SCUDDER
INVESTMENTS(SM)
[LOGO]
-------------------------
ASSET ALLOCATION
-------------------------
Scudder
Pathway Series:
Conservative Portfolio
Fund #080
Balanced Portfolio
Fund #081
Growth Portfolio
Fund #082
Annual Report
August 31, 2000
For investors seeking professionally managed and diversified portfolios through
investment in a select mix of Scudder funds.
<PAGE>
Contents
--------------------------------------------------------------------------------
4 Letter from the Series' President
6 Portfolio Management Discussion
12 Glossary of Investment Terms
Conservative Portfolio
13 Portfolio Highlights
15 Performance Update
17 Portfolio Summary
31 Investment Portfolio
39 Financial Highlights
Balanced Portfolio
19 Portfolio Highlights
21 Performance Update
23 Portfolio Summary
32 Investment Portfolio
40 Financial Highlights
Growth Portfolio
25 Portfolio Highlights
27 Performance Update
29 Portfolio Summary
33 Investment Portfolio
41 Financial Highlights
34 Financial Statements
42 Notes to Financial Statements
45 Report of Independent Accountants
46 Tax Information
47 Shareholder Meeting Results
50 Officers and Trustees
51 Investment Products and Services
53 Account Management Resources
2
<PAGE>
Scudder Pathway Series
--------------------------------------------------------------------------------
Conservative Portfolio ticker symbol SCPCX fund number 080
Balanced Portfolio ticker symbol SPBAX fund number 081
Growth Portfolio ticker symbol SPGRX fund number 082
--------------------------------------------------------------------------------
Date of o During the past year, the domestic equity and fixed
Portfolios' income markets gained ground amid high levels of
Inception: volatility, with growth stocks outperforming value
11/15/96 stocks and Treasury issues providing the strongest
performance within the bond market. International
Total Net equities also posted favorable returns over the full
Assets as period, despite a more muted performance during the
of 8/31/00-- most recent six months.
Conservative: o In constructing the Pathway portfolios, management
$29 million continues to emphasize careful diversification and a
long-term investment horizon.
Balanced:
$258 million o The Growth Portfolio finished in the top 8% of funds in
its peer group during the one-year period and in the
Growth: top 13% over the three-year period, according to Lipper
$128 million Analytical Services.^1
o Lipper ranks the Balanced Portfolio in the top 28% of
all balanced funds over the past twelve months.^2
^1 Source: Lipper Analytical Services, Inc., an independent analyst of
investment performance. Performance includes reinvestment of dividends
and capital gains. For the period ended August 31, 2000 Scudder Pathway
Series: Growth Portfolio's Lipper ranking was 35 out of 484 funds for
the one-year period and 41 out of 337 funds for the three-year period.
Past performance is no guarantee of future results.
^2 Source: Lipper Analytical Services, Inc., an independent analyst of
investment performance. Performance includes reinvestment of dividends
and capital gains. For the period ended August 31, 2000 Scudder Pathway
Series: Balanced Portfolio's Lipper ranking was 131 out of 467 funds
for the one-year period and 200 out of 356 funds for the three-year
period. Past performance is no guarantee of future results.
3
<PAGE>
Letter from the Series' President
--------------------------------------------------------------------------------
Dear Shareholders,
We are pleased to report the results of the Scudder Pathway Series for the
twelve-month period ended August 31, 2000, during which the portfolios produced
a strong performance amid high levels of market volatility. A powerful winter
rally in growth stocks gave way to a violent correction during April and May, as
concerns built that the Federal Reserve (the "Fed") would be forced to raise
rates several times in order to stem inflation pressures. Just as market
sentiment reached its nadir, however, the U.S. economy began to show signs of
cooling to a more manageable rate of growth. Investors took this to mean that
the Fed would be less likely to raise rates over the second half of the year,
sparking advances in both stocks and bonds during the summer.
We believe that the lesson from the past year is that no matter what is taking
place in the financial markets, it is essential to stay focused on your
long-term goals and ensure that your investments are appropriately suited for
your needs. For many investors, however, the strong performance of the U.S.
stock market during the second half of the 1990s diminished the perceived
attractiveness of diversification. But as the recent volatility in stocks has
demonstrated, diversification remains as important as ever. Unless you plan to
devote your energies to investing every
4
<PAGE>
day, we think that you will benefit from taking a long-term approach that
includes exposure to several asset classes. As a shareholder of Scudder Pathway
Series, you already have access to a family of investment products that can help
you create a well-rounded portfolio which will give you staying power during
trying times. For the most recent twelve-month reporting period, Lipper
Analytical Services ranks the Growth Portfolio in the top 8% of funds in its
peer category, and the Balanced Portfolio in the top third among its peers.
Thank you for your continued investment in Scudder Pathway Series. 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 one of our representatives by
calling 1-800-SCUDDER (1-800-728-3337).
Sincerely,
/s/Linda C. Coughlin
Linda C. Coughlin
President
Scudder Pathway Series
5
<PAGE>
Portfolio Management Discussion
--------------------------------------------------------------------------------
August 31, 2000
In the following interview, Donald E. Hall, portfolio manager of Scudder Pathway
Series, discusses the recent market environment and the portfolios' current
investment strategy during the twelve-month period ended August 31, 2000.
Q: During the past year, the stock market has been extremely volatile. What has
been the cause of this trend?
A: Many factors affect the performance of stock prices, but earnings and
interest rates are among the most important. And for the past year, expectations
regarding the direction of both have been changing at an extremely quick pace,
leading to rapid sector rotations and high levels of market volatility. Although
the past five years have brought occasional inflation scares, the economy has
produced the greatest expansion in its history without sparking significant
price pressures. But in the first half of the year, a number of factors -- such
as higher energy prices, a soaring stock market, and a tight job market --
prompted the U.S. Federal Reserve to raise short-term interest rates from 5.25%
a year ago to 6.50% at the close of the reporting period. These moves, in
themselves, have not been a significant negative for the markets. In all cases
the moves were widely anticipated and, in general, viewed by investors as being
a necessity. But the primary catalyst for volatility has been the changes taking
place in the longer-term outlook for rates. During the times when prevailing
wisdom has said that very few rate hikes would be needed to cool the economy --
such as in the first two months of 2000, late May, and August -- stocks have
generally gained ground. On the other hand, the periods when investors have been
worried that an indefinite series of rate increases was in the offing -- such as
March-April, and again in July -- have generally been accompanied by market
corrections, some of them severe.
An additional question that has been hanging over the markets has been the issue
of how corporate earnings would respond to a slowing economy. One school of
thought says that rising productivity and the proliferation of technology will
allow corporate America to maintain
6
<PAGE>
the strong earnings growth of the past several years, while another feels that a
slowdown in the economy -- as well as rising energy prices -- will eventually
take a bite out of the bottom lines of most companies. While the resolution of
this question remains to be seen, the shifting expectations regarding its
outcome have been an important factor in the market's high levels of volatility
during the past year.
Q: How has this affected growth stocks, compared to value stocks?
A: Growth stocks, particularly those in the technology and biotech sectors,
suffered the brunt of the April-May market correction. Stocks in these groups
had risen extremely quickly throughout the winter months, and had reached
valuation levels that left them very vulnerable to negative developments, such
as rising interest rates. Nevertheless, growth outperformed value by a wide
margin over the full period, due largely to the strength of its winter run-up
and subsequent summer rebound. In general, investors have found a measure of
safety in stocks with stronger earnings growth, on the basis that such companies
would be better equipped to survive in a difficult economic environment.
On the other hand, the earnings of many stocks in traditional value areas tend
to be much more dependent on the direction of the economy and interest rates.
Although sectors such as energy, financials, and basic materials showed signs of
life during the summer, value -- as an asset class -- underperformed over the
full period. However, it is important to note that past is not necessarily
prologue. We believe that value -- i.e., the lower P/E spectrum of the market --
is poised for improved relative returns from here.
Q: What factors have impacted the performance of stocks overseas?
A: The swings in the international markets have closely followed those of the
U.S., and the relationship between the growth and value groups has been
approximately the
7
<PAGE>
same. While the 12-month returns from most overseas markets were impressive, a
variety of local factors have contributed to shaky overall returns from
international equities during the past half-year. In Europe, the decline of the
euro (the common currency used by European Union members) has been a distinct
negative for dollar-based investors. Meanwhile, Japan's market has been
pressured by the lack of a strong economic recovery, concerns surrounding the
Bank of Japan's interest rate policy, and fears about the health of the
country's corporations. In the emerging markets stocks have been pressured by
rising interest rates worldwide. Although international equities have produced
spotty performance of late, we believe that they remain an essential part of a
diversified portfolio.
Q: How have rising short-term interest rates affected the bond market?
