Scudder
Development
Fund
Annual Report
June 30, 1998
Pure No-Load(TM) Funds
A fund seeking long-term growth of capital by investing primarily in securities
of small and medium-size growth companies.
A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
SCUDDER (logo)
<PAGE>
Scudder Development Fund
- --------------------------------------------------------------------------------
Date of Inception: 2/11/71 Total Net Assets as of Ticker Symbol: SCDVX
6/30/98: $845.4 million
- --------------------------------------------------------------------------------
o Scudder Development Fund returned 17.86%, exceeding the 13.18% return of the
unmanaged Russell 2000 Growth Index, for the twelve-month period ended June 30,
1998.
o Longer term, the Fund outperformed the Russell 2000 Growth Index for the
three-, five- and 10-year periods ended June 30, 1998.
o Management continued to position the portfolio away from companies subject to
Asian and cyclical influences and toward U.S. companies that management believes
stand to benefit from the aging of baby boomers and companies with unique
products and services.
Table of Contents
3 Letter from the Fund's President 21 Financial Highlights
4 Performance Update 22 Notes to Financial Statements
5 Portfolio Summary 26 Report of Independent Accountants
6 Portfolio Management Discussion 27 Tax Information
10 Glossary of Investment Terms 28 Officers and Trustees
11 Investment Portfolio 29 Investment Products and Services
18 Financial Statements 30 Scudder Solutions
2 - Scudder Development Fund
<PAGE>
Letter from the Fund's President
Dear Shareholders,
Solid economic growth, low interest rates, and a strong dollar provided a
generally favorable environment for domestic equities for much of the 12-month
period ended June 30, 1998. While emphasis turned to large-cap growth stocks as
a relative "safe haven," small- and mid-cap stocks continued to generate
attractive returns. Scudder Development Fund participated in this positive
environment for smaller, rapidly growing companies to outperform its benchmark
for the period. The results for the past year through June 30, 1998, are
discussed on page 6.
On July 1, 1998, Kurt R. Stalzer and David H. Burshtan assumed
responsibility as portfolio managers for your Fund. Mr. Stalzer is a managing
director of Scudder Kemper Investments with more than 15 years of investment
experience. For seven years, he has served as a manager of small- and mid-
capitalization equity portfolios and has been with Scudder Kemper since 1996.
Mr. Burshtan, a senior vice president, has a strong background in research and
has also managed small- and mid-capitalization stock funds. He has 10 years of
industry experience and joined Scudder Kemper in 1995. The Fund will continue to
pursue a "growth" investment style, focusing on common stocks of companies that
the management team believes have above-average earnings growth potential over
the long term. A summary of their investment philosophy with this report begins
on page 7.
Thank you for your investment in Scudder Development Fund. If you have any
questions about your Fund, please call Scudder Investor Relations at
1-800-225-2470, or visit our Internet Web site at http://funds.scudder.com.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President,
Scudder Development Fund
3 - Scudder Development Fund
<PAGE>
PERFORMANCE UPDATE as of June 30, 1998
- -----------------------------------------------------------------
FUND INDEX COMPARISONS
- -----------------------------------------------------------------
Total Return
Period Growth --------------
Ended of Average
6/30/98 $10,000 Cumulative Annual
- ---------------------------------------
SCUDDER DEVELOPMENT FUND
- ---------------------------------------
1 Year $ 11,786 17.86% 17.86%
5 Year $ 19,194 91.94% 13.93%
10 Year $ 39,290 292.90% 14.66%
20 Year $147,451 1,374.51% 14.40%
- ---------------------------------------
RUSSELL 2000 GROWTH INDEX
- ---------------------------------------
1 Year $ 11,318 13.18% 13.18%
5 Year $ 19,005 90.05% 13.70%
10 Year $ 29,925 199.25% 11.58%
20 Year* $ -- --% --%
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly periods ended June 30
SCUDDER DEVELOPMENT FUND
Year Amount
- ---------------------------
'88 $10,000
'89 $10,466
'90 $13,449
'91 $14,836
'92 $16,740
'93 $20,470
'94 $17,828
'95 $25,924
'96 $35,065
'97 $33,335
'98 $39,290
RUSSELL 2000 GROWTH INDEX
Year Amount
- ---------------------------
'88 $10,000
'89 $11,025
'90 $11,986
'91 $12,054
'92 $13,072
'93 $15,746
'94 $15,886
'95 $19,985
'96 $25,278
'97 $26,440
'98 $29,925
The Russell 2000 Growth Index is an unmanaged capitalization-weighted
measure of 2,000 of the smallest capitalized U.S. companies with a greater-than-
average growth orientation and whose common stocks trade on the NYSE, AMEX, and
NASDAQ. Index returns assume reinvestment of dividends and, unlike Fund returns,
do not reflect any fees or expenses.
- -----------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly periods Ended June 30
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------
NET ASSET VALUE... $ 22.54 $ 26.25 $ 27.33 $ 29.92 $ 34.58 $ 27.58 $ 37.35 $ 45.56 $ 39.02 $ 41.67
CAPITAL GAINS
DIVIDENDS......... $ .42 $ 2.28 $ 1.23 $ .96 $ 1.70 $ 3.07 $ 2.12 $ 4.20 $ 4.48 $ 3.88
FUND TOTAL
RETURN (%)........ 4.66 28.50 10.32 12.83 22.28 -12.91 45.41 35.26 -4.93 17.86
INDEX TOTAL
RETURN (%)........ 10.26 8.72 .58 8.45 20.45 .88 25.82 26.49 4.51 13.18
</TABLE>
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased.
*Index returns are not available for this period.
4 - Scudder Development Fund
<PAGE>
PORTFOLIO SUMMARY as of June 30, 1998
- ---------------------------------------------------------------------------
ASSET ALLOCATION
- ---------------------------------------------------------------------------
Common Stocks 96%
Cash Equivalents 3%
Convertible Securities 1%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
The Fund pursued a fully invested
approach to selecting small- and
mid-cap growth stocks.
- --------------------------------------------------------------------------
SECTOR DIVERSIFICATION
(Excludes 3% Cash Equivalents)
- --------------------------------------------------------------------------
Service Industries 24%
Health 20%
Technology 17%
Consumer Discretionary 11%
Financial 9%
Energy 5%
Manufacturing 4%
Construction 4%
Media 2%
Other 4%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Almost all of the Fund's service
company holdings are involved
with providing outsourcing
services or solutions that address
the year 2000 (Y2K) computer
reprogramming tasks.
