UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-CSR
Investment Company Act file number 811-07347
SCUDDER ADVISOR FUNDS II
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(Exact Name of Registrant as Specified in Charter)
One South Street, Baltimore, Maryland 21202
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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: 12/31
Date of reporting period: 12/31/03
ITEM 1. REPORT TO STOCKHOLDERS
[Scudder Investments logo]
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Annual Report to Shareholders | ||
December 31, 2003 | ||
Contents |
<Click Here> Performance Summary <Click Here> Portfolio Management Review <Click Here> Portfolio Summary Scudder US Bond Index Fund <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 US Bond Index Portfolio <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> Account Management Resources |
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. We advise you to consider the fund's objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the fund. Please read the prospectus carefully before you invest.
Investments in mutual funds involve risk. The fund may not be able to mirror the Lehman Brothers Aggregate Bond Index closely enough to track its performance for several reasons, including the fund's cost to buy and sell securities, the flow of money into and out of the fund and the potential underperformance of securities selected. Additionally, the fund invests in individual bonds whose yields and market values fluctuate so that your investment may be worth more or less than its original cost. Please read this fund's prospectus for specific details regarding its investments and risk profile.
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.
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.
All performance shown is historical and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Please visit scudder.com for the product's most recent month-end performance.
Returns and rankings during all periods shown reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns and rankings would have been lower.
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.
Average Annual Total Returns | ||||
Scudder US Bond Index Fund | 1-Year | 3-Year | 5-Year | Life of Fund* |
| Premier Class | 3.75% | 7.29% | 6.37% | 7.27% |
| Lehman Brothers Aggregate Bond Index+ | 4.10% | 7.57% | 6.62% | 7.43% |
Sources: Lipper Inc. and Deutsche Asset Management, Inc.
* The Fund commenced operations on June 30, 1997. Index returns begin June 30, 1997.Net Asset Value and Distribution Information | |
Premier Class | |
| Net Asset Value: 12/31/03 | $ 10.46 |
| 12/31/02 | $ 10.60 |
| Distribution Information: Twelve Months: Income Dividends | $ .42 |
| Capital Gains | $ .11 |
| December Income Dividend | .0310 |
| SEC 30-day Yield++ | 3.22% |
| Current Annualized Distribution Rate++ | 3.56% |
++ Current annualized distribution rate is the latest monthly dividend shown as an annualized percentage of net asset value on December 31, 2003. Distribution rate simply measures the level of dividends and is not a complete measure of performance. The SEC yield is net investment income per share earned over the month ended December 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. Yields and distribution rates are historical and will fluctuate. The SEC yield would have been 2.93% had certain expenses not been reduced.
Premier Class Lipper Rankings - Intermediate Investment Grade Debt Funds Category | ||||
Period | Rank | Number of Funds Tracked | Percentile Ranking | |
| 1-Year | 285 | of | 426 | 67 |
| 3-Year | 97 | of | 321 | 31 |
| 5-Year | 59 | of | 229 | 26 |
Rankings are historical and do not guarantee future results. Rankings are based on total returns with distributions reinvested.
Source: Lipper Inc.
Growth of an Assumed $5,000,000 Investment |
[] Scudder US Bond Index Fund - Premier Class [] Lehman Brothers Aggregate Bond Index+ |
 |
Yearly periods ended December 31 |
Comparative Results | |||||
Scudder US Bond Index Fund | 1-Year | 3-Year | 5-Year | Life of Fund* | |
Premier Class | Growth of $5,000,000 | $5,187,500 | $6,175,500 | $6,810,000 | $7,891,500 |
| Average annual total return | 3.75% | 7.29% | 6.37% | 7.27% | |
| Lehman Brothers Aggregate Bond Index+ | Growth of $5,000,000 | $5,205,000 | $6,223,500 | $6,890,000 | $7,965,000 |
| Average annual total return | 4.10% | 7.57% | 6.62% | 7.43% | |
The growth of $5,000,000 is cumulative.
* The Fund commenced operations on June 30, 1997. Index returns begin June 30, 1997.+ Lehman Brothers Aggregate Bond Index is an unmanaged index representing domestic taxable investment grade bonds, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities with an average maturity of one year or more. 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.
Scudder US Bond Index Fund: A Team Approach to Investing
Deutsche Asset Management, Inc. ("DeAM, Inc." or the "Advisor"), which is part of Deutsche Asset Management, is the investment advisor for US Bond Index Portfolio, in which the fund invests all of its assets. DeAM, Inc. provides a full range of investment advisory services to institutional and retail clients. DeAM, Inc. 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.
DeAM, Inc. 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.
Northern Trust Investments, N.A. ("NTI"), an indirect subsidiary of Northern Trust Corporation, is the subadvisor for the portfolio. As of September 30, 2003, NTI had approximately $222 billion of assets under management.
A group of investment professionals is responsible for the day-to-day management of the portfolio.
In the following interview, Portfolio Manager Louis R. D'Arienzo discusses Scudder US Bond Index Fund's market environment during the 12-month period ended December 31, 2003.
Q: How did Scudder US Bond Index Fund perform over 2003?
A: Scudder US Bond Index Fund produced a total return of 3.75% (Premier Class shares unadjusted for sales charges) for the 12 months ended December 31, 2003, as compared with 4.10% for its benchmark, the Lehman Brothers Aggregate Bond Index.1 (Please see pages 3 through 4 for more complete performance information.) For an index fund based on the Lehman Brothers Aggregate Bond Index, such as this one, scale is everything. On funds with $500 million in assets or less, we expect about a tracking error versus the index of plus or minus 25 basis points to 35 basis points on an annual basis, which accounts for the fund's underperformance this period. This tracking error stems from an inability to diversify a fund of this size to match the index identically and reduce the tracking error below that range.
1 The Lehman Brothers Aggregate Bond Index is unmanaged and represents US domestic taxable investment-grade bonds including US Treasuries, agencies, corporate securities and mortgage-backed securities with an average maturity and duration in the intermediate range. Index returns do not reflect expenses, which have been deducted from the fund's return.Q: What were the primary factors affecting the US bond markets during the past 12 months?
A: During 2003, the US bond markets overall experienced a good year, primarily due to the stellar performance of the US credit sector. The Lehman Brothers Aggregate Bond Index produced a positive 4.10% return for the 12 months ended December 31, 2003. However, while long-term US Treasury yields remained below their long-term mean, US Treasury yields across the yield curve actually rose over the 12-month period ended December 31, 2003 in the face of strong US economic growth during the second half of the year. For the annual period, yields on two-year Treasury notes rose from 1.60% to 1.83%, five-year Treasury yields climbed from 2.73% to 3.22%, 10-year Treasury yields increased from 3.82% to 4.25%, and 30-year Treasury bond yields rose from 4.78% to 5.07%. The yield curve remained relatively steep, though essentially unchanged in yield spread between the two-year and 30-year Treasuries, widening just 0.07% during 2003.
During the first quarter, continued US economic sluggishness, the fight against terrorism at home and abroad, equity market weakness and volatility, and the impending and then actual engagement of Iraq's military by coalition forces supported the ongoing strength of the US fixed-income markets. At its March 2003 meeting, the Federal Reserve Board stated that it would not currently take a stance on monetary policy given "the unusually large uncertainties clouding the geopolitical situation in the short run and their apparent effects on economic decision making."
During the second quarter, economic indicators were more mixed, on balance, suggesting a modest level of improvement in growth since the end of active military operations in Iraq at the end of April. The economy, however, continued to face powerful drags as it struggled to unwind the excesses of the 1990s boom. Households were still trying to save more, and businesses remained reluctant to invest or hire aggressively until the outlook for demand improved. On the other hand, consumer confidence bounced back a bit, consumer spending stabilized, and capital outlays continued to slowly improve. On June 25, in a conservative move, the Federal Reserve Board cut the targeted federal funds rate by 25 basis points to 1.00%, in an effort to "add further support for an economy which it expects to improve over time."2 After 13 consecutive interest rate cuts by the Federal Reserve Board since the start of 2001, short-term rates stood at their lowest levels in more than four decades.
While the sustainability of the economy remained of concern through much of the third quarter, personal consumption grew significantly, and the annualized rate of gross domestic product (GDP) growth reached a robust 8.2% during the third quarter. By early in the fourth quarter, improving economic indicators and the effects of strict cost cutting by businesses combined to produce a recovery in corporate profits. Jobless claims fell, industrial production jumped, housing starts continued to be strong despite higher mortgage rates, and core inflation continued to inch lower. GDP growth for the fourth quarter is estimated to be at an annualized rate of approximately 4%. Given this scenario, the market believed there would be no official increase in interest rates by the Federal Reserve Board until well into 2004.
2 A basis point is one-hundredth of one percent, so 100 basis points equals 1.00%.3 The Lehman US Treasury Index measures the public obligations of the US Treasury with a remaining maturity of one year or more. It excludes Treasury bills (because of the maturity constraint), certain special issues, such as flower bonds, targeted investor notes, and state and local government series bonds, STRIPS, and Treasury Inflation-Protection Securities.
Q: Which sectors within the Lehman Brothers Aggregate Bond Index were the best and worst performers?
A: Overall, on a duration-adjusted basis, the spread sectors in the Lehman Brothers Aggregate Bond Index outperformed US Treasury securities for the 12-month period ended December 31, 2003. The Lehman US Treasury Index produced a total return of 2.24% for the period.3
Corporate bonds led the way, as the Lehman US Credit Index provided an excess return over duration-adjusted Treasuries of approximately 527 basis points for the annual period, the strongest annual excess return on record.4 Corporate bond performance was driven by a combination of improving fundamentals, solid technicals and attractive relative valuations versus other fixed-income asset classes.
Commercial mortgage-backed securities (CMBS), as measured by the Lehman Investment-Grade CMBS Index, outperformed duration-adjusted Treasuries by 201 basis points for the same time frame.5 This was followed by asset-backed securities (ABS), which earned an excess return over duration-adjusted Treasuries of 181 basis points for the 12 months, with the manufactured housing segment the greatest contributing segment overall, as measured by the Lehman ABS Index.6 Against the backdrop of lower interest rates and the magnitude of refinancing activity, mortgage-backed securities (MBS) outperformed duration-adjusted Treasuries by just 11 basis points for the annual period, as per the Lehman MBS Index.7
4 The Lehman US Credit Index measures all publicly issued fixed-rate, nonconvertible, investment-grade domestic corporate debt.
5 The Lehman Investment-Grade CMBS Index measures ERISA-eligible, Aaa, Aa, A, and Baa rated commercial mortgage-backed securities, as rated by Moody's Investors Service, Standard & Poor's Corporation or Fitch Investors Services. Issues must have an outstanding par value of at least $50 million.
6 The Lehman ABS Index is the component of the Lehman US Aggregate Index that comprises debt securities backed by credit card, auto and home equity loans that are rated investment grade or higher by Moody's Investors Service, Standard & Poor's Corporation or Fitch Investors Services. Issues must have at least one year to maturity and an outstanding par value of at least $50 million.
7 The Lehman MBS Index comprises fixed-rate 15- and 30-year securities backed by pools of mortgages, balloon mortgages and graduated-payment mortgages backed by the Government National Mortgage Association, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation that are rated investment-grade or higher by Moody's Investors Service, Standard & Poor's Corporation or Fitch Investors Services. Issues must have an outstanding par value of at least $50 million.
The views expressed in this report reflect those of the portfolio managers only through the end of the period of the report as stated on the cover. The management team's views are subject to change at any time based on market and other conditions and should not be construed as a recommendation.
Asset Allocation | 12/31/03 | 12/31/02 |
| US Government Backed | 24% | 12% |
| Corporate Bonds | 21% | 25% |
| US Government Sponsored Agencies | 21% | 11% |
| US Government Agency Sponsored Pass-Thrus | 17% | 22% |
| Foreign Bonds - US$ Denominated | 5% | 5% |
| Cash Equivalents & Other, net | 4% | 15% |
| Government National Mortgage Association | 4% | 5% |
| Collateralized Mortgage Obligations | 2% | 3% |
| Asset Backed | 2% | 2% |
| 100% | 100% |
Corporate Bond Diversification (Excludes Cash Equivalents) | 12/31/03 | 12/31/02 |
| Financials | 44% | 42% |
| Consumer Discretionary | 10% | 9% |
| Utilities | 8% | 9% |
| Energy | 8% | 6% |
| Consumer Staples | 7% | 10% |
| Industrials | 7% | 9% |
| Telecommunication Services | 6% | 4% |
| Materials | 4% | 4% |
| Information Technology | 3% | 5% |
| Health Care | 3% | 2% |
| 100% | 100% |
Quality | 12/31/03 | 12/31/02 |
| US Government Sponsored Agencies | 70% | 57% |
| AAA | 6% | 11% |
| AA | 3% | 4% |
| A | 10% | 16% |
| BAA | 11% | - |
| BBB | - | 12% |
| 100% | 100% |
Effective Maturity | 12/31/03 | 12/31/02 |
| Under 1 year | 3% | 6% |
| 1 < 5 years | 41% | 43% |
| 5 < 10 years | 40% | 26% |
| 10 < 15 years | 10% | 14% |
| 15 years or greater | 6% | 11% |
| 100% | 100% |
Weighted average effective maturity: 6.35 years and 7.10 years, respectively.
