Scudder
Pathway Series:
International Portfolio
Annual Report
September 30, 1997
Pure No-Load(TM) Funds
A mutual fund which seeks maximum total return by investing in a select mix of
international and global Scudder Funds.
A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
SCUDDER [logo]
<PAGE>
In Brief
o For the abbreviated fiscal period ended September 30, 1997, Scudder Pathway
International Portfolio returned 16.58%, surpassing by a wide margin the
Portfolio's custom benchmark.
o The international markets provided positive returns overall for the period,
with Europe, and especially Latin America, providing outstanding returns, while
Southeast Asia and Japan reported negative returns.
o The diverging performance of the world markets during this period highlighted
the importance of diversification and asset allocation in the international
markets.
Table of Contents
3 Letter from the Series' President
4 Performance Update
5 Portfolio Summary
6 Portfolio Management Discussion
8 Glossary of Investment Terms
9 Portfolio Highlights
10 Investment Portfolio
11 Financial Statements
14 Financial Highlights
15 Notes to Financial Statements
17 Report of Independent Accountants
18 Tax Information
20 Officers and Trustees
21 Investment Products and Services
22 Scudder Solutions
2-SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
Letter from the Series' President
Dear Shareholders,
We are pleased to present the first annual report for Scudder Pathway
Series: International Portfolio for the abbreviated fiscal period ended
September 30, 1997.
The strong performance of Pathway Series Portfolios is gratifying,
especially given an increase in market volatility towards the end of the period.
After the close of the fiscal period, volatility accelerated, as the ripple
effects from the currency crisis in Southeast Asia were felt across the globe.
For the U.S. stock market, which had been viewed by some as amply priced, these
events helped to trigger a 554 point decline in the Dow Jones Industrial Average
on October 27. While the Dow recovered more than 330 points the next day, these
events serve as reminders to investors of the truly global nature of the
investment markets and the price volatility, which can occur.
In this context, volatility provides many opportunities for the underlying
funds in which Pathway Portfolios invest. In this environment, we believe a
sound approach to building an investment portfolio designed to weather a range
of market conditions is based on careful diversification with exposure to
small-cap, foreign, emerging market, and fixed income securities in addition to
large-cap U.S. stocks. The Pathway Series Portfolios provide this type of
investment program, which, when combined with the habit of investing regularly
and a long-term perspective, can help many investors meet their goals.
For those of you who are interested in new Scudder products, we recently
introduced Scudder International Growth and Income Fund, which pursues a
yield-oriented approach to investing in international equities. The Fund seeks
to provide long-term growth of capital plus current income. Investors who desire
international exposure but wish to take a conservative approach may appreciate
the Fund's emphasis on dividend-paying stocks of established companies listed on
foreign exchanges. For further information on this new fund, please turn to
page 23.
Thank you for your investment in Scudder Pathway Series. If you have any
questions about the Series, please call Scudder Investor Relations at
1-800-225-2470, or visit our Internet Web site at http://funds.scudder.com.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President,
Scudder Pathway Series
3-SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
Performance Update as of September 30, 1997
- -----------------------------------------------------------------
Portfolio Index Comparison
- -----------------------------------------------------------------
Total Return
- -----------------------------------------------------------------
Period Ended Growth of
9/30/97 $10,000 Cumulative
- -----------------------------------------------------------------
SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
TICKER SYMBOL: SPIPX
- -----------------------------------------------------------------
Life of
Portfolio* $11,658 16.58%
- -----------------------------------------------------------------
MSCI ALL COUNTRY EX U.S. INDEX (75%),
JP MORGAN NON-U.S. GLOBAL GOVERNMENT BOND
INDEX (20%), 3-MONTH T-BILL (5%)
- -----------------------------------------------------------------
Total Return
Period Ended Growth of
9/30/97 $10,000 Cumulative
- -----------------------------------------------------------------
Life of
Portfolio* $10,734 7.34%
*The Portfolio commenced operations on November 15, 1996.
Index comparisons begin November 30, 1996.
