An unusual situation where short-term interest rates are
Curve higher than long-term interest rates. An inverted curve
results when a surge in demand for short-term credit drives
up short-term rates, while long-term rates move up more
slowly since borrowers are not willing to commit themselves
to pay high rates for many years. This scenario is often
indicative of negative sentiment concerning a country's
economic health.
Liquidity A characteristic of an investment or an asset referring to
the ease of convertibility into cash within a reasonably
short period of time. A stock that is liquid has enough
shares outstanding and a substantial enough market
capitalization to allow large purchases and sales to occur
without causing a significant move in its market price as a
result.
14
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Weighting Refers to the allocation of assets -- usually in terms of
(Over/Under) sectors, industries, or countries -- within a portfolio
relative to the portfolio's benchmark index or investment
universe.
Yield Curve A graph showing the term structure of interest rates by
plotting the yields of all bonds of the same quality with
maturities ranging from the shortest to the longest
available. The resulting curve shows the relationship
between short-, intermediate-, and long-term interest rates.
(Source: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
15
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Investment Portfolio as of July 31, 2000 (Unaudited)
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Repurchase Agreements 4.4%
--------------------------------------------------------------------------------------------
<S> <C> <C>
Donaldson, Lufkin & Jenrette, 6.53%, to be repurchased ------------
at $36,319,587 on 8/1/2000* (Cost $36,313,000) .............. 36,313,000 36,313,000
------------
U.S. Treasury Obligations 19.4%
U.S. Treasury Bond:
6.5%, 2/15/2010 ............................................. 10,630,000 10,980,462
6.125%, 8/15/2029 ........................................... 35,670,000 36,712,277
6.25%, 5/15/2030 ............................................ 41,350,000 44,050,569
U.S. Treasury Inflationary Index Note:
3.98%, 1/15/2009 ............................................ 20,000,000 20,648,262
3.79%, 4/15/2028 ............................................ 19,250,000 19,597,468
U.S. Treasury Note:
6.625%, 5/31/2002 ........................................... 1,600,000 1,606,992
6.75%, 5/15/2005 ............................................ 25,715,000 26,341,675
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Total U.S. Treasury Obligations (Cost $159,665,812) 159,937,705
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Government National Mortgage Association 3.3%
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Government National Mortgage Association Pass-thrus:
6.5% with various maturities to 2/15/2028 ................... 6,699,996 6,360,808
7% with various maturities to 6/15/2029 ..................... 14,675,878 14,263,703
8% with various maturities to 12/1/2029 ..................... 6,225,569 6,278,097
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Total Government National Mortgage Association (Cost $27,302,531) 26,902,608
--------------------------------------------------------------------------------------------
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U.S. Government Agency Pass-Thrus 17.3%
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Federal National Mortgage Association:
7.5% with various maturities to 1/1/2029 .................... 6,425,027 6,333,672
7% with various maturities to 8/1/2029 ...................... 48,443,917 47,363,037
6.5% with various maturities to 9/1/2029 .................... 73,516,238 69,504,798
8% with various maturities to 1/1/2030 ...................... 19,581,315 19,725,492
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Total U.S. Government Agency Pass-Thrus (Cost $146,893,886) 142,926,999
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</TABLE>
The accompanying notes are an integral part of the financial statements.
16
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<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Collateralized Mortgage Obligations 1.9%
--------------------------------------------------------------------------------------
<S> <C> <C>
Residential Accredit Loans, Inc., Series 1997-A7, ------------
7.25%, 11/25/2027 (Cost $16,119,818) .................. 15,854,322 15,269,615
------------
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Foreign Bonds -- U.S.$ Denominated 2.3%
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PacifiCorp Australia LLC, 6.15%, 1/15/2008 ............... 11,000,000 10,141,340
Repsol International Finance, 7.45%, 7/15/2005 ........... 8,600,000 8,602,408
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Total Foreign Bonds -- U.S.$ Denominated (Cost $19,505,460) 18,743,748
--------------------------------------------------------------------------------------
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Asset Backed 2.6%
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Automobile Receivables 1.1%
First Security Auto Owner Trust, Series 1999-2 A3,
6%, 10/15/2003 ........................................ 9,000,000 8,933,907
------------
Credit Card Receivables 1.4%
MBNA Master Credit Card Trust, 5.8%, 12/15/2005 .......... 12,000,000 11,595,000
------------
Home Equity Loans 0.1%
First Plus Residential Trust Series 1998A, 8.5%,
5/15/2023 ............................................. 1,361,524 544,610
------------
Manufactured Housing Receivables 0.0%
Green Tree Financial Corp., Series 1997-2 B2, 8.05%,
6/15/2028 ............................................. 488,235 234,353
------------
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Total Asset Backed (Cost $22,815,060) 21,307,870
--------------------------------------------------------------------------------------
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Corporate Bonds 47.3%
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Consumer Discretionary 2.5%
Federated Department Stores, 8.5%, 6/15/2003 ............. 9,600,000 9,603,168