Asset allocation, diversification, quality and effective maturity are subject to change.
For more complete details about the fund's investment portfolio, see page 25. A quarterly Fact Sheet and Portfolio Holdings are available upon request.
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities as of December 31, 2003 | |
| Assets | |
| Investment in US Bond Index Portfolio, at value | $ 142,978,413 |
| Receivable for Fund shares sold | 425,338 |
| Other assets | 8,478 |
| Total assets | 143,412,229 |
| Liabilities | |
| Dividends payable | 59,327 |
| Payable for Fund shares redeemed | 145,916 |
| Other accrued expenses and payables | 50,996 |
| Total liabilities | 256,239 |
| Net assets, at value | $ 143,155,990 |
| Net Assets | |
| Net assets consist of: Net unrealized appreciation (depreciation) on investments | 4,379,546 |
| Accumulated net realized gain (loss) | 327,496 |
| Paid-in capital | 138,448,948 |
| Net assets, at value | $ 143,155,990 |
| Net Asset Value | |
| Net Asset Value, offering and redemption price per share ($143,155,990 / 13,684,666 shares of beneficial interest outstanding, $.001 par value, unlimited number of shares authorized) | $ 10.46 |
The accompanying notes are an integral part of the financial statements.
Statement of Operations for the year ended December 31, 2003 | |
| Investment Income | |
| Total investment income allocated from US Bond Index Portfolio: Interest | $ 5,514,587 |
| Securities lending income | 1,211 |
| Mortgage dollar roll income | 437,822 |
| Less allocated expensesa | (135,123) |
| Net investment income allocated from US Bond Index Portfolio | 5,818,497 |
| Expenses: Administrator service fee | 269,678 |
| Auditing | 17,125 |
| Legal fees | 31,335 |
| Trustees' fees and expenses | 5,797 |
| Reports to shareholders | 4,778 |
| Registration fees | 29,453 |
| Other | 3,675 |
| Total expenses, before expense reductions | 361,841 |
| Expense reductions | (294,493) |
| Total expenses, after expense reductions | 67,348 |
| Net investment income (loss) | 5,751,149 |
| Realized and Unrealized Gain (Loss) on Investment Transactions | |
| Net realized gain (loss) from investments | 1,172,749 |
| Net unrealized appreciation (depreciation) during the period on investments | (1,859,970) |
| Net gain (loss) on investment transactions | (687,221) |
| Net increase (decrease) in net assets resulting from operations | $ 5,063,928 |
a For the year ended December 31, 2003, the Advisor to the US Bond Index Portfolio waived fees in the amount of $178,580, which was allocated to the Fund.
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Net Assets | ||
| Increase (Decrease) in Net Assets | Years Ended December 31, | |
2003 | 2002 | |
| Operations: Net investment income | $ 5,751,149 | $ 5,356,748 |
| Net realized gain (loss) on investment transactions | 1,172,749 | 2,043,601 |
| Net unrealized appreciation (depreciation) on investment transactions during the period | (1,859,970) | 3,222,430 |
| Net increase (decrease) in net assets resulting from operations | 5,063,928 | 10,622,779 |
| Distributions to shareholders from: Net investment income | (5,284,590) | (5,335,897) |
| Net realized gains | (1,468,368) | (2,914,291) |
| Fund share transactions: Proceeds from shares sold | 100,673,025 | 26,831,348 |
| Reinvestment of distributions | 6,239,325 | 7,785,906 |
| Cost of shares redeemed | (62,544,297) | (46,822,307) |
| Net increase (decrease) in net assets from Fund share transactions | 44,368,053 | (12,205,053) |
| Increase (decrease) in net assets | 42,679,023 | (9,832,462) |
| Net assets at beginning of period | 100,476,967 | 110,309,429 |
| Net assets at end of period | $ 143,155,990 | $ 100,476,967 |
The accompanying notes are an integral part of the financial statements.
Years Ended December 31, | 2003 | 2002 | 2001 | 2000 | 1999 |
| Selected Per Share Data | |||||
| Net asset value, beginning of period | $ 10.60 | $ 10.42 | $ 10.24 | $ 9.76 | $ 10.47 |
| Income (loss) from investment operations: Net investment income | .44a | .52a | .59 | .62 | .57 |
| Net realized and unrealized gain (loss) on investment transactions | (.05) | .50 | .23 | .48 | (.70) |
Total from investment operations | .39 | 1.02 | .82 | 1.10 | (.13) |
| Less distributions from: Net investment income | (.42) | (.52) | (.59) | (.62) | (.58) |
| Net realized gains on investment transactions | (.11) | (.32) | (.05) | - | - |
Total distributions | (.53) | (.84) | (.64) | (.62) | (.58) |
| Net asset value, end of period | $ 10.46 | $ 10.60 | $ 10.42 | $ 10.24 | $ 9.76 |
| Total Return (%)b | 3.75 | 10.04 | 8.19 | 11.72 | (1.30) |
| Ratios to Average Net Assets and Supplemental Data | |||||
| Net assets, end of period ($ millions) | 143 | 100 | 110 | 116 | 93 |
| Ratio of expenses before expense reductions, including expenses allocated from the US Bond Index Portfolio (%) | .50 | .52 | .53 | .57 | .56 |
| Ratio of expenses after expense reductions, including expenses allocated from the US Bond Index Portfolio (%) | .15 | .15 | .15 | .15 | .15 |
| Ratio of net investment income (%) | 4.27 | 4.94 | 5.68 | 6.33 | 5.79 |
| a Based on average shares outstanding during the period. b Total return would have been lower had certain expenses not been reduced. | |||||
A. Significant Accounting Policies
US Bond Index Fund - Premier Class ("Scudder US Bond Index Fund" or the "Fund") is a diversified series of the Scudder Advisor Funds II (the "Trust"), formerly BT Advisor Funds, which is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company organized as a Massachusetts business trust.
The Fund seeks to achieve its investment objective by investing substantially all of its assets in the US Bond Index Portfolio (the "Portfolio"), a diversified, open-end management investment company advised by Deutsche Asset Management, Inc. ("DeAM, Inc.").
On December 31, 2003, the Fund owned approximately 100% of the US Bond Index Portfolio. The financial statements of the Portfolio, including the Investment Portfolio, are contained elsewhere in this report and should be read in conjunction with the Fund's financial statements.
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. The Fund determines the valuation of its investment in the Portfolio by multiplying its proportionate ownership of the Portfolio by the total value of the Portfolio's net assets.
The Portfolio's policies for determining the value of its net assets are discussed in the Portfolio's Financial Statements, which accompany this report.
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.
Distribution of Income and Gains. All of the net investment income is declared as a daily dividend and distributed to shareholders 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. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.
The net unrealized appreciation/depreciation of the Fund's investment in the Portfolio consists of an allocated portion of the Portfolio's appreciation/depreciation. Please refer to the Portfolio's financial statements for a breakdown of the appreciation/depreciation from investments.
At December 31, 2003, the Fund's components of distributable earnings (accumulated losses) on a tax-basis were as follows:
| Undistributed ordinary income* | $ 214,222 |
| Undistributed net long-term capital gains | $ - |
| Capital loss carryforwards | $ - |
In addition, the tax character of distributions paid to shareholders by the Fund is summarized as follows:
Year ended December 31, | ||
2003 | 2002 | |
| Distributions from ordinary income* | $ 6,120,017 | $ 7,463,792 |
| Distributions from long-term capital gains | $ 632,941 | $ 786,396 |
* For tax purposes short-term capital gains distributions are considered ordinary income distributions.
Other. The Fund receives a daily allocation of the Portfolio's income, expenses and net realized and unrealized gains and losses in proportion to its investment in the Portfolio. Expenses directly attributed to a fund are charged to that Fund, while expenses which are attributable to the Trust are allocated among the funds in the Trust on the basis of relative net assets.
B. Related Parties
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 Asset Management, Inc. (the "Advisor") is the Advisor for the Portfolio and Investment Company Capital Corp. ("ICCC" or the "Administrator") is the Administrator for the Fund, both wholly owned subsidiaries of Deutsche Bank AG.
Administrator Service Fee. For its services as Administrator, ICCC receives a fee (the "Administrator Service Fee") of 0.20% of the Fund's average daily net assets, computed and accrued daily and payable monthly.
For the year ended December 31, 2003, the Advisor and Administrator contractually agreed to waive its fees and reimburse expenses of the Fund to the extent necessary to maintain the annualized expenses at 0.15% including expenses allocated from the Portfolio. Accordingly, for the year ended December 31, 2003, the Administrator Service Fee was $269,678, all of which was waived. In addition, under this arrangement the Advisor and Administrator reimbursed the Fund in the amount of $24,815.
Trustees' Fees and Expenses. As compensation for his or her services, each Independent Trustee receives an aggregate annual fee, plus a fee for each meeting attended (plus reimbursement for reasonable out-of-pocket expenses incurred in connection with his or her attendance at board and committee meetings) from each Fund in the Fund Complex for which he or she serves. In addition, the Chairman of the Fund Complex's Audit Committee receives an annual fee for their services. Payment of such fees and expenses is allocated among all such Funds described above in direct proportion to their relative net assets.
C. Share Transactions
The following table summarizes share and dollar activity in the Fund:
Year Ended December 31, 2003 | Year Ended December 31, 2002 | |||
Shares | Dollars | Shares | Dollars | |
| Shares sold | ||||
| 9,516,017 | $ 100,673,025 | 2,553,645 | $ 26,831,348 | |
| Shares issued to shareholders in reinvestment of distributions | ||||
| 590,833 | $ 6,239,325 | 737,225 | $ 7,785,906 | |
| Shares redeemed | ||||
| (5,900,191) | $ (62,544,297) | (4,402,927) | $ (46,822,307) | |
| Net increase (decrease) | ||||
| 4,206,659 | $ 44,368,053 | (1,112,057) | (12,205,053) | |
To the Trustees of Scudder Advisor Funds II (formerly BT Advisor Funds) and Shareholders of US Bond Index Fund - Premier Class:
In our opinion, the accompanying statement of assets and liabilities and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of US Bond Index Fund - Premier Class (the "Fund") at December 31, 2003, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Boston, Massachusetts | PricewaterhouseCoopers LLP |
The Fund paid distributions of $0.05 per share to shareholders from net long-term capital gains, of which 83% represents 15% rate gains and 17% represents 20% rate gains.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates $692,000 as capital gain dividends for the year ended December 31, 2003, of which 83% represents 15% rate gains and 17% represents 20% rate gains.
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 1-800-294-4366.
The following individuals hold the same position with the Fund and the Scudder Investment Portfolios.