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly periods ended September 30
Scudder Pathway Series: International Portfolio
Year Amount
- ----------------------
11/96* $10,000
12/96 $10,151
1/97 $10,277
2/97 $10,439
3/97 $10,387
4/97 $10,481
5/97 $10,984
6/97 $10,470
7/97 $11,837
8/97 $11,958
9/97 $11,581
MSCI All Country (ex U.S.) Index
Year Amount
- ----------------------
11/96* $10,000
12/96 $ 9,861
1/97 $ 9,553
2/97 $ 9,699
3/97 $ 9,708
4/97 $ 9,767
5/97 $10,411
6/97 $10,967
7/97 $11,169
8/97 $10,346
9/97 $10,926
MSCI All Country ex U.S. Index (75%),
JP Morgan Non-U.S. Global Government Bond
Index (20%), 3-month T-Bill (5%)
Year Amount
- ----------------------
11/96* $10,000
12/96 $ 9,886
1/97 $ 9,576
2/97 $ 9,665
3/97 $ 9,662
4/97 $ 9,672
5/97 $10,217
6/97 $10,651
7/97 $10,747
8/97 $10,166
9/97 $10,648
The MSCI All Country (ex U.S.) Index is a market value-weighted
measure of stocks of 46 countries. The JP Morgan Non-U.S. Global
Government Bond Index is a market value-weighted measure of bonds
excluding U.S. bonds. Index returns assume reinvestment of
dividends and do not reflect any fees or expenses.
- -----------------------------------------------------------------
Returns and Per Share Information
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly periods ended September 30
- ---------------------------------
<TABLE>
<S> <C>
1997*
----------
Net Asset Value... $13.59
Income Dividends.. $ .25
Capital Gains
Distributions..... $ .10
Portfolio Total
Return (%)........ 16.58
Blended Index Total
Return (%)........ 7.34
</TABLE>
Performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results.
Total return and principal value will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than when purchased.
4 -- SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
PORTFOLIO SUMMARY as of September 30, 1997
- ---------------------------------------------------------------------------
ASSET ALLOCATION
- ---------------------------------------------------------------------------
Money Market 1%
Fix Income 11%
Equity 88%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Assets were broadly diversified in
international equity and fixed income
funds with exposure to established
and emerging markets securities.
- --------------------------------------------------------------------------
ASSET CLASS RANGES
- --------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO
Money Market 0-20%
Fixed Income Funds 0-40%
Equity Funds 60-100%
Portfolio allocations are derived from
the risk profile for the Fund, changes
are expected to be modest and infrequent.
- --------------------------------------------------------------------------
PORTFOLIO HOLDINGS BY FUND
- --------------------------------------------------------------------------
- --------------------------------------------
Scudder International Fund 66%
- --------------------------------------------
Scudder Emerging Markets Growth Fund 10%
- --------------------------------------------
Scudder Emerging Markets Income Fund 6%
- --------------------------------------------
Scudder Latin America Fund 5%
- --------------------------------------------
Scudder Greater Europe Growth Fund 5%
- --------------------------------------------
Scudder International Bond Fund 5%
- --------------------------------------------
Scudder Pacific Opportunities Fund 2%
- --------------------------------------------
Scudder Cash Investment Trust 1%
- --------------------------------------------
100%
- --------------------------------------------
The strong performance of Latin America Fund
more than offset the weak performance of
Pacific Opportunities Fund, while International
Fund continued to anchor the Portfolio with a
solid return for the period.
- -----------------------------------------------------------------------------
For more complete details about the Fund's investment portfolio,
see page 10. A monthly Investment Portfolio Summary is available
upon request.
5 -- SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
Portfolio Management Discussion
We asked Benjamin W. Thorndike, lead portfolio manager of Scudder Pathway
Series: International Portfolio, to discuss the market environment and Scudder's
current investment strategy.
Q: How would you describe the environment for the 10-1/2 month fiscal period
which ended September 30, 1997?