A: Despite the Fed's long series of rate hikes, bonds have actually performed
well over both the trailing six- and twelve-month periods. Government bonds, in
particular, have produced exceptional performance in the wake of the Treasury's
buyback program, which has reduced the supply of outstanding issues. Meanwhile,
corporate bonds have been supported by sound economic growth, robust corporate
profits, positive sector fundamentals, and attractive valuations. Bond market
performance was particularly impressive during the summer months, when
investors' fears of an indefinite series of interest rate hikes began to
dissipate. In a period of high volatility in the stock market, bonds proved to
be a valuable addition to investors' portfolios by providing favorable returns
and helping to reduce overall volatility.
Q: What changes did you make in the portfolios during this period?
A: As we have said in the past, our goal in managing the portfolios is to
establish positions in response to the long-term trends, rather than attempting
to adjust to short-term developments by making rapid-fire changes.
8
<PAGE>
The value of such an approach has been borne out by the rapid sentiment shifts
and numerous sector rotations of the past year, which would have been nearly
impossible to navigate using a strategy that emphasized short-term trading. We
did make two important adjustments in each of the three portfolios, however.
First, we trimmed our position in international equities to compensate for the
deteriorating outlook for these areas, especially Japan. While we will always
seek to maintain a position in overseas stocks -- since the sector is so
critical for effective diversification -- we took profits and cut the
portfolios' international exposure by a substantial amount.
The second important adjustment was our decision to boost our weighting in funds
that invest in value stocks and trim our position in those that invest in
growth. The portfolios have been tilted toward growth during the past year --
which has helped performance substantially -- but we believe that going forward,
the investment environment will be much less conducive to a similar performance
gap. As a consequence, the portfolios are now more evenly weighted between
growth and value.
Q: What is your outlook for the financial markets from here?
A: We believe that it is important for investors to realize that the last five
years have been an extraordinary time for the stock market. Led by growth
stocks, the S&P 500 Index produced returns of over 20% annually from 1995-1999.
Many investors have become used to returns of this magnitude, but it is
important to note that this type of performance is far above the market's
long-term average. Similarly, it is unusual for growth to outperform other
sectors by as wide a margin as it has in recent years. Although many of the
pillars that have supported the bull market remain in place -- such as improving
productivity, the growing influence of technology, and a growing economy -- it
is likely that stock market returns will be more subdued in the coming years. In
addition, it is likely that the performance of growth stocks in relation to
other
9
<PAGE>
asset classes will ultimately return to a level closer to the historical norm.
For this reason, we believe that now, more than ever, investors should take a
long-term view when assessing their investment strategies. Volatility can be
nerve-wracking, and it can lead undisciplined investors to make ill-advised
decisions during times when the market is falling. However, we believe that
those who establish long-term goals, ensure that their investments are
appropriately diversified, and ignore the short-term movements of the markets
are creating the foundation for a sound financial future. In managing the
Pathway Series, we seek to help you achieve these goals through our long-term
approach and focus on measured diversification among multiple asset classes.
Even if growth stocks slow from their torrid pace of the last 2-3 years, we feel
that the portfolios will be positioned to prosper by virtue of their exposure to
bonds, value stocks, and international equities.
10
<PAGE>
Scudder Pathway Series:
A Team Approach to Investing
The portfolios are managed by a team of Scudder Kemper Investments, Inc. (the
"Adviser") professionals, each of whom plays an important role in each
portfolio's management process. Team members work together to develop investment
strategies for the fund's portfolio. They are supported by the Adviser's large
staff of economists, research analysts, traders, and other investment
specialists who work in our offices across the United States and abroad. We
believe our team approach benefits portfolio investors by bringing together many
disciplines and leveraging our extensive resources. All members of the Pathway
investment team are members of Scudder's Global Asset Allocation Committee,
which 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.
Portfolio manager Donald E. Hall, CFA, is responsible for the portfolios'
day-to-day management. Mr. Hall joined the Adviser in 1982 and has over 17 years
of investment experience.
Portfolio manager Maureen Allyn is the Adviser's chief economist, a position she
has held since 1989, and is responsible for analyzing both the world and U.S.
economies.
Portfolio manager Shahram Tajbakhsh, CFA, joined the Adviser in 1996 and has
over nine years of investment experience.
11
<PAGE>
Glossary of Investment Terms
--------------------------------------------------------------------------------
Consolidation The reduction in the number of companies in a particular
industry, brought about by merger and acquisition activity.
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.
Growth Stock Stock of a company that has displayed above-average earnings
growth and is expected to continue to increase profits
faster than the overall market. Stocks of such companies
usually trade at higher valuations and experience more price
volatility than the market as a whole. Distinct from value
stock.
Restructuring The general term for major corporate changes aimed at
greater efficiency and adaptation to changing markets.
Cost-cutting initiatives, debt retirement, management
realignments, and the sale of non-core businesses are all
developments frequently associated with corporate
restructuring.
Value Stock A company whose stock price does not fully reflect its
intrinsic value, as indicated by price/earnings ratio,
price/book value ratio, dividend yield, or some other
valuation measure, relative to its industry or the market
overall. Value stocks tend to display less price volatility
and may carry higher dividend yields. Distinct from growth
stock.
(Source: Scudder Kemper Investments, Inc.; Barron's Dictionary of Investment
Terms)
12
<PAGE>
Portfolio Highlights
--------------------------------------------------------------------------------
August 31, 2000
Pathway Conservative Portfolio
Pathway Conservative Portfolio seeks current income and, secondarily, long-term
growth of capital by investing substantially in bond mutual funds, with moderate
exposure to equity funds.
Performance
In the twelve-month period ended August 31, 2000, the Conservative Portfolio
produced a total return of 7.39%, versus a return of 9.98% for the portfolio's
custom benchmark. Detailed performance information is listed on page 15.
During the past year, the portfolio gained favorable returns from both its
equity and fixed income components, but its focus on value stocks -- which is
consistent with its conservative objective -- dampened performance in relation
to the index. The strongest performer among the portfolio's eight mutual fund
holdings was Classic Growth Fund, which is a growth-oriented offering that was
well positioned to prosper in an environment that generally favored stocks with
the best earnings prospects. International Fund, which benefited from the rally
in technology, telecommunications, and media stocks during the first quarter of
2000, was also a strong contributor over the full period. On the down side, our
three holdings in the value area -- Growth and Income Fund, Large Company Value
Fund, and Small Company Value Fund -- all underperformed the S&P 500, which is
the equity component of the portfolio's benchmark. Nevertheless, we are pleased
to report that a large value component helped mitigate the volatility in growth
stocks and overseas equities.
The bond component of the portfolio also contributed positive returns and
overall stability amid volatility in the stock market. Through the three bond
funds in the portfolio, we have exposure to a wide range of sectors, including
Treasuries, corporate bonds, mortgage-backed securities, and high yield issues.
We believe that the structure of the portfolio's income holdings provides the
13
<PAGE>
ideal combination of strong yield potential and extensive diversification.
Although bonds have not received much attention in recent years due to the
run-up in the stock market, their performance during the past year illustrates
their ongoing value to investors who place an emphasis on diversification.
Portfolio Strategy
As always, the changes we made to the portfolio's weightings during the
twelve-month period were relatively modest. The overall weighting in bond funds
has fallen from 65% to 59% over the past year, but this is primarily a
reflection of the growth of the portfolio's holdings in equity funds rather than
a specific decision to trim our holdings in this area. The fixed income position
is diversified among Scudder GNMA Fund (5% of net assets), Scudder Corporate
Bond Fund (7%), and Scudder Income Fund (47%), providing exposure to a variety
of sectors within the bond market. In the stock portion of the portfolio, we cut
the weighting in international funds, for two reasons: first, to bring the
composition of the portfolio more closely in line with that of the benchmark;
and second, to account for what we see as a deterioration in the investment
picture overseas. We also increased the portfolio's weighting in value funds, to
position the fund for an environment which -- in our view -- will lend itself to
better relative performance from the value sector than that which has existed
over the past two years. Overall, we believe that the portfolio's extensive
diversification will help position it for an environment of persistent market
volatility.
14
<PAGE>
Performance Update
--------------------------------------------------------------------------------
August 31, 2000
--------------------------------------------------------------------------------
Growth of a $10,000 Investment
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART DATA:
LBAB Index (60%),
S&P 500 Index (25%),
Scudder Pathway MSCI All Country
Series: Conservative (ex U.S.) Index (5%),
Portfolio LBAB Index* 3-month T-Bill (10%)*
11/96** 10000 10000 10000
2/97 10236 9963 10110
8/97 11006 10402 10813
2/98 11768 10996 11716
8/98 11232 11499 11778
2/99 11871 11684 12845
8/99 12088 11588 13131
2/00 12188 11811 13569
8/00 12981 12463 14442
--------------------------------------------------------------------------------
Fund Index Comparison
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total Return
Growth of Average
Period ended 8/31/2000 $10,000 Cumulative Annual
------------------------------------------------------------------------------------
Scudder Pathway Series: Conservative Portfolio
------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 year $ 10,739 7.39% 7.39%
------------------------------------------------------------------------------------
Life of Portfolio** $ 13,143 31.43% 7.47%
------------------------------------------------------------------------------------
LBAB Index (60%), S&P 500 Index (25%), MSCI All Country (ex U.S.) Index (5%),
3-month T-Bill (10%)*
------------------------------------------------------------------------------------
1 year $ 10,998 9.98% 9.98%
------------------------------------------------------------------------------------
Life of Portfolio** $ 14,442 44.42% 10.29%
------------------------------------------------------------------------------------
</TABLE>
* The Lehman Brothers Aggregate Bond (LBAB) Index is a market
value-weighted measure of treasury issues, agency issues, corporate
bond issues and mortgage-backed securities. The Standard & Poor's 500
Index is a capitalization-weighted index of 500 stocks. The index is
designed to measure performance of the broad domestic economy through
changes in the aggregate market value of 500 stocks representing all
major industries. The MSCI All Country (ex U.S.) Index is a market
value-weighted measure of stocks of 46 countries. Index returns assume
reinvestment of dividends and, unlike Portfolio returns, do not reflect
any fees or expenses.