- --------------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS
(23% OF PORTFOLIO)
- --------------------------------------------------------------------------
1. CINTAS CORP.
Uniform rentals
2. KEANE, INC.
Provider of computer software project
management & design development services
3. IDX SYSTEMS CORP.
Provider of healthcare information systems to
physician groups and academic medical centers
4. CMG INFORMATION SERVICES, INC.
Developer of information-based products and
services for direct marketing
5. SYSTEMS & COMPUTER TECHNOLOGY CORP.
Computer software for educational institutions
6. NETWORK APPLIANCE
Designer and manufacturer of network data
storage devices
7. G & K SERVICES INC.
Uniform rentals
8. ACCUSTAFF, INC.
National provider of temporary staffing
personnel
9. FAMILY GOLF CENTERS
Operator of golf-related recreational facilities
10. CCB FINANCIAL CORP.
Commercial bank providing retail, commercial,
mortgage and construction loans
We continued to de-emphasize
companies that could be
adversely affected by Asian and
cyclical influences while
focusing on companies that
should benefit from the aging
baby boomer population.
For more complete details about the Fund's investment portfolio,
see page 11. A monthly Investment Portfolio Summary and quarterly Portfolio
Holdings are available upon request.
5 - Scudder Development Fund
<PAGE>
Portfolio Management Discussion
Dear Shareholders,
The Fund significantly outperformed its benchmark, the Russell 2000 Growth Index
over the last six- and 12-month periods. For the 12-month report period, the
Fund returned 17.86%, versus a 13.18% return for the Russell 2000 Growth Index.
These results partially reflect our risk reduction strategy that was implemented
during the second quarter of 1997.
Portfolio Strategy
Over the 12-month period, the good performance of small- and mid-cap stocks has
been overshadowed by the exceptionally strong performance of stocks with very
large market capitalizations. We continued to position the portfolio away from
companies subject to Asian and cyclical influences and toward U.S. companies
that we believe stand to benefit from an aging population of baby boomers and
companies with a unique product or service niche. The Fund's holdings of
innovative medical product and biotech companies are two good examples of this
portfolio theme.
Almost all of the Fund's service company holdings are involved with providing
outsourcing services or solutions that address the year 2000 (Y2K) computer
re-programming tasks. The Y2K theme also was shared by many of the Fund's
technology holdings which were concentrated heavily in mid-sized software
companies.
The Fund's exposure to U.S. consumer spending companies in the clothing,
recreation, and housing sectors was also increased as consumer confidence
remained near all time highs. Our positions in U.S. regional banks provided
slower, but steady, earnings growth and significant risk reduction
characteristics to the portfolio.
In the last six months of the period, ever larger corporate takeovers continued
to make headlines. Four of the Fund's holdings benefited from takeover
situations including: Ciena Corporation, Viking Office Products, Authentic
Specialty Foods, and Triangle Pacific.
Negative performance was mostly related to the effect of declining oil prices on
energy companies and drug approval delays by the FDA (Food and Drug
Administration) on pharmaceutical companies. In addition, one company
pre-released an earnings disappointment and one missed earnings estimates.
In closing, we would like to thank you, our shareholders, who have continued to
invest with us over the years. We have sincerely enjoyed serving you on this
fund and know that you will be in good hands as we pass the reins over to
Messrs. Stalzer and Burshtan, two accomplished individuals in the small- and
mid-cap area.
Sincerely,
/s/Roy C. McKay /s/Peter Chin
Roy C. McKay Peter Chin
6 - Scudder Development Fund
<PAGE>
New Management Team
Scudder Development Fund has a new portfolio management team effective July 1,
1998 -- lead portfolio manager Kurt R. Stalzer and portfolio manager David H.
Burshtan, who are investment professionals with extensive experience managing
small- and mid-cap stock portfolios. In the interest of gaining insight into
what shareholders might expect going forward, we asked them to discuss their
investment approach.
Q: Let's start at the beginning: The Fund seeks long-term growth of capital by
investing primarily in securities of small- and medium-sized growth companies.
In seeking to meet this objective, what is your investment philosophy?
A: We believe superior returns can be achieved by investing in undervalued
growth stocks of superior quality small- to mid-sized companies that have
sustainable above-average earnings growth. In other words, we attempt to buy
"growth" at a reasonable price. We search for franchise businesses with visible
earnings growth over at least a two year period. We like companies that have
proprietary businesses, dominant and/or growing market shares, and unique and
defensible market niches. We seek to identify companies with a low cost
structure, which also can contribute to a strong market position. Companies that
have the ability to influence the prices of assets that are bought and sold
within an industry are also attractive; in other words, companies with pricing
power. Overall, we are interested in companies with limited sensitivity to
changes in the economy.
==================================================================
Stock Selection Criteria
------------------------------------------------------------------
Growth Quality and financial stability
o Expected earnings growth o Return on equity of 12% or
rate of 15% or more more
o Demonstrated earnings o Debt-to-capitalization
growth in four consecutive ratio below 50% or interest
quarters over the past three coverage of 3x or more.
years.
------------------------------------------------------------------
Q: How do you intend to manage the portfolio?
A: We will pursue a bottom-up approach, selecting securities on a stock by stock
basis. Any stock included in the portfolio must meet all our requirements for
growth, quality, and financial stability. The specific criteria that we require
of any portfolio holding includes an expected earnings growth rate of at least
15%, persistent historical earnings growth (we believe success breeds success),
a return on equity of at least 12%, and either debt as a percentage of overall
capitalization of under 50% or coverage of interest payments on debt of three
times or more.
Q: Once a stock has passed your initial tests, what are the next steps in the
selection process?
A: We will employ a comprehensive research and evaluation process on each
company we consider adding to the Fund. We will review a company's corporate
strategy, the competitive landscape, financial statements, and accounting
practices. We will also look for potential catalysts that may cause its stock
price to move. Regular contacts with company management teams will also be
important, and with Scudder Kemper Investment's size, we have access to the
7 - Scudder Development Fund
<PAGE>
senior management teams of nearly every company that we need to see. We believe
the management team is an important key to a company's success. It is important
for us as portfolio managers to understand first hand the character and
commitment of management.
Q: From a business life-cycle standpoint, at what stage is the ideal Fund
holding?
A: We are looking for companies that have already hit bottom that we believe are
on the way up, with the prospect of positive earnings surprises. These stocks
tend to be transitioning from value to growth stocks.
Q: Tell us more about your valuation requirements.
A: Once we have established the level of earnings growth, we have three
requirements. The stock price must be attractive relative to its earnings per
share growth rate, its industry peers (if applicable), and the overall market.
We will not purchase a stock unless we see at least a potential upside of about
20% versus the market over the next 12 months.
Q: What is your criteria for determining when to sell a stock?
A: Target prices are calculated for each of our current holdings; a stock is
sold when it reaches its target price and an improved earnings outlook can no
longer be justified. A sell signal is triggered when valuation measures
deteriorate, or when other stocks with similar growth characteristics appear
more attractive. We will also eliminate a holding if its financial stability
weakens, e.g., if there is a dramatic increase in leverage or a significant
change in accounting policies. Of course, there are those cases when management
loses its strategic focus, which also would cause us to eliminate a holding.