Independent Trustees | ||
| Name, Date of Birth, Position with the Fund and Length of Time Served1,2 | Business Experience and Directorships During the Past 5 Years | Number of Funds in the Fund Complex Overseen |
| Richard R. Burt 2/3/47 Trustee since 2002 | Chairman, Diligence LLC (international information-collection and risk-management firm) (September 2002 to present); Chairman, IEP Advisors, Inc. (July 1998 to present); Chairman of the Board, Weirton Steel Corporation3 (April 1996 to present); Member of the Board, Hollinger International, Inc.3 (publishing) (September 1995 to present), HCL Technologies Limited (information technology) (April 1999 to present), UBS Mutual Funds (formerly known as Brinson and Mitchell Hutchins families of funds) (registered investment companies) (September 1995 to present); and Member, Textron Inc.3 International Advisory Council (July 1996 to present). Formerly, Partner, McKinsey & Company (consulting) (1991-1994) and US Chief Negotiator in Strategic Arms Reduction Talks (START) with former Soviet Union and US Ambassador to the Federal Republic of Germany (1985-1991); Member of the Board, Homestake Mining3 (mining and exploration) (1998-February 2001), Archer Daniels Midland Company3 (agribusiness operations) (October 1996-June 2001) and Anchor Gaming (gaming software and equipment) (March 1999-December 2001). | 68 |
| S. Leland Dill 3/28/30 Trustee since 1986 for the Fund and since 1993 for the Scudder Investment Portfolios | Trustee, Phoenix Zweig Series Trust (since September 1989), Phoenix Euclid Market Neutral Funds (since May 1998) (registered investment companies); Retired (since 1986). Formerly, Partner, KPMG Peat Marwick (June 1956-June 1986); Director, Vintners International Company Inc. (wine vintner) (June 1989-May 1992); Coutts (USA) International (January 1992-March 2000), Coutts Trust Holdings Ltd., Coutts Group (private bank) (March 1991-March 1999); General Partner, Pemco (investment company) (June 1979-June 1986). | 66 |
| Martin J. Gruber 7/15/37 Trustee since 1992 for the Fund and since 1999 for the Scudder Investment Portfolios | Nomura Professor of Finance, Leonard N. Stern School of Business, New York University (since September 1964); Trustee, CREF (pension fund) (since January 2000); Director, Japan Equity Fund, Inc. (since January 1992), Thai Capital Fund, Inc. (since January 2000) and Singapore Fund, Inc. (since January 2000) (registered investment companies). Formerly, Trustee, TIAA (pension fund) (January 1996-January 2000). | 66 |
| Joseph R. Hardiman 5/27/37 Trustee since 2002 | Private Equity Investor (January 1997 to present); Director, Corvis Corporation3 (optical networking equipment) (July 2000 to present), Brown Investment Advisory & Trust Company (investment advisor) (February 2001 to present), The Nevis Fund (registered investment company) (July 1999 to present), and ISI Family of Funds (registered investment companies) (March 1998 to present). Formerly, Director, Circon Corp.3 (medical instruments) (November 1998-January 1999); President and Chief Executive Officer, The National Association of Securities Dealers, Inc. and The NASDAQ Stock Market, Inc. (1987-1997); Chief Operating Officer of Alex. Brown & Sons Incorporated (now Deutsche Bank Securities Inc.) (1985-1987); General Partner, Alex. Brown & Sons Incorporated (now Deutsche Bank Securities Inc.) (1976-1985). | 66 |
| Richard J. Herring 2/18/46 Trustee since 1995 for the Fund and since 1999 for the Scudder Investment Portfolios | Jacob Safra Professor of International Banking and Professor, Finance Department, The Wharton School, University of Pennsylvania (since July 1972); Director, Lauder Institute of International Management Studies (since July 2000); Co-Director, Wharton Financial Institutions Center (since July 2000). Formerly, Vice Dean and Director, Wharton Undergraduate Division (July 1995-June 2000). | 66 |
| Graham E. Jones 1/31/33 Trustee since 2002 | Senior Vice President, BGK Realty, Inc. (commercial real estate) (since 1995); Trustee, 8 open-end mutual funds managed by Weiss, Peck & Greer (since 1985) and Trustee of 18 open-end mutual funds managed by Sun Capital Advisers, Inc. (since 1998). | 66 |
| Rebecca W. Rimel 4/10/51 Trustee since 2002 | President and Chief Executive Officer, The Pew Charitable Trusts (charitable foundation) (1994 to present); Executive Vice President, The Glenmede Trust Company (investment trust and wealth management) (1983 to present). | 66 |
| Philip Saunders, Jr. 10/11/35 Trustee since 1986 for the Fund and since 1993 for the Scudder Investment Portfolios | Principal, Philip Saunders Associates (economic and financial consulting) (since November 1988). Formerly, Director, Financial Industry Consulting, Wolf & Company (consulting) (1987-1988); President, John Hancock Home Mortgage Corporation (1984-1986); Senior Vice President of Treasury and Financial Services, John Hancock Mutual Life Insurance Company, Inc. (1982-1986). | 66 |
| William N. Searcy 9/03/46 Trustee since 2002 | Private investor (since October 2003); Trustee of 18 open-end mutual funds managed by Sun Capital Advisers, Inc. (since October 1998). Formerly, Pension & Savings Trust Officer, Sprint Corporation3 (telecommunications) (November 1989 to October 2003). | 66 |
| Robert H. Wadsworth 1/29/40 Trustee since 2002 | President, Robert H. Wadsworth Associates, Inc. (consulting firm) (May 1983 to present). Formerly, President and Trustee, Trust for Investment Managers (registered investment company) (April 1999-June 2002); President, Investment Company Administration, L.L.C. (January 1992*-July 2001); President, Treasurer and Director, First Fund Distributors, Inc. (June 1990-January 2002); Vice President, Professionally Managed Portfolios (May 1991-January 2002) and Advisors Series Trust (October 1996-January 2002) (registered investment companies). * Inception date of the corporation which was the predecessor to the L.L.C. | 69 |
Interested Trustee | ||
| Name, Date of Birth, Position with the Fund and Length of Time Served1,2 | Business Experience and Directorships During the Past 5 Years | Number of Funds in the Fund Complex Overseen |
| Richard T. Hale4 7/17/45 Chairman since 2002 and Trustee since 1999 | 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 |
Officers | |
| Name, Date of Birth, Position with the Fund and Length of Time Served1,2 | Business Experience and Directorships During the Past 5 Years |
| Richard T. Hale4 7/17/45 Chief Executive Officer since 2003 | See information presented under Interested Trustee. |
| Brenda Lyons5 2/21/63 President since 2003 | Managing Director, Deutsche Asset Management. |
| Kenneth Murphy5 10/13/63 Vice President and Anti-Money Laundering Compliance Officer since 2002 | Vice President, Deutsche Asset Management (September 2000-present). Formerly, Director, John Hancock Signature Services (1992-2000). |
| Bruce A. Rosenblum 9/14/60 Vice President since 2003 Assistant Secretary since 2002 | Director, Deutsche Asset Management. |
| Charles A. Rizzo5 8/5/57 Treasurer and Chief Financial Officer since 2002 | Director, Deutsche Asset Management (April 2000 to 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). |
| Salvatore Schiavone5 11/03/65 Assistant Treasurer since 2003 | Director, Deutsche Asset Management. |
| Lucinda H. Stebbins5 11/19/45 Assistant Treasurer since 2003 | Director, Deutsche Asset Management. |
| Kathleen Sullivan D'Eramo5 1/25/57 Assistant Treasurer since 2003 | Director, Deutsche Asset Management. |
| John Millette5 8/23/62 Secretary since 2003 | Director, Deutsche Asset Management. |
| Daniel O. Hirsch 3/27/54 Assistant Secretary since 2003 | 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). |
| Caroline Pearson5 4/01/62 Assistant Secretary since 2002 | Managing Director, Deutsche Asset Management. |
1 Unless otherwise indicated, the mailing address of each Trustee and Officer with respect to fund operations is One South Street, Baltimore, MD 21202.
2 Length of time served represents the date that each Trustee or Officer first began serving in that position with Scudder Advisor Funds II of which this fund is a series and Scudder Investment Portfolios.
3 A publicly held company with securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.
4 Mr. Hale is a Trustee who is an "interested person" within the meaning of Section 2(a)(19) of the 1940 Act. Mr. Hale is Vice President of Deutsche Asset Management, Inc. and a Managing Director of Deutsche Asset Management, the US asset management unit of Deutsche Bank AG and its affiliates.
5 Address: Two International Place, Boston, Massachusetts.
The fund's Statement of Additional Information includes additional information about the fund's Trustees. To receive your free copy of the Statement of Additional Information, call toll-free: 1-800-621-1048.
Principal | Value ($) | |
Corporate Bonds 20.9% | ||
| Consumer Discretionary 2.1% | ||
| Albertson's, Inc.: | ||
7.25%, 5/1/2013 | 25,000 | 28,271 |
7.5%, 2/15/2011 | 50,000 | 57,318 |
| Comcast Cable Communications: | ||
6.2%, 11/15/2008 | 100,000 | 109,737 |
6.875%, 6/15/2009 | 60,000 | 67,640 |
| Comcast Corp., 5.85%, 1/15/2010 | 25,000 | 26,693 |
| Cox Communications, Inc., 7.875%, 8/15/2009 | 50,000 | 59,077 |
| DaimlerChrysler NA Holding Corp.: | ||
7.2%, 9/1/2009 | 150,000 | 167,517 |
8.0%, 6/15/2010 | 150,000 | 171,784 |
| Delphi Auto Systems Corp., 6.125%, 5/1/2004 | 5,000 | 5,073 |
| Federated Department Stores, Inc., 7.45%, 7/15/2017 | 300,000 | 349,649 |
| Ford Motor Co.: | ||
6.625%, 10/1/2028 | 75,000 | 68,991 |
8.875%, 1/15/2022 | 200,000 | 226,290 |
| Fred Meyer, Inc., 7.45%, 3/1/2008 | 50,000 | 56,947 |