MGM Grand Inc., 9.75%, 6/1/2007 .......................... 3,700,000 3,801,750
Park Place Entertainment, Inc., 8.5%, 11/15/2006 ......... 2,450,000 2,450,417
Tricon Global Restaurants, 7.65%, 5/15/2008 .............. 5,600,000 5,097,512
------------
20,952,847
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
Principal
Amount ($) Value ($)
--------------------------------------------------------------------------------
Consumer Staples 2.7%
Bass North America Inc., 6.625%, 3/1/2003 .......... 11,000,000 10,714,550
Safeway Inc., 7.25%, 9/15/2004 ..................... 8,600,000 8,470,484
The Great Atlantic & Pacific Tea Co., Inc.,
7.7%, 1/15/2004 ................................. 3,000,000 2,873,700
------------
22,058,734
------------
Communications 3.8%
Deutsche Telekom, 7.75%, 6/15/2005 ................. 7,550,000 7,579,446
Intermedia Communications, Inc., 8.875%,
11/1/2007 ....................................... 2,000,000 1,610,000
Level 3 Communications Inc., 9.125%, 5/1/2008 ...... 2,000,000 1,720,000
McLeodUSA Inc., 8.125%, 2/15/2009 .................. 1,500,000 1,346,250
Nextel Communications, 9.375%, 11/15/2009 .......... 5,650,000 5,452,250
Qwest Communications International, 7.5%, 11/1/2008 6,200,000 6,054,424
Sprint Capital Corp., 6.125%, 11/15/2008 ........... 8,575,000 7,650,615
------------
31,412,985
------------
Financial 14.9%
Bank of America, 7.8%, 2/15/2010 ................... 8,600,000 8,587,015
Bank United Capital Trust, 10.25%, 12/31/2026 ...... 4,250,000 3,527,500
BankBoston NA, 6.375%, 4/15/2008 ................... 6,125,000 5,628,569
Bell Atlantic Financial Services, 7.6%, 3/15/2007 .. 6,400,000 6,437,184
Capital One Bank, 8.25%, 6/15/2005 ................. 5,725,000 5,725,344
Chase Manhattan Corp., 5.75%, 4/15/2004 ............ 12,000,000 11,310,120
Commerce Bancorporation, 11.75%, 6/6/2027 .......... 6,200,000 6,603,000
Firstar Bank, 7.125%, 12/1/2009 .................... 6,000,000 5,760,180
Ford Motor Credit Co., 7.375%, 10/28/2009 .......... 3,450,000 3,333,942
GS Escrow Corp., 7%, 8/1/2003 ...................... 9,000,000 8,250,210
General Electric Capital Corp., 7%, 2/3/2003 ....... 9,450,000 9,447,638
General Motors Acceptance Corp., 6.15%, 4/5/2007 ... 3,450,000 3,159,096
Goldman Sachs Group, Inc., 7.8%, 1/28/2010 ......... 8,600,000 8,564,654
Merrill Lynch & Co., Inc., 6%, 2/17/2009 ........... 8,750,000 7,835,713
National Westminster Bank, 7.375%, 10/1/2009 ....... 4,000,000 3,904,320
PNC Funding Corp., 7%, 9/1/2004 .................... 5,500,000 5,342,755
Prudential Insurance Co., 6.375%, 7/23/2006 ........ 12,000,000 11,111,880
Wells Fargo & Company, 7.55%, 6/21/2010 ............ 8,600,000 8,571,362
------------
123,100,482
------------
Media 10.6%
AMFM Inc., 8%, 11/1/2008 ........................... 8,500,000 8,585,000
British Sky Broadcasting, 6.875%, 2/23/2009 ........ 9,950,000 8,423,173
Cablevision Systems Corp., 7.875%, 12/15/2007 ...... 9,610,000 9,225,600
Charter Communications Holdings LLC, 8.25%, 4/1/2007 9,500,000 8,360,000
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
------------------------------------------------------------------------------------
<S> <C> <C>
Liberty Media Group, 7.875%, 7/15/2009 ............. 5,700,000 5,551,458
News America Holdings, Inc., 9.25%, 2/1/2013 ....... 12,500,000 13,549,125
Outdoor Systems Inc., 8.875%, 6/15/2007 ............ 11,000,000 11,220,000
TCI-Communications, Inc., 8%, 8/1/2005 ............. 13,750,000 14,031,050
Time Warner Inc., 9.125%, 1/15/2013 ................ 7,500,000 8,257,050
------------
87,202,456
------------
Durables 1.6%
Daimler-Chrysler NA Holdings, 7.375%, 9/15/2006 .... 7,900,000 7,676,746
Lear Corp, 7.96%, 5/15/2005 ........................ 5,250,000 5,011,524
------------
12,688,270
------------
Manufacturing 1.1%
International Paper Co., 8.125%, 7/8/2005 .......... 8,700,000 8,812,404
------------
Energy 6.4%
Barrett Resources Corp., 7.55%, 2/1/2007 ........... 8,200,000 7,609,600
Conoco, Inc., 6.35%, 4/15/2009 ..................... 8,550,000 7,989,719
Duke Energy Corp., 10%, 8/15/2001 .................. 2,000,000 2,045,680
Louis Dreyfus Natural Gas Corp., 6.875%, 12/1/2007 . 2,500,000 2,255,175
Petroleum Geo-Services, 7.5%, 3/31/2007 ............ 5,300,000 5,085,032
Philips Petroleum Co., 8.75%, 5/25/2010 ............ 8,600,000 9,143,692
Pioneer Natural Resources Co.:
6.5%, 1/15/2008 ................................. 1,900,000 1,642,322
9.625%, 4/1/2010 ................................ 6,925,000 7,202,000
Texas Eastern Transmission Corp., 10%, 8/15/2001 ... 5,500,000 5,625,620
Williams Gas Pipeline Center, 7.375%, 11/15/2006 ... 4,175,000 4,075,009
------------
52,673,849
------------
Transportation 0.3%
Delta Air Lines, 7.9%, 12/15/2009 .................. 2,500,000 2,369,950
------------
Utilities 3.4%
Alabama Power Co., 7.125%, 8/15/2004 ............... 2,500,000 2,474,000
Cleveland Electric Illumination Co., 7.67%, 7/1/2004 8,600,000 8,488,630
Detroit Edison Co., 7.5%, 2/1/2005 ................. 8,600,000 8,578,328
Niagara Mohawk Power Corp., 6.625%, 7/1/2005 ....... 9,250,000 8,828,848
28,369,806
------------
--------------------------------------------------------------------------------
Total Corporate Bonds (Cost $398,925,751) 389,641,783
--------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
Principal
Amount ($) Value ($)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Other 1.5%
--------------------------------------------------------------------------------
Riverside Loan Trust I, 7.438%, 7/16/2008 (b) ------------
(Cost $15,000,000) .............................. 15,000,000 12,710,655
------------
--------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $842,541,318) (a) 823,753,983
--------------------------------------------------------------------------------
* Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
(a) The cost for federal income tax purposes was $842,541,318. At July 31,
2000, net unrealized depreciation for all securities based on tax cost
was $18,787,335. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of value
over tax cost of $5,677,404 and aggregate gross unrealized depreciation
for all securities in which there was an excess of tax cost over value
of $24,464,739.