A: The environment was generally unsettled. We saw a currency devaluation in
Thailand which triggered a crisis that spread like wildfire through Southeast
Asia, gutting local equity markets and crippling regional growth prospects.
Meanwhile, Japan's fragile recovery buckled under the weight of new taxes
introduced in April. Despite rising Japanese exports, second quarter growth fell
at an 11.2% annual rate, the worst performance in 23 years. In contrast, low
interest rates and weaker currencies have had a positive effect on growth in
Europe, causing Germany's central bank to take the lead in raising interest
rates, a move that might have been a political statement as much as an economic
one, as Europe heads toward currency union.
Q: How did the foreign markets perform?
A: Performance has been mixed, with Latin American and European markets
providing excellent returns, while the emerging markets indices suffered from
weakness in Southeast Asia and Japan. Clearly, the benefits of diversification
are more pronounced when performance diverges sharply, as we have seen during
the fiscal period.
Q: What caused the crisis in Southeast Asia?
A: Currency turmoil in Southeast Asia is due, in part, to failed efforts to tie
local currencies to the U.S. dollar in an effort to stabilize domestic inflation
and boost financial market credibility. In the early 1990s, as the U.S. dollar
- -------------------------------------------------------
Country/Market Index
Year-to-date returns
- -------------------------------------------------------
Latin America 44.43%
- -------------------------------------------------------
USA 27.74%
- -------------------------------------------------------
Europe 22.02%
- -------------------------------------------------------
Pathway International Portfolio 14.20%
- -------------------------------------------------------
Europe, Australia, and Far East (EAFE) 9.18%
- -------------------------------------------------------
Emerging Markets Free 5.40%
- -------------------------------------------------------
Japan -5.33%
- -------------------------------------------------------
Far East -22.18%
- -------------------------------------------------------
Source: Morgan Stanley Capital International indices in U.S. dollars, including
dividends for the nine-month period from December 31, 1996 to September 30,
1997.
depreciated against the Japanese yen and European currencies, Southeast Asian
economies benefited from improved competitiveness and huge capital inflows,
leading to rapid export and investment-led growth. However, the dollar's
reversal and slower worldwide growth have combined to reveal substantial excess
capacity, weak banking systems, and misguided or corrupt economic policies.
Q: What triggered the event?
A: Political turmoil ultimately lit the spark in Thailand, but many of the same
fundamental problems have existed to varying degrees in other economies across
the region. Once Thailand devalued in July, investors scrambled for the exits in
Malaysia, Indonesia and the Philippines, knocking currencies down by more than
6-SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
20% against the U.S. dollar. Local policymakers are hoping that weaker
currencies will help restore competitiveness, and ultimately growth. The
immediate effects, however, include higher inflation and slower growth as
interest rates are increased to stabilize the newly floating currencies.
Q: The strong performance of the Latin American markets has been a sharp
contrast. What is different there?
A: This region has staged a remarkable comeback from the days of the 1994-95
Mexican financial crisis. The combination of an improved macroeconomic
environment, a favorable flow of funds, and generally attractive starting
valuations has given rise to strong stock market performance. Governments are
paying far more attention to the financing of current account deficits, the
health of their commercial banking systems, and the necessity of encouraging
higher rates of domestic savings. In many ways, they have learned from previous
missteps, and it is paying off.
Q: What is Scudder's outlook?
A: With valuations of U.S. stocks higher than in many other countries, the
foreign markets look especially attractive. However, one of the key supports to
the positive environment has been ample liquidity. While liquidity will continue
as a concern for the emerging markets, we will also be monitoring it in more
established markets. Restraint could come in the form of increases in interest
rates by central banks (as we have recently witnessed in Germany). Yet, the
environment remains healthy in many markets, including Latin America and much of
Europe.