| Gannett Co., Inc., 6.375%, 4/1/2012 | 50,000 | 55,805 |
| General Motors Corp., 8.25%, 7/15/2023 | 50,000 | 56,770 |
| Gillette Co., 2.5%, 6/1/2008 | 50,000 | 48,134 |
| Home Depot, Inc., 5.375%, 4/1/2006 | 25,000 | 26,654 |
| Kimberly-Clark Corp., 5.625%, 2/15/2012 | 50,000 | 53,398 |
| Liberty Media Corp., 5.7%, 5/15/2013 | 70,000 | 70,789 |
| News America Holdings, Inc. , 9.25%, 2/1/2013 | 100,000 | 129,000 |
| Northwest Airlines Corp. , 8.072%, 4/1/2021 | 22,731 | 24,982 |
| Target Corp., 5.875%, 3/1/2012 | 200,000 | 217,065 |
| TCI Communications, Inc., 7.125%, 2/15/2028 | 100,000 | 108,449 |
| Time Warner Entertainment Co. LP, 7.25%, 9/1/2008 | 100,000 | 114,694 |
| Time Warner, Inc.: | ||
6.125%, 4/15/2006 | 50,000 | 53,826 |
6.625%, 5/15/2029 | 10,000 | 10,277 |
6.875%, 5/1/2012 | 100,000 | 112,530 |
6.95%, 1/15/2028 | 30,000 | 32,041 |
7.7%, 5/1/2032 | 25,000 | 29,178 |
| Viacom, Inc.: | ||
7.7%, 7/30/2010 | 200,000 | 239,041 |
7.75%, 6/1/2005 | 30,000 | 32,438 |
| Walt Disney Co.: | ||
6.2%, 6/20/2014 | 75,000 | 80,620 |
6.75%, 3/30/2006 | 100,000 | 108,764 |
2,999,442 | ||
| Consumer Staples 1.6% | ||
| Archer-Daniels-Midland Co., 6.75%, 12/15/2027 | 25,000 | 27,671 |
| Bottling Group LLC, 5.0%, 11/15/2013 | 50,000 | 50,658 |
| Campbell Soup Co., 5.5%, 3/15/2007 | 20,000 | 21,594 |
| Coca-Cola Co., 5.75%, 3/15/2011 | 25,000 | 27,317 |
| Coca-Cola Enterprises, Inc., 8.5%, 2/1/2022 | 250,000 | 323,609 |
| Conagra Foods, Inc.: | ||
7.125%, 10/1/2026 | 100,000 | 114,005 |
7.5%, 9/15/2005 | 25,000 | 27,161 |
| Coors Brewing Co., 6.375%, 5/15/2012 | 10,000 | 10,894 |
| General Mills, Inc.: | ||
5.125%, 2/15/2007 | 10,000 | 10,622 |
6.0%, 2/15/2012 | 75,000 | 80,203 |
| H.J. Heinz Co., 6.625%, 7/15/2011 | 25,000 | 28,296 |
| H.J. Heinz Finance Co., 6.0%, 3/15/2012 | 25,000 | 27,116 |
| Kellogg Co.: | ||
6.0%, 4/1/2006 | 200,000 | 214,308 |
6.6%, 4/1/2011 | 50,000 | 56,035 |
| Kraft Foods, Inc.: | ||
5.25%, 6/1/2007 | 20,000 | 21,278 |
5.625%, 11/1/2011 | 50,000 | 52,682 |
6.25%, 6/1/2012 | 40,000 | 43,595 |
| Kroger Co.: | ||
7.5%, 4/1/2031 | 50,000 | 57,613 |
7.8%, 8/15/2007 | 50,000 | 57,051 |
| McDonald's Corp., 8.875%, 4/1/2011 | 300,000 | 380,530 |
| Nabisco, Inc., 6.375%, 2/1/2005 | 75,000 | 78,274 |
| Philip Morris Co., Inc., 6.375%, 2/1/2006 | 50,000 | 53,057 |
| Safeway, Inc.: | ||
6.5%, 11/15/2008 | 90,000 | 98,690 |
6.5%, 3/1/2011 | 80,000 | 87,330 |
| Unilever Capital Corp.: | ||
6.875%, 11/1/2005 | 50,000 | 54,219 |
7.125%, 11/1/2010 | 50,000 | 58,130 |
| Wal-Mart Stores, Inc.: | ||
4.375%, 7/12/2007 | 20,000 | 20,978 |
6.875%, 8/10/2009 | 100,000 | 115,205 |
| Wendy's International, 6.25%, 11/15/2011 | 20,000 | 21,967 |
2,220,088 | ||
| Energy 1.7% | ||
| Alabama Power Co.: | ||
5.5%, 10/15/2017 | 100,000 | 103,382 |
5.7%, 2/15/2033 | 50,000 | 48,885 |
| Amerada Hess Corp., 7.875%, 10/1/2029 | 75,000 | 82,288 |
| Amoco Co., 6.5%, 8/1/2007 | 250,000 | 281,170 |
| Anadarko Petroleum Corp., 7.5%, 10/15/2026 | 60,000 | 70,340 |
| Arizona Public Service, 7.625%, 8/1/2005 | 100,000 | 107,816 |
| Burlington Resources, Inc., 7.375%, 3/1/2029 | 50,000 | 58,283 |
| Conoco Funding Co., 6.35%, 10/15/2011 | 200,000 | 224,232 |
| Conoco, Inc.: | ||
5.9%, 4/15/2004 | 100,000 | 101,278 |
6.35%, 4/15/2009 | 140,000 | 157,057 |
| Devon Financing Corp., 6.875%, 9/30/2011 | 100,000 | 113,392 |
| Duke Capital Corp., 7.5%, 10/1/2009 | 150,000 | 171,533 |
| Exelon Generation Co. LLC, 6.95%, 6/15/2011 | 25,000 | 28,075 |
| Kinder Morgan Energy Partners LP, 6.75%, 3/15/2011 | 60,000 | 67,350 |
| Lasmo USA, Inc., 7.5%, 6/30/2006 | 100,000 | 111,697 |
| Marathon Oil Corp., 5.375%, 6/1/2007 | 50,000 | 53,511 |
| MidAmerican Energy Holdings Co.: | ||
3.5%, 5/15/2008 | 75,000 | 73,735 |
5.875%, 10/1/2012 | 25,000 | 26,213 |
| Occidental Petroleum Corp., 7.375%, 11/15/2008 | 100,000 | 115,358 |
| Pemex Project Funding Master Trust: | ||
7.375%, 12/15/2014 | 100,000 | 106,750 |
7.875%, 2/1/2009 | 50,000 | 56,450 |
| Phillips Petroleum Co., 8.75%, 5/25/2010 | 50,000 | 62,460 |
| PPL Energy Supply LLC, 6.4%, 11/1/2011 | 25,000 | 27,303 |
| Tosco Corp., 7.625%, 5/15/2006 | 50,000 | 55,710 |
| Transocean Sedco Forex, Inc., 6.625%, 4/15/2011 | 50,000 | 55,812 |
| Valero Energy Corp., 6.125%, 4/15/2007 | 25,000 | 27,141 |
2,387,221 | ||
| Financials 9.1% | ||
| ABN Amro Bank NV, 7.125%, 6/18/2007 | 540,000 | 609,195 |
| Allstate Corp., 7.2%, 12/1/2009 | 100,000 | 116,640 |
| American Express Co., 6.875%, 11/1/2005 | 50,000 | 54,452 |
| American Express Credit Corp., 3.0%, 5/16/2008 | 50,000 | 48,934 |
| American General Finance Corp.: | ||
5.75%, 3/15/2007 | 75,000 | 81,576 |
7.25%, 5/15/2005 | 225,000 | 242,044 |
| American International Group, Inc.: | ||
144A, 2.875%, 5/15/2008 | 50,000 | 48,653 |
144A, 4.25%, 5/15/2013 | 100,000 | 94,851 |
| Avalonbay Communities, 6.125%, 11/1/2012 | 30,000 | 32,031 |
| AXA Financial, Inc., 7.75%, 8/1/2010 | 100,000 | 118,452 |
| Bank of America Corp.: | ||
4.875%, 1/15/2013 | 200,000 | 199,675 |
5.125%, 11/15/2014 | 100,000 | 99,747 |
5.875%, 2/15/2009 | 50,000 | 54,785 |
6.5%, 3/15/2006 | 100,000 | 108,857 |
7.125%, 5/1/2006 | 200,000 | 221,428 |
| Bank of New York Co., Inc.: | ||
5.2%, 7/1/2007 | 25,000 | 26,782 |
7.3%, 12/1/2009 | 65,000 | 76,217 |
| Bank One Corp.: | ||
5.5%, 3/26/2007 | 20,000 | 21,616 |
6.5%, 2/1/2006 | 50,000 | 54,274 |
7.875%, 8/1/2010 | 50,000 | 60,061 |
| Barclays Bank PLC, 7.4%, 12/15/2009 | 60,000 | 70,322 |
| Bear Stearns & Co., Inc.: | ||
4.0%, 1/31/2008 | 150,000 | 152,780 |
5.7%, 11/15/2014 | 150,000 | 156,358 |
| Boeing Capital Corp.: | ||
5.75%, 2/15/2007 | 100,000 | 108,000 |
6.1%, 3/1/2011 | 110,000 | 118,725 |
6.35%, 11/15/2007 | 50,000 | 55,074 |
| Boston Properties, Inc., 6.25%, 1/15/2013 | 25,000 | 26,826 |
| Charter One Bank Financial, Inc., 6.375%, 5/15/2012 | 10,000 | 10,875 |
| Chubb Corp., 6.0%, 11/15/2011 | 10,000 | 10,797 |
| CIT Group, Inc., 3.875%, 11/3/2008 | 125,000 | 124,642 |
| Citigroup, Inc.: | ||
5.875%, 2/22/2033 | 100,000 | 98,281 |
6.0%, 10/31/2033 | 200,000 | 199,980 |
6.5%, 2/7/2006 | 75,000 | 81,224 |
6.5%, 1/18/2011 | 150,000 | 169,121 |
6.625%, 6/15/2032 | 50,000 | 54,164 |
6.75%, 12/1/2005 | 150,000 | 162,958 |
7.25%, 10/1/2010 | 50,000 | 58,278 |
8.625%, 2/1/2007 | 200,000 | 232,924 |
| Credit Suisse First Boston USA, Inc.: | ||
6.125%, 11/15/2011 | 100,000 | 108,873 |
6.5%, 1/15/2012 | 100,000 | 111,302 |
| EOP Operating LP: | ||
7.0%, 7/15/2011 | 100,000 | 112,841 |
7.75%, 11/15/2007 | 45,000 | 51,587 |
| First Chicago NBD Corp., 7.125%, 5/15/2007 | 200,000 | 225,545 |
| FleetBoston Financial Corp., 7.375%, 12/1/2009 | 65,000 | 76,316 |
| Ford Motor Credit Co.: | ||
6.875%, 2/1/2006 | 50,000 | 53,365 |
7.25%, 10/25/2011 | 275,000 | 298,255 |
7.375%, 10/28/2009 | 150,000 | 164,724 |
7.6% , 8/1/2005 | 100,000 | 106,882 |
| Fund American Co., Inc., 5.875%, 5/15/2013 | 50,000 | 50,606 |
| General Electric Capital Corp.: | ||
5.0%, 2/15/2007 | 40,000 | 42,535 |
6.0% , 6/15/2012 | 400,000 | 433,781 |
6.75%, 3/15/2032 | 50,000 | 55,356 |
6.875%, 11/15/2010 | 50,000 | 57,482 |
7.5%, 5/15/2005 | 50,000 | 53,887 |
| General Motors Acceptance Corp.: | ||
6.125%, 9/15/2006 | 50,000 | 53,512 |
6.75%, 1/15/2006 | 100,000 | 107,355 |
7.25%, 3/2/2011 | 225,000 | 246,849 |
7.5%, 7/15/2005 | 200,000 | 214,941 |
8.0%, 11/1/2031 | 75,000 | 84,223 |
| Goldman Sachs Group, Inc.: | ||
5.25%, 4/1/2013 | 50,000 | 50,643 |
5.5%, 11/15/2014 | 100,000 | 102,437 |
6.65%, 5/15/2009 | 15,000 | 16,967 |
6.875%, 1/15/2011 | 100,000 | 113,561 |
7.35%, 10/1/2009 | 50,000 | 58,314 |
7.625%, 8/17/2005 | 100,000 | 109,296 |
| Hartford Financial Services Group, Inc., 7.75%, 6/15/2005 | 50,000 | 54,164 |
| Heller Financial, Inc.: | ||
6.0%, 3/19/2004 | 30,000 | 30,293 |
6.375%, 3/15/2006 | 75,000 | 81,813 |
| Household Finance Corp.: | ||
6.375%, 10/15/2011 | 50,000 | 55,059 |
6.5%, 1/24/2006 | 50,000 | 54,074 |
6.75%, 5/15/2011 | 25,000 | 28,144 |
7.0%, 5/15/2012 | 100,000 | 114,037 |
8.0%, 7/15/2010 | 150,000 | 179,637 |
| International Lease Finance Corp.: | ||
5.625%, 6/1/2007 | 10,000 | 10,768 |
5.7%, 7/3/2006 | 50,000 | 53,352 |
| John Deere Capital Corp.: | ||
6.0%, 2/15/2009 | 35,000 | 38,684 |
7.0%, 3/15/2012 | 100,000 | 115,199 |
| John Hancock Financial Services, Inc., 5.625%, 12/1/2008 | 25,000 | 27,005 |
| JP Morgan Chase & Co.: | ||
6.375%, 4/1/2008 | 100,000 | 110,196 |
6.75%, 2/1/2011 | 100,000 | 112,759 |
7.125%, 6/15/2009 | 300,000 | 344,508 |
| KeyCorp, 7.5%, 6/15/2006 | 100,000 | 111,761 |
| KFW International Finance, Inc.: | ||
5.25%, 6/28/2006 | 75,000 | 80,925 |
7.0%, 3/1/2013 | 275,000 | 317,975 |
| Lehman Brothers Holdings, Inc.: | ||
4.0%, 1/22/2008 | 50,000 | 50,997 |
6.25%, 5/15/2006 | 50,000 | 54,320 |
6.625%, 4/1/2004 | 100,000 | 101,306 |
7.0%, 2/1/2008 | 50,000 | 56,472 |
7.75%, 1/15/2005 | 50,000 | 53,428 |
8.25%, 6/15/2007 | 50,000 | 58,281 |
| MBIA, Inc., 9.375%, 2/15/2011 | 125,000 | 162,910 |
| Merrill Lynch & Co., Inc., 6.0%, 2/17/2009 | 250,000 | 274,828 |
| MetLife, Inc., 6.125%, 12/1/2011 | 25,000 | 27,265 |
| Morgan Stanley Dean Witter & Co.: | ||
5.3%, 3/1/2013 | 100,000 | 102,151 |
6.1%, 4/15/2006 | 150,000 | 162,318 |
6.6%, 4/1/2012 | 50,000 | 55,842 |
7.75%, 6/15/2005 | 250,000 | 271,351 |
| National Rural Utilities Cooperative Finance Corp., 5.75%, 11/1/2008 | 100,000 | 108,582 |
| Nationwide Financial Services, 5.9%, 7/1/2012 | 25,000 | 26,092 |
| Nisource Finance Corp., 7.625%, 11/15/2005 | 25,000 | 27,312 |
| Pemex Project Funding Master Trust, 9.125%, 10/13/2010 | 150,000 | 178,125 |
| Pitney Bowes Credit Corp., 8.55%, 9/15/2009 | 100,000 | 121,985 |