(b) Scudder Kemper Investments, Inc., which also manages the Riverside Loan
Trust I portfolio, has agreed not to impose its advisory fee on the
value of the Fund's investment in Riverside Loan Trust I.
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. Some separate investments in the
Federal National Mortgage Association and the Government National
Mortgage Association issues which have similar coupon rates have been
aggregated for presentation purposes in the investment portfolio.
20
<PAGE>
Financial Statements
--------------------------------------------------------------------------------
Statement of Assets and Liabilities as of July 31, 2000 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets
----------------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (cost $842,541,318) ................ $ 823,753,983
Cash ................................................................... 20,108
Receivable for investments sold ........................................ 11,675,220
Interest receivable .................................................... 11,938,894
Receivable for Fund shares sold ........................................ 1,373,241
Due from Adviser ....................................................... 48,591
Other assets ........................................................... 115
---------------
Total assets ........................................................... 848,810,152
Liabilities
----------------------------------------------------------------------------------------
Payable for investments purchased ...................................... 12,769,711
Dividends payable ...................................................... 150,066
Payable for Fund shares redeemed ....................................... 3,251,831
Accrued management fee ................................................. 935,882
Accrued reorganization costs ........................................... 351,572
Accrued Trustees' fees and expenses .................................... 102,070
Other accrued expenses and payables .................................... 908,368
---------------
Total liabilities ...................................................... 18,469,500
----------------------------------------------------------------------------------------
Net assets, at value $ 830,340,652
----------------------------------------------------------------------------------------
Net Assets
----------------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income .................................... 133,925
Net unrealized appreciation (depreciation) on investments .............. (18,787,335)
Accumulated net realized gain (loss) ................................... (45,609,847)
Paid-in capital ........................................................ 894,603,909
----------------------------------------------------------------------------------------
Net assets, at value $ 830,340,652
----------------------------------------------------------------------------------------
Net Asset Value
----------------------------------------------------------------------------------------
Class AARP
NetAsset Value, offering and redemption price per share ($183,550,274 /
15,065,712 outstanding shares of beneficial interest, $.01 par value, -------------
unlimited number of shares authorized) .............................. $ 12.18
-------------
Class S
Net Asset Value, offering and redemption price per share ($646,790,378 /
53,078,761 outstanding shares of beneficial interest, $.01 par value, -------------
unlimited number of shares authorized) .............................. $ 12.19
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
--------------------------------------------------------------------------------
Statement of Operations for the six months ended July 31, 2000 (Unaudited)
--------------------------------------------------------------------------------
Investment Income
------------------------------------------------------------------------------
Income: ....................................................... $ 26,425,054
Interest
---------------
Expenses:
Management fee ................................................ 2,025,667
Administrative fee ............................................ 6,830
Services to shareholders ...................................... 2,698,024
Custodian and accounting fees ................................. 22,847
Auditing ...................................................... 20,982
Legal ......................................................... 9,014
Trustees' fees and expenses ................................... 117,869
Reports to shareholders ....................................... 67,349
Reorganization ................................................ 450,559
---------------
Total expenses, before expense reductions ..................... 5,419,141
Expense reductions ............................................ (1,713,193)
---------------
Total expenses, after expense reductions ...................... 3,705,948
------------------------------------------------------------------------------
Net investment income 22,719,106
------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
------------------------------------------------------------------------------
Net realized gain (loss) from investments ..................... (23,271,495)
Net unrealized appreciation (depreciation) during the period on
investments ................................................ 26,144,330
------------------------------------------------------------------------------
Net gain (loss) on investment transactions 2,872,835
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 25,591,941
------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
--------------------------------------------------------------------------------
Statements of Changes in Net Assets
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended July 31, Year Ended
2000 January 31,
Increase (Decrease) in Net Assets (Unaudited) 2000
------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ............................. $ 22,719,106 $ 46,680,885
Net realized gain (loss) on investment transactions (23,271,495) (19,415,171)
Net unrealized appreciation (depreciation) on
investment transactions during the period ...... 26,144,330 (47,271,570)
--------------- ---------------
Net increase (decrease) in net assets resulting ... 25,591,941 (20,005,856)
from operations
--------------- ---------------
Distributions to shareholders from:
Net investment income -- Class S .................. (27,092,639) (47,341,068)
--------------- ---------------
Fund share transactions:
Proceeds from shares sold ......................... 111,685,035 215,739,482
Net assets acquired in tax-free reorganization .... 183,509,996 --
Reinvestment of distributions ..................... 24,221,539 42,701,249
Cost of shares redeemed ........................... (175,430,512) (288,967,370)
--------------- ---------------
Net increase (decrease) in net assets from Fund
share transactions ............................. 143,986,058 (30,526,639)
--------------- ---------------
Increase (decrease) in net assets ................. 142,485,360 (97,873,563)
Net assets at beginning of period ................. 687,855,292 785,728,855
Net assets at end of period (including
undistributed net investment income of $133,925 --------------- ---------------
and $4,507,458, respectively) .................. $ 830,340,652 $ 687,855,292
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
Financial Highlights
--------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
the period and other performance information derived from the financial
statements.