Pathway Series:
International Portfolio
A team approach to investing
The Portfolios are managed by a team of Scudder investment professionals who
each play an important role in the Portfolios' management process. Team
members work together to develop investment strategies and select underlying
Funds for each Portfolio. They are supported by Scudder's large staff of
portfolio managers, economists, research analysts, traders and other
investment specialists. All members of the Pathway investment team are members
of Scudder's Global Asset Allocation Committee. This group is responsible for
analyzing the global economy and capital markets, integrating information from
the firm's equity and fixed income specialists, and developing the outlook for
the major markets in which a Portfolio invests.
Lead Portfolio Manager Benjamin W. Thorndike, who has 18 years of investment
experience, joined Scudder in 1983 as a portfolio manager. Since 1986, he has
served as a portfolio manager for Scudder Growth and Income Fund. Cornelia
Small, Portfolio Manager, is Director of Global Equity Investments and
Chairman of the Capital Markets Group. Margaret (Peg) Hadzima, Portfolio
Manager, is Director of Scudder's Institutional Group, which includes a focus
on asset allocation strategy. Philip Fortuna, Portfolio Manager, joined
Scudder in 1986 as manager of institutional equity accounts. Maureen Allyn,
Portfolio Manager, is Scudder's Chief Economist, a position she has held since
1989, and is responsible for analyzing both the world and U.S. economies.
7-SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
Glossary of Investment Terms
ASSET ALLOCATION The distribution of an investment
portfolio's assets among the major asset classes,
such as stocks, bonds, and money market instruments.
The asset allocation decision is based on an
investor's objective, investment horizon, and risk
tolerance.
CURRENCY DEVALUATION A significant decline of a currency's
value relative to other currencies, such as the U.S.
dollar. This may be prompted by currency trading or
foreign central bank intervention (or the lack of
intervention). For U.S. dollar investors who are
investing overseas, a devaluation of a foreign
currency can have the effect of reducing an
investment's total return.
DIVERSIFICATION The spreading of risk by investing in several asset
categories, industry sectors, or individual
securities. An investor with a broadly diversified
portfolio will receive some protection from the price
declines of an individual asset class.
MARKET CAPITALIZATION The value of a company's outstanding
shares of common stock, determined by the number of
shares outstanding multiplied by the share price
(Shares x Price = Market Capitalization). The
universe of publicly traded companies is frequently
divided into large-, mid-, and small-capitalizations.
In general, "large-cap" stocks tend to be more liquid
than "small-cap" stocks.
OVER/UNDER WEIGHTING Refers to the allocation of assets --
usually by sector, industry, or country -- within a
portfolio relative to a benchmark index, (i.e. the
S&P 500) or an investment universe. For example, an
investment portfolio that overweights financial
stocks holds a higher percentage of finance stocks
than the comparative benchmark.
PRICE-EARNINGS RATIO (P/E) A widely used gauge of a stock's
(also "earnings multiple") valuation that indicates what
investors are paying for a company's earnings on a
per share basis. A higher "earnings multiple"
indicates a higher expected growth rate and the
potential for greater price fluctuations.
(Sources: Scudder; Barron's Dictionary of Finance and Investment Terms)
8-SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
Portfolio Highlights
Pathway International Portfolio
Pathway International Portfolio seeks to maximize total return by investing in a
select mix of established international mutual funds.
Performance
This report covers the abbreviated fiscal period from the Portfolio's
commencement of operations on November 15, 1996 to September 30, 1997. During
this 10-1/2 month period, the Portfolio provided a total return of 16.58%,
exceeding its custom benchmark by a wide margin, and the unmanaged MSCI All
Country excluding U.S. Index return of 10.41%. Returns and the components of
this benchmark are listed on page 4.
The foreign markets provided diverging performance, with Latin America and much
of Europe providing the best returns while Southeast Asia and Japan delivered
negative results. The benefit of the Portfolio's diversification among eight
funds was pronounced during this period, as returns varied significantly by
region. The Portfolio's broad diversification helped to dampen the effects of
price declines in selected markets.