** The Portfolio commenced operations on November 15, 1996. Index
comparisons begin November 30, 1996.
15
<PAGE>
--------------------------------------------------------------------------------
Returns and Per Share Information
--------------------------------------------------------------------------------
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE ILLUSTRATING THE SCUDDER PATHWAY
SERIES: CONSERVATIVE PORTFOLIO TOTAL RETURN (%) AND LBAB INDEX (60%), S&P 500
INDEX (25%), MSCI ALL COUNTRY (EX U.S.) INDEX (5%), 3-MONTH T-BILL (10%) (THE
BLENDED INDEX)* TOTAL RETURN (%)
Yearly periods ended August 31
1997** 1998 1999 2000
--------------------------------------------------------------------------------
Portfolio
Total
Return (%) 11.45 2.05 7.62 7.39
--------------------------------------------------------------------------------
Blended
Index Total
Return (%) 8.13 8.93 11.49 9.98
--------------------------------------------------------------------------------
Net Asset
Value ($) 12.86 12.28 12.45 12.47
--------------------------------------------------------------------------------
Income
Dividends
($) .33 .57 .55 .65
--------------------------------------------------------------------------------
Capital
Gains
Distributions
($) .15 .30 .21 .21
--------------------------------------------------------------------------------
* The Lehman Brothers Aggregate Bond (LBAB) Index is a market
value-weighted measure of treasury issues, agency issues, corporate
bond issues and mortgage-backed securities. The Standard & Poor's 500
Index is a capitalization-weighted index of 500 stocks. The index is
designed to measure performance of the broad domestic economy through
changes in the aggregate market value of 500 stocks representing all
major industries. The MSCI All Country (ex U.S.) Index is a market
value-weighted measure of stocks of 46 countries. Index returns assume
reinvestment of dividends and, unlike Portfolio returns, do not reflect
any fees or expenses.
** The Portfolio commenced operations on November 15, 1996. Index
comparisons begin November 30, 1996.
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. If the Adviser had not
maintained some of the Underlying Funds' expenses, the total return for
the Portfolio would have been lower.
16
<PAGE>
Portfolio Summary
--------------------------------------------------------------------------------
August 31, 2000
Pathway Conservative Portfolio
--------------------------------------------------------------------------------
Asset Allocation
--------------------------------------------------------------------------------
A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
Management seeks to
Money Market 7% maintain diversified
Fixed Income 59% exposure to stocks,
Equity 34% bonds, and money
------------------------------------ market securities.
100%
------------------------------------
--------------------------------------------------------------------------------
Asset Class Ranges
--------------------------------------------------------------------------------
Asset allocations are
Money Market 0-15% derived from the risk of
Fixed Income 40-80% the portfolio; changes
Equity 20-50% are expected to be
------------------------------------ modest and infrequent.
17
<PAGE>
--------------------------------------------------------------------------------
Portfolio Holdings
--------------------------------------------------------------------------------
Consistent with its
--------------------------------------------------- conservative approach,
Scudder Income Fund "S" 47% the portfolio holds a
--------------------------------------------------- heavy weighting in
Scudder Classic Growth Fund "S" 12% bonds and value stocks.
---------------------------------------------------
Scudder Growth & Income Fund "S" 11%
---------------------------------------------------
Scudder Cash Investment Trust 7%
---------------------------------------------------
Scudder Corporate Bond Fund 7%
---------------------------------------------------
Scudder Large Company Value Fund 6%
---------------------------------------------------
Scudder GNMA Fund "S" 5%
---------------------------------------------------
Scudder International Fund "S" 3%
---------------------------------------------------
Scudder Small Company Value Fund "S" 2%
---------------------------------------------------
100%
---------------------------------------------------
For more complete details about the Fund's investment portfolio, see page 31. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
18
<PAGE>
Portfolio Highlights
--------------------------------------------------------------------------------
August 31, 2000
Pathway Balanced Portfolio
Pathway Balanced Portfolio seeks a balance of growth and income by investing in
a mix of money market, bond, and equity mutual funds.
Performance
In the twelve-month period ended August 31, 2000, the Balanced Portfolio
produced a total return of 15.65%, versus a return of 12.55% for the portfolio's
custom benchmark. The portfolio finished in the top 28% of 467 balanced funds
during the period, according to Lipper Analytical Services. Detailed performance
information is listed on page 21.
The key to the strong relative performance of the Balanced Portfolio lies in the
favorable returns produced by the growth component of its equity fund holdings.
The top performer was Development Fund, which is an aggressive growth fund that
focuses on companies with three important characteristics: strong revenue
growth, products with the potential to be a hit in the marketplace, and
top-notch management teams. This focus led the managers of the Development Fund
to build a heavy weighting in technology issues (over half its portfolio), the
top-performing sector over the past year. The portfolio also benefited from its
holdings in Classic Growth Fund, which is a growth-oriented offering that was
well positioned to prosper in an environment that generally favored stocks with
the best earnings prospects. International Fund, which also was boosted by its
holdings in the technology, media, and telecommunications areas, was a positive
contributor. Our holdings in funds that invest in value stocks (Growth and
Income Fund, Small Company Value Fund) and stocks in the developing countries
(Emerging Markets Growth Fund) produced single digit returns, but made important
contributions by adding diversification and helping reduce the overall
volatility of the portfolio.
19
<PAGE>
Our holdings in the fixed income area -- Scudder Income Fund and Scudder
Corporate Bond Fund -- also contributed to our goal of achieving favorable
risk-adjusted returns. Between the two funds, we achieved diversified exposure
to a wide range of subsectors within the bond market, including Treasuries,
corporate bonds, high-yield issues, and mortgage-backed securities. Our holdings
in these areas provided income for the fund, and helped stabilize its share
price during periods when the stock market was falling.
Portfolio Strategy
Consistent with our long-term approach to investing, we made only minor changes
to the portfolio during the past twelve months. We entered the period with 29%
of net assets in Scudder Income Fund and 8% in Scudder Corporate Bond Fund, and
closed with weightings of 28% and 8%, respectively. We believe that given the
recent volatility in the stock markets, bonds have proven to be important as
ever to maintaining effective diversification. On the equity side of the
portfolio, we made two significant shifts. First, we trimmed our position in
international stock funds in order to 1) rebalance the outsized position, which
had grown to 15% of the portfolio versus 12.15% in the benchmark; and 2) to
account for the deterioration in the investment picture overseas. While we
maintained a position in international stock funds, we closed the period with 9%
of net assets in this area, versus 15% a year ago. A second, more recent, shift
was our decision to increase our weighting in domestic value funds, at the
expense of growth. The portfolio has been tilted heavily toward growth for most
of the year, which has helped performance significantly. Going forward, however,
we anticipate that the performance gap between growth and value will narrow
significantly, and we have positioned the portfolio accordingly.
20
<PAGE>
Performance Update
--------------------------------------------------------------------------------
August 31, 2000
--------------------------------------------------------------------------------
Growth of a $10,000 Investment
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART DATA:
S&P 500 Index (50%),
LBAB Index (35%),
Scudder Pathway MSCI All Country
Series: Balanced (ex U.S.) Index (10%),
Portfolio S&P 500 Index* LBAB Index* 3-month T-Bill (5%)*
11/96** 10000 10000 10000 10000
2/97 10235 10496 9963 10232
8/97 11074 12048 10402 11229
2/98 11888 14172 10996 12516
8/98 10759 13026 11499 12098
2/99 12107 16969 11684 14129
8/99 12725 18212 11588 14810
2/00 14153 18962 11811 15484
8/00 14716 21187 12463 16670
--------------------------------------------------------------------------------
Fund Index Comparison
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total Return
Growth of Average
Period ended 8/31/2000 $10,000 Cumulative Annual
------------------------------------------------------------------------------------
Scudder Pathway Series: Balanced Portfolio
------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 year $ 11,565 15.65% 15.65%
------------------------------------------------------------------------------------
Life of Portfolio** $ 14,875 48.75% 11.03%
------------------------------------------------------------------------------------
S&P 500 Index (50%), LBAB Index (35%), MSCI All Country (ex U.S.) Index (10%),
3-month T-Bill (5%)*
------------------------------------------------------------------------------------
1 year $ 11,255 12.55% 12.55%
------------------------------------------------------------------------------------
Life of Portfolio** $ 16,670 66.70% 14.58%
------------------------------------------------------------------------------------
</TABLE>
* The Standard & Poor's 500 Index is a capitalization-weighted index of
500 stocks. The index is designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries. The Lehman Brothers Aggregate
Bond (LBAB) Index is a market value-weighted measure of treasury
issues, agency issues, corporate bond issues and mortgage-backed
securities. The MSCI All Country (ex U.S.) Index is a market
value-weighted measure of stocks of 46 countries. Index returns assume
reinvestment of dividends and, unlike Portfolio returns, do not reflect
any fees or expenses.