===============================================================================
Portfolio Strategy
===============================================================================
An emphasis on quality and managing risk
o Reduce the number of stocks in the portfolio to about 80
o Hold more significant individual positions while limiting overall exposure
to a specific industry to less than 10% of assets
o Invest in stocks with historically low volatility and solid earnings
records
o Broaden diversification through representation in most industry sectors
o Focus on issues in the $1-$5 billion market capitalization range.
===============================================================================
Q: How will you manage risk in the portfolio?
A: We believe we can reduce the portfolio's risk through diversification, by
emphasizing high quality holdings, and by remaining fully invested. We'll
maintain diversification across as many industries as possible without violating
our investment discipline. We generally expect that no single industry will
represent more than 10% of assets and that the portfolio will have a lower than
average exposure to cyclical industries, which are highly sensitive to downturns
in the economy.
Q: Overall, how will Scudder Development Fund's strategy and composition differ
going forward?
A: Investors should expect the portfolio to contain fewer holdings as we begin
to focus on what we believe are the best quality names for the Fund. We think
8 - Scudder Development Fund
<PAGE>
this should reduce the portfolio's relative level of risk versus the overall
market. Partly as a result of this emphasis on quality, the projected growth
rate will be lower, but we also expect more consistent returns over the long
run. In addition, there will be more "concept" and start-up companies in the
portfolio.
Q: Generally, stocks with a market capitalization under $1 billion are
considered small-cap. The Fund's median market cap was $910 million at the end
of the period. Do you plan to change its market cap focus?
A: We expect to hold stocks with market caps in the range of $1-$5 billion with
a median portfolio market cap of about $3 billion. The move to larger cap stocks
reflects our strategy of holding fewer and higher quality names.
Q: What is your opinion of the stock market? Are you a bull or a bear?
A: Since we pursue a bottom up, fully invested approach, we do not focus on
predicting the overall movements of the market. We just follow the disciplined
strategy we've already outlined, which has worked very well in managing other
portfolios at Scudder Kemper Investments over the years. We will continue to
seek the best companies we can find that meet these investment criteria whether
the market is going up or down.
9 - Scudder Development Fund
<PAGE>
Glossary of Investment Terms
FUNDAMENTAL RESEARCH Analysis of companies based on the projected
impact of management, products, sales, and
earnings on balance sheets and income
statements. Distinct from technical analysis,
which evaluates the attractiveness of a stock
based on historical price and trading volume
movements, rather than the financial results
of the underlying company.
GROWTH STOCK Stock of a company that has displayed
above-average earnings growth and is expected
to continue to increase profits rapidly going
forward.
LIQUIDITY A characteristic of an investment or an asset
referring to the ease of convertibility into
cash within a reasonably short period of
time.
MARKET CAPITALIZATION The value of a company's outstanding shares
of common stock, determined by multiplying
the number of shares outstanding by the share
price (Shares x Price = Market
Capitalization). The universe of publicly
traded companies is frequently divided into
large-, mid-, and small-capitalizations.
OVER/UNDERWEIGHTING Refers to the allocation of assets -- usually
by sector, industry, or country -- within an
investment portfolio relative to a benchmark
index or investment universe.
PRICE/EARNINGS RATIO (P/E) A widely used gauge of a stock's valuation
(also "earnings multiple") that indicates what investors are paying for
a company's earnings on a per share basis.
Typically based on a company's projected
earnings for the next 12 months, a higher
"earnings multiple" indicates a higher
expected growth rate and the potential for
greater price fluctuations.
RETURN ON EQUITY An amount, expressed as a percentage, earned
on a company's common stock investment for a
given period. Calculated by dividing common
stock equity (net worth) at the beginning of
the period into net income for the period
after preferred stock dividends but before
common stock dividends. Return on equity
tells common shareholders how effectively
their money is being employed.
VALUE STOCK A company whose stock price does not fully
reflect its intrinsic value, as indicated by
price/earnings and price/book ratios,
dividend yield, or some other valuation
measure, relative to its industry or the
market overall. Value stocks tend to display
less price volatility and may carry higher
dividend yields.
(Sources: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
10 - Scudder Development Fund
<PAGE>
Investment Portfolio as of June 30, 1998
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements 2.6%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 6/30/1998 at 5.75%,
to be repurchased at $21,852,490 on 7/1/1998, collateralized by a $21,484,000 ------------
U.S. Treasury Note, 5.875%, 2/15/2000 (Cost $21,849,000) .............................. 21,849,000 21,849,000
------------
Convertible Bonds 0.2%
- ------------------------------------------------------------------------------------------------------------------------------
Health 0.1%
Pharmaceuticals
North American Vaccine, Inc., 6.5%, 5/1/2003 ............................................ 1,000,000 756,250
------------
Media 0.0%
Broadcasting & Entertainment
Intouch Group, Inc. Promissory Note, 8%*, 2/1/1996 (b) (c) (d) .......................... 217,500 0
------------
Durables 0.1%
Aerospace
Simula, Inc., 8%, 5/1/2004 .............................................................. 923,000 1,015,300
- ------------------------------------------------------------------------------------------------------------------------------
Total Convertible Bonds (Cost $2,321,985) 1,771,550
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Shares
- ------------------------------------------------------------------------------------------------------------------------------
Convertible Preferred Stocks 0.9%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Health 0.4%
Biotechnology 0.2%
Norian Corp. "D"* (Developer and manufacturer of a proprietary biomaterial for
skeletal repair) (b) (c) .............................................................. 357,142 1,999,995
------------
Medical Supply & Specialty 0.2%
InterVentional Technologies, Inc. "G"* (Manufacturer of minimally invasive
disposable microsurgical devices and systems for treatment of cardiovascular
disease) (b) (c) ...................................................................... 120,000 1,200,000
------------
Technology 0.5%
Diverse Electronic Products
Lernout & Hauspie Speech Products N.V. (Developer of advanced speech
technologies) ......................................................................... 72,000 4,338,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Convertible Preferred Stocks (Cost $6,799,995) 7,537,995
- ------------------------------------------------------------------------------------------------------------------------------
Common Stocks 96.3%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 10.8%
Apparel & Shoes 1.6%
St. John Knits, Inc. (Manufacturer of women's clothing) ................................. 356,500 13,769,813
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 - Scudder Development Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Home Furnishings 1.6%
Furniture Brands International Inc.* (Manufacturer of furniture and home
furnishings) .......................................................................... 154,800 4,344,075
WestPoint Stevens, Inc.* (Manufacturer of bedroom and bathroom textile products) ........ 276,600 9,127,800
------------
13,471,875
------------
Hotels & Casinos 0.9%
Anchor Gaming* (Operator of gaming machines and casinos) ................................ 97,600 7,576,200
------------
Recreational Products 2.3%