The Portfolio was anchored by its core holding in International Fund, at 66% of
assets at period end. The Fund's broad diversification, primarily among
established foreign companies, was an important and strong contributor to
returns throughout the period. Emerging Markets Growth Fund was also a strong
performer, despite weakness in Southeast Asia, due in part, to the Fund's
significant underweighting in that region. Latin America Fund was the
Portfolio's strongest single performer for the period, more than offsetting the
weak performance of Pacific Opportunities Fund. Both funds individually
represented 5% or less of assets at the end of the period. In the fixed income
portion of the portfolio (11% of assets), Emerging Markets Income Fund continued
to provide very good returns, more than compensating for the marginally negative
return of International Bond Fund.
Portfolio Strategy
Over the period, the Portfolio's equity fund holdings were increased and fixed
income holdings were decreased, reflecting improved return expectations in the
foreign equity markets. Asset allocations were held steady until June when we
decreased holdings of Emerging Markets Income Fund from 10% to 6% of assets and
increased equity holdings. This was accomplished by boosting Emerging Markets
Growth Fund (where relative valuation and opportunity appears more favorable)
and adding a new equity position, Greater Europe Growth Fund. This Fund, which
seeks long-term growth of capital through investment primarily in equity
securities of European companies, was added based on its solid performance
record and expectations of improving prospects in Europe. In September, the
small position in Pacific Opportunities was reduced in favor of Emerging Markets
Growth Fund and Greater Europe Growth Fund.
9-SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
Investment Portfolio as of September 30, 1997
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Money Market 1.2%
- ------------------------------------------------------------------------------------------------------------------------------------
Scudder Cash Investment Trust (Cost $136,103) ........................................... 136,103 136,103
------------
Fixed Income 10.8%
- ------------------------------------------------------------------------------------------------------------------------------------
Scudder Emerging Markets Income Fund .................................................... 51,053 686,669
Scudder International Bond Fund ......................................................... 55,445 576,079
- ------------------------------------------------------------------------------------------------------------------------------------
Total Fixed Income (Cost $1,242,032) 1,262,748
- ------------------------------------------------------------------------------------------------------------------------------------
Equity 88.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Scudder Emerging Markets Growth Fund .................................................... 71,143 1,157,498
Scudder Greater Europe Growth Fund ...................................................... 24,332 531,899
Scudder International Fund .............................................................. 141,423 7,735,859
Scudder Latin America Fund .............................................................. 19,535 606,948
Scudder Pacific Opportunities Fund ...................................................... 19,450 279,686
- ------------------------------------------------------------------------------------------------------------------------------------
Total Equity(Cost $9,605,733) 10,311,890
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $10,983,868) (a) 11,710,741
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $11,006,970. At September 30,
1997, net unrealized appreciation for all securities based on tax cost was
$703,771. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $772,252 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over market value of $68,481.
The accompanying notes are an integral part of the financial statements.
10 -- SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of September 30, 1997
<TABLE>
<S> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
Investments, at market (identified cost $10,983,868) ................... $ 11,710,741
Receivable on Portfolio shares sold .................................... 17,862
Income receivable ...................................................... 3,082
----------------
Total assets ........................................................... 11,731,685
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Payable for investments purchased ...................................... 3,002
Payable for Portfolio shares redeemed .................................. 638
----------------
Total liabilities ...................................................... 3,640
--------------------------------------------------------------------------------------------
Net assets, at market value $ 11,728,045
--------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income .................................... 53,602
Net unrealized appreciation on investments ............................. 726,873
Accumulated net realized gain .......................................... 41,774
Paid-in capital ........................................................ 10,905,796
--------------------------------------------------------------------------------------------
Net assets, at market value $ 11,728,045
--------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($11,728,045 / 863,241 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares
authorized) .......................................................... $13.59
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 -- SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
Statement of Operations
for the period November 15, 1996 (commencement
of operations) to September 30, 1997
<TABLE>
<S> <C>
Investment Income
- -----------------------------------------------------------------------------------------------------------------------------
Income:
Income distributions from Underlying Funds ............................. $ 61,993
--------------------------------------------------------------------------------------------
Net investment income .................................................. 61,993