** The Portfolio commenced operations on November 15, 1996. Index
comparisons begin November 30, 1996.
21
<PAGE>
--------------------------------------------------------------------------------
Returns and Per Share Information
--------------------------------------------------------------------------------
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE ILLUSTRATING THE SCUDDER PATHWAY
SERIES: BALANCED PORTFOLIO TOTAL RETURN (%) AND S&P 500 INDEX (50%), LBAB INDEX
(35%), MSCI ALL COUNTRY (EX U.S.) INDEX (10%), 3-MONTH T-BILL (5%) (THE BLENDED
INDEX)* TOTAL RETURN (%)
Yearly periods ended August 31
1997** 1998 1999 2000
--------------------------------------------------------------------------------
Portfolio
Total
Return (%) 11.94 -2.84 18.27 15.65
--------------------------------------------------------------------------------
Blended
Index Total
Return (%) 12.29 7.74 22.42 12.55
--------------------------------------------------------------------------------
Net Asset
Value ($) 13.01 12.06 13.42 14.30
--------------------------------------------------------------------------------
Income
Dividends
($) .33 .42 .38 .48
--------------------------------------------------------------------------------
Capital
Gains
Distributions
($) .07 .21 .43 .69
--------------------------------------------------------------------------------
* The Standard & Poor's 500 Index is a capitalization-weighted index of
500 stocks. The index is designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries. The Lehman Brothers Aggregate
Bond (LBAB) Index is a market value-weighted measure of treasury
issues, agency issues, corporate bond issues and mortgage-backed
securities. The MSCI All Country (ex U.S.) Index is a market
value-weighted measure of stocks of 46 countries. Index returns assume
reinvestment of dividends and, unlike Portfolio returns, do not reflect
any fees or expenses.
** The Portfolio commenced operations on November 15, 1996. Index
comparisons begin November 30, 1996.
Performance is historical and 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. If the Adviser had not
maintained some of the Underlying Funds' expenses, the total return for
the Portfolio would have been lower.
22
<PAGE>
Portfolio Summary
--------------------------------------------------------------------------------
August 31, 2000
Pathway Balanced Portfolio
--------------------------------------------------------------------------------
Asset Allocation
--------------------------------------------------------------------------------
A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
The portfolio's
Money Market 5% weighting in money
Fixed Income 36% market securities
Equity 59% increased slightly
------------------------------------ during the period.
100%
------------------------------------
--------------------------------------------------------------------------------
Asset Class Ranges
--------------------------------------------------------------------------------
Asset allocations are
Money Market 0-10% derived from the risk of
Fixed Income 25-60% the portfolio; changes
Equity 40-70% are expected to
------------------------------------ be modest and infrequent.
23
<PAGE>
--------------------------------------------------------------------------------
Portfolio Holdings
--------------------------------------------------------------------------------
In a period
------------------------------------------------- characterized by high
Scudder Income Fund "S" 28% volatility and rapid
------------------------------------------------- sector rotations,
Scudder Growth & Income Fund "S" 23% the portfolio benefited
------------------------------------------------- from its diversified
Scudder Classic Growth Fund "S" 22% approach.
-------------------------------------------------
Scudder Corporate Bond Fund 8%
-------------------------------------------------
Scudder International Fund "S" 7%
-------------------------------------------------
Scudder Cash Investment Trust 5%
-------------------------------------------------
Scudder Development Fund 4%
-------------------------------------------------
Scudder Emerging Markets Growth Fund 2%
-------------------------------------------------
Scudder Small Company Value Fund "S" 1%
-------------------------------------------------
Scudder Small Company Stock Fund "S" 0%
-------------------------------------------------
100%
-------------------------------------------------
For more complete details about the Fund's investment portfolio, see page 32. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
24
<PAGE>
Portfolio Highlights
--------------------------------------------------------------------------------
August 31, 2000
Pathway Growth Portfolio
Pathway Growth Portfolio seeks long-term growth of capital by investing
primarily in equity mutual funds. The Portfolio also invests a portion of assets
in bond funds, which offer the potential for capital appreciation as well as
income.
Performance
In the twelve-month period ended August 31, 2000, the Growth Portfolio produced
a total return of 24.24%, versus a return of 13.85% for the portfolio's custom
benchmark. We are pleased to report that the portfolio finished in the top 8% of
funds in its peer group during the period, according to Lipper Analytical
Services. Detailed performance information is listed on page 27.
In a period in which growth stocks outperformed most other sectors by a
substantial margin, our emphasis on growth funds (within the context of the
diversified portfolio) was the most important factor in our strong performance
relative to our peer group. The top-performing fund was 21st Century Growth
Fund, which emphasized small-cap growth stocks, particularly those in aggressive
areas such as technology. This positioning proved ideal during a period in which
technology was the best-performing sector in the market. The portfolio also
benefited from the powerful returns of Large Company Growth Fund, which invests
in stocks that its management team believes to be best positioned to sustain
strong long-term earnings growth. International Fund, which benefited from the
rally in technology, telecommunications, and media stocks during the first
quarter of 2000, also was an important contributor over the full period. In
comparison, the fund holds a relatively small weighting in funds that invest in
value stocks, which helped performance in a period characterized by the weak
performance of this area.
The fund holds 15% of net assets in bond funds, the same percentage it held in
this area when the reporting period began. The strongest performer in this area
was Emerging
25
<PAGE>
Markets Income Fund, which was boosted by the improving economic outlook in the
developing countries. Our other holdings -- Income Fund and Corporate Bond Fund
-- provided diversified exposure to a variety of sectors within the domestic
bond market. Although the returns of these two funds paled in comparison to the
performance of our holdings in growth stocks, they contributed positively to the
portfolio's risk profile by providing ballast during times when the stock market
was falling.
Portfolio Strategy
Although the overall composition of the portfolio has not changed substantially
during the past year -- a fact that is consistent with our focus on long-term
investing -- we did make two important shifts. First, we trimmed our position in
International Fund from 23% of net assets at the beginning of the period, to 15%
by August 31, 2000. This decision, which brings the portfolio's weighting in
this sector closer to that of the benchmark, reflects our view that although
international stocks remain critical to diversification, the outlook for the
overseas markets has dimmed in recent months. The second important change was
our decision to trim the portfolio's position in growth stocks, and increase its
weighting in value stocks through our holdings in Large Company Value Fund. The
portfolio has been tilted heavily toward growth for most of the year, a
positioning that boosted performance significantly. Believing that the
performance gap between growth and value will narrow in the months ahead, we
have positioned the portfolio accordingly. On the fixed income side, we closed
the period with exactly the same weightings as we held when the period began.
26
<PAGE>
Performance Update
--------------------------------------------------------------------------------
August 31, 2000
--------------------------------------------------------------------------------
Growth of a $10,000 Investment
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART DATA:
S&P 500 Index (60%),
MSCI All Country
Scudder Pathway (ex U.S.) Index (20%),
Series: Growth LBAB Index (15%),
Portfolio S&P 500 Index* 3-month T-Bill (5%)*
11/96** 10000 10000 10000
2/97 10336 10496 10278
8/97 11340 12048 11407
2/98 12294 14172 12841
8/98 10633 13026 12029
2/99 12660 16969 14580
8/99 14003 18212 15609
2/00 17144 18962 16559
8/00 17398 21187 17771
--------------------------------------------------------------------------------
Fund Index Comparison
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total Return
Growth of Average
Period ended 8/31/2000 $10,000 Cumulative Annual
------------------------------------------------------------------------------------
Scudder Pathway Series: Growth Portfolio
------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 year $ 12,424 24.24% 24.24%
------------------------------------------------------------------------------------
Life of Portfolio** $ 17,600 76.00% 16.07%
------------------------------------------------------------------------------------
S&P 500 Index (60%), MSCI All Country (ex U.S.) Index (20%), LBAB Index (15%),
3-month T-Bill (5%)*
------------------------------------------------------------------------------------
1 year $ 11,385 13.85% 13.85%
------------------------------------------------------------------------------------
Life of Portfolio** $ 17,771 77.71% 16.56%
------------------------------------------------------------------------------------
</TABLE>
* The Standard & Poor's 500 Index is a capitalization-weighted index of
500 stocks. The index is designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries. The MSCI All Country (ex
U.S.) Index is a market value-weighted measure of stocks of 46
countries. The Lehman Brothers Aggregate Bond (LBAB) Index is a market
value-weighted measure of treasury issues, agency issues, corporate
bond issues and mortgage-backed securities. Index returns assume
reinvestment of dividends and, unlike Portfolio returns, do not reflect
any fees or expenses.
