UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-CSR
Investment Company Act file number 811-2743
SCUDDER STRATEGIC INCOME FUND
--------------------------------
(Exact Name of Registrant as Specified in Charter)
222 South Riverside Plaza, Chicago, IL 60606
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 295-2663
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Salvatore Schiavone
Two International Place
Boston, Massachusetts 02110
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(Name and Address of Agent for Service)
Date of fiscal year end: 10/31
Date of reporting period: 10/31/03
ITEM 1. REPORT TO STOCKHOLDERS
[Scudder Investments logo]
| ||
Annual Report to Shareholders | ||
October 31, 2003 | ||
Contents |
<Click Here> Performance Summary <Click Here> Portfolio Management Review <Click Here> Portfolio Summary <Click Here> Investment Portfolio <Click Here> Financial Statements <Click Here> Financial Highlights <Click Here> Notes to Financial Statements <Click Here> Report of Independent Auditors <Click Here> Tax Information <Click Here> Trustees and Officers <Click Here> Investment Products <Click Here> Account Management Resources |
Scudder Investments is part of Deutsche Asset Management, which is the marketing name in the US for the asset management activities of Deutsche Bank AG, Deutsche Investment Management Americas Inc., Deutsche Asset Management Inc., Deutsche Asset Management Investment Services Ltd., Deutsche Bank Trust Company Americas and Scudder Trust Company.
This report must be preceded or accompanied by a prospectus. To obtain a prospectus for any of our funds, refer to the Account Management Resources information provided in the back of this booklet. The prospectus contains more complete information, including a description of the risks of investing in the fund, management fees and expenses. Please read it carefully before you invest or send money.
Fund shares are not FDIC-insured and are not deposits or other obligations of, or guaranteed by, any bank. Fund shares involve investment risk, including possible loss of principal.
Average Annual Total Returns (Unadjusted for Sales Charge) | ||||
Scudder Strategic Income Fund | 1-Year | 3-Year | 5-Year | 10-Year |
| Class A | 19.05% | 8.39% | 4.46% | 5.53% |
| Class B | 18.08% | 7.44% | 3.53% | 4.54%(a) |
| Class C | 18.20% | 7.68% | 3.78% | 4.76%(a) |
| Lehman Brothers Government/Corporate Bond Index+ | 6.17% | 8.91% | 6.57% | 6.77% |
Sources: Lipper Inc. and Deutsche Investment Management Americas Inc.
Net Asset Value and Distribution Information | |||
Class A | Class B | Class C | |
| Net Asset Value: 10/31/03 | $ 4.53 | $ 4.52 | $ 4.56 |
| 10/31/02 | $ 4.08 | $ 4.08 | $ 4.11 |
| Distribution Information: Twelve Months: Income Dividends | $ .31 | $ .27 | $ .28 |
| October Income Dividend | $ .0255 | $ .0223 | $ .0232 |
| SEC 30-day Equivalent Yield++ | 5.04% | 4.36% | 4.32% |
| Current Annualized Distribution Rate (based on Net Asset Value)++ | 6.76% | 5.92% | 6.11% |
++ The SEC yield is net investment income per share earned over the month ended October 31, 2003, shown as an annualized percentage of the net asset value on that date. The SEC yield is computed in accordance with a standardized method prescribed by the Securities and Exchange Commission. Current annualized distribution rate is the latest monthly dividend shown as an annualized percentage of net asset value on October 31, 2003. Distribution rate simply measures the level of dividends and is not a complete measure of performance. Yields and distribution rates are historical and will fluctuate.
Class A Lipper Rankings - Multi-Sector Income Funds Category | ||||
Period | Rank | Number of Funds Tracked | Percentile Ranking | |
| 1-Year | 52 | of | 112 | 47 |
| 3-Year | 49 | of | 103 | 48 |
| 5-Year | 66 | of | 89 | 74 |
| 10-Year | 15 | of | 28 | 52 |
Rankings are historical and do not guarantee future results. Rankings are based on total return unadjusted for sales charges with distributions reinvested. If sales charges had been included, rankings might have been less favorable.
Source: Lipper Inc.
Growth of an Assumed $10,000 Investment(b) (Adjusted for Sales Charge) |
[] Scudder Strategic Income Fund - Class A(c) [] Lehman Brothers Government/Corporate Bond Index+ |
 |
Yearly periods ended October 31 |
Comparative Results (Adjusted for Sales Charge) | |||||
Scudder Strategic Income Fund | 1-Year | 3-Year | 5-Year | 10-Year | |
Class A(c) | Growth of $10,000 | $11,370 | $12,161 | $11,877 | $16,360 |
| Average annual total return | 13.70% | 6.74% | 3.50% | 5.05% | |
Class B(c) | Growth of $10,000 | $11,508 | $12,204 | $11,811 | $15,591(a) |
| Average annual total return | 15.08% | 6.86% | 3.38% | 4.54%(a) | |
Class C(c) | Growth of $10,000 | $11,702 | $12,359 | $11,919 | $15,765(a) |
| Average annual total return | 17.02% | 7.32% | 3.57% | 4.66%(a) | |
| Lehman Brothers Government/ Corporate Bond Index+ | Growth of $10,000 | $10,617 | $12,917 | $13,745 | $19,256 |
| Average annual total return | 6.17% | 8.91% | 6.57% | 6.77% | |
The growth of $10,000 is cumulative.
a Returns shown for Class B and C shares for the periods prior to their inception on May 31, 1994 are derived from the historical performance of Class A shares of the Scudder Strategic Income Fund during such periods and have been adjusted to reflect the higher gross total annual operating expenses of each specific class. Any difference in expenses will affect performance.
b The Fund's growth of an assumed $10,000 investment is adjusted for the maximum sales charge of 4.50%. This results in a net initial investment of $9,550.
c Returns shown for Class A, B and C shares have been adjusted to reflect the current applicable sales charges of each specific class. Returns for Class A reflect the current maximum initial sales charge of 4.50%. Class B share performance is adjusted for the applicable contingent deferred sales charge ("CDSC"), which is 4% within the first year after purchase, declining to 0% after six years. Returns for Class C shares reflect an initial sales charge of 1%. Redemptions on Class C shares within one year of purchase may be subject to a CDSC of 1%. Any difference in expenses will affect performance.
+ The Lehman Brothers Government/Corporate Bond Index is an unmanaged index comprising intermediate- and long-term government and investment-grade corporate debt securities. Index returns assume reinvestment of dividends and, unlike Fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
All performance is historical, assumes reinvestment of all dividends and capital gains, and is not indicative of future results. Investment return and principal value will fluctuate, so an investor's shares, when redeemed, may be worth more or less than when purchased. Performance figures do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Returns and rankings may differ by share class.
Investments in funds involve risk. Some funds have more risk than others. These include funds that allow exposure to or otherwise concentrate investments in certain sectors, geographic regions, security types, market capitalization or foreign securities (e.g., political or economic instability, which can be accentuated in emerging market countries). Please read this fund's prospectus for specific details regarding its investments and risk profile.
Please call (800) 621-1048 for the Fund's most up-to-date performance. On the Web, go to scudder.com.
Scudder Strategic Income Fund: A Team Approach to Investing
Deutsche Investment Management Americas Inc. ("DeIM" or the "Advisor"), which is part of Deutsche Asset Management, is the investment advisor for Scudder Strategic Income Fund. DeIM and its predecessors have more than 80 years of experience managing mutual funds and DeIM provides a full range of investment advisory services to institutional and retail clients. DeIM is also responsible for selecting brokers and dealers and for negotiating brokerage commissions and dealer charges.
Deutsche Asset Management is a global asset management organization that offers a wide range of investing expertise and resources. This well-resourced global investment platform brings together a wide variety of experience and investment insight across industries, regions, asset classes and investing styles.
DeIM is an indirect, wholly owned subsidiary of Deutsche Bank AG. Deutsche Bank AG is a major global banking institution that is engaged in a wide range of financial services, including investment management, mutual funds, retail, private and commercial banking, investment banking and insurance.
Portfolio Management Team
Jan C. Faller
CFA, Managing Director of Deutsche Asset Management and Lead Manager of the fund.
• Joined Deutsche Asset Management in 1999 and the fund in 2000 after nine years of experience as investment manager for PanAgora Asset Management and banking officer for Wainwright Bank & Trust Co.
• Portfolio manager for Enhanced Strategies & Mutual Funds Group: New York.
• MBA, Amos Tuck School, Dartmouth College.
Andrew P. Cestone
Managing Director of Deutsche Asset Management and Portfolio Manager of the fund.
• Joined Deutsche Asset Management in March 1998 and the fund in 2002.
• Prior to that, Investment Analyst, Phoenix Investment Partners, from 1997 to 1998. Prior to that, Credit Officer, asset based lending group, Fleet Bank, from 1995 to 1997.
Sean P. McCaffrey, CFA
Managing Director of Deutsche Asset Management and Portfolio Manager of the fund.
• Joined Deutsche Asset Management in 1996 and the fund in 2002 after five years as a fixed income analyst at Fidelity Investments.
• Head of Fixed Income Enhanced Strategies and Mutual Funds Group and portfolio manager for structured grade and enhanced fixed income strategies underlying retail mutual fund and institutional mandates: New York.
• MBA, Yale University.
Brett Diment
Managing Director of Deutsche Asset Management and Portfolio Manager of the fund.
• Joined Deutsche Asset Management in 1991 and the fund in 2002.
• Over 12 years of investment industry experience.
• Head of emerging market debt for London Fixed Income and responsible for coordinating research into Continental European markets and managing global fixed income, balanced and cash based portfolios: London.
Edwin Gutierrez
Vice President of Deutsche Asset Management and Portfolio Manager of the fund.
• Joined Deutsche Asset Management in 2000 after five years of experience including emerging debt portfolio manager at INVESCO Asset Management responsible for Latin America and Asia and economist responsible for Latin America at LGT Asset Management.
• MSc, Georgetown University.
• Joined the fund in 2002.
In the following interview, Portfolio Manager Jan C. Faller discusses market conditions and investment strategy during Scudder Strategic Income Fund's most recent fiscal year ended October 31, 2003.
Q: How did the fund perform over its most recent fiscal year?
A: The fund posted strong absolute and relative results for the period. Specifically, the fund's Class A shares (unadjusted for sales charges) provided a 19.05% total return for the 12 months ended October 31, 2003.1 (Please see page 3 for performance of other share classes.) This compares with the 6.17% total return of the fund's benchmark, the unmanaged Lehman Brothers Government/Corporate Bond Index.2 The fund also outperformed the 17.40% average return of its peers in the Lipper Multi-Sector Income Funds category.3
1 Returns reflect the reinvestment of all distributions.2 The Lehman Brothers Government/Corporate Bond Index is composed of US government Treasury and agency securities, and corporate Yankee bonds. Index returns assume reinvestment of dividends and capital gains and, unlike fund returns, do not reflect fees or expenses. It is not possible to invest directly in an index.
3 The Lipper Multi-Sector Income Funds category includes funds that seek current income by allocating assets among several different fixed-income securities (with no more than 65% in any one sector except for defensive purposes), including US government and foreign governments, with a significant portion of assets in securities rated below investment grade. It is not possible to invest directly in the Lipper category.
Q: Will you discuss the general market environment for the sectors in which the fund was invested during the period?
A: During the past 12 months, both high-yield debt and emerging-market debt provided strong performance. Prior to the current fiscal year, high-yield bonds endured a tough environment amid corporate accounting scandals, global political turmoil and a volatile stock market. We always felt that high-yield bonds - though they often perform in tandem with stocks - were not in a "bubble" the way equities were. More recently, high-yield bonds have benefited from strong demand from risk-tolerant investors as yields of investment-grade and Treasury bonds declined dramatically. Now high-yield seems to have returned to "fair value" after investors snapped up many of these bonds at depressed prices. On the other hand, the definition of a fair-value price for some high-yield bonds continues to rise as government economic statistics improve and we see the recovery beginning to gain traction.
Within emerging markets, Brazil and Russia were the biggest stories. At the beginning of the period, Brazil elected a new president, Luiz Inacio Lula da Silva. A politician from a populist background, Lula began to "shift gears" a third of the way through the election. From the reforms that he has begun to push through, it's clear that Lula is conscious of investor concerns. At the same time, he's managed to be popular among the Brazilian people. Lula has managed to keep two important constituents happy, and the market has rewarded him handsomely for that. In Russia, despite the controversy over the arrest of YUKOS Oil Company president Mikhail Khodorkovsky, sovereign debt continues to perform well, as the market has kept its confidence in the ability of President Putin and the Russian administration to maintain order and meet the country's debt obligations. The growth of Russia's oil business has continued to put the country on a more sound financial footing.
Another prime mover of performance was the euro, which gained approximately 17% over the dollar during the period. Much of the recent dollar weakness is a result of the Bush administration's desire to retreat from the standard strong-dollar rhetoric. That's because a weaker dollar helps American companies compete internationally, even as a stated government policy favoring a strong dollar encourages stability in the financial markets and discourages a dollar free fall. In addition, the administration and the Fed have been concerned over the possibility of deflation. Taking advantage of US dollar weakness and verbally intervening to push it even lower helps the Fed accomplish its goal of an easier monetary environment and less deflationary pressure.
Q: What impact has exposure to these three areas had on the fund's performance?
A: The fund's high-yield exposure ranged from 35% to 45% of assets, and its emerging-market allocation ranged from 18% to 23% of assets over the past 12 months. The fund strongly benefited from its high-yield allocation during the period. Lower-quality high-yield bonds were the strongest performers, and we gradually shifted our exposure in the direction of lower-quality high-yield bonds during the fiscal year. In the emerging markets, the good news I mentioned from Brazil and Russia was the main driver of positive performance. Brazilian "C" Brady bonds, which had been distressed, have soared in value as President Lula has shown himself to be investor friendly. Russian bonds also posted strong gains as the country's leaders made progress in shoring up Russia's fiscal picture. Meanwhile, the fund's exposure to the euro, which ranged between 4% and 12% in the period, also boosted performance.
Q: How is the remainder of the fund's portfolio allocated?
A: Much of the remainder of the portfolio is invested in high-quality sovereign bonds. Here we're focused on the major capitalized countries. These include the United Kingdom, countries within the European Union and Japan. The fund also invests in US Treasury bonds. This means that within the fund we have very high-quality as well as lower-quality bonds. We "barbell" the fund's credit exposure this way to make it easier for us to distinguish between the fund's levels of credit risk and interest rate risk, and to manage both types of risk.