Class AARP
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
2000(a)
--------------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $12.19
----------
--------------------------------------------------------------------------------------
Income (loss) from investment operations:
--------------------------------------------------------------------------------------
Net investment income --
--------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (.01)
----------
--------------------------------------------------------------------------------------
Total from investment operations (.01) Less distributions from:
--------------------------------------------------------------------------------------
Net investment income --
--------------------------------------------------------------------------------------
Net asset value, end of period $12.18
----------
--------------------------------------------------------------------------------------
Total Return (%) (.08)**
--------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 184
--------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .89*
--------------------------------------------------------------------------------------
Ratio of net investment income (%) N/A***
--------------------------------------------------------------------------------------
Portfolio turnover rate (%) 104**
--------------------------------------------------------------------------------------
</TABLE>
(a) For the day ended July 31, 2000 (commencement of sale of Class AARP)
(Unaudited).
* Annualized
** Not annualized
*** Ratio not meaningful due to short period of operation.
24
<PAGE>
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Class S (b)
------------------------------------------------------------------------------------
2000(c) 2000(d) 1999(e) 1998(f) 1997(f) 1996(f)1995(f)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $12.21 $13.36 $13.24 $13.46 $13.15 $13.61 $12.32
------------------------------------------------------------
------------------------------------------------------------------------------------
Income (loss) from investment operations:
------------------------------------------------------------------------------------
Net investment
income (a) .41 .79 .07 .81 .80 .80 .83
------------------------------------------------------------------------------------
Net realized and
unrealized gain
(loss) on investment
transactions (.01) (1.13) .05 .00(g) .31 (.36) 1.41
------------------------------------------------------------
------------------------------------------------------------------------------------
Total from investment
operations .40 (.34) .12 .81 1.11 .44 2.24
------------------------------------------------------------------------------------
Less distributions from:
------------------------------------------------------------------------------------
Net investment income (.42) (.81) -- (.79) (.79) (.81) (.92)
------------------------------------------------------------------------------------
Net realized gains on
investment
transactions -- -- -- (.24) (.01) (.09) (.03)
------------------------------------------------------------
------------------------------------------------------------------------------------
Total distributions (.42) (.81) -- (1.03) (.80) (.90) (.95)
------------------------------------------------------------------------------------
Net asset value, end
of period $12.19 $12.21 $13.36 $13.24 $13.46 $13.15 $13.61
------------------------------------------------------------
------------------------------------------------------------------------------------
Total Return (%) 3.97(h)** (2.61)(h) .91(h)** 6.11(h) 8.66 3.41 18.54
------------------------------------------------------------------------------------
Ratios to Average Net assets and Supplemental Data
------------------------------------------------------------------------------------
Net assets, end of
period ($ millions) 647 688 786 806 695 579 578
------------------------------------------------------------------------------------
Ratio of expenses
before expense
reductions (%) 1.53(i)* 1.44 1.50* 1.33 1.18 .98 .99
------------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 1.03(i)* .95 .95* .99 1.18 .98 .99
------------------------------------------------------------------------------------
Ratio of net investment
income (%) 6.76* 6.19 5.85* 5.98 6.00 6.01 6.35
------------------------------------------------------------------------------------
Portfolio turnover
rate (%) 104** 81 21** 126 62 67 128
------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) On July 28, 2000 existing shares of the Fund were redesignated as Class
S.
(c) For the six months ended July 31, 2000 (Unaudited).
(d) For the year ended January 31, 2000.
(e) For the one month ended January 31, 1999. On August 10, 1998, the
Trustees of the Fund changed the fiscal year end to January 31 from
December 31.
(f) For the year ended December 31.
(g) Amount is less than one half of $.01.
(h) Total returns would have been lower had certain expenses not been
reduced.
(i) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were 1.45%
and 0.95%, respectively. (See Notes to Financial Statements).
* Annualized
** Not annualized
25
<PAGE>
Notes to Financial Statements (Unaudited)
--------------------------------------------------------------------------------
A. Significant Accounting Policies
Scudder Income Fund (the "Fund") is a diversified series of Scudder Portfolio
Trust (the "Trust") which is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company
and is organized as a Massachusetts business trust.
On July 28, 2000, existing shares of the Fund were redesignated as Class S
shares. In addition, all of the net assets acquired from the merger with AARP
Bond for Income Fund (see Note G) were designated as Class AARP shares. The two
classes of shares provide investors with different purchase options. Shares of
Class AARP are especially designed for members of AARP. On July 31, 2000, the
Fund commenced offering multiple classes of shares.
Investment income, realized and unrealized gains and losses, certain fund level
expenses and expense reductions, if any, are borne pro rata on the basis of
relative net assets by the holders of all classes of shares, except that each
class bears certain expenses unique to that class such as reorganization
expenses (see Note F). Differences in class expenses may result in payment of
different per share dividends by class. All shares of the Fund have equal rights
with respect to voting subject to class specific arrangements.
The Fund's financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require the use of
management estimates. The policies described below are followed consistently by
the Fund in the preparation of its financial statements.