** The Portfolio commenced operations on November 15, 1996. Index
comparisons begin November 30, 1996.
27
<PAGE>
--------------------------------------------------------------------------------
Returns and Per Share Information
--------------------------------------------------------------------------------
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE ILLUSTRATING THE SCUDDER PATHWAY
SERIES: GROWTH PORTFOLIO TOTAL RETURN (%) AND S&P 500 INDEX (60%), MSCI ALL
COUNTRY (EX U.S.) INDEX (20%), LBAB INDEX (15%), 3-MONTH T-BILL (5%) (THE
BLENDED INDEX)* TOTAL RETURN (%)
Yearly periods ended August 31
1997** 1998 1999 2000
--------------------------------------------------------------------------------
Portfolio
Total
Return (%) 14.72 -6.23 31.69 24.24
--------------------------------------------------------------------------------
Blended
Index Total
Return (%) 14.07 5.46 29.77 13.85
--------------------------------------------------------------------------------
Net Asset
Value ($) 13.44 12.17 15.33 17.85
--------------------------------------------------------------------------------
Income
Dividends
($) .16 .21 .20 .29
--------------------------------------------------------------------------------
Capital
Gains
Distributions
($) .13 .26 .43 .89
--------------------------------------------------------------------------------
* The Standard & Poor's 500 Index is a capitalization-weighted index of
500 stocks. The index is designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries. The MSCI All Country (ex
U.S.) Index is a market value-weighted measure of stocks of 46
countries. The Lehman Brothers Aggregate Bond (LBAB) Index is a market
value-weighted measure of treasury issues, agency issues, corporate
bond issues and mortgage-backed securities. Index returns assume
reinvestment of dividends and, unlike Portfolio returns, do not reflect
any fees or expenses.
** The Portfolio commenced operations on November 15, 1996. Index
comparisons begin November 30, 1996.
Performance is historical and 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. If the Adviser had not
maintained some of the Underlying Funds' expenses, the total return for
the Portfolio would have been lower.
28
<PAGE>
Portfolio Summary
--------------------------------------------------------------------------------
August 31, 2000
Pathway Growth Portfolio
--------------------------------------------------------------------------------
Asset Allocation
--------------------------------------------------------------------------------
A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
Since February 29, 2000,
Money Market 3% management trimmed
Fixed Income 15% the portfolio's
Equity 82% weighting in money
------------------------------------ market securities, while
100% slightly increasing its
------------------------------------ weighting in funds that
invest in stocks and
bonds.
--------------------------------------------------------------------------------
Asset Class Ranges
--------------------------------------------------------------------------------
Asset allocations are
Money Market 0-5% derived from the risk of
Fixed Income 10-40% the portfolio; changes
Equity 60-90% are expected to be
------------------------------------ modest and infrequent.
29
<PAGE>
--------------------------------------------------------------------------------
Portfolio Holdings
--------------------------------------------------------------------------------
The fund received
----------------------------------------------- strong performance
Scudder Large Company Growth Fund "S" 33% from its holdings in
----------------------------------------------- funds that invest in
Scudder Large Company Value Fund 27% growth stocks and
----------------------------------------------- international equities.
Scudder International Fund "S" 15%
-----------------------------------------------
Scudder Income Fund "S" 9%
-----------------------------------------------
Scudder 21st Century Growth Fund "S" 5%
-----------------------------------------------
Scudder Cash Investment Trust 3%
-----------------------------------------------
Scudder Corporate Bond Fund 3%
-----------------------------------------------
Scudder Emerging Markets Income Fund 3%
-----------------------------------------------
Scudder Emerging Markets Growth Fund 2%
-----------------------------------------------
100%
-----------------------------------------------
For more complete details about the Fund's investment portfolio, see page 33. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
30
<PAGE>
Investment Portfolio as of August 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value ($)
--------------------------------------------------------------------------------------
Pathway Conservative Portfolio
--------------------------------------------------------------------------------------
Money Market 7.1%
--------------------------------------------------------------------------------------
<S> <C> <C>
Scudder Cash Investment Trust (Cost $2,024,295) ......... 2,024,295 2,024,295
--------------------------------------------------------------------------------------
Fixed Income 58.5%
--------------------------------------------------------------------------------------
Scudder GNMA Fund "S" ................................... 97,403 1,420,134
Scudder Corporate Bond Fund ............................. 175,530 1,988,759
Scudder Income Fund "S" ................................. 1,078,245 13,251,632
--------------------------------------------------------------------------------------
Total Fixed Income (Cost $17,882,152) 16,660,525
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Equity 34.4%
--------------------------------------------------------------------------------------
Scudder Classic Growth Fund "S" ......................... 120,668 3,459,540
Scudder Growth & Income Fund "S" ........................ 113,090 3,147,303
Scudder International Fund "S" .......................... 14,096 814,017
Scudder Large Company Value Fund ........................ 63,020 1,766,440
Scudder Small Company Value Fund "S" .................... 34,544 606,240
--------------------------------------------------------------------------------------
Total Equity (Cost $9,285,046) 9,793,540
--------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $29,191,493) (a) 28,478,360
--------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $29,275,053. At August 31,
2000, net unrealized depreciation for all securities based on tax cost
was $796,693. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess of value over tax cost
of $571,028 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value of
$1,367,721.
During the year ended August 31, 2000, purchases and sales of
investment securities (excluding money market investments) aggregated
$8,124,051 and $8,455,000, respectively.
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
Investment Portfolio as of August 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value ($)
---------------------------------------------------------------------------------------
Pathway Balanced Portfolio
---------------------------------------------------------------------------------------
Money Market 4.9%
---------------------------------------------------------------------------------------
<S> <C> <C>
Scudder Cash Investment Trust (Cost $12,658,970) ......... 12,658,970 12,658,970
---------------------------------------------------------------------------------------
Fixed Income 35.6%
---------------------------------------------------------------------------------------
Scudder Corporate Bond Fund .............................. 1,779,997 20,167,366
Scudder Income Fund "S" .................................. 5,820,473 71,533,614
---------------------------------------------------------------------------------------
Total Fixed Income (Cost $96,493,148) 91,700,980
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Equity 59.5%
---------------------------------------------------------------------------------------
Scudder Classic Growth Fund "S" .......................... 2,010,813 57,650,018
Scudder Development Fund ................................. 200,389 10,338,057
Scudder Emerging Markets Growth Fund ..................... 491,798 6,417,967
Scudder Growth & Income Fund "S" ......................... 2,118,911 58,969,294
Scudder International Fund "S" ........................... 310,650 17,940,017
Scudder Small Company Stock Fund "S" ..................... 5,173 97,554
Scudder Small Company Value Fund "S" ..................... 108,812 1,909,643
---------------------------------------------------------------------------------------
Total Equity (Cost $138,113,266) 153,322,550
---------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $247,265,384) (a) 257,682,500
---------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $247,855,730. At August
31, 2000, net unrealized appreciation for all securities based on tax
cost was $9,826,770. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of value
over tax cost of $17,751,921 and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax
cost over value of $7,925,151.
During the year ended August 31, 2000, purchases and sales of
investment securities (excluding money market investments) aggregated
$86,207,557 and $105,865,000, respectively.
The accompanying notes are an integral part of the financial statements.
32
<PAGE>
Investment Portfolio as of August 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value ($)
---------------------------------------------------------------------------------------
Pathway Growth Portfolio
---------------------------------------------------------------------------------------
Money Market 3.1%
---------------------------------------------------------------------------------------
<S> <C> <C>
Scudder Cash Investment Trust (Cost $3,967,818) .......... 3,967,818 3,967,818
---------------------------------------------------------------------------------------
Fixed Income 14.5%
---------------------------------------------------------------------------------------
Scudder Corporate Bond Fund .............................. 331,427 3,755,065
Scudder Emerging Market Income Fund ...................... 415,196 3,441,971
Scudder Income Fund "S" .................................. 921,053 11,319,742
---------------------------------------------------------------------------------------
Total Fixed Income (Cost $19,797,999) 18,516,778
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Equity 82.4%
---------------------------------------------------------------------------------------
Scudder 21st Century Growth Fund "S" ..................... 220,743 6,794,480
Scudder Emerging Markets Growth Fund ..................... 166,202 2,168,932
Scudder International Fund "S" ........................... 327,164 18,893,717
Scudder Large Company Growth Fund "S" .................... 944,529 42,909,973
Scudder Large Company Value Fund ......................... 1,235,704 34,636,791
---------------------------------------------------------------------------------------
Total Equity (Cost $87,049,669) 105,403,893
---------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $110,815,486) (a) 127,888,489
---------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $111,107,992. At August
31, 2000, net unrealized appreciation for all securities based on tax
cost was $16,780,497. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of value
over tax cost of $18,749,999 and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax
cost over value of $1,969,502.