--------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments
- -----------------------------------------------------------------------------------------------------------------------------
Net realized gain:
Investments ............................................................ 37,838
Capital gain distributions from Underlying Funds ....................... 7,292
----------------
45,130
----------------
Net unrealized appreciation during the period on investments ........... 726,873
--------------------------------------------------------------------------------------------
Net gain on investment transactions 772,003
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 833,996
--------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 -- SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Period
Nov. 15, 1996
(commencement
of operations)
to September 30,
Increase (Decrease) in Net Assets 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Operations:
Net investment income ................................................... $ 61,993
Net realized gains ...................................................... 45,130
Net unrealized appreciation on investments during the period ............ 726,873
------------------
Net increase in net assets resulting from operations .................... 833,996
------------------
Distributions to shareholders from:
Net investment income ................................................... (8,391)
------------------
Net realized gains on investment transactions ........................... (3,356)
------------------
Portfolio share transactions:
Proceeds from shares sold ............................................... 12,327,560
Net asset value of shares issued to shareholders in reinvestment
of distributions ...................................................... 10,929
Cost of shares redeemed ................................................. (1,457,693)
------------------
Net increase in net assets from Portfolio share transactions ............ 10,880,796
------------------
Increase in net assets .................................................. 11,703,045
Net assets at beginning of period ....................................... 25,000
Net assets at end of period (including undistributed net investment ------------------
income of $53,602) .................................................... $11,728,045
------------------
Other Information
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period ............................... 2,083
------------------
Shares sold ............................................................. 971,043
Shares issued to shareholders in reinvestment of distributions .......... 918
Shares redeemed ......................................................... (110,803)
------------------
Net increase in Portfolio shares ........................................ 861,158
------------------
Shares outstanding at end of period ..................................... 863,241
------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 -- SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<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.
<TABLE>
<CAPTION>
For the Period
November 15, 1996
(commencement of
operations) to
September 30, 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
------------------
Net asset value, beginning of period .................................................... $12.00
------------------
Income from investment operations: ...................................................... .31
Net investment income
Net realized and unrealized gain on investment transactions ............................. 1.63(a)
------------------
Total from investment operations ........................................................ 1.94
------------------
Less distributions:
From net investment income .............................................................. (.25)
From net realized gain on investments ................................................... (.10)
------------------
Total distributions ..................................................................... (.35)
------------------
------------------
Net asset value, end of period .......................................................... $13.59
------------------
- ---------------------------------------------------------------------------------------------------------------------
Total Return (%) ........................................................................ 16.58**
Ratios and Supplemental Data
Net assets, end of period ($ millions) .................................................. 12
Ratio of operating expenses to average daily net assets (%)(b) .......................... --
Ratio of net investment income to average daily net assets (%) .......................... 1.23*
Portfolio turnover rate (%) ............................................................. 35.1*
</TABLE>
(a) The amount shown for a share outstanding throughout the period does not
accord with the change in the aggregate gains and losses in the portfolio
securities during the period because of the timing of sales and
repurchases of Portfolio shares in relation to fluctuating market values
during the period.
(b) This Portfolio invests in other Scudder Funds, and although the Portfolio
did not incur any direct expenses for the period, the Portfolio did bear
its share of the operating, administrative and advisory expenses of the
Underlying Scudder Funds.
* Annualized
** Not annualized
14 -- SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies
The International Portfolio (the "Portfolio") is a diversified series of Scudder
Pathway Series (the "Trust"). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended, as
an open-end management investment company. The series is composed of six
separate diversified portfolios, four of which are currently offered. These
portfolios invest primarily in existing Scudder Funds (the "Underlying Scudder
Funds').
The Portfolio'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 by the Portfolio in the preparation of
its financial statements.
Security Valuation. Investments in the Underlying Scudder Funds are valued at
the net asset value per share of each Underlying Scudder Fund as of the close of
regular trading on the New York Stock Exchange. Short-term investments having a
maturity of sixty days or less are valued at amortized cost.