Family Golf Centers, Inc.* (Operator of golf-related recreational facilities) ........... 594,750 15,054,609
Harley-Davidson Inc. (Manufacturer of motorcycles) ...................................... 100,000 3,875,000
------------
18,929,609
------------
Restaurants 0.6%
Dave & Buster's, Inc.* (Operator of restaurant/entertainment complexes) ................. 204,000 5,074,500
------------
Specialty Retail 3.8%
The North Face, Inc.* (Designer and retailer of outerwear and camping equipment) ........ 165,700 3,976,800
Viking Office Products Inc.* (Direct marketer of office supplies) ....................... 262,800 8,245,350
West Marine, Inc.* (Retailer of recreational and commercial boating supplies and
apparel) .............................................................................. 240,000 4,320,000
Wet Seal, Inc. "A"* (Specialty retailer of moderately priced casual apparel for
young women) .......................................................................... 243,100 7,779,200
Wilmar Industries, Inc.* (National distributor of repair and maintenance
products for the apartment housing market) ............................................ 284,200 7,247,100
------------
31,568,450
------------
Health 19.0%
Biotechnology 4.4%
Alexion Pharmaceuticals, Inc.* (Developer of immunoregulatory compounds) (e) ............ 567,400 5,674,000
Guilford Pharmaceuticals, Inc.* (Research and development of therapeutic and
diagnostic drugs) ..................................................................... 114,900 2,025,113
Hyseq, Inc.* (Developer of gene-based therapeutic and diagnostic products) .............. 336,000 3,633,000
Immunex Corp.* (Biopharmaceutical company) .............................................. 155,000 10,268,750
Ligand Pharmaceuticals "B"* (Developer of drugs to regulate hormone activated
receptors) ............................................................................ 151,400 1,949,275
Neoprobe Corp.* (Research and development of a system for diagnosis and
treatment of cancer) .................................................................. 751,062 2,065,421
Protein Design Labs, Inc.* (Developer of human and humanized antibodies) ................ 177,100 4,267,003
Sepracor, Inc.* (Developer of enhanced forms of existing pharmaceuticals) ............... 155,500 6,453,250
------------
36,335,812
------------
Health Industry Services 3.7%
Access Health, Inc.* (Personal health management services) .............................. 191,100 4,873,050
IDX Systems Corp.* (Provider of health care information systems to physician
groups and academic medical centers) .................................................. 480,500 22,133,023
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 - Scudder Development Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Ventana Medical Systems, Inc.* (Manufacturer of automated medical test systems
for cell and tissue analysis) ......................................................... 145,700 4,079,600
------------
31,085,673
------------
Hospital Management 1.1%
Assisted Living Concepts, Inc.* (Operator of assisted living residences) ................ 315,600 5,444,100
Atria Communities, Inc.* (Provider of assisted and independent living
communities for the elderly) .......................................................... 222,000 3,829,500
------------
9,273,600
------------
Medical Supply & Specialty 7.0%
Closure Medical Corp.* (Manufacturer of medical adhesive products) ...................... 97,500 2,425,313
ESC Medical Systems Ltd.* (Producer of devices for non-invasive treatment of
benign vascular lesions) .............................................................. 252,900 8,535,375
Focal, Inc.* (Manufacturer of synthetic liquid surgical sealants) ....................... 100,000 1,000,000
ICU Medical Inc.* (Designer, manufacturer and marketer of proprietary disposable
medical products) (e) ................................................................. 450,900 6,481,688
Novoste Corp.* (Developer of a beta radiation catheter delivery system) ................. 41,900 924,419
PLC Systems Inc.* (Developer, manufacturer and marketer of medical laser
systems) .............................................................................. 420,000 4,488,750
Perclose, Inc.* (Developer and producer of minimally invasive single-use systems
to close arterial access sites surgically) ............................................ 247,800 7,000,350
STERIS Corp.* (Manufacturer of sterile processing systems) .............................. 218,000 13,863,438
Theragenics Corp.* (Manufacturer of device for treatment of prostate cancer) ............ 231,400 6,030,863
Thermo Cardiosystems, Inc.* (Manufacturer of implantable heart assisting
devices) .............................................................................. 351,300 7,992,075
------------
58,742,271
------------
Pharmaceuticals 2.8%
Agouron Pharmaceuticals, Inc.* (Developer of therapeutic and synthetic drugs for
treatment of cancer and other diseases) ............................................... 185,700 5,629,031
North American Vaccine, Inc.* (Developer of immunological products) ..................... 286,700 4,443,850
Noven Pharmaceuticals, Inc.* (Transdermal drug delivery systems) ........................ 358,900 2,130,969
PathoGenesis Corp.* (Developer of drugs for treatment of serious infectious
diseases) ............................................................................. 380,000 11,020,000
------------
23,223,850
------------
Financial 9.2%
Banks 7.6%
CCB Financial Corp. (Commercial bank providing retail, commercial, mortgage and
construction loans) ................................................................... 141,100 14,991,875
First American Corp. (Tennessee) (Regional commercial banking) .......................... 84,200 4,052,125
First Security Corp. (Commercial banking in western states) ............................. 376,625 8,062,129
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 - Scudder Development Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First Virginia Banks, Inc. (Commercial and mortgage banking and insurance) .............. 80,200 4,100,225
Imperial Bancorp* (Merchant card transaction processing, trust and custodial
services, international trade and foreign exchange services) .......................... 278,850 8,365,500
Silicon Valley Bancshares* (Commercial bank holding company) ............................ 200,000 7,118,750
Sovereign Bancorp, Inc. (Commercial bank holding company) ............................... 185,880 3,037,976
Zions Bancorp (Commercial banking in Utah) .............................................. 254,300 13,509,688
------------
63,238,268
------------
Insurance 0.8%
Fremont General Corp. (Insurance and financial services) ................................ 120,700 6,540,431
------------
Real Estate 0.8%
Boston Properties, Inc. (REIT) (Commercial and industrial real estate developer) ........ 187,500 6,468,750
------------
Media 2.1%
Advertising
Outdoor Systems, Inc.* (Outdoor advertising company) .................................... 450,000 12,600,000
Young & Rubicam Inc.* (Advertising, marketing and communications company) ............... 143,600 4,595,200
------------
17,195,200
------------
Service Industries 23.1%
EDP Services 7.5%
Analysts International Corp. (Contract programming and software services) ............... 254,250 7,214,344
Computer Horizons Corp.* (Diversified information technology services and
solutions) ............................................................................ 268,650 9,956,841
Keane, Inc.* (Provider of computer software project management and design
development services) ................................................................. 450,000 25,200,000
Systems & Computer Technology Corp.* (Computer software for educational
institutions) ......................................................................... 740,600 19,996,200
------------
62,367,385
------------
Investment 0.3%
E*TRADE Group, Inc.* (Online discount brokerage services) ............................... 117,900 2,704,331
------------
Miscellaneous Commercial Services 14.8%
AccuStaff, Inc.* (National provider of temporary staffing personnel) .................... 485,200 15,162,500
Apollo Group, Inc. "A"* (Provider of higher education programs for working