Security Valuation. Portfolio debt securities purchased with an original
maturity greater than sixty days are valued by pricing agents approved by the
officers of the Fund, whose quotations reflect broker/dealer-supplied valuations
and electronic data processing techniques. If the pricing agents are unable to
provide such quotations, the most recent bid quotation supplied by a bona fide
market maker shall be used. Money market instruments purchased with an original
maturity of sixty days or less are valued at amortized cost. All other
securities are valued at their fair value as determined in good faith by the
Valuation Committee of the Board of Trustees.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian or
sub-custodian bank, receives delivery of the underlying securities, the amount
of which at the time of purchase and each subsequent business day is required
26
<PAGE>
to be maintained at such a level that the market value is equal to at least the
principal amount of the repurchase price plus accrued interest.
When Issued/Delayed Delivery Securities. The Fund may purchase securities with
delivery or payment to occur at a later date beyond the normal settlement
period. At the time the Fund enters into a commitment to purchase a security,
the transaction is recorded and the value of the security is reflected in the
net asset value. The value of the security may vary with market fluctuations. No
interest accrues to the Fund until payment takes place. At the time the Fund
enters into this type of transaction it is required to segregate cash or other
liquid assets at least equal to the amount of the commitment.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. Accordingly, the Fund paid no federal income taxes and no federal
income tax provision was required.
At January 31, 2000, the Fund had a net tax basis capital loss carryforward of
approximately $8,539,000, which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until January 31,
2007 ($2,659,000) and January 31, 2008 ($5,880,000), the respective expiration
dates, whichever occurs first. From November 1, 1999 through January 31, 2000
the Fund incurred approximately $12,266,000 of net capital realized losses. As
permitted by tax regulations, the Fund intends to elect to defer these losses
and treat them as arising in the fiscal year ending January 31, 2001.
In addition, the Fund inherited approximately $14,500,000 of capital losses from
its merger (see Note G) with AARP Bond for Income Fund, which may be applied
against any realized net taxable capital gains in future years, subject to
certain limitations imposed by Section 382 of the Internal Revenue Code.
Distribution of Income and Gains. Distributions of net investment income, if
any, were made quarterly for the period ended July 31, 2000. Effective July 31,
2000, the Fund will declare dividends daily and pay dividends monthly. Net
realized gains from investment transactions, in excess of available capital loss
carryforwards, would be taxable to the Fund if not distributed, and, therefore,
will be distributed to shareholders at least annually.
27
<PAGE>
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax
regulations, which may differ from accounting principles generally accepted in
the United States. As a result, net investment income (loss) and net realized
gain (loss) on investment transactions for a reporting period may differ
significantly from distributions during such period. Accordingly, the Fund may
periodically make reclassifications among certain of its capital accounts
without impacting the net asset value of the Fund.
Investment Transactions and Investment Income. Investment transactions are
accounted for on the trade date. Interest income is recorded on the accrual
basis. Original issue discounts are accreted for both tax and financial
reporting purposes. Realized gains and losses from investment transactions are
recorded on an identified cost basis.
B. Purchases and Sales of Securities
During the six months ended July 31, 2000, purchases and sales of investment
securities (excluding short-term investments and direct U.S. Government
Obligations) aggregated $386,334,449 and $439,974,004, respectively. Purchases
and sales of direct U.S. Government obligations aggregated $305,098,921 and
$310,553,036, respectively.
C. Related Parties
As described in Note F, Scudder Kemper Investments, Inc. has initiated a
restructuring program for most of its Scudder no-load, open-end funds. As part
of this reorganization, the Fund adopted a new Investment Management Agreement
and entered into an Administrative Agreement. Both of these agreements were
effective July 31, 2000. The terms of the newly adopted and the pre-existing
agreements are set out below.
Management Agreement. Under the Investment 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
28
<PAGE>
such net assets, and 0.55% of such net assets in excess of $500,000,000,
computed and accrued daily and payable monthly.
Effective July 31, 2000, the Fund, as approved by the Fund's Board of Trustees,
adopted a new Investment Management Agreement (the "Management Agreement") with
Scudder Kemper. The Management Agreement is identical to the pre-existing
Agreement, except for the dates of execution and termination and fee rate. The
management fee payable under the Management Agreement is equal to an annual rate
of 0.65% on the first $200,000,000 of average daily net assets, 0.60% on the
next $300,000,000 of such net assets, 0.55% on the next $500,000,000 of such net
assets, 0.525% on the next $500,000,000 of such net assets, and 0.50% of such
net assets in excess of $1,500,000,000, computed and accrued daily and payable
monthly.
In addition, during the six months ended July 31, 2000, the Adviser maintained
the annualized expenses of the Fund at not more than 0.95% of average daily net
assets. Certain expenses, such as reorganization, taxes, brokerage and interest
expense are excluded from the expense limitation. Accordingly, for the six
months ended July 31, 2000, the Adviser did not impose a portion of its
management fee pursuant to the Agreement and the Management Agreement
aggregating $1,651,218 and the amount imposed aggregated $374,449. The
management fee imposed was equivalent to an annualized effective rate of 0.11%
of the Fund's average daily net assets.