Q: How did interest rate movements affect fund performance during the period?
A: Based on sovereign bonds' performance indices over the past 12 months, the average non-US index is up about 2.5%, and Treasury bond prices rose approximately 2.80%, which means that yields were almost unchanged. In the case of the United States and Germany, 10-year bond yields are within 20 basis points of where they were 12 months ago. But these results disguise the enormous volatility that occurred in between. As an example, for US Treasuries, the low was a 3.11% yield on the 10-year bond, and the high was 4.60%, which is almost 1.5 percentage points of volatility. German bonds performed similarly. In the end, most of these sovereign bonds simply earned their coupon yield.
Q: How do you assess the market environment for the fund's sectors at present?
A: I mentioned that high-yield bonds seem to have reached fair value for the moment. We think that emerging markets are fully valued and somewhat vulnerable to any external shocks that might come along. That's why we reduced our allocation in emerging-market bonds to approximately 18% of assets as of October 31. In terms of currency exposure, we are holding bonds of euro-denominated countries, in pursuit of gains that would come from any further weakening of the US dollar. Following increases in short-term interest rates by the Bank of England and the Australian central bank late in the period - the first such moves in the current global business cycle - we are carefully monitoring US Federal Reserve statements for any signs of a near-term shift in policy. We believe that Scudder Strategic Income Fund remains an attractive vehicle for investors seeking high current return.
The views expressed in this report reflect those of the portfolio managers only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions and should not be construed as a recommendation.
Portfolio Composition | 10/31/03 | 10/31/02 |
| High-Yield Corporate Bonds | 42% | 35% |
| US Treasury Obligations | 23% | 9% |
| Emerging Market Bonds | 18% | 23% |
| Foreign Currency Bonds | 14% | 26% |
| Cash Equivalents | 2% | 2% |
| Other | 1% | 5% |
| 100% | 100% | |
Quality | 10/31/03 | 10/31/02 |
| AAA* | 31% | 19% |
| AA | 6% | 15% |
| A | 6% | - |
| BBB | 4% | 12% |
| BB | 15% | 16% |
| B | 31% | 27% |
| CCC and CC | 6% | 5% |
| Below CC | 1% | 6% |
| 100% | 100% | |
* Includes cash equivalents
Interest Rate Sensitivity | 10/31/03 | 10/31/02 |
| Average maturity | 7.2 years | 7.4 years |
| Average duration | 5.1 years | 4.5 years |
Portfolio composition, quality and interest rate sensitivity are subject to change.
For more complete details about the fund's investment portfolio, see page 15. A quarterly Fact Sheet and Portfolio Holdings are available upon request.
Principal Amount ($)(c) | Value ($) | |
Corporate Bonds 36.8% | ||
| Consumer Discretionary 10.7% | ||
| Adelphia Communications Corp., 10.25%, 6/15/2011* | 225,000 | 189,000 |
| Advantica Restaurant Co.: | ||
11.25%, 1/15/2008 | 160,216 | 99,334 |
12.75%, 9/30/2007 | 315,000 | 319,725 |
| American Achieve Corp., 11.625%, 1/1/2007 | 570,000 | 629,850 |
| American Lawyer Media, Inc., Series B, 9.75%, 12/15/2007 | 725,000 | 689,656 |
| Ameristar Casino, Inc., 10.75%, 2/15/2009 | 225,000 | 259,313 |
| Boca Resorts, Inc., 9.875%, 4/15/2009 | 1,005,000 | 1,075,350 |
| Broder Brothers Co., 144A, 11.25%, 10/15/2010 | 180,000 | 184,500 |
| Buffets, Inc., 11.25%, 7/15/2010 | 775,000 | 837,000 |
| Carrols Corp., 9.5%, 12/1/2008 | 165,000 | 167,063 |
| Central Garden & Pet Co., 9.125%, 2/1/2013 | 250,000 | 274,375 |
| Charter Communications Holdings LLC: | ||
8.625%, 4/1/2009 | 375,000 | 300,938 |
9.625%, 11/15/2009 | 395,000 | 317,975 |
144A, 10.25%, 9/15/2010 | 710,000 | 722,425 |
Step-up Coupon, 0% to 1/15/2006, 13.5% to 1/15/2011 | 105,000 | 70,875 |
Step-up Coupon, 0% to 1/15/2007, 12.125% to 1/15/2012 | 120,000 | 65,100 |
Step-up Coupon, 0% to 5/15/2006, 11.75% to 5/15/2011 | 635,000 | 373,063 |
| Choctaw Resort Development Enterprises, 9.25%, 4/1/2009 | 680,000 | 742,050 |
| Cinemark USA, Inc.: | ||
8.5%, 8/1/2008 | 670,000 | 698,475 |
9.0%, 2/1/2013 | 255,000 | 279,225 |
| Circus & Eldorado, 10.125%, 3/1/2012 | 670,000 | 685,913 |
| CKE Restaurants, Inc., 9.125%, 5/1/2009 | 225,000 | 228,375 |
| CSC Holdings, Inc.: | ||
7.875%, 12/15/2007 | 535,000 | 547,038 |
Senior Notes, 7.25%, 7/15/2008 | 205,000 | 205,000 |
| Dex Media East LLC, 12.125%, 11/15/2012 | 1,960,000 | 2,364,250 |
| Dex Media West LLC, 144A, 9.875%, 8/15/2013 | 615,000 | 699,563 |
| DIMON, Inc.: | ||
144A, 7.75%, 6/1/2013 | 470,000 | 484,100 |
Series B, 9.625%, 10/15/2011 | 1,035,000 | 1,159,200 |
| EchoStar DBS Corp.: | ||
144A, 6.375%, 10/1/2011 | 50,000 | 49,750 |
9.375%, 2/1/2009 | 360,000 | 380,700 |
| Eldorado Resorts LLC, 10.5%, 8/15/2006 | 888,000 | 897,990 |
| Finlay Fine Jewelry Corp., 8.375%, 5/1/2008 | 460,000 | 473,800 |
| General Motors Corp., 8.25%, 7/15/2023 | 505,000 | 531,229 |
| Group 1 Automotive, Inc., 144A, 8.25%, 8/15/2013 | 415,000 | 450,275 |
| Herbst Gaming, Inc., 10.75%, 9/1/2008 | 1,290,000 | 1,443,188 |
| Imperial Home Decor Group, Inc., Series B, 11.0%, 3/15/2008* | 720,000 | 0 |
| Inn of the Mountain Gods, 144A, 12.0%, 11/15/2010 | 445,000 | 465,025 |
| Interep National Radio Sales, Inc., 10.0%, 7/1/2008 | 690,000 | 609,788 |
| International Game Technology, 8.375%, 5/15/2009 | 600,000 | 716,023 |
| Intrawest Corp., 10.5%, 2/1/2010 | 520,000 | 571,350 |
| J.C. Penney Co., Inc., 6.875%, 10/15/2015 | 165,000 | 166,650 |
| Jacobs Entertainment Co., 11.875%, 2/1/2009 | 375,000 | 405,469 |
| Jefra Cosmetics, 10.75%, 5/15/2011 | 700,000 | 770,000 |
| Kellwood Co.: | ||
7.625%, 10/15/2017 | 295,000 | 299,794 |
7.875%, 7/15/2009 | 50,000 | 53,438 |
| Keystone Automotive Operation, 144A, 9.75%, 11/1/2013 | 250,000 | 263,750 |
| Krystal, Inc., 10.25%, 10/1/2007 | 400,000 | 400,500 |
| Laidlaw International, Inc., 144A, 10.75%, 6/15/2011 | 260,000 | 280,800 |
| Levi Strauss & Co., 12.25%, 12/15/2012 | 270,000 | 224,100 |
| Lin Television Corp., 144A, 6.5%, 5/15/2013 | 215,000 | 209,088 |
| Mediacom Broadband LLC, 11.0%, 7/15/2013 | 300,000 | 313,500 |
| Mediacom LLC: | ||
7.875%, 2/15/2011 | 85,000 | 75,225 |
9.5%, 1/15/2013 | 85,000 | 80,750 |
| Meritage Corp., 9.75%, 6/1/2011 | 245,000 | 271,950 |
| MGM Mirage, Inc., 6.0%, 10/1/2009 | 385,000 | 389,813 |
| Mortons Restaurant Group, 144A, 7.5%, 7/1/2010 | 170,000 | 154,700 |
| National Vision, Inc., 12.0%, 3/30/2009 | 1,208,106 | 641,806 |
| Norcraft Co. LP, 144A, 9.0%, 11/1/2011 | 130,000 | 136,500 |
| Old Evangeline Downs, 13.0%, 3/1/2010 | 255,000 | 262,969 |
| Park Place Entertainment Corp., 9.375%, 2/15/2007 | 590,000 | 663,750 |
| PEI Holding, Inc., 11.0%, 3/15/2010 | 455,000 | 514,150 |
| Petro Stopping Centers, 10.5%, 2/1/2007 | 1,550,000 | 1,577,125 |
| PRIMEDIA, Inc.: | ||
7.625%, 4/1/2008 | 255,000 | 253,725 |
8.875%, 5/15/2011 | 260,000 | 268,450 |
| Rayovac Corp., 144A, 8.5%, 10/1/2013 | 350,000 | 364,000 |
| Remington Arms Co., Inc., 10.5%, 2/1/2011 | 650,000 | 680,063 |
| Renaissance Media Group, 10.0%, 4/15/2003 | 805,000 | 823,113 |
| Rent-Way, Inc., 144A, 11.875%, 6/15/2010 | 210,000 | 224,963 |
| Restaurant Co., 11.25%, 5/15/2008 | 712,259 | 705,136 |
| Rite Aid Corp.: | ||
"C1", Series 97, 7.3%, 3/10/2019 | 595,258 | 532,756 |
144A, 6.125%, 12/15/2008 | 265,000 | 253,075 |
| Samsonite Corp., 10.75%, 6/15/2008 | 1,195,000 | 1,254,750 |
| Schuler Homes, Inc., 10.5%, 7/15/2011 | 780,000 | 890,175 |
| Scientific Games Corp., 12.5%, 8/15/2010 | 325,000 | 383,500 |
| Sealy Mattress Co., Series B, 9.875%, 12/15/2007 | 410,000 | 423,325 |
| Sinclair Broadcast Group, Inc.: | ||
8.0%, 3/15/2012 | 1,060,000 | 1,118,300 |
8.75%, 12/15/2011 | 475,000 | 520,125 |
| Six Flags, Inc.: | ||
8.875%, 2/1/2010 | 1,210,000 | 1,149,500 |
9.5%, 2/1/2009 | 110,000 | 107,800 |
| Sonic Automotive, Inc., 144A, 8.625%, 8/15/2013 | 805,000 | 851,288 |
| Transwestern Publishing, Series F, 9.625%, 11/15/2007 | 1,130,000 | 1,163,900 |
| Trump Holdings & Funding, 11.625%, 3/15/2010 | 545,000 | 480,281 |
| Venetian Casino Resort LLC, 144A, 11.0%, 6/15/2010 | 425,000 | 490,344 |
| Wheeling Island Gaming, Inc., 10.125%, 12/15/2009 | 750,000 | 772,500 |
| Williams Scotsman, Inc.: | ||
9.875%, 6/1/2007 | 395,000 | 400,925 |
144A, 10.0%, 8/15/2008 | 265,000 | 291,500 |
| Worldspan LP/ WS Finance Corp., 144A, 9.625%, 6/15/2011 | 485,000 | 472,875 |
| XM Satellite Radio, Inc., Step-up Coupon, 0% to 12/31/2005, 14% to 12/31/2009 | 535,000 | 458,763 |
44,748,808 | ||
| Consumer Staples 0.9% | ||
| Agrilink Foods, Inc., 11.875%, 11/1/2008 | 258,000 | 272,835 |
| Elizabeth Arden, Inc., Series B, 11.75%, 2/1/2011 | 572,000 | 654,940 |
| Hines Nurseries, Inc., 144A, 10.25%, 10/1/2011 | 360,000 | 385,200 |
| Michael Foods, Inc., Series B, 11.75%, 4/1/2011 | 265,000 | 334,894 |
| National Beef Pack, 144A, 10.5%, 8/1/2011 | 280,000 | 308,000 |
| Pilgrim's Pride Corp., 9.625%, 9/15/2011 | 125,000 | 136,719 |
| Salton, Inc., 10.75%, 12/15/2005 | 410,000 | 401,800 |
| Stater Brothers Holdings, Inc., 10.75%, 8/15/2006 | 1,040,000 | 1,095,900 |
3,590,288 | ||
| Energy 4.0% | ||
| Avista Corp., 9.75%, 6/1/2008 | 1,490,000 | 1,758,200 |
| Chesapeake Energy Corp., 8.125%, 4/1/2011 | 395,000 | 433,513 |
| Citgo Petroleum Corp., 11.375%, 2/1/2011 | 1,605,000 | 1,813,650 |
| Coastal Corp., 6.5%, 6/1/2008 | 405,000 | 333,113 |
| Continental Resources, Inc., 10.25%, 8/1/2008 | 1,005,000 | 987,413 |
| Dynegy Holdings, Inc., 144A, 9.875%, 7/15/2010 | 665,000 | 714,875 |
| Edison Mission Energy, 7.73%, 6/15/2009 | 1,755,000 | 1,500,525 |
| Gulfterra Energy Partner, 144A, 6.25%, 6/1/2010 | 120,000 | 120,600 |
| Lone Star Technologies, Inc., Series B, 9.0%, 6/1/2011 | 660,000 | 641,850 |
| Newpark Resources, Inc., 8.625%, 12/15/2007 | 475,000 | 490,438 |