adults) ............................................................................... 300,000 9,918,750
CMG Information Services, Inc.* (Developer of information-based products and
services for direct marketing) ........................................................ 305,800 21,635,350
Cintas Corp. (Uniform rentals) .......................................................... 530,000 27,030,000
Concord EFS, Inc.* (Electronic transaction authorization, processing, settlement
and transfer services) ................................................................ 363,900 9,506,888
Copart, Inc.* (Auctioneer of damaged vehicles for insurance companies) .................. 409,900 9,478,938
Eagle USA Airfreight, Inc.* (Airfreight forwarding services) ............................ 152,700 5,296,781
G & K Services, Inc. "A" (Uniform rentals) .............................................. 364,000 15,879,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 - Scudder Development Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
StaffMark, Inc.* (Diversified staffing services) ........................................ 88,900 3,255,963
Wackenhut Corrections Corp.* (Manager of privatized correctional and detention
facilities) ........................................................................... 166,500 3,891,938
Whittman-Hart, Inc.* (Information technology consulting and system integration
services) ............................................................................. 54,500 2,636,438
------------
123,693,046
------------
Miscellaneous Consumer Services 0.5%
ITT Educational Services, Inc.* (Provider of technology-oriented postsecondary
degree programs) ...................................................................... 142,900 4,608,525
------------
Durables 1.5%
Aerospace 0.7%
Simula, Inc.* (Development and production of transportation safety products) ............ 350,000 5,753,125
------------
Telecommunications Equipment 0.8%
Ciena Corp.* (Manufacturer of dense wavelength multiplexing systems for
fiberoptic telecommunication networks) ................................................ 100,000 6,962,500
------------
Manufacturing 3.9%
Containers & Paper 1.7%
Aptargroup, Inc. (Manufacturer of packaging equipment components) ....................... 229,700 14,284,469
------------
Electrical Products 1.8%
Advanced Lighting Technologies, Inc.* (Manufacturer of metal halide lighting
products) ............................................................................. 190,000 4,417,500
American Power Conversion Corp.* (Manufacturer of backup power supply products) ......... 188,000 5,640,000
FORE Systems, Inc.* (Producer of high-performance networking products) .................. 200,700 5,318,550
------------
15,376,050
------------
Office Equipment/Supplies 0.4%
Knoll, Inc.* (Manufacturer of office systems and business furniture) .................... 115,000 3,392,500
------------
Technology 16.5%
Computer Software 9.0%
Advent Software, Inc.* (Provider of stand-alone and client/server software
products) ............................................................................. 268,200 11,264,400
CBT Group PLC* (ADR) (New) (Software developer) ......................................... 188,200 10,068,700
Cadence Design System Inc.* (Software for computer-aided engineering) ................... 100,000 3,125,000
Check Point Software Technologies Ltd.* (Developer of network security software) ........ 410,300 13,437,325
J.D. Edwards & Co.* (Producer of software solutions to changing business needs) ......... 100,000 4,293,750
JDA Software Group, Inc.* (Comprehensive software solutions for management of
retailing information) ................................................................ 204,100 8,929,375
LHS Group Inc.* (Billing and customer care software products and services) .............. 36,200 2,384,675
Security Dynamics Technologies, Inc.* (Designer, developer and supporter of a
family of security products used to manage access to computer-based
information resources) ................................................................ 441,700 8,171,450
Sterling Commerce, Inc.* (Producer of electronic data interchange products and
services) ............................................................................. 184,300 8,938,550
</TABLE>
The accompanying notes are an integral part of the financial statements.
15 - Scudder Development Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Vantive Corp.* (Provider of customer interaction applications software) ................. 163,100 3,343,550
Xylan Corp.* (Producer of switching systems for local area networks) .................... 50,000 1,490,625
------------
75,447,400
------------
EDP Peripherals 2.9%
Mercury Interactive Corp.* (Producer of automated software testing tools) ............... 114,100 5,091,713
Network Appliance, Inc.* (Designer and manufacturer of network data storage
devices) .............................................................................. 482,300 18,779,556
------------
23,871,269
------------
Electronic Components/Distributors 0.4%
Lernout & Hauspie Speech Products N.V.* (Developer of advanced speech
technologies) ......................................................................... 57,400 3,426,063
------------
Office/Plant Automation 1.8%
Mercury Computer Systems, Inc.* (Manufacturer of digital signal processing
computer systems) ..................................................................... 240,500 3,487,250
Pinnacle Systems, Inc.* (Manufacturer of video post-production workstations) (e) ........ 350,000 11,331,250
------------
14,818,500
------------
Precision Instruments 0.7%
Uniphase Corp.* (Manufacturer of laser subsystems, semiconductor wafer defect
examination and analysis equipment) ................................................... 89,500 5,618,922
------------
Semiconductors 1.7%
Vitesse Semiconductor Corp.* (Manufacturer of digital integrated circuits) .............. 464,300 14,335,263
------------
Energy 4.8%
Oil & Gas Production 1.2%
Barrett Resources Corp.* (Oil and gas exploration and production) ....................... 138,700 5,192,581
Triton Energy Ltd. "A"* (Independent oil and gas exploration and production
company) .............................................................................. 132,350 4,723,241
------------
9,915,822
------------
Oilfield Services/Equipment 3.6%
Global Industries Ltd.* (Pipeline construction, derrick and diving services for
offshore oil and gas industry) ........................................................ 600,000 10,125,000
Newpark Resources, Inc.* (Environmental management and oilfield construction
services) (e) ......................................................................... 570,900 6,351,263
Transocean Offshore Inc. (Contract drilling services of offshore oil and gas wells) ..... 310,000 13,795,000
------------
30,271,263
------------
Construction 3.6%
Building Materials 2.9%
Simpson Manufacturing Co., Inc.* (Manufacturer of wood-to-wood, wood-to-concrete
and wood-to-masonry connectors) ....................................................... 318,600 12,305,925
Triangle Pacific Corp.* (Manufacturer of wood floorings and cabinets) ................... 210,600 11,583,000
------------
23,888,925
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16 - Scudder Development Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Homebuilding 0.7%
D.R. Horton, Inc. (Construction and sale of single family homes) ........................ 302,000 6,304,250
------------
Transportation 1.8%
Air Freight 1.1%
Expeditors International of Washington, Inc. (Air and ocean freight forwarding,
customs clearance, cargo insurance and logistical services) ........................... 214,800 9,451,200
------------
Airlines 0.7%
America West Holdings Corp. "B"* (Passenger airline) .................................... 200,000 5,712,500
- ------------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (Cost $501,519,261) 804,697,610
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $532,490,241) (a) 835,856,155
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) The cost for federal income tax purposes was $532,875,446. At June 30,
1998, net unrealized appreciation for all securities based on tax cost was
$302,980,709. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess of market value over tax
cost of $325,590,470 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$22,609,761.