| PNC Funding Corp., 6.875%, 7/15/2007 | 300,000 | 335,781 |
| ProLogis: | ||
5.5%, 3/1/2013 | 20,000 | 20,568 |
7.1%, 4/15/2008 | 10,000 | 11,234 |
| Sanwa Bank Ltd., 7.4%, 6/15/2011 | 10,000 | 11,459 |
| Simon Property Group, 6.35%, 8/28/2012 | 100,000 | 108,667 |
| SLM Corp., 4.0%, 1/15/2009 | 50,000 | 50,343 |
| Spieker Properties, Inc., 6.8%, 5/1/2004 | 10,000 | 10,151 |
| The St. Paul Co., Inc., 7.875%, 4/15/2005 | 50,000 | 53,668 |
| Toyota Motor Credit Corp.: | ||
5.5%, 12/15/2008 | 30,000 | 32,830 |
5.65%, 1/15/2007 | 25,000 | 27,554 |
| US Bancorp.: | ||
3.95%, 8/23/2007 | 20,000 | 20,578 |
5.1%, 7/15/2007 | 20,000 | 21,325 |
| US Bank National Association, 6.3%, 2/4/2014 | 100,000 | 110,132 |
| Verizon Global Funding Corp.: | ||
6.75%, 12/1/2005 | 150,000 | 162,760 |
7.25%, 12/1/2010 | 150,000 | 172,708 |
7.75%, 12/1/2030 | 50,000 | 58,736 |
| Wachovia Corp., 7.5%, 7/15/2006 | 100,000 | 112,804 |
| Washington Mutual, Inc., 4.375%, 1/15/2008 | 150,000 | 154,205 |
| Wells Fargo & Co.: | ||
6.45%, 2/1/2011 | 75,000 | 84,213 |
7.55% , 6/21/2010 | 200,000 | 237,050 |
13,033,718 | ||
| Health Care 0.5% | ||
| Aetna, Inc., 7.125%, 8/15/2006 | 50,000 | 55,549 |
| Merck & Co, Inc., 6.4%, 3/1/2028 | 500,000 | 549,511 |
| Schering-Plough Corp., 6.5%, 12/1/2033 | 25,000 | 26,006 |
| UnitedHealth Group, Inc., 4.875%, 4/1/2013 | 25,000 | 25,174 |
| Wyeth, 6.25%, 3/15/2006 | 100,000 | 107,866 |
764,106 | ||
| Industrials 1.4% | ||
| Burlington North Santa Fe, 5.9%, 7/1/2012 | 100,000 | 107,018 |
| Caterpillar, Inc., 9.0%, 4/15/2006 | 50,000 | 56,958 |
| Cendant Corp., 6.25%, 1/15/2008 | 25,000 | 27,271 |
| ChevronTexaco Capital Co., 3.5%, 9/17/2007 | 20,000 | 20,370 |
| CSX Corp., 7.45%, 5/1/2007 | 115,000 | 130,426 |
| Delphi Auto Systems Corp., 6.55%, 6/15/2006 | 50,000 | 53,652 |
| Delphi Corp., 7.125%, 5/1/2029 | 5,000 | 5,085 |
| Delta Air Lines, Inc., Series 02-1, 6.417%, 7/2/2012 | 50,000 | 53,593 |
| FedEx Corp., 9.65%, 6/15/2012 | 50,000 | 65,405 |
| General Motors Acceptance Corp., 8.8%, 3/1/2021 | 200,000 | 231,636 |
| Honeywell International, Inc.: | ||
6.875%, 10/3/2005 | 50,000 | 54,337 |
7.5%, 3/1/2010 | 25,000 | 29,525 |
| Lockheed Martin Corp., 8.2%, 12/1/2009 | 100,000 | 121,435 |
| Norfolk Southern Corp.: | ||
6.2%, 4/15/2009 | 50,000 | 54,987 |
7.8%, 5/15/2027 | 100,000 | 120,106 |
| Northrop Grumman Corp, 7.125%, 2/15/2011 | 200,000 | 231,317 |
| Raytheon Co., 6.75%, 8/15/2007 | 200,000 | 221,585 |
| Republic Services, Inc., 7.125%, 5/15/2009 | 10,000 | 11,476 |
| Union Pacific Corp.: | ||
6.4%, 2/1/2006 | 80,000 | 86,137 |
6.65%, 1/15/2011 | 50,000 | 55,761 |
6.79%, 11/9/2007 | 16,000 | 17,875 |
| United Technologies Corp.: | ||
6.1%, 5/15/2012 | 50,000 | 54,911 |
7.0%, 9/15/2006 | 50,000 | 55,618 |
7.125%, 11/15/2010 | 50,000 | 58,548 |
| Waste Management, Inc.: | ||
6.5%, 11/15/2008 | 50,000 | 55,027 |
7.0%, 7/15/2028 | 50,000 | 53,816 |
2,033,875 | ||
| Information Technology 0.5% | ||
| Citizens Communications, 8.5%, 5/15/2006 | 50,000 | 54,593 |
| Compaq Computer Corp., 7.65%, 8/1/2005 | 100,000 | 107,983 |
| Hewlett-Packard Co., 5.75%, 12/15/2006 | 20,000 | 21,652 |
| International Business Machines Corp.: | ||
4.75%, 11/29/2012 | 100,000 | 100,211 |
6.5%, 1/15/2028 | 100,000 | 109,011 |
| Motorola, Inc.: | ||
7.6%, 1/1/2007 | 200,000 | 222,008 |
7.625%, 11/15/2010 | 50,000 | 57,465 |
| Scana Corp.: | ||
6.25%, 2/1/2012 | 60,000 | 65,548 |
6.875%, 5/15/2011 | 25,000 | 28,403 |
766,874 | ||
| Materials 0.9% | ||
| Alcoa, Inc.: | ||
6.0%, 1/15/2012 | 25,000 | 27,169 |
7.25%, 8/1/2005 | 100,000 | 108,471 |
7.375%, 8/1/2010 | 100,000 | 117,222 |
| Dow Chemical Co., 6.0%, 10/1/2012 | 100,000 | 105,263 |
| E.I. du Pont de Nemours and Co., 6.875%, 10/15/2009 | 150,000 | 173,499 |
| International Flavors & Fragrance, Inc., 6.45%, 5/15/2006 | 10,000 | 10,861 |
| International Paper Co.: | ||
5.85%, 10/30/2012 | 100,000 | 104,183 |
6.75%, 9/1/2011 | 40,000 | 44,471 |
| Meadwestvaco Corp., 6.85%, 4/1/2012 | 70,000 | 76,998 |
| Potash Corp., 7.125%, 6/15/2007 | 300,000 | 336,756 |
| Praxair, Inc., 3.95%, 6/1/2013 | 50,000 | 46,848 |
| Weyerhaeuser Co., 6.75%, 3/15/2012 | 150,000 | 163,641 |
1,315,382 | ||
| Telecommunication Services 1.3% | ||
| AT&T Broadband Corp., 8.375%, 3/15/2013 | 90,000 | 110,119 |
| AT&T Corp.: | ||
6.0%, 3/15/2009 | 9,000 | 9,700 |
8.05%, 11/15/2011 | 200,000 | 230,196 |
| AT&T Wireless Services, Inc.: | ||
7.35%, 3/1/2006 | 25,000 | 27,338 |
7.875%, 3/1/2011 | 200,000 | 231,429 |
8.125%, 5/1/2012 | 35,000 | 41,159 |
| BellSouth Capital Funding, 7.75%, 2/15/2010 | 100,000 | 118,166 |
| BellSouth Corp., 6.0%, 10/15/2011 | 100,000 | 108,424 |
| Cingular Wireless, 6.5%, 12/15/2011 | 75,000 | 82,018 |
| Clear Channel Communications, Inc.: | ||
4.4%, 5/15/2011 | 50,000 | 48,821 |
7.65%, 9/15/2010 | 50,000 | 58,527 |
| GTE North, Inc., 5.65%, 11/15/2008 | 100,000 | 107,368 |
| SBC Communications, Inc.: | ||
5.875%, 8/15/2012 | 150,000 | 159,265 |
6.25%, 3/15/2011 | 50,000 | 54,733 |
| Sprint Capital Corp.: | ||
6.875%, 11/15/2028 | 120,000 | 117,100 |
8.375%, 3/15/2012 | 175,000 | 204,365 |
| Verizon New York, Inc., Series A, 6.875%, 4/1/2012 | 25,000 | 27,663 |
| Verizon Virginia, Inc., 4.625%, 3/15/2013 | 100,000 | 96,379 |
| Verizon Wireless, Inc., 5.375%, 12/15/2006 | 50,000 | 53,355 |
1,886,125 | ||
| Utilities 1.8% | ||
| American Electric Power, 6.125%, 5/15/2006 | 45,000 | 48,491 |
| Arizona Public Service, 6.5%, 3/1/2012 | 25,000 | 27,566 |
| Columbia Energy Group, 7.62%, 11/28/2025 | 25,000 | 27,117 |
| Consolidated Natural Gas Corp., 6.625%, 12/1/2008 | 200,000 | 224,144 |
| Constellation Energy Group, Inc., 7.0%, 4/1/2012 | 25,000 | 28,285 |
| Dominion Resources, Inc.: | ||
7.625%, 7/15/2005 | 75,000 | 81,020 |
8.125%, 6/15/2010 | 90,000 | 107,959 |
| DTE Energy Co.: | ||
6.45%, 6/1/2006 | 40,000 | 43,238 |
7.05%, 6/1/2011 | 50,000 | 56,067 |
| Duke Energy Field Services, 7.5%, 8/16/2005 | 100,000 | 107,446 |
| Exelon Corp., 6.75%, 5/1/2011 | 50,000 | 55,846 |
| FPL Group Capital, Inc., 7.625%, 9/15/2006 | 50,000 | 56,134 |
| General Electric Co., 5.0%, 2/1/2013 | 300,000 | 303,400 |
| Kansas City Power & Light Co., Series B, 6.0%, 3/15/2007 | 25,000 | 26,903 |
| KeySpan Corp.: | ||
6.15%, 6/1/2006 | 50,000 | 54,040 |
7.875%, 2/1/2010 | 25,000 | 29,895 |
8.0%, 11/15/2030 | 50,000 | 63,960 |
| Kinder Morgan, Inc.: | ||
6.5%, 9/1/2012 | 50,000 | 55,175 |
6.65%, 3/1/2005 | 50,000 | 52,806 |
| National Rural Utilities, 8.0%, 3/1/2032 | 100,000 | 124,549 |
| Niagara Mohawk Power Corp.: | ||
7.75%, 5/15/2006 | 85,000 | 94,914 |
Series G, 7.75%, 10/1/2008 | 50,000 | 58,024 |
| Potomac Electic Power, 6.25%, 10/15/2007 | 100,000 | 110,104 |
| PP&L Capital Funding, Inc., 8.375%, 6/15/2007 | 25,000 | 28,578 |
| Progress Energy, Inc.: | ||
5.85%, 10/30/2008 | 25,000 | 26,809 |
6.75%, 3/1/2006 | 50,000 | 54,207 |
6.85%, 4/15/2012 | 35,000 | 39,007 |
7.1%, 3/1/2011 | 90,000 | 101,396 |
| PSE&G Power LLC, 7.75%, 4/15/2011 | 70,000 | 82,392 |
| Public Service Co. of Colorado, 4.875%, 3/1/2013 | 75,000 | 74,968 |
| Sempra Energy, 7.95%, 3/1/2010 | 25,000 | 29,403 |
| South Carolina Electric & Gas, 7.5%, 6/15/2005 | 70,000 | 75,577 |
| Virginia Electric and Power Co.: | ||
5.75%, 3/31/2006 | 25,000 | 26,768 |
7.625%, 7/1/2007 | 100,000 | 115,057 |
| Wisconsin Energy Corp., 6.5%, 4/1/2011 | 50,000 | 55,098 |
2,546,343 | ||
| Total Corporate Bonds (Cost $27,977,943) | 29,953,174 | |
Foreign Bonds - US$ Denominated 4.8% | ||
| Abbey National PLC, 6.69%, 10/17/2005 | 50,000 | 54,075 |
| Alberta Energy Co., Ltd., 7.65%, 9/15/2010 | 10,000 | 11,885 |
| Alcan, Inc.: | ||
4.5%, 5/15/2013 | 100,000 | 96,366 |
4.875%, 9/15/2012 | 10,000 | 9,975 |
5.2%, 1/15/2014 | 25,000 | 25,269 |
| Apache Finance Canada , 7.75%, 12/15/2029 | 25,000 | 30,988 |
| AXA, 8.6%, 12/15/2030 | 50,000 | 63,025 |
| British Columbia, 5.375%, 10/29/2008 | 50,000 | 54,060 |
| British Gas Finance, Inc., 6.625%, 6/1/2018 | 100,000 | 109,899 |
| British Telecommunications PLC: | ||
7.875%*, 12/15/2005 | 50,000 | 55,101 |
8.375%, 12/15/2010 | 50,000 | 60,844 |
8.875%*, 12/15/2030 | 70,000 | 91,532 |
| Canadian Government, 5.25%, 11/5/2008 | 100,000 | 108,381 |
| Canadian National Railways, 4.4%, 3/15/2013 | 50,000 | 48,082 |
| Canadian National Resources, 5.45%, 10/1/2012 | 25,000 | 25,942 |
| Corp. Andina De Fomento: | ||
5.2% , 5/21/2013 | 25,000 | 24,883 |
6.875%, 3/15/2012 | 10,000 | 11,096 |
| Deutsche Telekom International Finance BV: | ||
8.0%, 6/15/2010 | 150,000 | 181,367 |
8.25%, 6/15/2005 | 200,000 | 216,951 |
| Dow Capital BV, 9.2%, 6/1/2010 | 50,000 | 60,815 |
| European Investment Bank: | ||
4.0%, 8/30/2005 | 50,000 | 52,019 |
4.625%, 3/1/2007 | 400,000 | 424,938 |
| France Telecom: | ||
8.45%, 3/1/2006 | 75,000 | 83,775 |
9.0%, 3/1/2011 | 75,000 | 90,081 |
9.75%, 3/1/2031 | 75,000 | 99,650 |
| Government of Malaysia, 8.75%, 6/1/2009 | 10,000 | 12,268 |
| Hanson Overseas BV, 6.75%, 9/15/2005 | 150,000 | 161,030 |
| HSBC Holding PLC, 7.5%, 7/15/2009 | 150,000 | 175,387 |
| Hydro-Quebec, Series HY, 8.4%, 1/15/2022 | 100,000 | 131,085 |
| INTELSAT, 144A, 6.5%, 11/1/2013 | 25,000 | 26,085 |
| Inter-American Development Bank, 6.625%, 3/7/2007 | 300,000 | 335,990 |
| Kingdom of Spain, 7.0%, 7/19/2005 | 75,000 | 80,655 |
| Kingdom of Sweden, 12.0%, 2/1/2010 | 220,000 | 307,742 |
| Koninklijke KPN NV: | ||
8.0%, 10/1/2010 | 25,000 | 29,906 |
8.375%, 10/1/2030 | 50,000 | 63,386 |
| Korea Development Bank: | ||
5.25%, 11/16/2006 | 50,000 | 52,976 |
7.125%, 4/22/2004 | 75,000 | 75,821 |
| National Australia Bank, 8.6%, 5/19/2010 | 50,000 | 61,918 |
| National Westminster Bank, 7.375%, 10/1/2009 | 50,000 | 58,489 |