| On Semiconductor Corp., 13%, 5/15/2008 | 600,000 | 696,000 |
| Parker Drilling Co.: | ||
144A, 9.625%, 10/1/2013 | 345,000 | 354,488 |
Series B, 10.125%, 11/15/2009 | 980,000 | 1,024,100 |
| Pemex Project Funding Master Trust, 7.375%, 12/15/2014 | 900,000 | 945,000 |
| Pioneer Natural Resources Co., 9.625%, 4/1/2010 | 1,240,000 | 1,509,094 |
| Southern Natural Gas Co., 8.875%, 3/15/2010 | 325,000 | 354,250 |
| Stone Energy Corp., 8.25%, 12/15/2011 | 455,000 | 486,850 |
| Trico Marine Services, Inc., 8.875%, 5/15/2012 | 725,000 | 496,625 |
| Westport Resources Corp.: | ||
8.25%, 11/1/2011 | 595,000 | 655,988 |
144A, 8.25%, 11/1/2011 | 50,000 | 55,125 |
| Williams Co., Inc.: | ||
8.75%, 3/15/2012 | 165,000 | 178,200 |
8.75%, 3/15/2032 | 225,000 | 235,125 |
| Williams Holdings of Delaware, Inc., 6.5%, 12/1/2008 | 645,000 | 651,450 |
| Wiser Oil Co., 9.5%, 5/15/2007 | 465,000 | 448,725 |
16,885,197 | ||
| Financials 1.8% | ||
| Ahold Finance USA, Inc., 6.25%, 5/1/2009 | 640,000 | 636,800 |
| AmeriCredit Corp.: | ||
9.25%, 5/1/2009 | 690,000 | 703,800 |
9.875%, 4/15/2006 | 600,000 | 612,000 |
| CBRE Escrow, Inc., 144A, 9.75%, 5/15/2010 | 490,000 | 529,200 |
| Dollar Financial Group, Series A, 10.875%, 11/15/2006 | 100,000 | 101,500 |
| Farmers Insurance Exchange, 144A, 8.625%, 5/1/2024 | 700,000 | 722,750 |
| FRD Acquisition Co., Series B, 12.5%, 7/15/2004* | 230,000 | 0 |
| Global Exchange Services, 144A, 12.0%, 7/15/2008 | 520,000 | 494,000 |
| IOS Capital LLC, 7.25%, 6/30/2008 | 545,000 | 540,913 |
| LaBranche & Co., Inc., 12.0%, 3/2/2007 | 485,000 | 497,125 |
| Pxre Capital Trust I, 8.85%, 2/1/2027 | 365,000 | 328,500 |
| Qwest Capital Funding, Inc.: | ||
5.875%, 8/3/2004 | 250,000 | 249,063 |
7.75%, 8/15/2006 | 555,000 | 552,225 |
| Qwest Corp., 7.25%, 10/25/2035 | 215,000 | 198,875 |
| R.H. Donnelly Finance Corp.: 144A, 10.875%, 12/15/2012 | 430,000 | 512,775 |
10.875%, 12/15/2012 | 45,000 | 53,663 |
| Thornburg Mortgage, Inc., 8.0%, 5/15/2013 | 445,000 | 467,250 |
| Universal City Development, 11.75%, 4/1/2010 | 430,000 | 497,188 |
7,697,627 | ||
| Health Care 1.2% | ||
| AmerisourceBergen Corp., 7.25%, 11/15/2012 | 720,000 | 741,600 |
| Genesis Healthcare Corp., 144A, 8.0%, 10/15/2013 | 195,000 | 199,144 |
| HEALTHSOUTH Corp., 7.625%, 6/1/2012 | 610,000 | 530,700 |
| HMP Equity Holdings Corp., 144A, Zero Coupon, 5/15/2008 | 375,000 | 187,500 |
| National Nephrology Association, 144A, 9.0%, 11/1/2011 | 190,000 | 196,175 |
| Neighbore, Inc., 144A, 6.875%, 11/15/2013 | 215,000 | 218,494 |
| Norcross Safety Products, 144A, 9.875%, 8/15/2011 | 380,000 | 410,400 |
| Quintiles Transnational Corp., 144A, 10.0%, 10/1/2013 | 275,000 | 290,125 |
| Tenet Healthcare Corp.: | ||
6.375%, 12/1/2011 | 1,285,000 | 1,191,838 |
7.375%, 2/1/2013 | 1,015,000 | 984,550 |
| Vanguard Health Systems, Inc., 9.75%, 8/1/2011 | 225,000 | 240,750 |
5,191,276 | ||
| Industrials 5.9% | ||
| Allied Waste North America, Inc.: | ||
Series B, 8.5%, 12/1/2008 | 320,000 | 352,800 |
Series B, 8.875%, 4/1/2008 | 880,000 | 972,400 |
Series B, 10.0%, 8/1/2009 | 1,175,000 | 1,277,813 |
| AMI Semiconductor, Inc., 10.75%, 2/1/2013 | 250,000 | 290,000 |
| Amsted Industries, Inc., 144A, 10.25%, 10/15/2011 | 490,000 | 540,225 |
| Argo-Tech Corp., 8.625%, 10/1/2007 | 430,000 | 425,700 |
| Atrium Companies, Inc., Series B, 10.5%, 5/1/2009 | 65,000 | 69,063 |
| AutoNation, Inc., 9.0%, 8/1/2008 | 410,000 | 467,400 |
| Avondale Mills, Inc., 144A, 10.25%, 7/1/2013 | 760,000 | 577,600 |
| Browning-Ferris Industries: | ||
7.4%, 9/15/2035 | 345,000 | 320,850 |
9.25%, 5/1/2021 | 140,000 | 144,900 |
| Case New Holland, Inc., 144A, 9.25%, 8/1/2011 | 310,000 | 344,100 |
| Collins & Aikman Floor Cover, Series B, 9.75%, 2/15/2010 | 450,000 | 483,750 |
| Collins & Aikman Products, 10.75%, 12/31/2011 | 825,000 | 693,000 |
| Congoleum Corp., 8.625%, 8/1/2008 | 445,000 | 268,113 |
| Continental Airlines, Inc., 8.0%, 12/15/2005 | 205,000 | 198,850 |
| Corrections Corp. of America: | ||
144A, 7.5%, 5/1/2011 | 395,000 | 412,775 |
9.875%, 5/1/2009 | 590,000 | 661,538 |
| CP Ships Ltd., 10.375%, 7/15/2012 | 675,000 | 776,250 |
| Dana Corp.: | ||
7.0%, 3/1/2029 | 255,000 | 226,313 |
9.0%, 8/15/2011 | 555,000 | 620,213 |
| DeCrane Aircraft Holdings, Inc., Series B, 12.0%, 9/30/2008 | 565,000 | 282,500 |
| Delta Air Lines, Inc.: | ||
7.7%, 12/15/2005 | 240,000 | 225,000 |
7.9%, 12/15/2009 | 305,000 | 247,813 |
Series 02-1, 7.779%, 1/2/2012 | 152,114 | 130,189 |
| DRS Technologies, Inc., 144A, 6.875%, 11/1/2013 | 170,000 | 170,850 |
| Eagle-Picher Industries, Inc., 144A, 9.75%, 9/1/2013 | 385,000 | 408,100 |
| Evergreen International Aviation, 144A, 12.0%, 5/15/2010 | 355,000 | 312,400 |
| Flextronics International Ltd., 144A, 6.5%, 5/15/2013 | 465,000 | 459,188 |
| Golden State Petroleum Transportation, 8.04%, 2/1/2019 | 340,000 | 323,231 |
| Grove Holdings LLC, Step-up Coupon, 11.625%, 5/1/2009* | 270,000 | 0 |
| Grove Investors, Inc., 14.5%, 5/1/2010* | 996,744 | 0 |
| GS Technologies, 12.0%, 9/1/2004* | 269,411 | 14,818 |
| Hercules, Inc., 11.125%, 11/15/2007 | 1,212,000 | 1,405,920 |
| Hornbeck Offshore Services, Inc., 10.625%, 8/1/2008 | 330,000 | 364,650 |
| ISP Chemco, Inc., Series B, 10.25%, 7/1/2011 | 440,000 | 491,700 |
| ISP Holdings, Inc., Series B, 10.625%, 12/15/2009 | 250,000 | 273,750 |
| Kansas City Southern: | ||
7.5%, 6/15/2009 | 55,000 | 57,063 |
9.5%, 10/1/2008 | 730,000 | 803,000 |
| Metaldyne Corp.: | ||
144A, 10.0%, 11/1/2013 | 355,000 | 346,125 |
11.0%, 6/15/2012 | 140,000 | 117,600 |
| Millennium America, Inc.: | ||
7.625%, 11/15/2026 | 350,000 | 299,250 |
9.25%, 6/15/2008 | 2,095,000 | 2,215,463 |
144A, 9.25%, 6/15/2008 | 435,000 | 460,013 |
| Mobile Mini, Inc., 144A, 9.5%, 7/1/2013 | 505,000 | 552,975 |
| Motors and Gears, Inc., 10.75%, 11/15/2006 | 340,000 | 278,800 |
| Overseas Shipholding Group, 8.75%, 12/1/2013 | 225,000 | 243,000 |
| Plainwell, Inc., Series B, 11.0%, 3/1/2008* | 2,200,000 | 110,000 |
| Republic Engineered Products LLC, 10.0%, 8/16/2009* | 523,294 | 225,016 |
| Seabulk International, Inc., 144A, 9.5%, 8/15/2013 | 565,000 | 581,950 |
| Tech Olympic USA, Inc., 10.375%, 7/1/2012 | 510,000 | 558,450 |
| Tenneco Automotive, Inc.: | ||
Series B, 10.25%, 7/15/2013 | 255,000 | 281,775 |
11.625%, 10/15/2009 | 320,000 | 332,000 |
| The Brickman Group, Ltd., Series B, 11.75%, 12/15/2009 | 230,000 | 262,200 |
| Westlake Chemical Corp., 144A, 8.75%, 7/15/2011 | 1,165,000 | 1,229,075 |
| Xerox Corp.: | ||
7.125%, 6/15/2010 | 435,000 | 443,700 |
7.625%, 6/15/2013 | 320,000 | 326,400 |
24,957,617 | ||
| Information Technology 0.4% | ||
| Cooperative Computing, 144A, 10.5%, 6/15/2011 | 220,000 | 237,600 |
| Digitalnet, Inc., 144A, 9.0%, 7/15/2010 | 179,000 | 195,110 |
| Lucent Technologies, Inc.: | ||
6.45%, 3/15/2029 | 680,000 | 525,300 |
7.25%, 7/15/2006 | 585,000 | 596,700 |
| Telex Communications, Inc., 144A, 11.5%, 10/15/2008 | 260,000 | 269,100 |
1,823,810 | ||
| Materials 5.8% | ||
| Aqua Chemical, Inc., 11.25%, 7/1/2008 | 250,000 | 200,000 |
| ARCO Chemical Co., 9.8%, 2/1/2020 | 1,895,000 | 1,696,025 |
| Boise Cascade Co., 6.5%, 11/1/2010 | 70,000 | 71,522 |
| Buckeye Technologies, Inc., 144A, 8.5%, 10/1/2013 | 345,000 | 360,525 |
| Caraustar Industries, Inc., 9.875%, 4/1/2011 | 805,000 | 841,225 |
| Cascades, Inc., 7.25%, 2/15/2013 | 465,000 | 485,925 |
| Crown Cork & Seal, 8.0%, 4/15/2023 | 225,000 | 195,750 |
| Dan River, Inc., 144A, 12.75%, 4/15/2009 | 520,000 | 145,600 |
| Dayton Superior Corp.: | ||
144A, 10.75%, 9/15/2008 | 375,000 | 390,938 |
13.0%, 6/15/2009 | 320,000 | 283,200 |
| DIMAC Corp., 144A, 12.5%, 10/1/2008* | 1,980,000 | 19,800 |
| Equistar Chemicals LP: | ||
8.75%, 2/15/2009 | 2,720,000 | 2,706,400 |
144A, 10.625%, 5/1/2011 | 150,000 | 156,750 |
| Euramax International PLC, 144A, 8.5%, 8/15/2011 | 435,000 | 461,100 |
| Fibermark, Inc., 10.75%, 4/15/2011 | 530,000 | 349,800 |
| Foamex LP, 10.75%, 4/1/2009 | 680,000 | 598,400 |
| Fonda Group, 9.5%, 3/1/2007 | 305,000 | 259,250 |
| Georgia-Pacific Corp.: | ||
7.375%, 7/15/2008 | 235,000 | 250,275 |
8.0%, 1/15/2014 | 220,000 | 236,500 |
8.875%, 2/1/2010 | 665,000 | 759,763 |
8.875%, 5/15/2031 | 885,000 | 940,313 |
9.375%, 2/1/2013 | 310,000 | 356,500 |
Debenture, 7.7%, 6/15/2015 | 1,230,000 | 1,279,200 |
| Hexcel Corp., 144A, 9.75%, 1/15/2009 | 185,000 | 192,863 |
| Huntsman Advanced Materials LLC, 144A, 11.0%, 7/15/2010 | 390,000 | 417,788 |
| Huntsman International LLC, 144A, 11.625%, 10/15/2010 | 190,000 | 182,400 |
| IMC Global, Inc., 144A, 10.875%, 8/1/2013 | 1,060,000 | 1,094,450 |
| Koppers Industry, Inc., 144A, 9.875%, 10/15/2013 | 305,000 | 321,775 |
| Nalco Co., 144A, 7.75%, 11/15/2011 | 545,000 | 566,800 |
| Neenah Corp.: 11.0%, 9/30/2010 | 168,000 | 182,280 |
144A, 13.0%, 9/30/2013 | 245,071 | 242,620 |
| Omnova Solutions, Inc., 144A, 11.25%, 6/1/2010 | 205,000 | 220,375 |
| Owens-Brockway Glass Container, 8.25%, 5/15/2013 | 735,000 | 775,425 |
| Pemex Project Funding Master Trust, 6.25%, 8/5/2013 | 1,800,000 | 2,055,793 |
| Pliant Corp.: | ||
11.125%, 9/1/2009 | 455,000 | 486,850 |
13.0%, 6/1/2010 | 55,000 | 52,525 |
13.0%, 6/1/2010 | 125,000 | 119,375 |
| Resolution Performance Products LLC: | ||
9.5%, 4/15/2010 | 65,000 | 68,575 |
13.5%, 11/15/2010 | 1,155,000 | 1,091,475 |
| Rockwood Specialties Corp., 144A, 10.625%, 5/15/2011 | 330,000 | 354,750 |
| Sweetheart Cup Co., Inc., 12.0%, 7/15/2004 | 185,000 | 184,538 |
| Texas Industries, Inc., 144A, 10.25%, 6/15/2011 | 440,000 | 490,600 |
| Toll Corp., 8.25%, 2/1/2011 | 260,000 | 288,600 |
| Trimas Corp., 9.875%, 6/15/2012 | 545,000 | 547,725 |
| United States Steel LLC, 9.75%, 5/15/2010 | 910,000 | 960,050 |
| US Can Corp., Series B, 12.375%, 10/1/2010 | 360,000 | 301,500 |
24,243,893 | ||
| Telecommunication Services 4.0% | ||