(b) Securities valued in good faith by the Valuation Committee of the Board of
Trustees at fair value amounted to $3,199,995 (.38% of net assets). Their
values have been estimated by the Board of Trustees in the absence of
readily ascertainable market values. However, because of the inherent
uncertainty of valuation, those estimated values may differ significantly
from the values that would have been used had a ready market for the
securities existed, and the difference could be material. The cost of
these securities at June 30, 1998 aggregated $3,417,495. These securities
may also have certain restrictions as to resale.
(c) Restricted Securities are securities which have not been registered with
the Securities and Exchange Commission under the Securities Act of 1933.
The aggregate fair value of restricted securities at June 30, 1998,
amounted to $3,199,995 which represents .38% of net assets. Information
concerning such restricted securities at June 30, 1998 is as follows were:
Security Acquisition Date Cost ($)
-------- ---------------- --------
InTouch Group Inc. 2/14/95 217,500
Norian Corp. "D" 4/12/95 1,999,995
InterVentional Technologies, Inc. "G" 3/6/95 1,200,000
(d) Issuer filed petition under Chapter 11 of the Federal Bankruptcy Code.
(e) Affiliated Issuer (See Notes to Financial Statements)
The accompanying notes are an integral part of the financial statements.
17 - Scudder Development Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of June 30, 1998
<TABLE>
<S> <C> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
Investments, at market:
Unaffiliated issuers (identified cost $507,779,701) ............... $ 806,017,954
Affiliated issuers (identified cost $24,710,540) .................. 29,838,201
----------------
Total investments, at market (identified cost $532,490,241) .......... 835,856,155
Cash ................................................................. 173
Receivable for investments sold ...................................... 9,020,810
Receivable for Fund shares sold ...................................... 3,061,862
Dividends and interest receivable .................................... 162,690
Foreign taxes recoverable ............................................ 812
Other assets ......................................................... 4,660
----------------
Total assets ......................................................... 848,107,162
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Payable for Fund shares redeemed ..................................... 1,590,060
Accrued management fee ............................................... 663,833
Other payables and accrued expenses .................................. 448,194
----------------
Total liabilities .................................................... 2,702,087
-------------------------------------------------------------------------------------------
Net assets, at market value $ 845,405,075
-------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Net unrealized appreciation (depreciation) on:
Investments ....................................................... 303,365,914
Foreign currency related transactions ............................. (4,280)
Accumulated net realized gain ........................................ 69,320,862
Paid-in capital ...................................................... 472,722,579
-------------------------------------------------------------------------------------------
Net assets, at market value $ 845,405,075
-------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($845,405,075 / 20,289,263 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares ----------------
authorized) ........................................................ $41.67
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18 - Scudder Development Fund
<PAGE>
Statement of Operations
year ended June 30, 1998
<TABLE>
<S> <C> <C>
Investment Income
- ----------------------------------------------------------------------------------------------------------------------------
Income:
Dividends ............................................................ $ 3,075,318
Interest ............................................................. 655,458
----------------
3,730,776
----------------
Expenses:
Management fee ....................................................... 8,554,028
Services to shareholders ............................................. 3,119,448
Custodian and accounting fees ........................................ 196,254
Trustees' fees and expenses .......................................... 56,878
Reports to shareholders .............................................. 200,702
Registration fees .................................................... 46,266
Auditing ............................................................. 45,209
Legal ................................................................ 27,202
Other ................................................................ 106,626
----------------
12,352,613
-------------------------------------------------------------------------------------------
Net investment loss (8,621,837)
-------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- ----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments -- Unaffiliated issuers .................................. 116,433,249
Investments -- Affiliated issuers .................................... 1,390,026
----------------
117,823,275
----------------
Net unrealized appreciation (depreciation) during the period on:
Investments .......................................................... 36,210,481
Foreign currency related transactions ................................ (4,081)
----------------
36,206,400
-------------------------------------------------------------------------------------------
Net gain on investment transactions 154,029,675
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 145,407,838
-------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
19 - Scudder Development Fund
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended June 30,
Increase (Decrease) in Net Assets 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment loss ........................................... $ (8,621,837) $ (9,394,013)
Net realized gain from investment transactions ................ 117,823,275 65,674,991
Net unrealized appreciation (depreciation) on
investment transactions during the period ................... 36,206,400 (110,480,305)
---------------- ----------------
Net increase (decrease) in net assets resulting from
operations .................................................. 145,407,838 (54,199,327)
---------------- ----------------
Distributions to shareholders from net realized gains ......... (78,146,533) (103,800,648)
---------------- ----------------
Fund share transactions:
Proceeds from shares sold ..................................... 623,810,270 437,599,929
Net asset value of shares issued to shareholders in
reinvestment of distributions ............................... 74,979,135 98,959,399
Cost of shares redeemed ....................................... (782,209,774) (557,283,948)
---------------- ----------------
Net increase (decrease) in net assets from Fund share
transactions ................................................ (83,420,369) (20,724,620)
---------------- ----------------
Increase (decrease) in net assets ............................. (16,159,064) (178,724,595)
Net assets at beginning of period ............................. 861,564,139 1,040,288,734
---------------- ----------------
Net assets at end of period ................................... $ 845,405,075 $ 861,564,139
---------------- ----------------
Other Information
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period ..................... 22,081,273 22,833,256
---------------- ----------------
Shares sold ................................................... 15,158,214 11,250,824
Shares issued to shareholders in reinvestment of
distributions ............................................... 2,003,718 2,413,215
Shares redeemed ............................................... (18,953,942) (14,416,022)
---------------- ----------------
Net increase (decrease) in Fund shares ........................ (1,792,010) (751,983)
---------------- ----------------
Shares outstanding at end of period ........................... 20,289,263 22,081,273
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
20 - Scudder Development Fund
<PAGE>
Financial Highlights
The following table includes selected data for a share outstanding throughout
each period (a) and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended June 30,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------
Net asset value, beginning of period .......................... $ 39.02 $ 45.56 $ 37.35 $ 27.58 $ 34.58
-----------------------------------------------------------
Income from investment operations:
Net investment loss ........................................... (.41) (.40) (.38) (.31) (.30)
Net realized and unrealized gain (loss) on investment
transactions ................................................ 6.94 (1.66) 12.79 12.20 (3.63)
-----------------------------------------------------------
Total from investment operations .............................. 6.53 (2.06) 12.41 11.89 (3.93)
-----------------------------------------------------------
Less distributions from net realized gains on investment
transactions ................................................ (3.88) (4.48) (4.20) (2.12) (3.07)
-----------------------------------------------------------
Total distributions ........................................... (3.88) (4.48) (4.20) (2.12) (3.07)
-----------------------------------------------------------
-----------------------------------------------------------
Net asset value, end of period ................................ $ 41.67 $ 39.02 $ 45.56 $ 37.35 $ 27.58
-----------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Total Return (%) .............................................. 17.86 (4.93) 35.26 45.41 (12.91)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ........................ 845 862 1,040 727 546
Ratio of operating expenses to average daily net assets (%) ... 1.41 1.36 1.24 1.32 1.27
Ratio of net investment loss to average daily net assets (%) .. (.99) (1.02) (.91) (1.01) (.91)
Portfolio turnover rate (%) ................................... 52.4 52.2 58.8 41.6 48.3
</TABLE>
(a) Per share amounts have been calculated using the weighted average shares
method.