During the year ended August 31, 2000, purchases and sales of
investment securities (excluding money market investments) aggregated
$49,715,246 and $35,799,893, respectively.
The accompanying notes are an integral part of the financial statements.
33
<PAGE>
Financial Statements
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Statements of Assets and Liabilities as of August 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Conservative Balanced Growth
Assets Portfolio Portfolio Portfolio
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investments in securities, at
value (for cost, see accompanying
investment portfolios) .......... $ 28,478,360 $257,682,500 $127,888,489
Receivable for investments sold .... -- 875,000 100,000
Receivable for Portfolio shares
sold ............................ 77,900 95,958 74,060
-------------- ------------- -------------
Total assets ....................... 28,556,260 258,653,458 128,062,549
Liabilities
----------------------------------------------------------------------------------
Payable for investments purchased .. -- 875,000 100,000
Payable for Portfolio shares
redeemed ........................ 30,591 100,032 50,310
-------------- ------------- -------------
Total liabilities .................. 30,591 975,032 150,310
----------------------------------------------------------------------------------
Net assets, at value $ 28,525,669 $257,678,426 $127,912,239
----------------------------------------------------------------------------------
Net Assets
----------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment
income .......................... 437,452 1,959,085 1,688,915
Net unrealized appreciation
(depreciation) on investments ... (713,133) 10,417,116 17,073,003
Accumulated net realized gain
(loss) .......................... 15,030 21,432,145 11,411,251
Paid-in capital .................... 28,786,320 223,870,080 97,739,070
----------------------------------------------------------------------------------
Net assets, at value $ 28,525,669 $257,678,426 $127,912,239
----------------------------------------------------------------------------------
Net Asset Value
----------------------------------------------------------------------------------
Net Asset Value, offering and
redemption price per share
(outstanding shares of
beneficial interest, $ 12.47 $ 14.30 $ 17.85
$.01 par value,
unlimited number of shares
authorized) ..................... 2,288,076 18,022,204 7,167,681
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE>
--------------------------------------------------------------------------------
Statements of Operations for the year ended August 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Conservative Balanced Growth
Investment Income Portfolio Portfolio Portfolio
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Income distributions from
Underlying Funds ............. $ 1,506,351 $ 8,556,951 $ 1,985,332
---------------------------------------------------------------------------------
Net investment income 1,506,351 8,556,951 1,985,332
---------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investment transactions
-------------------------------------------------------------------------------
Net realized gain (loss) from
investments .................. (237,296) 13,576,161 8,056,939
Capital gain distributions from
Underlying Funds ............. 463,769 9,305,706 4,728,653
-------------- ------------- ------------
226,473 22,881,867 12,785,592
-------------- ------------- ------------
Net unrealized appreciation
(depreciation) during the
period on investments ........ 297,128 6,039,371 8,896,681
-------------------------------------------------------------------------------
Net gain (loss) on investment
transactions 523,601 28,921,238 21,682,273
-------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations $ 2,029,952 $ 37,478,189 $ 23,667,605
-------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
35
<PAGE>
--------------------------------------------------------------------------------
Statements of Changes in Net Assets -- Pathway Conservative Portfolio
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended August 31,
Increase (Decrease) in Net Assets 2000 1999
------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ............................. $ 1,506,351 $ 1,354,107
Net realized gain (loss) on investment transactions 226,473 632,972
Net unrealized appreciation (depreciation) on
investment transactions during the period ...... 297,128 267,272
--------------- ---------------
Net increase (decrease) in net assets resulting
from operations ................................ 2,029,952 2,254,351
--------------- ---------------
Distributions to shareholders from:
Net investment income ............................. (1,501,999) (1,326,852)
--------------- ---------------
Net realized gains ................................ (496,165) (503,342)
--------------- ---------------
Portfolio share transactions:
Proceeds from shares sold ......................... 10,993,069 12,307,682
Reinvestment of distributions ..................... 1,971,501 1,800,922
Cost of shares redeemed ........................... (12,699,741) (15,106,407)
--------------- ---------------
Net increase (decrease) in net assets from
Portfolio share transactions ................... 264,829 (997,803)
--------------- ---------------
Increase (decrease) in net assets ................. 296,617 (573,646)
Net assets at beginning of period ................. 28,229,052 28,802,698
Net assets at end of period (including
undistributed net investment income of $437,452
and $97,885, respectively) .................... $ 28,525,669 $ 28,229,052
Other Information
----------------------------------------------------------------------------------
Shares outstanding at beginning of period ......... 2,268,100 2,346,300
--------------- ---------------
Shares sold ....................................... 898,481 973,400
Shares issued to shareholders in reinvestment of
distributions .................................. 161,702 142,672
Shares redeemed ................................... (1,040,207) (1,194,272)
--------------- ---------------
Net increase (decrease) in Portfolio shares ....... 19,976 (78,200)
Shares outstanding at end of period ............... 2,288,076 2,268,100
</TABLE>
The accompanying notes are an integral part of the financial statements.
36
<PAGE>
--------------------------------------------------------------------------------
Statements of Changes in Net Assets -- Pathway Balanced Portfolio
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended August 31,
Increase (Decrease) in Net Assets 2000 1999
------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ............................. $ 8,556,951 $ 7,179,392
Net realized gain (loss) on investment transactions 22,881,867 13,123,322
Net unrealized appreciation (depreciation) on
investment transactions during the period ...... 6,039,371 20,343,808
--------------- ---------------
Net increase (decrease) in net assets resulting
from operations ................................ 37,478,189 40,646,522
--------------- ---------------
Distributions to shareholders from:
Net investment income ............................. (9,014,342) (7,186,841)
--------------- ---------------
Net realized gains ................................ (12,447,102) (7,901,241)
--------------- ---------------
Portfolio share transactions:
Proceeds from shares sold ......................... 108,535,744 77,180,711
Reinvestment of distributions ..................... 21,360,904 14,977,593
Cost of shares redeemed ........................... (135,571,896) (92,851,056)
--------------- ---------------
Net increase (decrease) in net assets from
Portfolio share transactions ................... (5,675,248) (692,752)
--------------- ---------------
Increase (decrease) in net assets ................. 10,341,497 24,865,688
Net assets at beginning of period ................. 247,336,929 222,471,241
Net assets at end of period (including
undistributed net investment income of
$1,959,085 and $401,668, respectively) ......... $ 257,678,426 $ 247,336,929
Other Information
------------------------------------------------------------------------------------
Shares outstanding at beginning of period ......... 18,431,371 18,453,223
--------------- ---------------
Shares sold ....................................... 7,833,193 5,878,541
Shares issued to shareholders in reinvestment of
distributions .................................. 1,530,882 1,149,711
Shares redeemed ................................... (9,773,242) (7,050,104)
--------------- ---------------
Net increase (decrease) in Portfolio shares ....... (409,167) (21,852)
Shares outstanding at end of period ............... 18,022,204 18,431,371
</TABLE>
The accompanying notes are an integral part of the financial statements.
37
<PAGE>
--------------------------------------------------------------------------------
Statements of Changes in Net Assets -- Pathway Growth Portfolio
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended August 31,
Increase (Decrease) in Net Assets 2000 1999
------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ............................. $ 1,985,332 $ 1,043,924
Net realized gain (loss) on investment transactions 12,785,592 5,846,674
Net unrealized appreciation (depreciation) on
investment transactions during the period ...... 8,896,681 14,890,953
--------------- ---------------
Net increase (decrease) in net assets resulting
from operations ................................ 23,667,605 21,781,551
--------------- ---------------
Distributions to shareholders from:
Net investment income ............................. (1,933,519) (1,106,885)
--------------- ---------------
Net realized gains ................................ (5,886,277) (2,384,022)
--------------- ---------------
Portfolio share transactions:
Proceeds from shares sold ......................... 59,261,130 46,295,932
Reinvestment of distributions ..................... 7,810,433 3,483,721
Cost of shares redeemed ........................... (49,103,823) (37,740,706)
--------------- ---------------
Net increase (decrease) in net assets from
Portfolio share transactions ................... 17,967,740 12,038,947
--------------- ---------------
Increase (decrease) in net assets ................. 33,815,549 30,329,591
Net assets at beginning of period ................. 94,096,690 63,767,099
Net assets at end of period (including
undistributed net investment income of
$1,688,915 and $615,278, respectively) ......... $ 127,912,239 $ 94,096,690
Other Information
------------------------------------------------------------------------------------
Shares outstanding at beginning of period ......... 6,137,871 5,240,260
--------------- ---------------
Shares sold ....................................... 3,423,782 3,262,973
Shares issued to shareholders in reinvestment of
distributions .................................. 445,546 251,169
Shares redeemed ................................... (2,839,518) (2,616,531)
--------------- ---------------
Net increase (decrease) in Portfolio shares ....... 1,029,810 897,611
Shares outstanding at end of period ............... 7,167,681 6,137,871
</TABLE>
The accompanying notes are an integral part of the financial statements.