| ACC Escrow Corp., 144A, 10.0%, 8/1/2011 | 1,355,000 | 1,476,950 |
| Alamosa Delaware, Inc., 13.625%, 8/15/2011 | 75,000 | 72,000 |
| Alamosa Holdings, Inc., Step-up Coupon, 0% to 2/15/2005, 12.875% to 2/15/2010 | 90,000 | 70,200 |
| American Tower Corp., 9.375%, 2/1/2009 | 985,000 | 1,034,250 |
| American Tower Escrow Corp., Zero Coupon, 8/1/2008 | 555,000 | 380,175 |
| Century Communications Corp., 8.75%, 10/1/2007* | 225,000 | 181,125 |
| Cincinnati Bell, Inc.: | ||
144A, 7.25%, 7/15/2013 | 220,000 | 224,400 |
144A, 8.375%, 1/15/2014 | 820,000 | 845,625 |
| Crown Castle International Corp., 9.375%, 8/1/2011 | 690,000 | 755,550 |
| Dobson Communications Corp., 144A, 8.875%, 10/1/2013 | 565,000 | 573,475 |
| Insight Midwest: | ||
9.75%, 10/1/2009 | 455,000 | 464,100 |
10.5%, 11/1/2010 | 450,000 | 470,250 |
| LCI International, Inc., 7.25%, 6/15/2007 | 490,000 | 441,000 |
| Level 3 Communications, Inc.: | ||
11.0%, 3/15/2008 | 375,000 | 363,750 |
Step-up Coupon, 0% to 12/01/2003, 10.5% to 12/01/2008 | 290,000 | 266,800 |
| Level 3 Financing, Inc., 144A, 10.75%, 10/15/2011 | 445,000 | 462,800 |
| Nextel Communications, Inc.: 6.875%, 10/31/2013 | 670,000 | 679,213 |
9.5%, 2/1/2011 | 885,000 | 997,838 |
| Nextel Partners, Inc.: | ||
144A, 8.125%, 7/1/2011 | 875,000 | 899,063 |
11.0%, 3/15/2010 | 290,000 | 321,175 |
12.5%, 11/15/2009 | 95,000 | 110,200 |
| Nortel Networks Corp., 7.4%, 6/15/2006 | 195,000 | 204,750 |
| Qwest Corp.: | ||
5.625%, 11/15/2008 | 1,455,000 | 1,425,900 |
7.25%, 9/15/2025 | 530,000 | 498,200 |
| Qwest Services Corp.: | ||
144A, 13.5%, 12/15/2010 | 390,000 | 455,325 |
144A, 14.0%, 12/15/2014 | 1,299,000 | 1,584,780 |
| Rural Cellular Corp., 144A, 9.875%, 2/1/2010 | 445,000 | 443,888 |
| Shaw Communications, Inc., 8.25%, 4/11/2010 | 330,000 | 364,650 |
| Triton PCS, Inc., 8.5%, 6/1/2013 | 130,000 | 136,825 |
| Western Wireless Corp., 144A, 9.25%, 7/15/2013 | 335,000 | 350,075 |
16,554,332 | ||
| Utilities 2.1% | ||
| AES Corp., 144A, 9.0%, 5/15/2015 | 255,000 | 272,850 |
| Calpine Corp., 144A, 8.5%, 7/15/2010 | 1,780,000 | 1,628,700 |
| CMS Energy Corp.: | ||
7.5%, 1/15/2009 | 1,030,000 | 1,048,025 |
144A, 7.75%, 8/1/2010 | 450,000 | 457,875 |
8.5%, 4/15/2011 | 1,085,000 | 1,133,825 |
8.9%, 7/15/2008 | 160,000 | 168,800 |
| El Paso Corp., 7.375%, 12/15/2012 | 600,000 | 495,000 |
| El Paso Production Holding Corp., 144A, 7.75%, 6/1/2013 | 1,175,000 | 1,128,000 |
| MSW Energy Holdings/Finance, 144A, 8.5%, 9/1/2010 | 220,000 | 235,400 |
| PG&E Corp., 144A, 6.875%, 7/15/2008 | 320,000 | 339,200 |
| Reliant Resources, Inc.: | ||
144A, 9.25%, 7/15/2010 | 390,000 | 349,050 |
144A, 9.5%, 7/15/2013 | 115,000 | 102,350 |
| Sonat, Inc., 7.625%, 7/15/2011 | 470,000 | 395,975 |
| TNP Enterprises, Inc., Series B, 10.25%, 4/1/2010 | 710,000 | 749,050 |
| Western Resources, Inc., 9.75%, 5/1/2007 | 265,000 | 301,741 |
8,805,841 | ||
| Total Corporate Bonds (Cost $155,390,010) | 154,498,689 | |
Foreign Bonds - US$ Denominated 13.6% | ||
| Antenna TV SA, 9.0%, 8/1/2007 | 330,000 | 320,100 |
| Avecia Group PLC, 11.0%, 7/1/2009 | 460,000 | 427,800 |
| Banque Cent de Tunisie, 8.25%, 9/19/2027 | 200,000 | 216,500 |
| Biovail Corp., 7.875%, 4/1/2010 | 520,000 | 510,900 |
| Burns, Philp & Co., Ltd.: | ||
144A, 9.5%, 11/15/2010 | 70,000 | 73,500 |
144A, 9.75%, 7/15/2012 | 575,000 | 586,500 |
144A, 10.75%, 2/15/2011 | 60,000 | 63,300 |
| Conproca SA de CV, 12.0%, 6/16/2010 | 395,000 | 501,650 |
| Corp Durango SA, 144A, 13.75%, 7/15/2009* | 345,000 | 203,550 |
| Crown Euro Holdings SA, 10.875%, 3/1/2013 | 645,000 | 735,300 |
| Eircom Funding, 144A, 8.25%, 8/15/2013 | 465,000 | 505,688 |
| Esprit Telecom Group PLC: | ||
10.875%, 6/15/2008* | 800,000 | 80 |
11.5%, 12/15/2007* | 2,345,000 | 235 |
| Fage Dairy Industry SA, 9.0%, 2/1/2007 | 885,000 | 885,000 |
| Federal Republic of Brazil, 10.0%, 8/7/2011 | 370,000 | 377,400 |
| Federative Republic of Brazil: | ||
8.875%, 4/15/2024 | 650,000 | 549,250 |
10.125%, 5/15/2027 | 700,000 | 658,000 |
C Bond, 8.0%, 4/15/2014 | 1,717,817 | 1,608,307 |
Floating Rate Bond, LIBOR plus .875%, 2.204%, 4/15/2009 | 711,788 | 651,286 |
Floating Rate Bond, LIBOR plus .875%, 2.204%, 4/15/2012 | 1,500,000 | 1,266,563 |
| Gerdau Ameristeel Corp., 144A, 10.375%, 7/15/2011 | 260,000 | 271,700 |
| Grupo Elektra SA de CV, 12.0%, 4/1/2008 | 420,000 | 448,350 |
| Grupo Iusacell SA de CV, Series B, 10.0%, 7/15/2004* | 105,000 | 63,525 |
| Innova S de R.L.: | ||
144A, 9.375%, 9/19/2013 | 680,000 | 685,100 |
12.875%, 4/1/2007 | 277,987 | 286,326 |
| Ivory Coast, Series YR20, 2.0%, 3/29/2018* | 430,000 | 75,250 |
| LeGrand SA, 8.5%, 2/15/2025 | 330,000 | 346,500 |
| Luscar Coal Ltd., 9.75%, 10/15/2011 | 400,000 | 451,000 |
| Millicom International Cellular SA, 144A, 13.5%, 6/1/2006 | 274,000 | 280,165 |
| Mobifon Holdings BV, 144A, 12.5%, 7/31/2010 | 735,000 | 810,338 |
| Mobile Telesystems Financial, 144A, 8.375%, 10/14/2010 | 445,000 | 438,325 |
| Nigeria Promissory Notes, Series RC, 5.092%, 1/5/2010 | 308,241 | 264,250 |
| Nortel Networks Corp., 6.125%, 2/15/2006 | 755,000 | 772,931 |
| OAO Gazprom, 144A, 9.625%, 3/1/2013 | 830,000 | 900,550 |
| Petro Mexicanos, 8.625%, 12/1/2023 | 100,000 | 107,750 |
| Petroliam Nasional Berhad, 7.75%, 8/15/2015 | 840,000 | 980,280 |
| Petronas Capital Ltd., 7.0%, 5/22/2012 | 800,000 | 892,400 |
| PTC International Finance II SA, 11.25%, 12/1/2009 | 235,000 | 256,738 |
| Republic of Algeria, Floating Rate Debt Conversion Bond, LIBOR plus .8125%, 2.063%, 3/4/2010 | 845,000 | 813,313 |
| Republic of Argentina: | ||
9.75%, 9/19/2027* | 1,100,000 | 302,500 |
11.375%, 3/15/2010* | 1,050,000 | 286,125 |
11.375%, 3/15/2010* | 2,700,000 | 735,750 |
11.375%, 3/15/2010* | 400,000 | 109,000 |
12.25%, 6/19/2018* | 424,500 | 110,370 |
| Republic of Bulgaria: | ||
8.25%, 1/15/2015 | 3,370,000 | 3,833,375 |
144A, 8.25%, 1/15/2015 | 155,000 | 176,313 |
| Republic of Ecuador, Step-up Coupon, 7.0% to 8/1/2004, 8.0% to 8/1/2005 | 1,450,000 | 971,500 |
| Republic of El Salvador, 8.25%, 4/10/2032 | 1,530,000 | 1,457,325 |
| Republic of Philippines: | ||
9.375%, 1/18/2017 | 700,000 | 742,875 |
9.5%, 10/21/2024 | 750,000 | 832,500 |
| Republic of Turkey: | ||
10.5%, 1/13/2008 | 290,000 | 332,050 |
11.0%, 1/14/2013 | 1,600,000 | 1,874,000 |
12.375%, 6/15/2009 | 1,620,000 | 2,004,750 |
| Republic of Uruguay: | ||
7.5%, 3/15/2015 | 620,000 | 480,500 |
7.875%, 1/15/2033 | 320,000 | 214,400 |
| Republic of Venezuela: | ||
5.375%, 8/7/2010 | 2,100,000 | 1,554,000 |
9.25%, 9/15/2027 | 255,000 | 205,275 |
10.75%, 9/19/2013 | 1,050,000 | 992,250 |
144A, 10.75%, 9/19/2013 | 105,000 | 99,225 |
Series A, Collateralized Par Bond, 6.75%, 3/31/2020 | 1,250,000 | 1,076,563 |
Series DL, Floating Rate Debt Conversion Bond, LIBOR plus .875%, 1.875%, 12/18/2007 | 99 | 92 |
| Royal Caribbean Cruises Ltd., 7.5%, 10/15/2027 | 355,000 | 330,150 |
| Russian Federation: | ||
12.75%, 6/24/2028 | 400,000 | 629,000 |
Step-up Coupon, 5.0% to 3/31/2007, 7.5% to 3/31/2030 | 3,720,000 | 3,472,620 |
| Russian Ministry of Finance: | ||
Series VI, 3.0%, 5/14/2006 | 1,300,000 | 1,254,500 |
3.0%, 5/14/2011 | 1,600,000 | 1,223,200 |
| Telus Corp., 8.0%, 6/1/2011 | 390,000 | 448,371 |
| Tembec Industries, Inc., 144A, 8.5%, 2/1/2011 | 1,330,000 | 1,283,450 |
| TFM SA de CV: | ||
10.25%, 6/15/2007 | 1,795,000 | 1,830,900 |
11.75%, 6/15/2009 | 50,000 | 50,375 |
12.5%, 6/15/2012 | 535,000 | 588,500 |
| Tyco International Group SA: | ||
6.375%, 10/15/2011 | 1,270,000 | 1,320,800 |
6.75%, 2/15/2011 | 240,000 | 255,300 |
| Ukraine Government: | ||
144A, 7.65%, 6/11/2013 | 425,000 | 421,281 |
7.65%, 6/11/2013 | 1,600,000 | 1,586,000 |
| United Mexican States, 8.0%, 9/24/2022 | 2,500,000 | 2,718,750 |
| Vicap SA, 11.375%, 5/15/2007 | 590,000 | 572,300 |
| Vitro SA de CV, 144A, 11.75%, 11/1/2013 | 390,000 | 377,325 |
| Vivendi Universal SA: | ||
144A, 6.25%, 7/15/2008 | 875,000 | 914,375 |
144A, 9.25%, 4/15/2010 | 415,000 | 482,438 |
| Yell Finance BV, Step-up Coupon, 0% to 8/1/2006, 13.5% to 8/1/2011 | 182,000 | 165,620 |
| Total Foreign Bonds - US$ Denominated (Cost $59,187,217) | 57,601,693 | |
Foreign Bonds - Non US$ Denominated 17.6% | ||
| Banque Cent de Tunisie, 6.25%, 2/20/2013 EUR | 430,000 | 518,578 |
| EMI Group PLC, 144A, 8.625%, 10/15/2013 EUR | 265,000 | 316,485 |
| Hellenic Republic, 4.6%, 5/20/2013 EUR | 17,250,000 | 20,225,384 |
| Huntsman International LLC, 10.125%, 7/1/2009 EUR | 90,000 | 90,789 |
| Ispat Europe Group SA, 11.875%, 2/1/2011 EUR | 820,000 | 950,790 |
| Kingdom of Spain, 6.0%, 1/31/2008 EUR | 16,000,000 | 20,377,510 |
| Mexican Fixed Rate Bonds, Series M10, 10.5%, 7/14/2011 MXP | 10,400,000 | 1,082,751 |
| Province of Ontario, 1.875%, 1/25/2010 JPY | 875,000,000 | 8,426,722 |
| Republic of Argentina: | ||
7.5%, 5/23/2049* EUR | 1,400,353 | 389,690 |
8.0%, 2/26/2008* EUR | 500,000 | 136,356 |
12.0%, 9/19/2016* EUR | 204,517 | 56,320 |
| Republic of Italy, 10.5%, 4/28/2014 GBP | 7,450,000 | 17,748,745 |
| Republic of Romania, 8.5%, 5/8/2012 EUR | 1,920,000 | 2,579,321 |
| Ukraine Government, 10.0%, 3/15/2007 EUR | 744,808 | 932,692 |
| Total Foreign Bonds - Non US$ Denominated (Cost $70,292,608) | 73,832,133 | |
Credit Linked Note 3.8% | ||
| JP Morgan Hydi-100, 8.0%, 6/20/2008 (Cost $16,315,200) | 15,840,000 | 16,176,600 |
US Treasury Obligations 20.9% | ||
| US Treasury Bond: | ||
5.375%, 2/15/2031 | 6,290,000 | 6,500,073 |
6.25%, 8/15/2023 | 8,600,000 | 9,705,908 |
7.25%, 5/15/2016 | 9,075,000 | 11,246,266 |
12.0%, 8/15/2013 | 2,880,000 | 3,996,786 |
12.75%, 11/15/2010 (d) | 6,100,000 | 7,404,827 |
| US Treasury Note: | ||
4.75%, 11/15/2008 | 15,500,000 | 16,563,207 |
6.125%, 8/15/2007 | 7,100,000 | 7,956,991 |
6.5%, 8/15/2005 | 22,300,000 | 24,173,713 |
| US Treasury STRIP, Principal Only, 4.656%, 8/15/2013 | 395,000 | 251,694 |
| Total US Treasury Obligations (Cost $88,090,219) | 87,799,465 | |