21 - Scudder Development Fund
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies
Scudder Development Fund (the "Fund") is a diversified series of Scudder
Securities Trust, a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. The Fund's financial statements are prepared in accordance with
generally accepted accounting principles which require the use of management
estimates. The policies described below are followed consistently by the Fund in
the preparation of its financial statements.
Security Valuation. Portfolio securities which are traded on U.S. or foreign
stock exchanges are valued at the most recent sale price reported on the
exchange on which the security is traded most extensively. If no sale occurred,
the security is then valued at the calculated mean between the most recent bid
and asked quotations. If there are no such bid and asked quotations, the most
recent bid quotation is used. Securities quoted on the Nasdaq System, for which
there have been sales, are valued at the most recent sale price reported on such
system. If there are no such sales, the value is the most recent bid quotation.
Securities which are not quoted on the Nasdaq System but are traded in another
over-the-counter market are valued at the most recent sale price on such market.
If no sale occurred, the security is then valued at the calculated mean between
the most recent bid and asked quotations. If there are no such bid and asked
quotations, the most recent bid quotation shall be used.
Portfolio debt securities other than money market securities with an original
maturity over sixty days are valued by pricing agents approved by the officers
of the Fund, which quotations reflect broker/dealer-supplied valuations and
electronic data processing techniques. If the pricing agents are unable to
provide such quotations, the most recent bid quotation supplied by a bona fide
market maker shall be used. Money market instruments purchased with an original
maturity of sixty days or less are valued at amortized cost. All other
securities are valued at their fair value as determined in good faith by the
Valuation Committee of the Board of Trustees.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian,
receives delivery of the underlying securities, the amount of which at the time
of purchase and each subsequent business day is required to be maintained at
such a level that the market value, depending on the maturity of the repurchase
agreement, is equal to at least 100.5% of the repurchase price.
Foreign Currency Translations. The books and records of the Fund are maintained
in U.S. dollars. Foreign currency transactions are translated into U.S. dollars
on the following basis:
(i) market value of investment securities, other assets and liabilities at
the daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the rates of exchange prevailing on the
respective dates of such transactions.
The Fund does not isolate that portion of gains and losses on investments which
is due to changes in foreign exchange rates from that which is due to changes in
market prices of the investments. Such fluctuations are included with the net
realized and unrealized gains and losses from investments.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.
22 - Scudder Development Fund
<PAGE>
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. Distributions of net investment income, if
any, are made annually. During any particular year 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 annually. An additional distribution may be made to
the extent necessary to avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. These
differences primarily relate to tax equalization and investments in certain
securities sold at a loss. 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 Fund uses the identified cost method for determining realized gain or loss
on investments for both financial and federal income tax reporting purposes.
Other. Investment security transactions are accounted for on a trade-date basis.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis.
B. Purchases and Sales of Securities
During the year ended June 30, 1998, purchases and sales of investment
securities (excluding short-term investments) aggregated $451,303,523 and
$651,314,723, respectively.
C. Related Parties
Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, formed a new global investment organization by combining
Scudder's business with that of Zurich's subsidiary, Zurich Kemper Investments,
Inc. As a result of the transaction, Scudder changed its name to Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"). The transaction between
Scudder and Zurich resulted in the termination of the Fund's Investment
Management Agreement with Scudder. However, a new Investment Management
Agreement (the "Management Agreement") between the Fund and Scudder Kemper was
approved by the Fund's Board of Trustees and by the Fund's Shareholders. The
Agreement, which is effective December 31, 1997, is the same in all material
respects as the corresponding previous Investment Management Agreement, except
that Scudder Kemper is the new investment adviser to the Fund.
Under the Management Agreement with Scudder Kemper, the Fund agrees to pay to
the Adviser a fee equal to an annual rate of 1% of the Fund's first $500 million
of average daily net assets, .95% of the next $500 million of such net assets,
and .90% on such net assets in excess of $1 billion, computed and accrued daily
and payable monthly. As manager of the assets of the Fund, the Adviser directs
the investments of the Fund in accordance with its investment objective,
policies, and restrictions. The
23 - Scudder Development Fund
<PAGE>
Adviser determines the securities, instruments and other contracts relating to
investments to be purchased, sold or entered into by the Fund. In addition to
portfolio management services, the Adviser provides certain administrative
services in accordance with the Agreement. For the year ended June 30, 1998, the
fee pursuant to these agreements amounted to $8,554,028, which was equivalent to
an annual effective rate of .98% of the Fund's average daily net assets.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
year ended June 30, 1998, the amount charged by SSC aggregated $1,402,341, of
which $107,595 is unpaid at June 30, 1998.
The Fund is one of several Scudder Funds (the "Underlying Funds") in which the
Scudder Pathway Series Portfolios (the "Portfolios") invest. In accordance with
the Special Servicing Agreement entered into by the Adviser, the Portfolios, the
Underlying Funds, SSC, SFAC, STC, and Scudder Investor Services, Inc., expenses
from the operation of the Portfolios are borne by the Underlying Funds based on
each Underlying Fund's proportionate share of assets owned by the Portfolios. No
Underlying Funds will be charged expenses that exceed the estimated savings to
each respective Underlying Fund. These estimated savings result from the
elimination of separate shareholder accounts which either currently are or have
potential to be invested in the Underlying Funds. For the year ended June 30,
1998, the Special Servicing Agreement expense charged to the Fund amounted to
$102,038.
Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans invested in the Fund. For the year ended June 30, 1998,
the amount charged to the Fund by STC aggregated $1,221,754, of which $110,640
is unpaid at June 30, 1998.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
June 30, 1998, the amount charged to the Fund by SFAC aggregated $121,851 of
which $9,054 is unpaid at June 30, 1998.
The Fund pays each of its Trustees not affiliated with the Adviser an annual
retainer plus specified amounts for attended board and committee meetings. For
the year ended June 30, 1998, Trustees' fees and expenses aggregated $56,878.