| Nippon Telegraph & Telephone Corp., 6.0%, 3/25/2008 | 10,000 | 10,987 |
| Ontario Electricity Financial Corp., 6.1%, 1/30/2008 | 35,000 | 38,735 |
| Province of Manitoba, 5.5%, 10/1/2008 | 200,000 | 215,722 |
| Province of Nova Scotia, 5.75%, 2/27/2012 | 50,000 | 53,714 |
| Province of Ontario: | ||
4.2%, 6/30/2005 | 125,000 | 129,109 |
4.375%, 2/15/2013 | 100,000 | 99,048 |
| Province of Quebec: | ||
5.75%, 2/15/2009 | 50,000 | 54,668 |
7.0%, 1/30/2007 | 200,000 | 224,484 |
| Repsol International Finance, 7.45%, 7/15/2005 | 100,000 | 107,515 |
| Republic of Chile, 6.875%, 4/28/2009 | 10,000 | 11,310 |
| Republic of Finland, 5.875%, 2/27/2006 | 200,000 | 215,427 |
| Republic of Italy: | ||
3.625%, 9/14/2007 | 20,000 | 20,408 |
6.0%, 2/22/2011 | 225,000 | 250,811 |
6.875%, 9/27/2023 | 200,000 | 235,580 |
| Republic of Korea, 8.875%, 4/15/2008 | 50,000 | 60,219 |
| Royal Bank of Scotland Group PLC, 7.648%, 8/31/2049 | 50,000 | 59,660 |
| Santander Central Hispano, 7.625%, 9/14/2010 | 50,000 | 59,271 |
| Santander Financial Issuances, 7.0%, 4/1/2006 | 20,000 | 21,860 |
| Swedish Export Credit Corp., 2.875%, 1/26/2007 | 25,000 | 25,124 |
| Telefonica Europe BV: | ||
7.35%, 9/15/2005 | 40,000 | 43,407 |
7.75%, 9/15/2010 | 125,000 | 148,404 |
| The International Bank for Reconstruction and Development, 4.375%, 9/28/2006 | 250,000 | 263,684 |
| United Mexican States: | ||
4.625%, 10/8/2008 | 25,000 | 25,312 |
6.375%, 1/16/2013 | 250,000 | 259,375 |
8.375%, 1/14/2011 | 50,000 | 59,375 |
8.625%, 3/12/2008 | 40,000 | 47,100 |
9.875%, 1/15/2007 | 100,000 | 119,000 |
9.875%, 2/1/2010 | 190,000 | 239,875 |
| Vodafone Group PLC: | ||
7.625%, 2/15/2005 | 50,000 | 53,303 |
7.75%, 2/15/2010 | 50,000 | 59,260 |
| Total Foreign Bonds - US$ Denominated (Cost $6,329,150) | 6,875,484 | |
Asset Backed 1.5% | ||
| Automobile Receivables 0.1% | ||
| Ford Credit Auto Owner Trust, "B", Series 2002-C, 4.22%, 12/15/2006 | 100,000 | 103,064 |
| Credit Card Receivables 1.1% | ||
| American Express Credit Account Master Trust, "A", Series 1999-2, 5.95%, 12/15/2006 | 50,000 | 50,878 |
| Chase Credit Card Master Trust, "A", Series 1999-3, 6.66%, 1/15/2007 | 100,000 | 103,330 |
| Chemical Master Credit Card Trust, "A", Series 1996-3, 7.09%, 2/15/2009 | 200,000 | 218,773 |
| Citibank Credit Card Master Trust I: | ||
"A", Series 1999-2, 5.875%, 3/10/2011 | 100,000 | 109,804 |
"A", Series 1999-7, 6.65%, 11/15/2006 | 250,000 | 261,361 |
| Discover Card Master Trust I, "A", Series 2002-2, 5.15%, 10/15/2009 | 200,000 | 213,943 |
| Fleet Credit Card Master Trust II, "A", Series 1999-C, 6.9%, 4/16/2007 | 40,000 | 41,616 |
| MBNA Credit Card Master Note Trust, "A", Series 1999-J, 7.0%, 2/15/2012 | 200,000 | 231,177 |
| MBNA Master Credit Card Trust USA: | ||
"A", Series 1999-B, 5.9% , 8/15/2011 | 50,000 | 55,136 |
"A", Series 1999-M, 6.6%, 4/16/2007 | 150,000 | 156,700 |
| Prime Credit Card Master Trust, "A", Series 2000-1, 6.7%, 10/15/2009 | 100,000 | 106,874 |
1,549,592 | ||
| Miscellaneous 0.3% | ||
| Detroit Edison Securitization, "A3", Series 2001-1, 5.875%, 3/1/2010 | 100,000 | 108,603 |
| Peco Energy Transition Trust: | ||
"A6", Series 1999-A, 6.05%, 3/1/2009 | 50,000 | 54,172 |
"A7", Series 1999-A, 6.13%, 3/1/2009 | 50,000 | 55,219 |
| West Penn Funding LLC, "A4", Series 1999-A, 6.98%, 12/26/2008 | 250,000 | 282,984 |
500,978 | ||
| Total Asset Backed (Cost $1,995,132) | 2,153,634 | |
US Government Agency Sponsored Pass-Thrus 17.2% | ||
| Federal Home Loan Mortgage Corp.: | ||
2.875%, 12/15/2006 | 1,000,000 | 1,007,169 |
5.0%, 12/1/2033 (b) (c) | 5,000,000 | 4,934,375 |
6.0%, 12/1/2033 (c) | 1,000,000 | 1,033,125 |
| Federal National Mortgage Association: | ||
4.5%, 12/1/2018 (b) (c) | 3,000,000 | 3,002,814 |
5.0%, 12/1/2018 (c) | 4,500,000 | 4,588,596 |
5.5%, 12/1/2018 (c) | 5,000,000 | 5,064,083 |
6.0%, 12/1/2033 (c) | 4,750,000 | 4,908,830 |
| Total US Government Agency Sponsored Pass-Thrus (Cost $24,462,464) | 24,538,992 | |
Collateralized Mortgage Obligations 2.0% | ||
| Bear Stearns Commercial Mortgage Securities: | ||
"A2", Series 1999-WF2, 7.08%, 7/15/2031 | 400,000 | 454,918 |
"A1", Series 2000-WF2, 7.11%, 10/15/2032 | 392,428 | 436,228 |
"A2", Series 2000-WF8, 7.78%, 2/15/2032 | 150,000 | 176,491 |
| Capco America Securitization Corp., "A1B", Series 1998-D7, 6.26%, 10/15/2030 | 100,000 | 110,751 |
| CS First Boston Mortgage Securities Corp., "A3", Series 2001-CF2, 6.238%, 2/15/2034 | 250,000 | 274,474 |
| DLJ Commercial Mortgage Corp., "A1B", Series 1998-CG1, 6.41%, 6/10/2031 | 100,000 | 111,051 |
| First Union National Bank Commercial Mortgage, "A1", Series 1999-C4, 7.184%, 12/15/2031 | 126,574 | 135,152 |
| First Union-Lehman Brothers-Bank of America, "A2", Series 1998-C2, 6.56%, 11/18/2035 | 100,000 | 111,545 |
| LB Commercial Conduit Mortgage Trust: | ||
"A2", Series 1999-C1, 6.78%, 6/15/2031 | 150,000 | 169,227 |
"A1", Series 1999-C2, 7.105%, 10/15/2032 | 126,803 | 136,899 |
| LB-UBS Commercial Mortgage Trust: | ||
"A2", Series 2002-C1, 5.969%, 3/15/2026 | 100,000 | 109,091 |
"A2", Series 2001-C2, 6.653%, 11/15/2027 | 100,000 | 113,045 |
| Morgan Stanley Capital, "A1", Series 1998-WF2, 6.34%, 7/15/2030 | 76,709 | 80,860 |
| Morgan Stanley Dean Witter Capital I: | ||
"A2", Series 2002-TOP7, 5.98%, 1/15/2039 | 185,000 | 201,211 |
"A2", Series 1999-LIFE, 7.11%, 4/15/2033 | 100,000 | 114,380 |
| Nomura Asset Securities Corp., "A1B", Series 1998-D6, 6.59%, 3/15/2030 | 100,000 | 111,905 |
| Total Collateralized Mortgage Obligations (Cost $2,573,325) | 2,847,228 | |
Municipal Investments 0.1% | ||
| Illinois, State GO, Taxable Pension, 5.1%, 6/1/2033 | 75,000 | 68,601 |
| Oregon, State GO, 5.892%, 6/1/2027 | 25,000 | 25,776 |
| Total Municipal Investments (Cost $94,257) | 94,377 | |
Government National Mortgage Association 4.1% | ||
| Government National Mortgage Association: | ||
5.5%, 12/1/2099 (b) (c) | 2,000,000 | 2,033,124 |
6.0% with various maturities until 12/1/2033 (c) | 1,794,004 | 1,865,027 |
6.5% with various maturities until 8/20/2032 | 652,130 | 688,095 |
7.5% with various maturities until 6/15/2032 | 438,094 | 470,154 |
8.0% with various maturities until 3/15/2032 | 604,220 | 658,703 |
8.5%, 11/15/2029 | 65,151 | 70,891 |
9.0%, 1/15/2023 | 30,925 | 34,538 |
| Total Government National Mortgage Association (Cost $5,702,026) | 5,820,532 | |
US Government Backed 23.9% | ||
| US Treasury Bonds: | ||
3.0%, 2/15/2008 (f) | 2,500,000 | 2,511,620 |
3.625%, 5/15/2013 | 1,000,000 | 961,211 |
5.0%, 2/15/2011 | 320,000 | 343,662 |
5.25%, 11/15/2028 | 675,000 | 679,878 |
5.375%, 2/15/2031 | 1,525,000 | 1,590,349 |
6.0%, 2/15/2026 | 300,000 | 332,684 |
6.25%, 8/15/2023 | 700,000 | 797,864 |
6.875%, 8/15/2025 | 795,000 | 972,539 |
7.25%, 8/15/2022 | 565,000 | 713,070 |
7.625%, 11/15/2022 | 90,000 | 117,879 |
7.875%, 2/15/2021 | 300,000 | 399,152 |
8.0%, 11/15/2021 | 1,000,000 | 1,350,547 |
8.75%, 8/15/2020 | 450,000 | 643,500 |
11.25%, 2/15/2015 | 1,150,000 | 1,840,629 |
| US Treasury Notes: | ||
1.625%, 3/31/2005 (f) | 3,900,000 | 3,913,408 |
2.375%, 8/15/2006 (f) | 2,000,000 | 2,010,782 |
3.0%, 11/15/2007 | 1,500,000 | 1,512,891 |
3.125%, 9/15/2008 | 4,125,000 | 4,122,583 |
3.375%, 11/15/2008 (f) | 4,000,000 | 4,031,720 |
4.25%, 8/15/2013 | 2,750,000 | 2,753,437 |
6.875%, 5/15/2006 (f) | 2,000,000 | 2,223,360 |
8.75%, 5/15/2020 | 300,000 | 428,391 |
| Total US Government Backed (Cost $33,695,419) | 34,251,156 | |
US Government Sponsored Agencies 20.8% | ||
| Federal Home Loan Bank: | ||
3.875%, 6/14/2013 | 1,000,000 | 945,130 |
4.5%, 11/15/2012 | 1,000,000 | 995,876 |
| Federal Home Loan Mortgage Corp.: | ||
3.5%, 9/15/2007 | 1,700,000 | 1,729,357 |
4.5% with various maturities until 1/15/2013 | 3,000,000 | 3,047,820 |
5.0%, 12/1/2017 | 2,209,427 | 2,252,268 |
5.5% with various maturities until 12/1/2033 (c) | 1,101,329 | 1,117,342 |
6.25%, 7/15/2032 | 133,000 | 144,639 |
6.5% with various maturities until 12/1/2033 (c) | 2,136,897 | 2,239,363 |
6.75%, 9/15/2029 | 3,000 | 3,452 |
6.875%, 1/15/2005 | 2,000,000 | 2,112,940 |
7.0% with various maturities until 12/1/2026 | 237,627 | 252,611 |
7.5% with various maturities until 10/1/2030 | 120,788 | 129,984 |
| Federal National Mortgage Association: | ||
4.375%, 10/15/2006 | 1,600,000 | 1,680,701 |
5.25%, 1/15/2009 | 500,000 | 538,121 |
5.5%, 12/1/2033 (c) | 1,000,000 | 1,035,938 |
6.0% with various maturities until 7/1/2029 (c) | 2,276,122 | 2,377,984 |
6.25%, 5/15/2029 | 800,000 | 866,624 |
6.5% with various maturities until 12/1/2033 (c) | 3,937,084 | 4,137,639 |
6.96%, 4/2/2007 | 500,000 | 565,299 |
7.0% with various maturities until 8/1/2032 | 1,991,970 | 2,117,499 |
7.125%, 1/15/2030 | 50,000 | 60,225 |
7.25%, 5/15/2030 | 650,000 | 793,712 |
7.5% with various maturities until 4/1/2028 | 119,781 | 128,406 |
8.0% with various maturities until 11/1/2031 | 333,861 | 361,378 |
8.5% with various maturities until 8/1/2031 | 128,507 | 138,995 |
| Total US Government Sponsored Agencies (Cost $29,064,328) | 29,773,303 | |
Shares | Value ($) | |
Cash Equivalents 34.8% | ||
| Cash Management Fund Institutional, 1.15% (d) | 37,351,668 | 37,351,668 |
| Daily Assets Fund Institutional, 1.08% (d) (e) | 12,341,813 | 12,341,813 |
| Total Cash Equivalents (Cost $49,693,481) | 49,693,481 | |
% of Net Assets | Value ($) | |
| Total Investment Portfolio (Cost $181,587,525) (a) | 130.1 | 186,001,361 |
| Other Assets and Liabilities, Net | (30.1) | (43,022,921) |
| Net Assets | 100.0 | 142,978,440 |
* Floating rate notes are securities whose yields vary with a designated market index or market rate, such as the coupon-equivalent of the US Treasury bill rate. These securities are shown at their current rate as of December 31, 2003.