38
<PAGE>
Financial Highlights
--------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Pathway Conservative Portfolio
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Years Ended August 31, 2000 1999 1998(b) 1997(c)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.45 $12.28 $13.27 $12.00
--------------------------------------
------------------------------------------------------------------------------------
Income from investment operations:
------------------------------------------------------------------------------------
Net investment income .65(a) .57(a) .51(a) .39
------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions .23 .36 (.63) 1.36
--------------------------------------
------------------------------------------------------------------------------------
Total from investment operations .88 .93 (.12) 1.75
------------------------------------------------------------------------------------
Less distributions from:
------------------------------------------------------------------------------------
Net investment income (.65) (.55) (.57) (.33)
------------------------------------------------------------------------------------
Net realized gains on investment
transactions (.21) (.21) (.30) (.15)
--------------------------------------
------------------------------------------------------------------------------------
Total distributions (.86) (.76) (.87) (.48)
------------------------------------------------------------------------------------
Net asset value, end of period $12.47 $12.45 $12.28 $13.27
--------------------------------------
------------------------------------------------------------------------------------
Total Return (%) (d) 7.39 7.62 (1.10)** 14.99**
------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 29 28 29 17
------------------------------------------------------------------------------------
Ratio of expenses (%) (e) -- -- -- --
------------------------------------------------------------------------------------
Ratio of net investment income (%) 5.30 4.45 4.21* 3.67*
------------------------------------------------------------------------------------
Portfolio turnover rate (%) 26 28 32* 42*
------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the eleven months ended August 31, 1998. On August 12, 1998 the
Trustees of the Portfolio changed the fiscal year end from September 30
to August 31.
(c) For the period November 15, 1996 (commencement of operations) to
September 30, 1997.
(d) Total return would have been lower if the Adviser had not maintained
some Underlying Funds' expenses.
(e) 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
39
<PAGE>
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Pathway Balanced Portfolio
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Years Ended August 31, 2000 1999 1998(b) 1997(c)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $13.42 $12.06 $13.56 $12.00
--------------------------------------
------------------------------------------------------------------------------------
Income from investment operations:
------------------------------------------------------------------------------------
Net investment income .45(a) .38(a) .39(a) .37
------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions 1.60 1.79 (1.26) 1.59
--------------------------------------
------------------------------------------------------------------------------------
Total from investment operations 2.05 2.17 (.87) 1.96
------------------------------------------------------------------------------------
Less distributions from:
------------------------------------------------------------------------------------
Net investment income (.48) (.38) (.42) (.33)
------------------------------------------------------------------------------------
Net realized gains on investment
transactions (.69) (.43) (.21) (.07)
--------------------------------------
------------------------------------------------------------------------------------
Total distributions (1.17) (.81) (.63) (.40)
------------------------------------------------------------------------------------
Net asset value, end of period $14.30 $13.42 $12.06 $13.56
--------------------------------------
------------------------------------------------------------------------------------
Total Return (%) (d) 15.65 18.27 (6.78)** 16.67**
------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 258 247 222 192
------------------------------------------------------------------------------------
Ratio of expenses (%) (e) -- -- -- --
------------------------------------------------------------------------------------
Ratio of net investment income (%) 3.23 2.88 3.15* 2.96*
------------------------------------------------------------------------------------
Portfolio turnover rate (%) 28 24 28* 24*
------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the eleven months ended August 31, 1998. On August 12, 1998 the
Trustees of the Portfolio changed the fiscal year end from September 30
to August 31.
(c) For the period November 15, 1996 (commencement of operations) to
September 30, 1997.
(d) Total return would have been lower if the Adviser had not maintained
some Underlying Funds' expenses.
(e) 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
40
<PAGE>
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Pathway Growth Portfolio
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Years Ended August 31, 2000 1999 1998(b) 1997(c)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $15.33 $12.17 $14.15 $12.00
--------------------------------------
------------------------------------------------------------------------------------
Income from investment operations:
------------------------------------------------------------------------------------
Net investment income .29(a) .18(a) .23(a) .29
------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions 3.41 3.61 (1.74) 2.15
--------------------------------------
------------------------------------------------------------------------------------
Total from investment operations 3.70 3.79 (1.51) 2.44
------------------------------------------------------------------------------------
Less distributions from:
------------------------------------------------------------------------------------
Net investment income (.29) (.20) (.21) (.16)
------------------------------------------------------------------------------------
Net realized gains on investment
transactions (.89) (.43) (.26) (.13)
--------------------------------------
------------------------------------------------------------------------------------
Total distributions (1.18) (.63) (.47) (.29)
------------------------------------------------------------------------------------
Net asset value, end of period $17.85 $15.33 $12.17 $14.15
--------------------------------------
------------------------------------------------------------------------------------
Total Return (%) (d) 24.24 31.69 (10.94)** 20.79**
------------------------------------------------------------------------------------
Ratios to Average Net Asssets and Supplemental Data
------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 128 94 64 50
------------------------------------------------------------------------------------
Ratio of expenses (%) (e) -- -- -- --
------------------------------------------------------------------------------------
Ratio of net investment income (%) 1.67 1.26 1.78* 2.09*
------------------------------------------------------------------------------------
Portfolio turnover rate (%) 27 28 24* 15*
------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the eleven months ended August 31, 1998. On August 12, 1998, the
Trustees of the Portfolio changed the fiscal year end from September 30
to August 31.
(c) For the period November 15, 1996 (commencement of operations) to
September 30, 1997.
(d) Total return would have been lower if the Adviser had not maintained
some Underlying Funds' expenses.
(e) 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
41
<PAGE>
Notes to Financial Statements
--------------------------------------------------------------------------------
A. Significant Accounting Policies
The Conservative, Balanced and Growth Portfolios (the "Portfolios") are each a
diversified series of Scudder Pathway Series (the "Trust") which is registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), as an
open-end management investment company organized as a Massachusetts business
trust. The series is composed of six separate diversified portfolios, three of
which are currently offered. These portfolios invest primarily in existing
Scudder Funds (the "Underlying Scudder Funds").
The Portfolios' financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America which require the
use of management estimates. The policies described below are followed
consistently by each 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. Money market instruments
purchased with an original maturity of sixty days or less are valued at
amortized cost.
Federal Income Taxes. Each Portfolio is treated as a single corporate taxpayer,
as provided for in the Internal Revenue Code, as amended, which is applicable to
regulated investment companies and to distribute all of its taxable income to
its shareholders. Accordingly, the Portfolios paid no federal income taxes and
no federal income tax provision was required.
Distribution of Income and Gains. Distributions of net investment income from
the Conservative and Balanced Portfolios, if any, are made quarterly.
Distributions of net investment income from the Growth Portfolio are made
annually. Net realized gains from investment transactions, in excess of
available capital loss carryforwards, would be taxable to each Portfolio if not
distributed, and, therefore, will be distributed to shareholders at least
annually. An additional distribution may be made to the extent necessary to
avoid 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 accounting principles generally accepted in the United
States of America. These differences primarily relate to investments sold at a
loss. As a result, net investment income (loss) and net realized gain
42
<PAGE>
(loss) on investment transactions for a reporting period may differ
significantly from distributions during such period. Accordingly, each Portfolio
may periodically make reclassifications among certain of its capital accounts
without impacting the net asset value of the Portfolio.
Investment Transactions and Investment Income. Investment transactions are
accounted for on the trade date. Income is recorded on the accrual basis.
Distributions of income and capital gains from the Underlying Scudder Funds are
recorded on the ex-dividend date. Realized gains and losses from investment
transactions are recorded on an identified cost basis.
B. Related Parties
Under the Special Servicing Agreement entered into by Scudder Kemper
Investments, Inc. (the "Adviser"), the Underlying Scudder Funds, Scudder Service
Corporation, Scudder Fund Accounting Corporation, Scudder Investor Services,
Inc., Scudder Trust Company and the Portfolios, the Adviser arranges for all
services pertaining to the operations of the Portfolios. If the Trustees
determine that the aggregate expenses of a Portfolio are less than the estimated
savings to the Underlying Scudder Funds from the operation of such Portfolio,
each of the Underlying Scudder Funds will bear those expenses in proportion to
the average daily value of its shares owned by the respective Portfolio.
Consequently, no Underlying Scudder Funds will be expected to carry expenses
that are in excess of the estimate of savings to the respective Underlying
Funds. These estimated savings result from the elimination of separate
shareholder accounts which either currently are or have the 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 any
Portfolio, the Adviser will pay certain costs on behalf of the respective
Portfolio. For the year ended August 31, 2000, the Adviser incurred expenses in
the amount of $51,740 on behalf of the Conservative Portfolio. In accordance
with the Special Servicing Agreement, no expenses were charged to the Portfolios
during the period.