US Agency Obligation 1.6% | ||
| Federal Home Loan Mortgage Corp., 5.875%, 3/21/2011 (Cost $7,196,880) | 6,300,000 | 6,737,100 |
| Value ($) | |
Common Stocks 0.1% | ||
| ACP Holding Co. 144A* | 53,227 | 26,613 |
| Catalina Restaurant Group, Inc. * | 4,239 | 6,782 |
| ICG Communications, Inc. (New)* | 4,043 | 29,514 |
| ICG Communications, Inc.* | 4,026 | 40 |
| IMPSAT Fiber Networks, Inc.* | 18,652 | 155,744 |
| MEDIQ, Inc. 144A* | 2,486 | 249 |
| XO Communications, Inc.* | 2,188 | 11,706 |
| XO Communications, Inc. (Rights)* | 24,649 | 8,627 |
| Total Common Stocks (Cost $5,005,934) | 239,275 | |
Warrants 0.0% | ||
| ACP Holding Co. 144A* | 47,949 | 18,796 |
| DeCrane Aircraft Holdings, Inc.* | 2,740 | 27 |
| Destia Communications, Inc.* | 1,425 | 0 |
| Empire Gas Corp.* | 2,208 | 0 |
| ICG Communications, Inc.* | 2,808 | 403 |
| Mariner Health Care, Inc.* | 2,781 | 681 |
| Republic Technologies International LLC* | 2,780 | 0 |
| Waxman Industries, Inc.* | 222,607 | 0 |
| XO Communications, Inc., Series A* | 4,376 | 7,002 |
| XO Communications, Inc., Series B* | 3,282 | 4,677 |
| XO Communications, Inc., Series C* | 3,282 | 3,151 |
| Total Warrants (Cost $2,877,120) | 34,737 | |
Preferred Stocks 0.3% | ||
| CSC Holdings, Inc. | 1,785 | 186,979 |
| Paxson Communications Corp. | 85 | 799,000 |
| TNP Enterprises, Inc. | 2,334 | 229,853 |
| Total Preferred Stocks (Cost $1,180,417) | 1,215,832 | |
Convertible Preferred Stocks 0.2% | ||
| Hercules Trust II | 1,105 | 716,167 |
| World Access, Inc. "D"* | 933 | 0 |
| Total Convertible Preferred Stocks (Cost $2,077,650) | 716,167 | |
Principal Amount ($)(c) | Value ($) | |
Convertible Bonds 0.8% | ||
| Aether Systems, 6.0%, 3/22/2005* | 180,000 | 176,400 |
| Aristocrat Leisure Ltd., 144A, 5.0%, 5/31/2006 | 385,000 | 361,900 |
| Aspen Technology, Inc., 5.25%, 6/15/2005* | 185,000 | 179,450 |
| Conexant Systems, Inc., 4.0%, 2/1/2007* | 225,000 | 201,938 |
| DIMON, Inc., 6.25%, 3/31/2007 | 465,000 | 441,750 |
| Infineon Technologies AG, Series IFX, 4.25%, 2/6/2007 EUR | 450,000 | 495,060 |
| Nortel Networks Corp., 4.25%, 9/1/2008* | 365,000 | 344,779 |
| Parker Drilling Co., 5.5%, 8/1/2004* | 995,000 | 986,344 |
| Total Convertible Bonds (Cost $3,032,161) | 3,187,621 | |
| Value ($) | |
Other 0.1% | ||
| SpinCycle, Inc.* | 105,025 | 611,246 |
| SpinCycle, Inc. "F"* | 737 | 4,289 |
| Total Other (Cost $256,680) | 615,535 | |
| Value ($) | |
Cash Equivalents 1.9% | ||
| Scudder Cash Management QP Trust, 1.07% (b) (Cost $7,945,435) | 7,945,435 | 7,945,435 |
% of Net Assets | Value ($) | |
| Total Investment Portfolio (Cost $418,847,531) (a) | 97.7 | 410,600,282 |
| Other Assets and Liabilities, Net | 2.3 | 9,475,935 |
| Net Assets | 100.0 | 420,076,217 |
* Non-income producing security. In the case of a bond, generally denotes that the issuer has defaulted on the payment of principal or interest.
(a) The cost for federal income tax purposes was $423,044,636. At October 31, 2003, net unrealized depreciation for all securities based on tax cost was $12,444,354. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $14,039,994 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $26,484,348.
(b) Scudder Cash Management QP Trust is also managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.
(c) Principal amount in US dollars unless otherwise noted.
(d) At October 31, 2003, this security has been pledged to cover, in whole or in part, initial margin requirements for open futures contracts.
144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transaction exempt from registration, normally to qualified institutional buyers.
At October 31, 2003, open futures contracts sold were as follows:
Futures | Expiration Date | Contracts | Aggregate Face Value ($) | Value ($) | Unrealized Appreciation (Depreciation) ($) |
| 5 Year CBT US Treasury Note | 12/19/2003 | 613 | 69,424,978 | 68,541,063 | (883,915) |
| 10 Year Canada Bond | 12/18/2003 | 174 | 14,065,894 | 14,271,821 | 205,927 |
| 2 Year CBT US Treasury Note | 12/29/2003 | 178 | 38,496,350 | 38,175,438 | (320,912) |
| Total net unrealized depreciation | (998,900) | ||||
At October 31, 2003, open futures contracts purchased were as follows:
Futures | Expiration Date | Contracts | Aggregate Face Value ($) | Value ($) | Unrealized Appreciation (Depreciation) ($) |
| 10 Year Japan Bond | 12/11/2003 | 57 | 70,435,112 | 71,041,223 | 606,111 |
| Euro Bund | 12/8/2003 | 75 | 9,928,734 | 9,805,019 | (123,715) |
| 10 Year US Treasury Note | 12/19/2003 | 114 | 12,409,762 | 12,801,844 | 392,082 |
| Total net unrealized appreciation | 874,478 | ||||
Currency Abbreviation | |||
| EUR | Euro | JPY | Japanese Yen |
| MXP | Mexican Peso | GBP | British Pounds |
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities as of October 31, 2003 | |
| Assets | |
| Investments: Investments in securities, at value (cost $410,902,096) | $ 402,654,847 |
| Investment in Scudder Cash Management QP Trust (cost $7,945,435) | 7,945,435 |
| Total investments in securities, at value (cost $418,847,531) | 410,600,282 |
| Cash | 20,917 |
| Foreign currency, at value (cost $57,872) | 57,582 |
| Receivable for investments sold | 7,816,537 |
| Interest receivable | 9,626,997 |
| Receivable for Fund shares sold | 367,630 |
| Foreign taxes recoverable | 1,969 |
| Unrealized appreciation on forward foreign currency exchange contracts | 265,914 |
| Total assets | 428,757,828 |
| Liabilities | |
| Payable for investments purchased | 7,098,475 |
| Payable for Fund shares redeemed | 471,906 |
| Payable for daily variation margin on open futures contracts | 223,047 |
| Unrealized depreciation on forward foreign currency exchange contracts | 435,566 |
| Accrued management fee | 199,896 |
| Other accrued expenses and payables | 252,721 |
| Total liabilities | 8,681,611 |
| Net assets, at value | $ 420,076,217 |
| Net Assets | |
| Net assets consist of: Undistributed net investment income | 171,110 |
| Net unrealized appreciation (depreciation) on: Investments | (8,247,249) |
| Futures | (124,422) |
| Foreign currency related transactions | (109,742) |
| Accumulated net realized gain (loss) | (112,500,553) |
| Paid-in capital | 540,887,073 |
| Net assets, at value | $ 420,076,217 |
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities as of October 31, 2003 (continued) | |
| Net Asset Value | |
| Class A Net Asset Value and redemption price per share ($329,018,231 / 72,638,919 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized) | $ 4.53 |
| Maximum offering price per share (100 / 95.5 of $4.53) | $ 4.74 |
| Class B Net Asset Value, offering and redemption price (subject to contingent deferred sales charge) per share ($71,316,902 / 15,761,465 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized) | $ 4.52 |
| Class C Net Asset Value and redemption price (subject to contingent deferred sales charge) per share ($19,741,084 / 4,332,571 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized) | $ 4.56 |
| Maximum offering price per share (100 / 99.00 of $4.56) | $ 4.61 |
The accompanying notes are an integral part of the financial statements.
Statement of Operations for the year ended October 31, 2003 | |
| Investment Income | |
| Income: Dividends | $ 117,200 |
| Interest (net of foreign taxes withheld of $23) | 29,816,027 |
| Interest - Scudder Cash Management QP Trust | 152,015 |
| Total Income | 30,085,242 |
| Expenses: Management fee | 2,363,899 |
| Administrative fee | 1,251,812 |
| Services to shareholders | 74,121 |
| Distribution service fees | 1,648,413 |
| Trustees' fees and expenses | 32,522 |
| Other | 38,265 |
| Total expenses, before expense reductions | 5,409,032 |
| Expense reductions | (2,334) |
| Total expenses, after expense reductions | 5,406,698 |
| Net investment income | 24,678,544 |
| Realized and Unrealized Gain (Loss) on Investment Transactions | |
| Net realized gain (loss) from: Investments | (15,265,588) |
| Futures | 1,746,942 |
| Foreign currency related transactions | (6,406,801) |
| (19,925,447) | |
| Net unrealized appreciation (depreciation) during the period on: Investments | 66,312,589 |
| Futures | (259,671) |
| Foreign currency related transactions | 285,980 |
| 66,338,898 | |
| Net gain (loss) on investment transactions | 46,413,451 |
| Net increase (decrease) in net assets resulting from operations | $ 71,091,995 |
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Net Assets | ||
Years Ended October 31, | ||
| Increase (Decrease) in Net Assets | 2003 | 2002 |
| Operations: Net investment income | $ 24,678,544 | $ 31,010,043 |
| Net realized gain (loss) on investment transactions | (19,925,447) | (43,851,097) |
| Net unrealized appreciation (depreciation) on investment transactions during the period | 66,338,898 | 23,605,577 |
| Net increase (decrease) in net assets resulting from operations | 71,091,995 | 10,764,523 |
| Distributions to shareholders from: Net investment income: Class A | (6,871,503) | (18,225,848) |
| Class B | (1,462,167) | (4,862,479) |
| Class C | (349,565) | (881,248) |
| Tax return of capital: Class A | (15,461,203) | (8,400,195) |
| Class B | (3,289,942) | (2,241,091) |
| Class C | (786,536) | (406,163) |
| Fund share transactions: Proceeds from shares sold | 99,273,790 | 92,735,397 |
| Reinvestment of distributions | 18,557,361 | 22,451,133 |
| Cost of shares redeemed | (137,586,945) | (132,594,464) |
| Net increase (decrease) in net assets from Fund share transactions | (19,755,794) | (17,407,934) |
| Increase (decrease) in net assets | 23,115,285 | (41,660,435) |
| Net assets at beginning of period | 396,960,932 | 438,621,367 |
| Net assets at end of period (including undistributed net investment income of $171,110 and $483,352, respectively) | $ 420,076,217 | $ 396,960,932 |
The accompanying notes are an integral part of the financial statements.