(a) The cost for federal income tax purposes was $181,425,890. At December 31, 2003, net unrealized appreciation for all securities based on tax cost was $4,575,471. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $4,950,479 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $375,008.
(b) When issued or forward delivery securities included.
(c) Mortgage dollar roll included.
(d) Cash Management Fund Institutional and Daily Assets Fund Institutional, affiliates, are also managed by Deutsche Asset Management, Inc. The rate shown is the annualized seven-day yield at period end.
(e) Represents collateral held in connection with securities lending.
(f) All or a portion of these securities were on loan (see Notes to Financial Statements). The value of all securities loaned at December 31, 2003 amounted to $12,030,563 which is 8.4% of net assets.
Included in the portfolio are investments in mortgage or asset-backed securities which are interests in separate pools of mortgages or assets. Effective maturities of these investments may be shorter than stated maturities due to prepayments. Some separate investments in the Federal Home Loan Mortgage Corp., the Federal National Mortgage Association and the Government National Mortgage Association issues which have similar coupon rates have been aggregated for presentation purposes in the investment portfolio.
144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
GO: General Obligation
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities as of December 31, 2003 | |
| Assets | |
| Investments: Investments in securities, at value (cost $131,894,044) | $ 136,307,880 |
Investment in Cash Management Fund Institutional (cost $37,351,668) | 37,351,668 |
Investment in Daily Assets Fund Institutional (cost $12,341,813) | 12,341,813 |
| Total investment in securities, at value (cost $181,587,525) | 186,001,361 |
| Receivable for investments sold | 2,188,984 |
| Due from Advisor | 19,564 |
| Interest receivable | 1,378,483 |
| Total assets | 189,588,392 |
| Liabilities | |
| Payable for investments purchased | 206,596 |
| Payable for collateral under securities lending agreements | 12,341,813 |
| Payable for when-issued and forward delivery securities | 4,983,131 |
| Payable for investments purchased - mortgage dollar rolls | 28,974,752 |
| Deferred mortgage dollar roll income | 48,361 |
| Other accrued expenses | 55,299 |
| Total liabilities | 46,609,952 |
| Net assets, at value | $ 142,978,440 |
The accompanying notes are an integral part of the financial statements.
Statement of Operations for the year ended December 31, 2003 | |
| Investment Income | |
| Interest | $ 5,199,106 |
| Interest - Cash Management Fund Institutional | 315,481 |
| Securities lending income | 1,211 |
| Mortgage dollar roll income | 437,822 |
| Total Income | 5,953,620 |
| Expenses: Investment advisory fees | 155,574 |
| Administrator service fee | 67,564 |
| Auditing | 41,542 |
| Legal fees | 12,901 |
| Trustees' fees and expenses | 2,751 |
| Other | 33,371 |
| Total expenses, before expense reductions | 313,703 |
| Expense reductions | (178,580) |
| Total expenses, after expense reductions | 135,123 |
| Net investment income | 5,818,497 |
| Realized and Unrealized Gain (Loss) on Investment Transactions | |
| Net realized gain (loss) from investments | 1,172,749 |
| Net unrealized appreciation (depreciation) during the period on investments | (1,860,286) |
| Net gain (loss) on investment transactions | (687,537) |
| Net increase (decrease) in net assets resulting from operations | $ 5,130,960 |
The accompanying notes are an integral part of the financial statements.
Statement of Cash Flows for the year ended December 31, 2003 | |
| Cash Flows from Operating Activities: | |
| Investment income received | $ 5,840,478 |
| Payment of operating expenses | (125,538) |
| Proceeds from sales and maturities of investments | 347,574,011 |
| Purchases of investments | (385,049,530) |
| Net purchases, sales and maturities of short-term investments | (19,655,135) |
| Cash provided (used) by operating activities | $ (51,415,714) |
| Cash Flows from Financing Activities: | |
| Net increase (decrease) in payable for investments purchased - mortgage dollar rolls | $ 13,190,924 |
| Proceeds from capital invested | 123,426,910 |
| Value of capital withdrawn | (85,169,389) |
| Cash provided (used) by financing activities | 51,448,445 |
| Increase (decrease) in cash | 32,731 |
| Cash at beginning of period | (32,731) |
| Cash at end of period | $ - |
| Reconciliation of Net Increase (Decrease) in Net Assets Resulting from Operations to Cash Used by Operating Activities: | |
| Net increase (decrease) in net assets resulting from operations | $ 5,130,960 |
| Net (increase) decrease in cost of investments | (59,423,097) |
| Net increase (decrease) in unrealized appreciation (depreciation) on investments | 1,860,286 |
| (Increase) decrease in interest receivable | (118,401) |
| (Increase) decrease in other assets | 7,091 |
| (Increase) decrease in receivable for investments sold | (2,188,984) |
| Increase (decrease) in payable for investments purchased | 3,306,846 |
| Increase (decrease) in other accrued expenses and payables | 9,585 |
| Cash provided (used) by operating activities | $ (51,415,714) |
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Net Assets | ||
| Increase (Decrease) in Net Assets | Years Ended December 31, | |
2003 | 2002 | |
| Operations: Net investment income | $ 5,818,497 | $ 5,986,193 |
| Net realized gain (loss) on investment transactions | 1,172,749 | 2,233,751 |
| Net unrealized appreciation (depreciation) on investment transactions during the period | (1,860,286) | 3,403,360 |
| Net increase (decrease) in net assets resulting from operations | 5,130,960 | 11,623,304 |
| Capital transaction in shares of beneficial interest: Proceeds from capital invested | 123,424,314 | 17,605,303 |
| Value of capital withdrawn | (85,169,389) | (60,129,225) |
| Net increase (decrease) in net assets from capital transactions in shares of beneficial interest | 38,254,925 | (42,523,922) |
| Increase (decrease) in net assets | 43,385,885 | (30,900,618) |
| Net assets at beginning of period | 99,592,555 | 130,493,173 |
| Net assets at end of period | $ 142,978,440 | $ 99,592,555 |
The accompanying notes are an integral part of the financial statements.
Years Ended December 31, | 2003 | 2002 | 2001 | 2000 | 1999 |
| Ratios to Average Net Assets and Supplemental Data | |||||
| Net assets, end of period ($ millions) | 143 | 100 | 130 | 130 | 110 |
| Ratio of expenses before expense reductions (%) | .23 | .25 | .24 | .28 | .22 |
| Ratio of expenses after expense reductions (%) | .10 | .10 | .10 | .10 | .10 |
| Ratio of net investment income (loss) (%) | 4.31 | 4.98 | 5.70 | 6.34 | 5.82 |
| Portfolio turnover rate (%) | 173a | 235a | 232 | 221 | 224 |
| Total Investment Return (%)b,c | 3.80 | 10.09 | - | - | - |
| a The portfolio turnover rates including mortgage dollar roll transactions were 271% and 266% for the years ended December 31, 2003 and December 31, 2002, respectively. b Total return would have been lower had certain expenses not been reduced. c Total investment return for the Portfolio was derived from the performance of the Premier Class of the Scudder US Bond Index Fund. | |||||
A. Significant Accounting Policies
The US Bond Index Portfolio (the "Portfolio"), a series of the Scudder Investment Portfolios (the "Trust"), formerly BT Investment Portfolios, is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end management investment company organized as a New York business trust.
The Portfolio'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 Portfolio 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 Portfolio. 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.
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 investments companies and Cash Management Fund Institutional 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.
Mortgage Dollar Rolls. The Portfolio may enter into mortgage dollar rolls in which the Portfolio sells to a bank or broker/dealer (the "counterparty") mortgage-backed securities for delivery in the current month and simultaneously contracts to repurchase similar, but not identical, securities on a fixed date. The counterparty receives all principal and interest payments, including prepayments, made on the security while it is the holder. The Portfolio receives compensation as consideration for entering into the commitment to repurchase. The compensation is paid in the form of a lower price for the security upon its repurchase, or alternatively, a fee. Mortgage dollar rolls may be renewed with a new sale and repurchase price and a cash settlement made at each renewal without physical delivery of the securities subject to the contract.
Mortgage dollar rolls may be treated for purposes of the 1940 Act as borrowings by the Portfolio because they involve the sale of a security coupled with an agreement to repurchase. A mortgage dollar roll involves costs to the Portfolio. For example, while the Portfolio receives compensation as consideration for agreeing to repurchase the security, the Portfolio forgoes the right to receive all principal and interest payments while the counterparty holds the security. These payments to the counterparty may exceed the compensation received by the Portfolio, thereby effectively charging the Portfolio interest on its borrowing. Further, although the Portfolio can estimate the amount of expected principal prepayment over the term of the mortgage dollar roll, a variation in the actual amount of prepayment could increase or decrease the cost of the Portfolio's borrowing.
Certain risks may arise upon entering into mortgage dollar rolls from the potential inability of counterparties to meet the terms of their commitments. Additionally, the value of such securities may change adversely before the Portfolio is able to repurchase them. There can be no assurance that the Portfolio's use of the cash that it receives from a mortgage dollar roll will provide a return that exceeds its borrowing costs.
When-Issued/Delayed Delivery Securities. The Portfolio may purchase securities with delivery or payment to occur at a later date beyond the normal settlement period. At the time the Portfolio enters into a commitment to purchase a security, the transaction is recorded and the value of the security is reflected in the net asset value. The price of such security and the date when the security will be delivered and paid for are fixed at the time the transaction is negotiated. The value of the security may vary with market fluctuations. No interest accrues to the Portfolio until payment takes place. At the time the Portfolio enters into this type of transaction it is required to segregate cash or other liquid assets at least equal to the amount of the commitment.
Certain risks may arise upon entering into when-issued or delayed delivery securities from the potential inability of counterparties to meet the terms of their contracts or if the issuer does not issue the securities due to political, economic, or other factors. Additionally, losses may arise due to changes in the value of the underlying securities.
Federal Income Taxes. The Portfolio is considered a partnership under the Internal Revenue Code. Therefore, no federal income tax provision is necessary.
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. Realized gains and losses from investment transactions are recorded on an identified cost basis. All premiums and discounts are amortized/accreted for both tax and financial reporting purposes.