Administrative Fee. Effective July 31, 2000, the Fund, as approved by the Fund's
Board of Trustees, adopted an Administrative Agreement (the "Administrative
Agreement") with Scudder Kemper. Under the Administrative Agreement the Adviser
provides or pays others to provide substantially all of the administrative
services required by the Fund (other than those provided by Scudder Kemper under
its Management Agreement with the Fund, as described above) in exchange for the
payment by the Fund of an administrative services fee (the "Administrative Fee")
of 0.30% of average daily net assets. As of the effective date of the
Administrative Agreement, each service provider will continue to provide the
services that it currently provides to the Fund (i.e., fund accounting,
shareholder services, custody, audit and legal), under the current arrangements,
except that Scudder Kemper will pay these entities for the provision of their
services to the Fund and will pay most other Fund expenses, including insurance,
registration, printing and postage fees. Certain expenses of the Fund would not
be borne by Scudder Kemper under the Administrative Agreement, such as taxes,
brokerage, interest and extraordinary expenses, and the fees and expenses of the
Independent Trustees
29
<PAGE>
(including the fees and expenses of their independent counsel). For the one day
ended July 31, 2000, the Administrative Agreement expense charged to the Fund
amounted to $6,830, all of which was unpaid at July 31, 2000.
Other Fees. Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is
the transfer, dividend paying and shareholder service agent for the Fund. Prior
to July 31, 2000, the amount charged to the Fund by SSC aggregated $363,782, of
which $68,610 is unpaid at July 31, 2000.
Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans invested in the Fund. Prior to July 31, 2000, the amount
charged to the Fund by STC aggregated $1,402,788, of which $279,291 is unpaid at
July 31, 2000.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. Prior to July 31,
2000, the amount charged to the Fund by SFAC aggregated $45,821, of which $7,626
is unpaid at July 31, 2000.
The Fund is one of several Scudder Funds (the "Underlying Funds") in which the
Scudder Pathway Series Portfolios (the "Portfolios") invest. In accordance with
the Special Servicing Agreement entered into by the Adviser, the Portfolios, the
Underlying Funds, SSC, SFAC, STC and Scudder Investor Services, Inc., expenses
from the operation of the Portfolios are borne by the Underlying Funds based on
each Underlying Fund's proportionate share of assets owned by the Portfolios. No
Underlying Fund will be charged expenses that exceed the estimated savings to
such Underlying Fund. These estimated savings result from the elimination of
separate shareholder accounts which either currently are or have potential to be
invested in the Underlying Funds. Prior to July 31, 2000 the Special Servicing
Agreement expense charged to the Fund amounted to $693,296.
Effective July 31, 2000, the above fees will be paid by the Adviser in
accordance with the Administrative Agreement.
Trustee Fees and Expenses. The Fund pays each Trustee not affiliated with the
Adviser an annual retainer plus specified amounts for attended board and
committee meetings. For the six months ended July 31, 2000, Trustees' fees and
expenses aggregated $20,688. In addition, a one-time fee of $97,180 was accrued
for payment to those Trustees not affiliated with the Adviser who did not stand
for re-election under the reorganization discussed in Note F.
30
<PAGE>
Inasmuch as the Adviser will also benefit from administrative efficiencies of a
consolidated Board, the Adviser has agreed to bear $48,590 of such costs.
Other Related Parties. Effective July 31, 2000, Scudder Kemper has agreed to pay
a fee to AARP and/or its affiliates in return for advice and other services
relating to investments by AARP members in Class AARP shares of the Fund. This
fee is calculated on a daily basis as a percentage of the combined net assets of
the AARP Classes of all funds managed by Scudder Kemper. The fee rates, which
decrease as the aggregate net assets of the AARP Classes become larger, are as
follows: 0.07% for the first $6 billion of net assets, 0.06% for the next $10
billion of such net assets and 0.05% of such net assets thereafter.
D. Expense Off-Set Arrangements
The Fund has entered into arrangements with its custodian and transfer agent
whereby credits realized as a result of uninvested cash balances were used to
reduce a portion of the Fund's expenses. During the six months ended July 31,
2000, the Fund's custodian fees were reduced by $3,443. Prior to July 31, 2000,
transfer agent fees were reduced by $9,942.
Effective July 31, 2000, transfer agent credits will no longer be used to reduce
Fund expenses.
E. Line of Credit
The Fund and several Scudder Funds (the "Participants") share in a $1 billion
revolving credit facility with Chase Manhattan Bank 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 upon net assets, among
each of the Participants. Interest is calculated based on the market rates at
the time of the borrowing. The Fund may borrow up to a maximum of 33 percent of
its net assets under the agreement.
F. Reorganization
In early 2000, Scudder Kemper initiated a restructuring program for most of its
Scudder no-load open-end funds in response to changing industry conditions and
investor needs. The program proposes to streamline the management and operations
of most of the no-load open-end funds Scudder Kemper advises principally through
the liquidation of several small funds, mergers of certain funds with similar
investment objectives, the creation of one Board of Directors/Trustees and the
adoption of an administrative fee
31
<PAGE>
covering the provision of most of the services currently paid for by the
affected funds. Costs incurred in connection with this restructuring initiative
are being borne jointly by Scudder Kemper and certain of the affected funds.
These costs, including printing, shareholder meeting expenses and professional
fees, are presented as reorganization expenses in the Statement of Operations of
the Fund.
G. Acquisition of Assets
On July 28, 2000, the Fund acquired all the net assets of AARP Bond for Income
Fund pursuant to a plan of reorganization approved by shareholders on July 13,
2000. The acquisition was accomplished by a tax-free exchange of 15,054,140
shares of the Fund (valued at $183,509,996) for 13,242,168 shares of AARP Bond
for Income Fund outstanding on July 28, 2000. AARP Bond for Income Fund's net
assets at that date ($183,509,996), including $4,631,154 of unrealized
depreciation, were combined with those of the Fund. The aggregate nets assets of
the Fund immediately before the acquisition were $649,750,265. The combined net
assets of the Fund immediately following the acquisition were $833,260,261.