Federal Income Taxes. The Portfolio's policy is to comply with the requirements
of the Internal Revenue Code which are applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, the Portfolio paid no federal income taxes and no provision for
federal income taxes was required.
Distribution of Income and Gains. Distributions of net investment income are
made annually. During any particular year net realized gains, in excess of
available capital loss carryforwards, would be taxable to the Portfolio if not
distributed and, therefore, will be distributed to shareholders annually. 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. 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 Portfolio may periodically make reclassifications among
certain of its capital accounts without impacting the net asset value of the
Portfolio.
The Portfolio 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 of income and capital gains from the Underlying Scudder Funds are
recorded on the ex-dividend date. Income is recorded on the accrual basis.
B. Purchases and Sales of Securities
During the period November 15, 1996 (commencement of operations) to September
30, 1997, purchases and sales of investment securities (excluding money market
investments) aggregated $12,706,458 and $1,896,531, respectively.
15 -- SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
C. Related Parties
In accordance with the Portfolio's Investment Management Agreement (the
"Agreement") with Scudder, Stevens & Clark, Inc. (the "Adviser"), the Adviser
regularly provides the Portfolio with continuing investment management
consistent with the Portfolio's investment objective.
Under the Special Servicing Agreement entered into by the Adviser, the
Underlying Scudder Funds, Scudder Service Corporation, Scudder Fund Accounting
Corporation, Scudder Investor Services, Inc., Scudder Trust Company and the
Portfolio, the Adviser arranges for all services pertaining to the operations of
the Portfolio. If the Trustees determine that the aggregate expenses of the
Portfolio are less than the estimated savings to the Underlying Scudder Funds
from the operation of the Portfolio, each of the Underlying Scudder Funds will
bear those expenses in proportion to the average daily value of its shares owned
by the Portfolio. Consequently, no underlying Scudder Funds will be expected to
carry expenses that are in excess of the estimate of savings to the respective
Funds. These estimated savings result from the elimination of separate
shareholder accounts which either currently are or have potential to be invested
in the Underlying Scudder Funds. In the event that the financial benefits to the
Underlying Scudder Funds do not exceed aggregate expenses of the Portfolio, the
Adviser will pay certain costs, on behalf of the Portfolio. For the period
November 15, 1996 (commencement of operations) to September 30, 1997, the
Adviser paid expenses in the amount of $79,178. In accordance with the Special
Servicing Agreement, no expenses were charged to the Portfolio during the
period. The Adviser has assumed the Portfolio's organizational costs.
On June 26, 1997, the Adviser entered into an agreement with The Zurich
Insurance Company ("Zurich"), an international insurance and financial services
organization, pursuant to which Zurich will acquire a majority interest in the
Adviser, and the Adviser will form a new global investment organization by
combining with Zurich's subsidiary, Zurich Kemper Investments, Inc. and change
its name to Scudder Kemper Investments, Inc. Subject to the receipt of the
required regulatory and shareholder approvals, the transaction is expected to
close in the fourth quarter of 1997.
16 -- SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
Report of Independent Accountants
To the Board of Trustees of Scudder Pathway Series and to the Shareholders of
Scudder Pathway Series: International Portfolio:
We have audited the accompanying statement of assets and liabilities of Scudder
Pathway Series: International Portfolio (one of the portfolios constituting the
Scudder Pathway Series), including the investment portfolio, as of September 30,
1997, and the related statement of operations for the period November 15, 1996
(commencement of operations) through September 30, 1997, the statements of
changes in net assets for the period November 15, 1996 (commencement of
operations) through September 30, 1997, and the financial highlights for the
period November 15, 1996 (commencement of operations) through September 30,
1997. These financial statements and financial highlights are the responsibility
of the Portfolio's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30, 1997 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder Pathway Series: International Portfolio as of September 30, 1997, the
results of its operations for the period November 15, 1996 (commencement of
operations) through September 30, 1997, the changes in its net assets for the
period November 15, 1996 (commencement of operations) through September 30,
1997, and the financial highlights for the period November 15, 1996
(commencement of operations) through September 30, 1997, in conformity with
generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
October 30, 1997
17 -- SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
Tax Information
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates $4,228
as long-term capital gain dividends for its fiscal year ended September 30,
1997.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Scudder Fund account, please call a Scudder Investor Relations
Representative at 1-800-225-5163.