The Portfolios do not invest in the Underlying Scudder Funds for the purpose of
exercising management or control; however, investments within the set limits may
represent a significant portion of an Underlying Fund's net assets. At August
31, 2000, the Conservative Portfolio held the following Underlying Funds'
outstanding shares: approximately 5% of the Scudder Corporate Bond Fund. At
August 31, 2000, the Balanced Portfolio held the following Underlying Funds'
outstanding shares: approximately 51% of the Scudder Corporate Bond Fund, 30% of
the Scudder Classic Growth Fund, 11% of the
43
<PAGE>
Scudder Income Fund and 7% of the Scudder Emerging Markets Growth Fund. At
August 31, 2000, the Growth Portfolio held the following Underlying Funds'
outstanding shares: approximately 9% of the Scudder Corporate Bond Fund.
C. Lines of Credit
The Portfolios 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.
D. Subsequent Events
On September 22, 2000, the Scudder Pathway Growth Fund acquired all the net
assets of AARP Diversified Growth Fund pursuant to a plan of reorganization
approved by shareholders on July 13, 2000. The acquisition was accomplished by a
tax-free exchange of 8,775,379 shares of the Pathway Growth Fund (valued at
$134,438,805) for 7,676,616 shares of AARP Diversified Growth Fund outstanding
on September 22, 2000. AARP Diversified Growth Fund's net assets at that date
($134,438,805), including $3,622,666 of unrealized appreciation, were combined
with those of the Pathway Growth Fund. The aggregate net assets of the Pathway
Growth Fund immediately before the acquisition were $123,169,202. The combined
net assets of the Fund immediately following the acquisition were $257,608,007.
In addition, also on September 22, 2000, the Scudder Pathway Conservative Fund
acquired all the net assets of the AARP Diversified Income with Growth Fund
pursuant to a plan of reorganization approved by shareholders on July 13, 2000.
The acquisition was accomplished by a tax-free exchange of 6,227,714 shares of
the Pathway Conservative Fund (valued at $75,728,998) for 4,910,097 shares of
the AARP Diversified Income with Growth Fund outstanding at September 22, 2000.
AARP Diversified Income with Growth Fund's net assets at that date ($75,728,998)
including $2,027,100 of unrealized depreciation, were combined with those of the
Pathway Conservative Fund. The aggregate net assets of the Pathway Conservative
Fund immediately before the acquisition were $28,381,617. The combined net
assets of the Fund immediately following the acquisition were $104,110,615.
44
<PAGE>
Report of Independent Accountants
--------------------------------------------------------------------------------
To the Board of Directors of Scudder Pathway Series and to the Shareholders of
Scudder Pathway Series: Conservative, Balanced, and Growth Portfolios:
In our opinion, the accompanying statements of assets and liabilities, including
the investment portfolios, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Scudder Pathway Series:
Conservative, Balanced, and Growth Portfolios (three of the portfolios
constituting the Scudder Pathway Series) (the "Funds") at August 31, 2000, the
results of their operations, the changes in their net assets, and the financial
highlights for the periods indicated therein, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Funds' management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at August 31, 2000 by correspondence with the custodian, provide a
reasonable basis for our opinion.
Boston, Massachusetts PricewaterhouseCoopers LLP
October 11, 2000
45
<PAGE>
Tax Information
--------------------------------------------------------------------------------
The Conservative, Balanced and Growth Portfolios paid distributions of $0.21,
$0.69, and $0.89, respectively, per share from net long-term capital gains
during the year ended August 31, 2000, of which 100%, 100%, and 100%,
respectively, represent 20% rate gains.
Pursuant to Section 852 of the Internal Revenue Code, the Conservative, Balanced
and Growth Portfolios designate long-term capital gain dividends for the fiscal
year ended August 31, 2000 in the amounts of $115,000, $23,629,000 and
$12,376,000, respectively, of which 100% represents 20% rate gains.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your account, please call 1-800-SCUDDER.
46
<PAGE>
Shareholder Meeting Results (Unaudited)
--------------------------------------------------------------------------------
Pathway Conservative Portfolio
A Special Meeting of Shareholders (the "Meeting") of Scudder Pathway Series:
Conservative Portfolio (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 Scudder Pathway Series: Conservative Portfolio.
Number of Votes:
Trustee For Withheld
--------------------------------------------------------------------------
Henry P. Becton, Jr. 851,658 12,566
Linda C. Coughlin 843,879 20,345
Dawn-Marie Driscoll 852,644 11,579
Edgar R. Fiedler 851,827 12,397
Keith R. Fox 843,874 20,350
Joan E. Spero 852,353 11,871
Jean Gleason Stromberg 843,874 20,350
Jean C. Tempel 852,649 11,575
Steven Zaleznick 843,780 20,444
--------------------------------------------------------------------------
2. To ratify the selection of PricewaterhouseCoopers LLP as the independent
accountants for the fund for the fiscal year ending August 31, 2000.
Number of Votes:
Broker
For Against Abstain Non-Votes*
--------------------------------------------------------------------------------
837,618 14,157 12,449 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.
47
<PAGE>
Shareholder Meeting Results (Unaudited)
--------------------------------------------------------------------------------
Pathway Balanced Portfolio
A Special Meeting of Shareholders (the "Meeting") of Scudder Pathway Series:
Balanced Portfolio (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 Scudder Pathway Series: Balanced Portfolio.
Number of Votes:
Trustee For Withheld
--------------------------------------------------------------------------------
Henry P. Becton, Jr. 7,760,509 60,105
Linda C. Coughlin 7,763,233 57,382
Dawn-Marie Driscoll 7,763,635 56,979
Edgar R. Fiedler 7,755,713 64,901
Keith R. Fox 7,759,951 60,663
Joan E. Spero 7,758,722 61,893
Jean Gleason Stromberg 7,762,467 58,148
Jean C. Tempel 7,761,208 59,406
Steven Zaleznick 7,759,462 61,153
--------------------------------------------------------------------------------
2. To ratify the selection of PricewaterhouseCoopers LLP as the independent
accountants for the fund for the fiscal year ending August 31, 2000.
Number of Votes:
Broker
For Against Abstain Non-Votes*
--------------------------------------------------------------------------------
7,684,914 42,651 93,049 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.
48
<PAGE>
Shareholder Meeting Results (Unaudited)
--------------------------------------------------------------------------------
Pathway Growth Portfolio
A Special Meeting of Shareholders (the "Meeting") of Scudder Pathway Series:
Growth Portfolio (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 Scudder Pathway Series: Growth Portfolio.
Number of Votes:
Trustee For Withheld
--------------------------------------------------------------------------------
Henry P. Becton, Jr. 2,734,861 53,686
Linda C. Coughlin 2,732,540 56,007
Dawn-Marie Driscoll 2,734,894 53,653
Edgar R. Fiedler 2,734,976 53,571
Keith R. Fox 2,733,935 54,612
Joan E. Spero 2,731,157 57,390
Jean Gleason Stromberg 2,730,557 57,990
Jean C. Tempel 2,734,095 54,452
Steven Zaleznick 2,729,812 58,735
--------------------------------------------------------------------------------
2. To ratify the selection of PricewaterhouseCoopers LLP as the independent
accountants for the fund for the fiscal year ending August 31, 2000.
Number of Votes:
Broker
For Against Abstain Non-Votes*
--------------------------------------------------------------------------------
2,671,387 57,885 59,276 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.
49
<PAGE>
Officers and Trustees
--------------------------------------------------------------------------------
Linda C. Coughlin* Thomas V. Bruns*
o President and Trustee o Vice President
Henry P. Becton, Jr. William F. Glavin*
o Trustee; President, WGBH o Vice President
Educational Foundation
Donald E. Hall*
Dawn-Marie Driscoll o Vice President
o Trustee; President, Driscoll
Associates; Executive Fellow, James E. Masur*
Center for Business Ethics, o Vice President
Bentley College
Ann M. McCreary*
Edgar R. Fiedler o Vice President
o Trustee; Senior Fellow and
Economic Counsellor, The Howard S. Schneider*
Conference Board, Inc. o Vice President
Keith R. Fox John Millette*
o Trustee; General Partner, o Vice President and Secretary
Exeter Capital Management
Corporation Kathryn L. Quirk*
o Vice President and
Joan E. Spero Assistant Secretary
o Trustee; President, The Doris
Duke Charitable Foundation John R. Hebble*
o Treasurer
Jean Gleason Stromberg
o Trustee; Consultant Brenda Lyons*
o Assistant Treasurer
Jean C. Tempel
o Trustee; Managing Director, Caroline Pearson*
First Light Capital, LLC o Assistant Secretary
Steven Zaleznick *Scudder Kemper Investments, Inc.
o Trustee; President and
Chief Executive Officer,
AARP Services, Inc.
50
<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 Health Care Fund
Scudder Pathway Growth Portfolio Scudder Technology Fund
U.S. Growth and Income
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder Select 500 Fund
Scudder S&P 500 Index Fund
51
<PAGE>
--------------------------------------------------------------------------------
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.
52
<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.
53
<PAGE>
--------------------------------------------------------------------------------
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
54
<PAGE>
Notes
--------------------------------------------------------------------------------
<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