Class A | |||||
Years Ended October 31, | 2003 | 2002a | 2001 | 2000 | 1999 |
| Selected Per Share Data | |||||
| Net asset value, beginning of period | $ 4.08 | $ 4.33 | $ 4.57 | $ 5.26 | $ 5.60 |
| Income (loss) from investment operations: Net investment income (loss)b | .27 | .32 | .39 | .48 | .49 |
| Net realized and unrealized gain (loss) on investment transactions | .49 | (.21) | (.20) | (.72) | (.35) |
Total from investment operations | .76 | .11 | .19 | (.24) | .14 |
| Less distributions from: Net investment income | (.10) | (.25) | (.34) | (.34) | (.48) |
| Tax return of capital | (.21) | (.11) | (.09) | (.11) | - |
Total distributions | (.31) | (.36) | (.43) | (.45) | (.48) |
| Net asset value, end of period | $ 4.53 | $ 4.08 | $ 4.33 | $ 4.57 | $ 5.26 |
| Total Return (%)c | 19.05 | 2.38 | 4.47 | (4.91) | 2.43 |
| Ratios to Average Net Assets and Supplemental Data | |||||
| Net assets, end of period ($ millions) | 329 | 300 | 322 | 359 | 492 |
| Ratio of expenses before expense reductions (%) | 1.12 | 1.12 | 1.21d | 1.10 | 1.11 |
| Ratio of expenses after expense reductions (%) | 1.12 | 1.12 | 1.19d | 1.09 | 1.10 |
| Ratio of net investment income (loss) (%) | 6.11 | 7.54 | 8.78 | 9.55 | 8.80 |
| Portfolio turnover rate (%) | 180 | 86 | 124 | 37 | 92 |
| a As required, effective November 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of these changes for the year ended October 31, 2002 was to decrease net investment income by $.02, increase net realized and unrealized gain (loss) per share by $.02, and decrease the ratio of net investment income to average net assets from 8.04% to 7.54%. Per share data and ratios for periods prior to November 1, 2001 have not been restated to reflect this change in presentation. b Based on average shares outstanding during the period. c Total return does not reflect the effect of any sales charges. d The ratios of operating expenses excluding costs incurred in connection with a fund complex reorganization before and after expense reductions were 1.18% and 1.18%, respectively. | |||||
Class B | |||||
Years Ended October 31, | 2003 | 2002a | 2001 | 2000 | 1999 |
| Selected Per Share Data | |||||
| Net asset value, beginning of period | $ 4.08 | $ 4.33 | $ 4.57 | $ 5.26 | $ 5.59 |
| Income (loss) from investment operations: Net investment income (loss)b | .23 | .29 | .35 | .43 | .43 |
| Net realized and unrealized gain (loss) on investment transactions | .48 | (.21) | (.21) | (.72) | (.34) |
Total from investment operations | .71 | .08 | .14 | (.29) | .09 |
| Less distributions from: Net investment income | (.08) | (.23) | (.30) | (.30) | (.42) |
| Tax return of capital | (.19) | (.10) | (.08) | (.10) | - |
Total distributions | (.27) | (.33) | (.38) | (.40) | (.42) |
| Net asset value, end of period | $ 4.52 | $ 4.08 | $ 4.33 | $ 4.57 | $ 5.26 |
| Total Return (%)c | 18.08 | 1.77 | 3.20 | (5.85) | 1.57 |
| Ratios to Average Net Assets and Supplemental Data | |||||
| Net assets, end of period ($ millions) | 71 | 82 | 100 | 119 | 198 |
| Ratio of expenses before expense reductions (%) | 1.94 | 1.94 | 2.22d | 2.11 | 2.06 |
| Ratio of expenses after expense reductions (%) | 1.94 | 1.94 | 2.22d | 2.10 | 2.05 |
| Ratio of net investment income (loss) (%) | 5.29 | 6.73 | 7.75 | 8.50 | 7.85 |
| Portfolio turnover rate (%) | 180 | 86 | 124 | 37 | 92 |
| a As required, effective November 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of these changes for the year ended October 31, 2002 was to decrease net investment income by $.02, increase net realized and unrealized gain (loss) per share by $.02, and decrease the ratio of net investment income to average net assets from 7.23% to 6.73%. Per share data and ratios for periods prior to November 1, 2001 have not been restated to reflect this change in presentation. b Based on average shares outstanding during the period. c Total return does not reflect the effect of any sales charges. d The ratios of operating expenses excluding costs incurred in connection with a fund complex reorganization before and after expense reductions were 2.19% and 2.19%, respectively. | |||||
Class C | |||||
Years Ended October 31, | 2003 | 2002a | 2001 | 2000 | 1999 |
| Selected Per Share Data | |||||
| Net asset value, beginning of period | $ 4.11 | $ 4.36 | $ 4.60 | $ 5.29 | $ 5.62 |
| Income (loss) from investment operations: Net investment income (loss)b | .24 | .29 | .37 | .45 | .45 |
| Net realized and unrealized gain (loss) on investment transactions | .49 | (.20) | (.21) | (.72) | (.34) |
Total from investment operations | .73 | .09 | .16 | (.27) | .11 |
| Less distributions from: Net investment income | (.09) | (.23) | (.31) | (.32) | (.44) |
| Tax return of capital | (.19) | (.11) | (.09) | (.10) | - |
Total distributions | (.28) | (.34) | (.40) | (.42) | (.44) |
| Net asset value, end of period | $ 4.56 | $ 4.11 | $ 4.36 | $ 4.60 | $ 5.29 |
| Total Return (%)c | 18.20 | 2.00 | 3.55 | (5.51) | 1.78 |
| Ratios to Average Net Assets and Supplemental Data | |||||
| Net assets, end of period ($ millions) | 20 | 15 | 16 | 19 | 30 |
| Ratio of expenses before expense reductions (%) | 1.79 | 1.76 | 1.87d | 1.76 | 1.87 |
| Ratio of expenses after expense reductions (%) | 1.79 | 1.76 | 1.84d | 1.75 | 1.85 |
| Ratio of net investment income (loss) (%) | 5.44 | 6.90 | 8.13 | 8.87 | 8.05 |
| Portfolio turnover rate (%) | 180 | 86 | 124 | 37 | 92 |
| a As required, effective November 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. The effect of these changes for the year ended October 31, 2002 was to decrease net investment income by $.02, increase net realized and unrealized gain (loss) per share by $.02, and decrease the ratio of net investment income to average net assets from 7.40% to 6.90%. Per share data and ratios for periods prior to November 1, 2001 have not been restated to reflect this change in presentation. b Based on average shares outstanding during the period. c Total return does not reflect the effect of any sales charges. d The ratios of operating expenses excluding costs incurred in connection with a fund complex reorganization before and after expense reductions were 1.83% and 1.83%, respectively. | |||||
A. Significant Accounting Policies
Scudder Strategic Income Fund (the ``Fund'') is registered under the Investment Company Act of 1940, as amended (the ``1940 Act''), as an open-end, diversified management investment company organized as a Massachusetts business trust.
The Fund offers multiple classes of shares which provide investors with different purchase options. Class A shares are offered to investors subject to an initial sales charge. Class B shares are offered without an initial sales charge but are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions. Class B shares automatically convert to Class A shares six years after issuance. Class C shares are offered to investors subject to an initial sales charge and are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions within one year of purchase. Prior to February 3, 2003, Class C shares were offered without an initial sales charge. Class C shares do not convert into another class. Class I shares (none sold through October 31, 2003) are offered to a limited group of investors, are not subject to initial or contingent deferred sales charges and have lower ongoing expenses than other classes.
Investment income, realized and unrealized gains and losses, and certain fund-level expenses and expense reductions, if any, are borne pro rata on the basis of relative net assets by the holders of all classes of shares, except that each class bears certain expenses unique to that class such as distribution service fees, administrative fees and certain other class-specific expenses. Differences in class-level expenses may result in payment of different per share dividends by class. All shares of the Fund have equal rights with respect to voting subject to class-specific arrangements.
The Fund's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require the use of management estimates. Actual results could differ from those estimates. The policies described below are followed consistently by the Fund in the preparation of its financial statements.
Security Valuation. Investments are stated at value determined as of the close of regular trading on the New York Stock Exchange on each day the exchange is open for trading. Debt securities are valued by independent pricing services approved by the Trustees of the Fund. If the pricing services are unable to provide valuations, securities are valued at the most recent bid quotation or evaluated price, as applicable, obtained from one or more broker-dealers. Such services may use various pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other data, as well as broker quotes.
Equity securities are valued at the most recent sale price reported on the exchange (US or foreign) or over-the-counter market on which the security is traded most extensively. Securities for which no sales are reported are valued at the calculated mean between the most recent bid and asked quotations on the relevant market or, if a mean cannot be determined, at the most recent bid quotation.
Money market instruments purchased with an original or remaining maturity of sixty days or less, maturing at par, are valued at amortized cost. Investments in open-end investment companies and Scudder Cash Management QP Trust are valued at their net asset value each business day.
Securities and other assets for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value are valued in a manner that is intended to reflect their fair value as determined in accordance with procedures approved by the Trustees.
Foreign Currency Translations. The books and records of the Fund are maintained in US dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into US dollars at the prevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses are translated into US dollars at the prevailing exchange rates on the respective dates of the transactions.
Net realized and unrealized gains and losses on foreign currency transactions represent net gains and losses between trade and settlement dates on securities transactions, the disposition of forward foreign currency exchange contracts and foreign currencies, and the difference between the amount of net investment income accrued and the US dollar amount actually received. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed but is included with net realized and unrealized gains and losses on investment securities.
Futures Contracts. A futures contract is an agreement between a buyer or seller and an established futures exchange or its clearinghouse in which the buyer or seller agrees to take or make a delivery of a specific amount of a financial instrument at a specified price on a specific date (settlement date). The Fund may enter into futures contracts as a hedge against anticipated interest rate, currency or equity market changes, and for duration management, risk management and return enhancement purposes.
Upon entering into a futures contract, the Fund is required to deposit with a financial intermediary an amount ("initial margin") equal to a certain percentage of the face value indicated in the futures contract. Subsequent payments ("variation margin") are made or received by the Fund dependent upon the daily fluctuations in the value of the underlying security and are recorded for financial reporting purposes as unrealized gains or losses by the Fund. When entering into a closing transaction, the Fund will realize a gain or loss equal to the difference between the value of the futures contract to sell and the futures contract to buy. Futures contracts are valued at the most recent settlement price.
Certain risks may arise upon entering into futures contracts, including the risk that an illiquid secondary market will limit the Fund's ability to close out a futures contract prior to the settlement date and that a change in the value of a futures contract may not correlate exactly with the changes in the value of the securities or currencies hedged. When utilizing futures contracts to hedge, the Fund gives up the opportunity to profit from favorable price movements in the hedged positions during the term of the contract.
Forward Foreign Currency Exchange Contracts. A forward foreign currency exchange contract ("forward currency contract") is a commitment to purchase or sell a foreign currency at the settlement date at a negotiated rate. The Fund may enter into forward currency contracts in order to hedge its exposure to changes in foreign currency exchange rates on its foreign currency denominated portfolio holdings and to facilitate transactions in foreign currency denominated securities. The Fund may also engage in forward currency contracts for non-hedging purposes.
Forward currency contracts are valued at the prevailing forward exchange rate of the underlying currencies and unrealized gain (loss) is recorded daily. Sales and purchases of forward currency contracts having the same settlement date and broker are offset and any gain (loss) is realized on the date of offset; otherwise, gain (loss) is realized on settlement date. Realized and unrealized gains and losses which represent the difference between the value of a forward currency contract to buy and a forward currency contract to sell are included in net realized and unrealized gain (loss) from foreign currency related transactions.
Certain risks may arise upon entering into forward currency contracts from the potential inability of counterparties to meet the terms of their contracts. Additionally, when utilizing forward currency contracts to hedge, the Fund gives up the opportunity to profit from favorable exchange rate movements during the term of the contract.
Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code, as amended, which are applicable to regulated investment companies, and to distribute all of its taxable income to its shareholders. Accordingly, the Fund paid no federal income taxes and no federal income tax provision was required.
At October 31, 2003, the Fund had a net tax basis capital loss carryforward of approximately $109,116,000 which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until October 31, 2006 ($2,523,000), October 31, 2007 ($18,866,000), October 31, 2008 ($25,665,000), October 31, 2009 ($20,682,000), October 31, 2010 ($38,904,000) and October 31, 2011 ($2,476,000), the respective expiration dates, whichever occurs first.
Distribution of Income and Gains. Distributions of net investment income, if any, are made monthly. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed, and, therefore, will be distributed to shareholders at least annually.
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 securities sold at a loss, premium amortization on debt securities and investments held in partnerships. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.
At October 31, 2003, the Fund's components of distributable earnings (accumulated losses) on a tax-basis were as follows:
| Undistributed ordinary income* | $ - |
| Undistributed net long-term capital gains | $ - |
| Capital loss carryforwards | $ (109,116,000) |
| Net unrealized appreciation (depreciation) on investments | $ (12,444,354) |
In addition, the tax character of distributions paid to shareholders by the Fund are summarized as follows:
Distribution Fee | Years Ended October 31, | |
2003 | 2002 | |
| Distributions from ordinary income | $ 8,683,235 | $ 23,969,575 |
| Distributions from return of capital | $ 19,537,681 | $ 11,047,449 |
* For tax purposes, short-term capital gains distributions are considered ordinary income distributions.
Other. Investment transactions are accounted for on a trade date plus one basis for daily net asset value calculations. However, for financial reporting purposes, investment transactions are reported on trade date. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date net of foreign withholding taxes. Certain dividends from foreign securities may be recorded subsequent to the ex-dividend date as soon as the Fund is informed of such dividends. Realized gains and losses from investment transactions are recorded on an identified cost basis. All premiums and discounts are amortized/accreted for financial reporting purposes.
B. Purchases and Sales of Securities
During the year ended October 31, 2003, purchases and sales of investment securities (excluding short-term investments and US Treasury securities) aggregated $574,966,047 and $658,212,843, respectively. Purchases and sales of US Treasury securities aggregated $138,248,857 and $83,775,595, respectively.
C. Related Parties
Management Agreement. Under the Management Agreement with Deutsche Investment Management Americas Inc. ("DeIM" or the "Advisor"), the Advisor directs the investments of the Fund in accordance with its investment objectives, policies and restrictions. The Advisor determines the securities, instruments and other contracts relating to investments to be purchased, sold or entered into by the Fund. In addition to portfolio management services, the Advisor provides certain administrative services in accordance with the Management Agreement. The management fee payable under the Management Agreement is equal to an annual rate of 0.58% of the first $250,000,000 of the Fund's average daily net assets, 0.55% of the next $750,000,000 of such net assets, 0.53% of the next $1,500,000,000 of such net assets, 0.51% of the next $2,500,000,000 of such net assets, 0.48% of the next $2,500,000,000 of such net assets, 0.46% of the next $2,500,000,000 of such net assets, 0.44% of the next $2,500,000,000 of such net assets and 0.42% of such net assets in excess of $12,500,000,000, computed and accrued daily and payable monthly. Accordingly, for the year ended October 31, 2003, the fee pursuant to the Management Agreement was equivalent to an annual effective rate of 0.57% of the Fund's average daily net assets. Deutsche Asset Management Investment Services Ltd. ("DeAMIS"), an affiliate of the Advisor, serves as subadvisor with respect to the investment and reinvestment of assets in the Fund.
Administrative Fee. Under the Administrative Agreement (the "Administrative Agreement"), the Advisor provides or pays others to provide substantially all of the administrative services required by the Fund (other than those provided by the Advisor under its Management Agreement with the Fund, as described above) in exchange for the payment by each class of the Fund of an administrative services fee (the "Administrative Fee") of 0.325%, 0.375% and 0.200% of the average daily net assets for Class A, B and C shares, respectively, computed and accrued daily and payable monthly.
For the period from November 1, 2002 through September 30, 2003, the Administrative Fee was as follows:
Administrative Fee | Total Aggregated |
| Class A | $ 950,843 |
| Class B | 268,434 |
| Class C | 32,535 |
$ 1,251,812 |
The Administrative Agreement between the Advisor and the Fund terminated September 30, 2003 and the Fund will directly bear the cost of those expenses formerly covered under the Administrative Agreement.