18 -- SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
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This Page
intentionally
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19-SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
Officers and Trustees
David S. Lee*
President and Trustee
Daniel Pierce*
Vice President and Trustee
Edgar R. Fiedler
Trustee; Vice President and Economic Counsellor, The Conference Board, Inc.
Dr. J. D. Hammond
Trustee; Dean, Smeal College of Business Administration, Pennsylvania State
University
Richard M. Hunt
Trustee; University Marshal and Senior Lecturer, Harvard University
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Kathryn L. Quirk*
Assistant Secretary
*Scudder, Stevens & Clark, Inc.
20-SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<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 --
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 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 Growth and Income Fund
Scudder S&P 500 Index 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 Growth
- -------------
Worldwide
Scudder Global Fund
Scudder International Growth and Income Fund
Scudder International Fund
Scudder Global Discovery Fund
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Retirement Programs
- -------------------
IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
The Latin America Dollar Income Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal Fund, Inc.
Scudder World Income Opportunities
Fund, Inc.
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +++Funds within categories are listed
in order from expected least risk to most risk. Certain Scudder funds may not be
available for purchase or exchange. +A portion of the income from the tax-free
funds may be subject to federal, state, and local taxes. *A class of shares of
the Fund. **Not available in all states. +++ +++A no-load variable annuity
contract provided by Charter National Life Insurance Company and its affiliate,
offered by Scudder's insurance agencies, 1-800-225-2470. #These funds, advised
by Scudder, Stevens & Clark, Inc., are traded on various stock exchanges.
21-SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<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 you designate Lets you purchase Scudder fund shares
the purchase details and the bank account, and money is electronically, avoiding potential mailing delays;
electronically debited from that account monthly to designate a bank account and the transaction
regularly purchase fund shares and "dollar cost average" details, and money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from that account.
fewer when it's higher, which can reduce your average
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 -- http://funds.scudder.com
1-800-343-2890
Scudder Electronic Account Services: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.
Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ------------------------------------------------------------------------------------------------------------------------------
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 designate.
DistributionsDirect
Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
22-SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<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 6,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
500 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder
shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load
Brokerage account already reserved for them, with Scudder funds but want ongoing professional assistance in
no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly
Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for
individuals investing $100,000 or more.
Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.
Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Services, Inc., Adviser.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------
New From Scudder: Scudder International Growth and Income Fund
Scudder International Growth and Income Fund takes a yield-oriented approach to investing in international equities. The
Fund seeks to provide long-term growth of capital plus current income. Investors who desire international exposure but
who wish to take a more conservative approach may appreciate the Fund's emphasis on the dividend paying stocks of
well-established companies outside the United States.
- ------------------------------------------------------------------------------------------------------------------------------
The share price of Scudder International Growth and Income Fund will fluctuate. International investing involves special
risks including currency fluctuation and political instability. Contact Scudder Investor Services, Inc., Distributor,
for a prospectus which contains more complete information, including management fees and other expenses. Please read it
carefully before you invest or send money.
</TABLE>
23-SCUDDER PATHWAY SERIES: INTERNATIONAL PORTFOLIO
<PAGE>
Celebrating Over 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven Clark,
Scudder, Stevens & Clark was the first independent investment counsel firm in
the United States. Since its birth, Scudder's pioneering spirit and commitment
to professional long-term investment management have helped shape the investment
industry. In 1928, we introduced the nation's first no-load mutual fund. Today
we offer over 40 pure no load(TM) funds, including the first international
mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped us become one of the
largest and most respected investment managers in the world. Though times have
changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
This information must be preceded or accompanied by a
current prospectus.
Portfolio changes should not be considered recommendations
for action by individual investors.
SCUDDER
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