D. Transactions in Securities of Affiliated Issuers
An affiliated issuer is a company in which the Fund has ownership of at least 5%
of the voting securities. A summary of the Fund's transactions with companies
which are or were affiliates for the year ended June 30, 1998 is as follows:
<TABLE>
<CAPTION>
Purchases Sales Dividend Market
Affiliate Cost ($) Cost ($) Income ($) Value ($)
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alexion Pharmaceuticals, Inc. 1,980,318 -- -- 5,674,000
ICU Medical, Inc. -- 1,371,156 -- 6,481,688
Newpark Resources, Inc. 2,373,172 3,924,956 -- 6,351,263
Pinnacle Systems, Inc. 9,522,806 810,095 -- 11,331,250
------------- ------------- ------------- -------------
13,876,296 6,106,207 -- 29,838,201
============= ============= ============= =============
</TABLE>
24 - Scudder Development Fund
<PAGE>
E. Lines of Credit
The Fund and several affiliated Funds (the "Participants") share in a $500
million revolving credit facility for temporary or emergency purposes, including
the meeting of redemption requests that otherwise might require the untimely
disposition of securities. The Participants are charged an annual commitment fee
which is allocated among each of the Participants. Interest is calculated based
on the market rates at the time of the borrowing. The Fund may borrow up to a
maximum of 33 percent of its net assets under the agreement. In addition, the
Fund also maintains an uncommitted line of credit.
25 - Scudder Development Fund
<PAGE>
Report of Independent Accountants
To the Trustees of Scudder Securities Trust and the Shareholders of Scudder
Development Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Scudder Development Fund (the
"Fund") at June 30, 1998, the results of its operations for the year then ended
and the changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 June
30, 1998 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
August 10, 1998
26 - Scudder Development Fund
<PAGE>
Tax Information
The Fund paid distributions of $3.88 per share from long-term capital gains
during its year ended June 30, 1998, of which 55.7% represents 20% rate gains.
Pursuant to section 852 of the Internal Revenue Code, the Fund designates
$118,000,000 as capital gain dividends for its fiscal year ended June 30, 1998,
of which 100% represents 20% gains.
Please consult a tax adviser if you have any questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at 1-800-225-5163.
27 - Scudder Development Fund
<PAGE>
Officers and Trustees
Daniel Pierce*
President and Trustee
Paul Bancroft III
Trustee; Venture Capitalist and
Consultant
Sheryle J. Bolton
Trustee; Chief Executive Officer,
Scientific Learning Corporation
William T. Burgin
Trustee; General Partner,
Bessemer Venture Partners
Thomas J. Devine
Trustee; Consultant
Keith R. Fox
Trustee; President, Exeter Capital
Management Corporation
William H. Luers
President, Metropolitan
Museum of Art
Wilson Nolen
Trustee; Consultant
Kathryn L. Quirk*
Trustee, Vice President and
Assistant Secretary
Robert G. Stone, Jr.
Honorary Trustee; Chairman
Emeritus and Director, Kirby
Corporation
Edmund R. Swanberg
Honorary Trustee
Peter Chin*
Vice President
J. Brooks Doherty*
Vice President
James M. Eysenbach*
Vice President
James E. Fenger*
Vice President
Philip S. Fortuna*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Roy C. McKay*
Vice President
Thaddeus Paluszek*
Vice President
Kimberly A. Purvis*
Vice President
Peter Taylor*
Vice President
Thomas F. McDonough*
Vice President, Secretary and
Treasurer
Richard W. Desmond*
Assistant Secretary
John R. Hebble*
Assistant Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
28 - Scudder Development Fund
<PAGE>
Investment Products and Services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Premium Shares*
Managed Shares*
Scudder Government Money Market Series --
Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**
Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited Term Tax Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**
U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund
Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund
U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Equity
- -------------
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund++
Scudder International Growth Fund
Scudder Global Discovery Fund***
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal Fund, Inc.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money. +++Funds within categories are listed in order from
expected least risk to most risk. Certain Scudder funds may not be available for
purchase or exchange. +A portion of the income from the tax-free funds may be
subject to federal, state, and local taxes. *A class of shares of the Fund.
**Not available in all states. ***Only the Scudder Shares of the Fund are part
of the Scudder Family of Funds. ++Only the International Shares of the Fund are
part of the Scudder Family of Funds. +++ +++A no-load variable annuity contract
provided by Charter National Life Insurance Company and its affiliate, offered
by Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder Kemper Investments, Inc., are traded on the New York Stock Exchange and,
in some cases, on various other stock exchanges.
29 - Scudder Development Fund
<PAGE>
Scudder Solutions
<TABLE>
<CAPTION>
Convenient ways to invest, quickly and reliably:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Investment Plan QuickBuy
A convenient investment program in which money is Lets you purchase Scudder fund shares
electronically debited from your bank account monthly to electronically, avoiding potential mailing delays;
regularly purchase fund shares and "dollar cost average" money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from a previously designated bank
fewer when it's higher, which can reduce your average account.
purchase price over time.*
Automatic Dividend Transfer Payroll Deduction and Direct Deposit
The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).
* Dollar cost averaging involves continuous investment in securities regardless of price
fluctuations and does not assure a profit or protect against loss in declining markets.
Investors should consider their ability to continue such a plan through periods of low price
levels.
Around-the-clock electronic account service and information, including some transactions:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- http://funds.scudder.com
1-800-343-2890
Scudder Electronic Account Services: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.
Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Plan QuickSell
You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you previously designated.
Distributions Direct
Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
30 - Scudder Development Fund
<PAGE>
Mutual Funds and More -- Brokerage and Guidance Services:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Brokerage Services Scudder Portfolio Builder
Offers you access to a world of investments, A free service designed to help suggest ways investors like
including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global,
over 8,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
500 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder
shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load
Brokerage account already reserved for them, with funds but want ongoing professional assistance in
no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly
Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for
individuals investing $100,000 or more.
Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.
Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Services, Inc., Adviser.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
Additional Information on How to Contact Scudder:
- ------------------------------------------------------------------------------------------------------------------------------
For existing account services and transactions Please address all written correspondence to
Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds
P.O. Box 2291
For establishing 401(k) and 403(b) plans Boston, Massachusetts
Scudder Defined Contribution Services -- 02107-2291
1-800-323-6105
Or Stop by a Scudder Investor Center
For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of
additional applications and prospectuses, or for the Scudder Investor Centers. Check for an Investor Center near
answers to investment questions you -- they can be found in the following cities:
Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco
[email protected] Boston New York
</TABLE>
31 - Scudder Development Fund
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc., is one of the largest and most experienced
investment management oganizations worldwide, managing more than $200 billion in
assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts. It is one of the ten largest mutual fund companies in the
United States.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 79
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Group. As a result, Zurich's subsidiary, Zurich Kemper Investments,
Inc., with 50 years of mutual fund and investment management experience, was
combined with Scudder. Headquartered in New York, Scudder Kemper Investments
offers a full range of investment counsel and asset management capabilities,
based on a combination of proprietary research and disciplined, long-term
investment strategies. With its global investment resources and perspective,
the firm seeks opportunities in markets throughout the world to meet the needs
of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Group. The Zurich Group is an internationally recognized leader in
financial services, including property/casualty and life insurance, reinsurance,
and asset management.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
SCUDDER
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