Effective October 1, 2003 through September 30, 2005, the Advisor has agreed to contractually waive all or a portion of its management fee and reimburse or pay certain operating expenses of the Fund to the extent necessary to maintain the operating expenses of each class at 1.05% of average daily net assets for Class A, B and C shares, respectively (excluding certain expenses such as Rule 12b-1 and/or service fees, trustees and trustee counsel fees, extraordinary expenses, taxes, brokerage and interest).
Service Provider Fees. Scudder Investments Service Company ("SISC"), an affiliate of the Advisor, is the Fund's transfer, dividend-paying agent and shareholder service agent. Pursuant to a subtransfer agency agreement between SISC and DST Systems, Inc. ("DST"), SISC has delegated certain transfer agent and dividend paying agent functions to DST. The costs and expenses of such delegation are borne by SISC, not by the Fund. For the period October 1, 2003 through October 31, 2003, the amount charged to the Fund by SISC aggregated $74,090, all of which is unpaid at October 31, 2003.
Prior to September 30, 2003, the fees outlined above were paid by the Advisor in accordance with the Administrative Agreement.
Distribution Service Agreement. Under the Distribution Service Agreement, in accordance with Rule 12b-1 under the 1940 Act, Scudder Distributors, Inc. ("SDI"), a subsidiary of the Advisor, receives a fee ("Distribution Fee") of 0.75% of average daily net assets of Class B and C shares. Pursuant to the agreement, SDI enters into related selling group agreements with various firms at various rates for sales of Class B and C shares. For the year ended October 31, 2003, the Distribution Fee was as follows:
Distribution Fee | Total Aggregated | Unpaid at October 31, 2003 |
| Class B | $ 582,285 | $ 43,987 |
| Class C | 134,478 | 12,421 |
$ 716,763 | $ 56,408 |
In addition, SDI provides information and administrative services ("Service Fee") to Class A, B and C shareholders at an annual rate of up to 0.25% of average daily net assets for each such class. SDI in turn has various agreements with financial services firms that provide these services and pays these fees based upon the assets of shareholder accounts the firms service. For the year ended October 31, 2003, the Service Fee was as follows:
Service Fee | Total Aggregated | Unpaid at October 31, 2003 | Effective Rate |
| Class A | $ 703,161 | $ 66,766 | .22% |
| Class B | 185,023 | 15,332 | .24% |
| Class C | 43,466 | 4,312 | .24% |
$ 931,650 | $ 86,410 |
Underwriting and Contingent Deferred Sales Charge. SDI is the principal underwriter for Class A, B and C shares. Underwriting commissions paid in connection with the distribution of Class A and C shares for the year ended October 31, 2003 aggregated $30,014 and $12, respectively.
In addition, SDI receives any contingent deferred sales charge ("CDSC") from Class B share redemptions occurring within six years of purchase and Class C share redemptions occurring within one year of purchase. There is no such charge upon redemption of any share appreciation or reinvested dividends. The CDSC is based on declining rates ranging from 4% to 1% for Class B and 1% for Class C, of the value of the shares redeemed. For the year ended October 31, 2003, the CDSC for Class B and C shares aggregated $161,533 and $3,237, respectively. A deferred sales charge of up to 1% is assessed on certain redemptions of Class A shares. For the year ended October 31, 2003, SDI received $62.
Trustees' Fees and Expenses. The Fund pays each Trustee not affiliated with the Advisor retainer fees plus specified amounts for attended board and committee meetings.
Scudder Cash Management QP Trust. Pursuant to an Exemptive Order issued by the SEC, the Fund may invest in the Scudder Cash Management QP Trust (the "QP Trust") and other affiliated funds managed by the Advisor. The QP Trust seeks to provide as high a level of current income as is consistent with the preservation of capital and the maintenance of liquidity. The QP Trust does not pay the Advisor a management fee for the affiliated funds' investments in the QP Trust.
D. Expense Off-Set Arrangement
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances were used to reduce a portion of the Fund's custodian expenses. During the year ended October 31, 2003, pursuant to the Administrative Agreement, the Administrative Fee was reduced by $2,334 for custodian credits earned.
E. Line of Credit
The Fund and several other affiliated funds (the ``Participants'') share in a $1.25 billion revolving credit facility administered by J.P. Morgan Chase 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 at the Federal Funds Rate plus 0.5 percent. The Fund may borrow up to a maximum of 33 percent of its net assets under the agreement.
F. Investing in High-Yield Securities
Investing in high-yield securities may involve greater risks and considerations not typically associated with investing in US Government bonds and other high quality fixed-income securities. These securities are non-investment grade securities, often referred to as "junk bonds." Economic downturns may disrupt the high-yield market and impair the ability of issuers to repay principal and interest. Also, an increase in interest rates would likely have an adverse impact on the value of such obligations. Moreover, high-yield securities may be less liquid due to the extent that there is no established retail secondary market and because of a decline in the value of such securities.
G. Investing in Emerging Markets
Investing in emerging markets may involve special risks and considerations not typically associated with investing in the United States of America. These risks include revaluation of currencies, high rates of inflation, repatriation restrictions on income and capital, and future adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, delayed settlements and their prices more volatile than those of comparable securities in the United States of America.
H. Forward Foreign Currency Commitments
As of October 31, 2003, the Fund had the following open forward foreign currency exchange contracts:
Contracts to Deliver | In Exchange For | Settlement Date | Net Unrealized Appreciation | ||
| USD | 460,000 | ARA | 1,353,550 | 11/21/2003 | 11,861 |
| USD | 470,000 | ARA | 1,392,375 | 11/21/2003 | 15,395 |
| USD | 470,000 | BRC | 1,449,715 | 11/21/2003 | 31,460 |
| USD | 475,749 | BRC | 1,540,000 | 11/21/2003 | 56,941 |
| USD | 510,000 | COP | 1,473,900,000 | 11/21/2003 | 559 |
| USD | 106,404 | EUR | 97,261 | 12/10/2003 | 6,254 |
| USD | 330,000 | INR | 2,843,940,000 | 11/21/2003 | 3,654 |
| USD | 520,000 | RUB | 16,484,000 | 10/27/2004 | 30,200 |
| USD | 490,000 | TRL | 750,190,000,000 | 11/21/2003 | 9,627 |
| USD | 520,000 | TRL | 785,460,000,000 | 11/21/2003 | 3,116 |
| EUR | 5,145,000 | USD | 5,996,395 | 1/29/2004 | 45,630 |
| USD | 852,307 | ZAR | 6,209,911 | 11/21/2003 | 45,890 |
| USD | 311,433 | ZAR | 2,190,000 | 11/21/2003 | 5,327 |
| Total unrealized appreciation | 265,914 | ||||
Contracts to Deliver | In Exchange For | Settlement Date | Unrealized (Depreciation) | ||
| USD | 165,297 | EUR | 141,400 | 12/10/2003 | (1,512) |
| BRC | 2,989,715 | USD | 927,907 | 11/21/2003 | (106,243) |
| ZAR | 8,400,000 | USD | 1,092,328 | 11/21/2003 | (122,643) |
| EUR | 97,261 | USD | 106,404 | 12/10/2003 | (6,254) |
| EUR | 97,261 | USD | 106,404 | 12/10/2003 | (6,254) |
| EUR | 107,630 | USD | 116,251 | 12/10/2003 | (8,417) |
| EUR | 1,079,556 | USD | 1,204,202 | 12/10/2003 | (46,254) |
| ARA | 1,347,202 | USD | 460,000 | 11/21/2003 | (9,648) |
| EUR | 84,238 | USD | 95,706 | 12/10/2003 | (1,867) |
| EUR | 415,540 | USD | 481,071 | 12/10/2003 | (251) |
| ZAR | 7,130,000 | USD | 1,020,248 | 11/21/2003 | (11,031) |
| GBP | 2,353,905 | USD | 3,883,943 | 1/16/2004 | (86,476) |
| COP | 1,473,900,000 | USD | 510,000 | 11/21/2003 | (559) |
| MXP | 5,316,170 | USD | 470,000 | 11/21/2003 | (11,626) |
| TRL | 750,190,000,000 | USD | 497,210 | 11/21/2003 | (2,417) |
| INR | 2,843,940,000 | USD | 328,210 | 11/21/2003 | (5,444) |
| MXP | 6,000,000 | USD | 541,526 | 11/21/2003 | (2,052) |
| USD | 460,000 | UGP | 12,921,400 | 11/20/2003 | (6,618) |
| Total unrealized depreciation | (435,566) | ||||
Currency Abbreviations | |||||
| ARA | Argentine Pesos | INR | Indian Rupees | USD | US Dollar |
| BRC | Brazilian Cruzeiros | MXP | Mexican Pesos | ZAR | South African Rand |
| COP | Colombian Pesos | RUB | Russian Rubles | ||
| EUR | Euro | TRL | Turkish Lira | ||
| GBP | British Pounds | UGP | Uruguayan Peso | ||
I. Share Transactions
The following table summarizes share and dollar activity in the Fund:
Year Ended October 31, 2003 | Year Ended October 31, 2002 | |||
Shares | Dollars | Shares | Dollars | |
| Shares sold | ||||
| Class A | 16,206,491 | $ 70,571,666 | 15,117,756 | $ 64,083,521 |
| Class B | 4,742,267 | 20,786,178 | 5,381,551 | 22,958,095 |
| Class C | 1,787,554 | 7,915,946 | 1,323,529 | 5,693,781 |
$ 99,273,790 | $ 92,735,397 | |||
| Shares issued to shareholders in reinvestment of distributions | ||||
| Class A | 3,371,804 | $ 14,745,891 | 4,001,069 | $ 17,012,513 |
| Class B | 691,174 | 3,013,350 | 1,057,440 | 4,498,272 |
| Class C | 181,140 | 798,120 | 219,740 | 940,348 |
$ 18,557,361 | $ 22,451,133 | |||
| Shares redeemed | ||||
| Class A | (20,400,596) | $ (88,779,082) | (19,904,717) | $ (84,887,575) |
| Class B | (9,712,491) | (42,613,467) | (9,606,116) | (41,092,484) |
| Class C | (1,408,124) | (6,194,396) | (1,541,528) | (6,614,405) |
$ (137,586,945) | $ (132,594,464) | |||
| Net increase (decrease) | ||||
| Class A | (822,301) | $ (3,461,525) | (785,892) | $ (3,791,541) |
| Class B | (4,279,050) | (18,813,939) | (3,167,125) | (13,636,117) |
| Class C | 560,570 | 2,519,670 | 1,741 | 19,724 |
$ (19,755,794) | $ (17,407,934) | |||
To the Trustees and Shareholders of Scudder Strategic Income Fund:
We have audited the accompanying statement of assets and liabilities, including the investment portfolio, of the Scudder Strategic Income Fund, (the "Fund"), as of October 31, 2003, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2003, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Scudder Strategic Income Fund, at October 31, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States.
Boston, Massachusetts | /s/ Ernst & Young LLP |
Please consult a tax advisor 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.
The following table presents certain information regarding the Trustees and Officers of the fund as of October 31, 2003. Each individual's age is set forth in parentheses after his or her name. Unless otherwise noted, (i) each individual has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each individual is c/o Deutsche Asset Management, 222 South Riverside Plaza, Chicago, Illinois, 60606. Each Trustee's term of office extends until the next shareholder's meeting called for the purpose of electing Trustees and until the election and qualification of a successor, or until such Trustee sooner dies, resigns or is removed as provided in the governing documents of the fund.