The Portfolio makes a daily allocation of its income, expenses and realized and unrealized gains and losses from securities and foreign currency transactions to its investors in proportion to their investment in the Portfolio.
B. Purchases and Sales of Securities
During the year ended December 31, 2003, purchases and sales of investment securities (excluding short-term investments, mortgage dollar rolls and US Treasury obligations) aggregated $185,878,525 and $197,183,462, respectively. Purchases and sales of US Treasury obligations aggregated $46,970,665 and $25,579,533, respectively. Mortgage dollar rolls aggregated $155,500,000 and $127,000,000, respectively.
C. Related Parties
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 Asset Management, Inc. ("DeAM, Inc." or the "Advisor") is the Advisor for the Portfolio and Investment Company Capital Corp. ("ICCC" or the "Administrator") is the Administrator for the Portfolio, both wholly owned subsidiaries of Deutsche Bank AG.
Investment Advisory Agreement. Under the Investment Advisory Agreement, the Advisor directs the investments of the Portfolio in accordance with its investment objectives, policies and restrictions. The advisory fee payable under the Investment Advisory Agreement is equal to an annual rate of 0.15% of the Portfolio's average daily net assets, computed and accrued daily and payable monthly. Effective April 25, 2003, Northern Trust Investments, N.A. ("NTI") serves as sub-advisor to the Portfolio and is paid by the Advisor for its services. NTI is responsible for the day to day management of the Portfolio. The Advisor does not impose advisory fees for the portion of assets invested in the affiliated money market fund, Cash Management Fund Institutional.
For the year ended December 31, 2003, the Advisor and Administrator maintained the annualized expenses of the Portfolio at not more than 0.10% of the Portfolio's average daily net assets. Accordingly, for the year ended December 31, 2003, the advisory fee pursuant to the Investment Advisory Agreement was $155,574, all of which was waived.
Administrator Service Fee. For its services as Administrator, ICCC receives a fee (the "Administrator Service Fee") of 0.05% of the Portfolio's average daily net assets, computed and accrued daily and payable monthly. For the year ended December 31, 2003, the Administrator Service Fee was $67,564, of which $23,006 was waived and none is unpaid at December 31, 2003.
Deutsche Bank Trust Company Americas, an affiliate of the Portfolio's Advisor and Administrator, served as the Portfolio's custodian. Effective May 9, 2003, State Street Bank and Trust Company ("State Street") became the Portfolio's custodian.
Trustees' Fees and Expenses. As compensation for his or her services, each Independent Trustee receives an aggregate annual fee, plus a fee for each meeting attended (plus reimbursement for reasonable out-of-pocket expenses incurred in connection with his or her attendance at board and committee meetings) from each Fund in the Fund Complex for which he or she serves. In addition, the Chairman of the Fund Complex's Audit Committee receives an annual fee for their services. Payment of such fees and expenses is allocated among all such Funds described above in direct proportion to their relative net assets.
Other. The Portfolio may invest in Cash Management Fund Institutional, an open-end management investment company managed by DeAM, Inc.
D. Securities Lending
The Portfolio may lend securities to financial institutions. The Portfolio retains beneficial ownership of the securities it has loaned and continues to receive interest and dividends paid by the securities and to participate in any changes in their market value. The Portfolio requires the borrowers of the securities to maintain collateral with the Portfolio in the form of cash and/or government securities equal to 102 percent of the value of domestic securities on loan. The Portfolio may invest the cash collateral in an affiliated money market fund. The Portfolio receives compensation for lending its securities either in the form of fees or by earning interest on invested cash collateral. Either the Portfolio or the borrower may terminate the loan. The Portfolio is subject to all investment risks associated with the value of any cash collateral received, including, but not limited to, interest rate, credit and liquidity risk associated with such investments.
E. Line of Credit
The Portfolio and several other affiliated funds (the "Participants") shared in a $200 million revolving credit facility administered by a syndicate of banks for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Participants were charged an annual commitment fee which was allocated pro-rata based upon net assets among each of the Participants. Interest was calculated at the Federal Funds Rate plus 0.625 percent.
Effective April 11, 2003, the Portfolio entered into a new revolving credit facility administered by J.P. Morgan Chase Bank that provides $1.25 billion of credit coverage. The new revolving credit facility covers the funds and portfolios advised or administered by DeAM, Inc. or its affiliates. Interest is calculated at the Federal Funds Rate plus 0.5 percent. The Portfolio may borrow up to a maximum of 33 percent of its net assets under the agreement.
To the Trustees of Scudder Investment Portfolios (formerly BT Investment Portfolios) and Holders of Beneficial Interest of
US Bond Index Portfolio:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations, of cash flows and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the US Bond Index Portfolio (the "Portfolio") at December 31, 2003, and the results of its operations, its cash flows, the changes in its net assets and the financial highlights for the periods indicated therein, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Portfolio's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
Boston, Massachusetts | PricewaterhouseCoopers LLP |
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 |
Premier Class | |
Nasdaq Symbol | BTUSX |
CUSIP Number | 81111W 204 |
Fund Number | 548 |
ITEM 2. CODE OF ETHICS.
As of the end of the period, December 31, 2003, Scudder Advisor Funds II 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. S.
Leland Dill. 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.
US BOND INDEX FUND
FORM N-CSR DISCLOSURE RE: AUDIT FEES
The following table shows the amount of fees that PricewaterhouseCoopers, LLP
("PWC"), the Fund's auditor, billed to the Fund during the Fund's last two
fiscal years. For engagements with PWC entered into on or after May 6, 2003, the
Audit Committee approved in advance all audit services and non-audit services
that PWC provided to the Fund.
The Audit Committee has delegated certain pre-approval responsibilities to its
Chairman (or, in his absence, any other member of the Audit Committee).
Services that the Fund's Auditor Billed to the Fund
- --------------------------------------------------------------------------------
Fiscal Year Audit Fees Audit-Related Tax Fees All Other
Ended Billed Fees Billed Billed Fees Billed
December 31 to Fund to Fund to Fund to Fund
- --------------------------------------------------------------------------------
2003 $14,200 $1,237 $7,520 $0
- --------------------------------------------------------------------------------
2002 $9,000 $0 $5,250 $0
- --------------------------------------------------------------------------------
The above "Tax Fees" were billed for professional services rendered for tax
compliance.
Services that the Fund's Auditor Billed to the Adviser and
Affiliated Fund Service Providers
The following table shows the amount of fees billed by PWC to Deutsche
Investment Management Americas, Inc. ("DeIM" or the "Adviser"), and any entity
controlling, controlled by or under common control with DeIM ("Control
Affiliate") that provides ongoing services to the Fund ("Affiliated Fund Service
Provider"), for engagements directly related to the Fund's operations and
financial reporting, during the Fund's last two fiscal years.
- --------------------------------------------------------------------------------
Audit-Related All
Fees Billed to Tax Fees Billed to Other Fees Billed
Fiscal Year Adviser and Adviser and to Adviser and
Ended Affiliated Fund Affiliated Fund Affiliated Fund
December 31 Service Providers Service Providers Service Providers
- --------------------------------------------------------------------------------
2003 $538,457 $0 $0
- --------------------------------------------------------------------------------
2002 $399,300 $69,500 $92,400
- --------------------------------------------------------------------------------
The "Audit-Related Fees" were billed for services in connection with the
assessment of internal controls, agreed-upon procedures and additional related
procedures.
Non-Audit Services
The following table shows the amount of fees that PWC billed during the Fund's
last two fiscal years for non-audit services. For engagements entered into on or
after May 6, 2003, the Audit Committee pre-approved all non-audit services that
PWC provided to the Adviser and any Affiliated Fund Service Provider that
related directly to the Fund's operations and financial reporting. The Audit
Committee requested and received information from PWC about any non-audit
services that PWC rendered during the Fund's last fiscal year to the Adviser and
any Affiliated Fund Service Provider. The Committee considered this information
in evaluating PWC's independence.
- --------------------------------------------------------------------------------
Total Non-Audit Fees
billed to Adviser and Total Non-Audit
Affiliated Fund Fees billed
Service Providers to Adviser
Total (engagements related and Affiliated
Non-Audit directly to the Fund Service
Fees operations and Providers
Billed financial reporting (all other Total of
Fiscal Year to Fund of the Fund) engagements) (A), (B)
Ended
December 31 (A) (B) (C) and (C)
- --------------------------------------------------------------------------------
2003 $7,520 $0 $3,967,000 $3,974,520
- --------------------------------------------------------------------------------
2002 $5,250 $161,900 $17,092,950 $17,260,100
- --------------------------------------------------------------------------------
All other engagement fees were billed for services in connection with risk
management, tax services and process improvement/integration initiatives for
DeIM and other related entities that provide support for the operations of the
fund.
US BOND INDEX PORTFOLIO
FORM N-CSR DISCLOSURE RE: AUDIT FEES
The following table shows the amount of fees that PricewaterhouseCoopers, LLP
("PWC"), the Fund's auditor, billed to the Fund during the Fund's last two
fiscal years. For engagements with PWC entered into on or after May 6, 2003, the
Audit Committee approved in advance all audit services and non-audit services
that PWC provided to the Fund.
The Audit Committee has delegated certain pre-approval responsibilities to its
Chairman (or, in his absence, any other member of the Audit Committee).
Services that the Fund's Auditor Billed to the Fund
- --------------------------------------------------------------------------------
Fiscal Year Audit Fees Audit-Related Tax Fees All Other
Ended Billed Fees Billed Billed Fees Billed
December 31 to Fund to Fund to Fund to Fund
- --------------------------------------------------------------------------------
2003 $38,700 $1,237 $4,000 $0
- --------------------------------------------------------------------------------
2002 $23,000 $0 $4,175 $0
- --------------------------------------------------------------------------------
The above "Tax Fees" were billed for professional services rendered for tax
compliance.
Services that the Fund's Auditor Billed to the Adviser and
Affiliated Fund Service Providers
The following table shows the amount of fees billed by PWC to Deutsche
Investment Management Americas, Inc. ("DeIM" or the "Adviser"), and any entity
controlling, controlled by or under common control with DeIM ("Control
Affiliate") that provides ongoing services to the Fund ("Affiliated Fund Service
Provider"), for engagements directly related to the Fund's operations and
financial reporting, during the Fund's last two fiscal years.
- --------------------------------------------------------------------------------
Audit-Related All
Fees Billed to Tax Fees Billed to Other Fees Billed
Fiscal Year Adviser and Adviser and to Adviser and
Ended Affiliated Fund Affiliated Fund Affiliated Fund
December 31 Service Providers Service Providers Service Providers
- --------------------------------------------------------------------------------
2003 $538,457 $0 $0
- --------------------------------------------------------------------------------
2002 $399,300 $69,500 $92,400
- --------------------------------------------------------------------------------
The "Audit-Related Fees" were billed for services in connection with the
assessment of internal controls, agreed-upon procedures and additional related
procedures.
Non-Audit Services
The following table shows the amount of fees that PWC billed during the Fund's
last two fiscal years for non-audit services. For engagements entered into on or
after May 6, 2003, the Audit Committee pre-approved all non-audit services that
PWC provided to the Adviser and any Affiliated Fund Service Provider that
related directly to the Fund's operations and financial reporting. The Audit
Committee requested and received information from PWC about any non-audit
services that PWC rendered during the Fund's last fiscal year to the Adviser and
any Affiliated Fund Service Provider. The Committee considered this information
in evaluating PWC's independence.
- --------------------------------------------------------------------------------
Total Non-Audit Fees
billed to Adviser and Total Non-Audit
Affiliated Fund Fees billed
Service Providers to Adviser
Total (engagements related and Affiliated
Non-Audit directly to the Fund Service
Fees operations and Providers
Billed financial reporting (all other Total of
Fiscal Year to Fund of the Fund) engagements) (A), (B)
Ended
December 31 (A) (B) (C) and (C)
- --------------------------------------------------------------------------------
2003 $4,000 $0 $3,967,000 $3,971,000
- --------------------------------------------------------------------------------
2002 $4,175 $161,900 $17,092,950 $17,259,025
- --------------------------------------------------------------------------------
All other engagement fees were billed for services in connection with risk
management, tax services and process improvement/integration initiatives for
DeIM and other related entities that provide support for the operations of the
fund.
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 U.S. Bond Index Fund
By: /s/Richard T. Hale
---------------------------
Richard T. Hale
Chief Executive Officer
Date: February 27, 2004
---------------------------
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 U.S. Bond Index Fund
By: /s/Richard T. Hale
---------------------------
Richard T. Hale
Chief Executive Officer
Date: February 27, 2004
---------------------------
By: /s/Charles A. Rizzo
---------------------------
Charles A. Rizzo
Chief Financial Officer
Date: February 27, 2004
---------------------------