32
<PAGE>
H. Share Transactions
The following tables summarize share and dollar activity in the Fund:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
July 31, 2000 January 31, 2000
----------------------------------------------------------------
Shares Dollars Shares Dollars
Shares sold
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class AARP ........ 50,043 $ 609,959 -- $ --
Class S ........... 8,969,673 111,075,076 16,928,791 215,739,482
-------------- --------------
$ 111,685,035 $ 215,739,482
-------------- --------------
Shares issued in tax-free reorganization
-----------------------------------------------------------------------------------
Class AARP ........ 15,054,140 $ 183,509,996 -- $ --
Shares issued to shareholders in reinvestment of distributions
-----------------------------------------------------------------------------------
Class AARP ........ -- $ -- -- $ --
Class S ........... 1,991,438 24,221,539 3,397,003 42,701,249
-------------- --------------
$ 24,221,539 $ 42,701,249
-------------- --------------
Shares redeemed
-----------------------------------------------------------------------------------
Class AARP ........ (38,471) $ (468,745) -- $ --
Class S ........... (14,216,122) (174,961,767) (22,837,180) (288,967,370)
-------------- --------------
$(175,430,512) $(288,967,370)
-------------- --------------
Net increase (decrease)
-----------------------------------------------------------------------------------
Class AARP ........ 15,065,712 $ 183,651,210 -- $ --
Class S ........... (3,255,011) (39,665,152) (2,511,386) (30,526,639)
-------------- --------------
$ 143,986,058 $ (30,526,639)
-------------- --------------
</TABLE>
33
<PAGE>
Shareholder Meeting Results (Unaudited)
--------------------------------------------------------------------------------
A Special Meeting of Shareholders (the "Meeting") of Scudder Income Fund (the
"fund") was held on July 13, 2000, 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 elect Trustees of the fund.
Number of Votes:
Trustee For Withheld
--------------------------------------------------------------------------------
Henry P. Becton, Jr. 29,077,306 395,233
Linda C. Coughlin 29,086,153 386,386
Dawn-Marie Driscoll 29,077,065 395,474
Edgar R. Fiedler 29,066,918 405,620
Keith R. Fox 29,092,252 380,286
Joan E. Spero 29,079,120 393,419
Jean Gleason Stromberg 29,085,669 386,870
Jean C. Tempel 29,088,702 383,837
Steven Zaleznick 29,079,887 392,652
--------------------------------------------------------------------------------
2. To ratify the selection of PricewaterhouseCoopers LLP as the independent
accountants for the fund for the year ending January 31, 2001.
Number of Votes:
Broker
For Against Abstain Non-Votes*
--------------------------------------------------------------------------------
28,996,209 191,743 284,587 0
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
* 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.
34
<PAGE>
Officers and Trustees
--------------------------------------------------------------------------------
Linda C. Coughlin* Thomas V. Bruns*
o President and Trustee o Vice President
Henry P. Becton, Jr. Robert S. Cessine*
o Trustee; President, WGBH o Vice President
Educational Foundation
William F. Glavin*
Dawn-Marie Driscoll o Vice President
o Trustee; President, Driscoll
Associates; Executive Fellow, Gary A. Langbaum*
Center for Business Ethics, o Vice President
Bentley College
James E. Masur*
Edgar R. Fiedler o Vice President
o Trustee; Senior Fellow and
Economic Counsellor, The Ann M. McCreary*
Conference Board, Inc. o Vice President
Keith R. Fox Harry E. Resis*
o Trustee; General Partner, o Vice President
The Exeter Group of Funds
Howard S. Schneider*
Joan E. Spero o Vice President
o Trustee; President, The Doris
Duke Charitable Foundation John Millette*
o Vice President and Secretary
Jean Gleason Stromberg
o Trustee; Consultant Kathryn L. Quirk*
o Vice President and
Jean C. Tempel Assistant Secretary
o Trustee; Managing Director,
First Light Capital, LLC John R. Hebble*
o Treasurer
Steven Zaleznick
o Trustee; President and Brenda Lyons*
Chief Executive Officer, o Assistant Treasurer
AARP Services, Inc.
Caroline Pearson*
o Assistant Secretary
*Scudder Kemper Investments, Inc.
35
<PAGE>
Investment Products and Services
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Scudder Funds
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Money Market U.S. Growth
Scudder U.S. Treasury Money Fund Value
Scudder Cash Investment Trust Scudder Large Company Value Fund
Scudder Money Market Series-- Scudder Value Fund
Prime Reserve Shares Scudder Small Company Value Fund
Premium Shares
Managed Shares Growth
Scudder Tax Free Money Fund Scudder Classic Growth Fund
Scudder Capital Growth Fund
Tax Free Scudder Large Company Growth Fund
Scudder Medium Term Tax Free Fund Scudder Select 1000 Growth Fund
Scudder Managed Municipal Bonds Scudder Development Fund
Scudder High Yield Tax Free Fund Scudder Small Company Stock Fund
Scudder California Tax Free Fund Scudder 21st Century Growth Fund
Scudder Massachusetts Tax Free Fund
Scudder New York Tax Free Fund Global Equity
Worldwide
U.S. Income Scudder Global Fund
Scudder Short Term Bond Fund Scudder International Fund
Scudder GNMA Fund Scudder Global Discovery Fund
Scudder Income Fund Scudder Emerging Markets Growth Fund
Scudder Corporate Bond Fund Scudder Gold Fund
Scudder High Yield Bond Fund
Regional
Global Income Scudder Greater Europe Growth Fund
Scudder Global Bond Fund Scudder Pacific Opportunities Fund
Scudder Emerging Markets Income Fund Scudder Latin America Fund
The Japan Fund, Inc.