Independent Trustees | ||
| Name, Age, Position(s) Held with the Fund and Length of Time Served1 | Principal Occupation(s) During Past 5 Years and Other Directorships Held | Number of Funds in Fund Complex Overseen |
| John W. Ballantine (57) Trustee, 1999-present | Retired; formerly, Executive Vice President and Chief Risk Management Officer, First Chicago NBD Corporation/The First National Bank of Chicago (1996-1998); Executive Vice President and Head of International Banking (1995-1996). Directorships: Enron Corporation (energy trading firm) (effective May 30, 2002); First Oak Brook Bancshares, Inc.; Oak Brook Bank; American Healthways, Inc. (provider of disease and care management services); F.N.B. Corporation (bank holding company); Prisma Energy International (owner and operator of Enron's international energy infrastructure business). | 82 |
| Lewis A. Burnham (70) Trustee, 1977-present | Retired; formerly, Director of Management Consulting, McNulty & Company (1990-1998); prior thereto, Executive Vice President, Anchor Glass Container Corporation. | 82 |
| Donald L. Dunaway (66) Trustee, 1980-present | Retired; formerly, Executive Vice President, A.O. Smith Corporation (diversified manufacturer) (1963-1994). | 82 |
| James R. Edgar (57) Trustee, 1999-present | Distinguished Fellow, University of Illinois, Institute of Government and Public Affairs (1999-present); formerly, Governor, State of Illinois (1991-1999). Directorships: Kemper Insurance Companies; John B. Sanfilippo & Son, Inc. (processor/packager/marketer of nuts, snacks and candy products); Horizon Group Properties, Inc.; Youbet.com (online wagering platform); Alberto-Culver Company (manufactures, distributes and markets health and beauty-care products). | 82 |
| Paul K. Freeman (53) Trustee, 2002-present | President, Cook Street Holdings (consulting); Adjunct Professor, University of Denver; Consultant, World Bank/Inter-American Development Bank; formerly, Project Leader, International Institute for Applied Systems Analysis (1998-2001); Chief Executive Officer, The Eric Group, Inc. (environmental insurance) (1986-1998). | 82 |
| Robert B. Hoffman (66) Trustee, 1981-present | Retired; formerly, Chairman, Harnischfeger Industries, Inc. (machinery for the mining and paper industries) (1999-2000); prior thereto, Vice Chairman and Chief Financial Officer, Monsanto Company (agricultural, pharmaceutical and nutritional/food products) (1994-1999). | 82 |
| Shirley D. Peterson (62) Trustee, 1995-present | Retired; formerly, President, Hood College (1995-2000); prior thereto, Partner, Steptoe & Johnson (law firm); Commissioner, Internal Revenue Service; Assistant Attorney General (Tax), US Department of Justice. Directorships: Federal Mogul Corp. (supplier of automotive components and subsystems); Trustee, Bryn Mawr College; AK Steel (steel production). | 82 |
| Fred B. Renwick (73) Trustee, 1988-present | Retired; Professor Emeritus of Finance, New York University, Stern School of Business (2001-present); formerly, Professor, New York University Stern School of Business (1965-2001). Directorships: The Wartburg Foundation; Chairman, Finance Committee of Morehouse College Board of Trustees; formerly, Director of Board of Pensions, Evangelical Lutheran Church in America; member of the Investment Committee of Atlanta University Board of Trustees; Chair of the Investment Committee, American Bible Society Board of Trustees. | 82 |
| William P. Sommers (70) Trustee, 1979-present | Retired; formerly, President and Chief Executive Officer, SRI International (research and development) (1994-1998); prior thereto, Executive Vice President, lameter (medical information and educational service provider); Senior Vice President and Director, Booz, Allen & Hamilton Inc. (management consulting firm). Directorships: PSI Inc. (satellite engineering and components); Evergreen Solar, Inc. (develop/manufacture solar electric system engines); H2 Gen (manufacture hydrogen generators); Zassi Medical Evolutions, Inc. (specialists in intellectual property opportunities in medical device arena); Guckenheimer Enterprises (executive food services). | 82 |
| John G. Weithers (70) Trustee, 1993-present | Retired; formerly, Chairman of the Board and Chief Executive Officer, Chicago Stock Exchange. Directorships: Federal Life Insurance Company; Chairman of the Members of the Corporation and Trustee, DePaul University; formerly, International Federation of Stock Exchanges; Records Management Systems. | 82 |
Interested Trustees and Officers2 | ||
| Name, Age, Position(s) Held with the Fund and Length of Time Served1 | Principal Occupation(s) During Past 5 Years and Other Directorships Held | Number of Funds in Fund Complex Overseen |
| Richard T. Hale3 (58) Chairman and Trustee, 2002-present Chief Executive Officer, 2003-present | Managing Director, Deutsche Investment Management Americas Inc. (2003-present); Managing Director, Deutsche Bank Securities Inc. (formerly Deutsche Banc Alex. Brown Inc.) and Deutsche Asset Management (1999 to present); Director and President, Investment Company Capital Corp. (registered investment advisor) (1996 to present); Director, Deutsche Global Funds, Ltd. (2000 to present), CABEI Fund (2000 to present), North American Income Fund (2000 to present) (registered investment companies); Director, Scudder Global Opportunities Fund (since 2003); Director/Officer Deutsche/Scudder Mutual Funds (various dates); President, Montgomery Street Income Securities, Inc. (2002 to present) (registered investment companies); Vice President, Deutsche Asset Management, Inc. (2000 to present); formerly, Director, ISI Family of Funds (registered investment companies; 4 funds overseen) (1992-1999) | 201 |
| Brenda Lyons4,7 (40) President, 2003-present | Managing Director, Deutsche Asset Management | n/a |
| Philip J. Collora (57) Vice President and Assistant Secretary, 1986-present | Director, Deutsche Asset Management | n/a |
| Jan C. Faller6 Vice President, 2000-present | Managing Director, Deutsche Asset Management | n/a |
| Daniel O. Hirsch3 (49) Vice President and Assistant Secretary, 2002-present | Managing Director, Deutsche Asset Management (2002-present) and Director, Deutsche Global Funds Ltd. (2002-present); formerly, Director, Deutsche Asset Management (1999-2002); Principal, BT Alex. Brown Incorporated (now Deutsche Bank Securities Inc.) (1998-1999); Assistant General Counsel, United States Securities and Exchange Commission (1993-1998) | n/a |
| Kenneth Murphy4 (40) Vice President, 2002-present | Vice President, Deutsche Asset Management (2000-present); Vice President, Scudder Distributors, Inc. (December 2002-present); formerly, Director, John Hancock Signature Services (1992-2000); Senior Manager, Prudential Mutual Fund Services (1987-1992) | n/a |
| Charles A. Rizzo4 (46) Treasurer and Chief Financial Officer, 2002-present | Director, Deutsche Asset Management (April 2000-present). Formerly, Vice President and Department Head, BT Alex. Brown Incorporated (now Deutsche Bank Securities Inc.) (1998-1999); Senior Manager, Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP) (1993-1998) | n/a |
| Salvatore Schiavone4 (37) Assistant Treasurer, 2003-present | Director, Deutsche Asset Management | n/a |
| Lucinda H. Stebbins4 (57) Assistant Treasurer, 2003-present | Director, Deutsche Asset Management | n/a |
| Kathleen Sullivan D'Eramo4 (46) Assistant Treasurer, 2003-present | Director, Deutsche Asset Management | n/a |
| John Millette4 (41) Secretary, 2001-present | Director, Deutsche Asset Management | n/a |
| Lisa Hertz5 (33) Assistant Secretary, 2003-present | Assistant Vice President, Deutsche Asset Management | n/a |
| Caroline Pearson4 (41) Assistant Secretary, 1998-present | Managing Director, Deutsche Asset Management | n/a |
1 Length of time served represents the date that each Trustee was first elected to the common board of trustees which oversees a number of investment companies, including the fund, managed by the Advisor. For the Officers of the fund, length of time served represents the date that each Officer was first elected to serve as an officer of any fund overseen by the aforementioned common board of trustees.
2 As a result of their respective positions held with the Advisor, these individuals are considered "interested persons" of the Advisor within the meaning of the 1940 Act, as amended. Interested persons receive no compensation from the fund.
3 Address: One South Street, Baltimore, Maryland
4 Address: Two International Place, Boston, Massachusetts
5 Address: 345 Park Avenue, New York, New York
6 Address: 280 Park Avenue, New York, New York
7 Ms. Lyons was elected by the Trustees as President on November 19, 2003.
The fund's Statement of Additional Information ("SAI") includes additional information about the Trustees. The SAI is available, without charge, upon request. If you would like to request a copy of the SAI, you may do so by calling the following toll-free number: 1-800-621-1048.
Scudder Funds |
| Growth Funds Scudder 21st Century Growth Fund Scudder Aggressive Growth Fund Scudder Blue Chip Fund Scudder Capital Growth Fund Scudder Development Fund Scudder Dynamic Growth Fund Scudder Flag Investors Scudder Gold & Precious Metals Fund Scudder Global Biotechnology Fund Scudder Growth Fund Scudder Health Care Fund Scudder Large Company Growth Fund Scudder Micro Cap Fund Scudder Mid Cap Fund Scudder Small Cap Fund Scudder Strategic Growth Fund Scudder Technology Fund Scudder Technology Innovation Fund Scudder Top 50 US Fund Value FundsScudder Contrarian Fund Scudder-Dreman Financial Services Fund Scudder-Dreman High Return Equity Fund Scudder-Dreman Small Cap Value Fund Scudder Flag Investors Equity Scudder Growth and Income Fund Scudder Large Company Value Fund Scudder-RREEF Real Estate Securities Fund Scudder Small Company Stock Fund Scudder Small Company Value Fund Scudder Tax Advantaged Dividend Fund Multicategory/Asset Allocation FundsScudder Balanced Fund Scudder Flag Investors Value Builder Fund Scudder Focus Value+Growth Fund Scudder Lifecycle Mid Range Fund Scudder Lifecycle Long Range Fund Scudder Lifecycle Short Range Fund Scudder Pathway Conservative Portfolio Scudder Pathway Growth Portfolio Scudder Pathway Moderate Portfolio Scudder Target 2013 Fund Scudder Total Return Fund International/Global FundsScudder Emerging Markets Growth Fund Scudder Emerging Markets Income Fund Scudder European Equity Fund Scudder Global Fund Scudder Global Bond Fund Scudder Global Discovery Fund Scudder Greater Europe Growth Fund Scudder International Fund Scudder International Equity Fund Scudder International Select Equity Fund Scudder Japanese Equity Fund Scudder Latin America Fund Scudder New Europe Fund Scudder Pacific Opportunities Fund Income FundsScudder Cash Reserves Fund Scudder Fixed Income Fund Scudder GNMA Fund Scudder High Income Plus Fund (formerly Deutsche High Yield Bond Fund) Scudder High Income Fund Scudder High Income Opportunity Fund Scudder Income Fund Scudder PreservationPlus Fund Scudder PreservationPlus Income Fund Scudder Short Duration Fund (formerly Scudder Short-Term Fixed Income Fund) Scudder Short-Term Bond Fund Scudder Strategic Income Fund Scudder US Government Securities Fund |
Scudder Funds (continued) |
| Tax-Free Income Funds Scudder California Tax-Free Income Fund Scudder Florida Tax-Free Income Fund Scudder High Yield Tax-Free Fund Scudder Intermediate Tax/AMT Free Fund (formerly Scudder Medium Term Tax-Free Fund) Scudder Managed Municipal Bond Fund Scudder Massachusetts Tax-Free Fund Scudder Municipal Bond Fund Scudder New York Tax-Free Income Fund Scudder Short-Term Municipal Bond Fund Index-Related FundsScudder EAFE ® Equity Index Fund Scudder Equity 500 Index Fund Scudder S&P 500 Index Fund Scudder S&P 500 Stock Fund Scudder Select 500 Fund Scudder US Bond Index Fund Money MarketA large number of money market funds are available through Scudder Investments. |
Retirement Programs and Education Accounts |
| Retirement Programs Traditional IRA Roth IRA SEP-IRA Inherited IRA Keogh Plan 401(k), 403(b) Plans Variable Annuities Education AccountsCoverdell Education Savings Account UGMA/UTMA IRA for Minors |
Closed-End Funds |
The Brazil Fund, Inc. The Korea Fund, Inc. Montgomery Street Income Securities, Inc. Scudder Global High Income Fund, Inc. Scudder New Asia Fund, Inc. Scudder High Income Trust Scudder Intermediate Government Trust Scudder Multi-Market Income Trust Scudder Municipal Income Trust Scudder RREEF Real Estate Fund, Inc. Scudder RREEF Real Estate Fund II, Inc. Scudder Strategic Income Trust Scudder Strategic Municipal Income Trust The Central Europe and Russia Fund, Inc. (formerly The Central European Equity Fund, Inc.) The Germany Fund, Inc. The New Germany Fund, Inc. |
Not all funds are available in all share classes.
Scudder open-end 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.
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 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.
Automated Information Lines | ScudderACCESS (800) 972-3060 Personalized account information, information on other Scudder funds and services via touchtone telephone and for Classes A, B, and C only, the ability to exchange or redeem shares. |
Web Site | scudder.com View your account transactions and balances, trade shares, monitor your asset allocation, and change your address, 24 hours a day.Obtain prospectuses and applications, blank forms, interactive worksheets, news about Scudder funds, subscription to fund updates by e-mail, retirement planning information, and more. |
For More Information | (800) 621-1048 To speak with a Scudder service representative. |
Written Correspondence | Scudder Investments PO Box 219356Kansas City, MO 64121-9356 |
Proxy Voting | A description of the fund's policies and procedures for voting proxies for portfolio securities can be found on our Web site - scudder.com (type "proxy voting" in the search field) - or on the SEC's Web site - www.sec.gov. To obtain a written copy without charge, call us toll free at (800) 621-1048. |
Principal Underwriter | If you have questions, comments or complaints, contact: Scudder Distributors, Inc. 222 South Riverside PlazaChicago, IL 60606-5808 (800) 621-1148 |
Class A | Class B | Class C | |
Nasdaq Symbol | KSTAX | KSTBX | KSTCX |
CUSIP Number | 81123J-100 | 81123J-209 | 81123J-308 |
Fund Number | 010 | 210 | 310 |
Notes |
Notes |
Notes |
ITEM 2. CODE OF ETHICS.
As of the end of the period, October 31, 2003, the Scudder Strategic Income Fund
has adopted a code of ethics, as defined in Item 2 of Form N-CSR, that applies
to its President and Treasurer and its Chief Financial Officer. A copy of the
code of ethics is filed as an exhibit to this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Fund's Board of Directors/Trustees has determined that the Fund has at least
one "audit committee financial expert" serving on its audit committee: Mr.
Donald L. Dunaway. This audit committee member is "independent," meaning that he
is not an "interested person" of the Fund (as that term is defined in Section
2(a)(19) of the Investment Company Act of 1940) and he does not accept any
consulting, advisory, or other compensatory fee from the Fund (except in the
capacity as a Board or committee member).
An "audit committee financial expert" is not an "expert" for any purpose,
including for purposes of Section 11 of the Securities Act of 1933, as a result
of being designated as an "audit committee financial expert." Further, the
designation of a person as an "audit committee financial expert" does not mean
that the person has any greater duties, obligations, or liability than those
imposed on the person without the "audit committee financial expert"
designation. Similarly, the designation of a person as an "audit committee
financial expert" does not affect the duties, obligations, or liability of any
other member of the audit committee or board of directors.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not currently applicable.
ITEM 5. [RESERVED]
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The Chief Executive and Financial Officers concluded that the Registrant's
Disclosure Controls and Procedures are effective based on the evaluation of the
Disclosure Controls and Procedures as of a date within 90 days of the filing
date of this report.
(b)During the filing period of the report, management identified issues relating
to the overall fund expense payment and accrual process. Management discussed
these matters with the Registrant's Audit Committee and auditors, instituted
additional procedures to enhance its internal controls and will continue to
develop additional controls and redesign work flow to strengthen the overall
control environment associated with the processing and recording of fund
expenses.
ITEM 10. EXHIBITS.
(a)(1) Code of Ethics pursuant to Item 2 of Form N-CSR is filed and attached
hereto as EX-99.CODE ETH.
(a)(2) Certification pursuant to Rule 30a-2(a) under the Investment Company
Act of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as
Exhibit 99.CERT.
(b) Certification pursuant to Rule 30a-2(b) under the Investment Company
Act of 1940 (17 CFR 270.30a-2(b)) is furnished and attached hereto as
Exhibit 99.906CERT.
Form N-CSR Item F
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: Scudder Strategic Income Fund
By: /s/Richard T. Hale
-----------------------------
Richard T. Hale
Chief Executive Officer
Date: December 22, 2003
-----------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Registrant: Scudder Strategic Income Fund
By: /s/Richard T. Hale
-----------------------------
Richard T. Hale
Chief Executive Officer
Date: December 22, 2003
-----------------------------
By: /s/Charles A. Rizzo
-----------------------------
Charles A. Rizzo
Chief Executive Officer
Date: December 22, 2003
-----------------------------