Asset Allocation
Scudder Pathway Conservative Portfolio Industry Sector Funds
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio Choice Series
Scudder Health Care Fund
U.S. Growth and Income Scudder Technology Fund
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder Select 500 Fund
Scudder S&P 500 Index Fund
36
<PAGE>
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Retirement Programs and Education Accounts
--------------------------------------------------------------------------------
Retirement Programs Education Accounts
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA IRA for Minors
Inherited IRA
Keogh Plan
401(k), 403(b) Plans
Variable Annuities
--------------------------------------------------------------------------------
Closed-End Funds
--------------------------------------------------------------------------------
The Argentina Fund, Inc. Montgomery Street Income Securities, Inc.
The Brazil Fund, Inc. Scudder Global High Income Fund, Inc.
The Korea Fund, Inc. Scudder New Asia Fund, Inc.
</TABLE>
Scudder funds are offered by prospectus only. For more complete information on
any fund or variable annuity registered in your state, including information
about a fund's objectives, strategies, risks, advisory fees, distribution
charges, and other expenses, please order a free prospectus. Read the prospectus
before investing in any fund to ensure the fund is appropriate for your goals
and risk tolerance. There is no assurance that the objective of any fund will be
achieved, and fund returns and net asset values fluctuate. Shares are redeemable
at current net asset value, which may be more or less than their original cost.
A money market mutual fund investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. Although a
money market mutual fund seeks to preserve the value of your investment at $1
per share, it is possible to lose money by investing in such a fund.
The services and products described should not be considered a solicitation to
buy or an offer to sell a security to any person in any jurisdiction where such
offer, solicitation, purchase, or sale would be unlawful under the securities
laws of such jurisdiction.
Scudder Investor Services, Inc.
37
<PAGE>
Account Management Resources
--------------------------------------------------------------------------------
For shareholders of Scudder funds including those in the AARP Investment Program
Convenient Automatic Investment Plan
ways to invest,
quickly and A convenient investment program in which money is
reliably electronically debited from your bank account monthly
to regularly purchase fund shares and "dollar cost
average" -- buy more shares when the fund's price is
lower and fewer when it's higher, which can reduce
your average purchase price over time.*
Automatic Dividend Transfer
The most timely, reliable, and convenient way to
purchase shares -- use distributions from one Scudder
fund to purchase shares in another, automatically
(accounts with identical registrations or the same
social security or tax identification number).
QuickBuy
Lets you purchase Scudder fund shares electronically,
avoiding potential mailing delays; money for each of
your transactions is electronically debited from a
previously designated bank account.
Payroll Deduction and Direct Deposit
Have all or part of your paycheck -- even government
checks -- invested in up to four Scudder funds at one
time.
* Dollar cost averaging involves continuous
investment in securities regardless of price
fluctuations and does not assure a profit or
protect against loss in declining markets.
Investors should consider their ability to
continue such a plan through periods of low
price levels.
Around-the- Automated Information Lines
clock electronic
account Scudder Class S Shareholders:
service and Call SAIL(TM) -- 1-800-343-2890
information,
including some AARP Investment Program Shareholders:
transactions Call Easy-Access Line -- 1-800-631-4636
Personalized account information, the ability to
exchange or redeem shares, and information on other
Scudder funds and services via touchtone telephone.
Web Site
Scudder Class S Shareholders --
www.scudder.com
AARP Investment Program Shareholders --
aarp.scudder.com
Personal Investment Organizer: Offering account
information and transactions, interactive worksheets,
prospectuses and applications for all Scudder funds,
plus your current asset allocation, whenever you need
them. Scudder's site also provides news about Scudder
funds, retirement planning information, and more.
38
<PAGE>
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Those who Automatic Withdrawal Plan
depend on
investment You designate the bank account, determine the
proceeds for schedule (as frequently as once a month) and amount
living expenses of the redemptions, and Scudder does the rest.
can enjoy these
convenient, Distributions Direct
timely, and
reliable Automatically deposits your fund distributions into
automated the bank account you designate within three business
withdrawal days after each distribution is paid.
programs
QuickSell
Provides speedy access to your money by
electronically crediting your redemption proceeds to
the bank account you previously designated.
For more Scudder Class S Shareholders:
information
about these Call a Scudder representative at
services 1-800-SCUDDER
AARP Investment Program Shareholders:
Call an AARP Investment Program representative at
1-800-253-2277
Please address For Scudder Class S Shareholders:
all written
correspondence The Scudder Funds
to PO Box 2291
Boston, Massachusetts
02107-2291
For AARP Investment Program Shareholders:
AARP Investment Program from Scudder
PO Box 2540
Boston, Massachusetts
02208-2540
39
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc. is one of the largest and most experienced
investment management organizations worldwide, managing more than $290 billion
in assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded over 80
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Financial Services Group. As a result, Zurich's subsidiary, Zurich
Kemper Investments, Inc., with 50 years of mutual fund and investment management
experience, was combined with Scudder. Headquartered in New York, Scudder Kemper
Investments offers a full range of investment counsel and asset management
capabilities, based on a combination of proprietary research and disciplined,
long-term investment strategies. With its global investment resources and
perspective, the firm seeks opportunities in markets throughout the world to
meet the needs of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Financial Services Group. The Zurich Financial Services Group is
an internationally recognized leader in financial services, including
property/casualty and life insurance, reinsurance, and asset management.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
SCUDDER
INVESTMENTS(SM)
[LOGO]
PO Box 2291
Boston, MA 02107-2291
1-800-SCUDDER
www.scudder.com
A member of the [LOGO] Zurich Financial Services Group
