SCUDDER
INVESTMENTS(SM)
[LOGO]
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EQUITY/VALUE
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Scudder Micro Cap Fund
Fund #048
Semiannual Report
February 29, 2000
A fund which seeks long-term growth of capital by investing primarily in a
diversified portfolio of U.S. micro-cap stocks.
A no-load fund with no commissions to buy, sell, or exchange shares.
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Contents
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4 Letter from the Fund's President
6 Performance Update
8 Portfolio Summary
10 Portfolio Management Discussion
14 Glossary of Investment Terms
15 Investment Portfolio
25 Financial Statements
26 Financial Highlights
29 Notes to Financial Statements
34 Officers and Trustees
35 Investment Products and Services
37 Scudder Solutions
2
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Scudder Micro Cap Fund
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ticker symbol SCMCX fund number 048
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Date of o The fund's emphasis on attractively valued micro-cap
Inception: stocks continued to be out of favor over the six-month
8/12/96 period as investors generally focused on a handful of
high priced growth stocks.
Total Net
Assets as of o Reflecting the challenging environment for micro-cap
2/29/00: stocks with deep value characteristics, the fund
$60.2 million trailed the performance of its index.
o The fund's strongest returns came from the technology
sector, but the fund's ongoing commitment to stocks
with attractive valuations precluded the portfolio from
fully participating in the sector's rally.
3
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Letter from the Fund's President
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Dear Shareholders,
I probably don't need to tell you about the exceptional outperformance of growth
stocks versus value stocks. The performance difference between these two styles
reached epic proportions during the six-month period. Small growth stocks,
driven by a large technology weighting, achieved a 66% return for the six-month
period. In contrast, small value stocks posted a modest 3% return for the same
period.^1 In this environment, momentum stocks -- those with recent top
performance -- again delivered the best performance regardless of fundamentals
or earnings histories. This narrow focus came at the expense of most other
sectors.
We believe that this type of investing is problematic because it ignores a
widely accepted and longstanding principle: Companies that consistently deliver
earnings should command higher prices. Just the opposite has generally been true
over the last year. In many cases, companies with little or no earnings and
inconsistent earnings records were among the best performers and commanded the
highest prices. In the investment management industry we say that "past
performance is no guarantee of future results," yet it seems that investors have
based their decisions almost entirely on past performance during this period.
While we are not going to attempt to predict when small-cap value stocks will
return to favor, we know that over the last 20 years growth and value stocks
have each taken several turns
4
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leading performance (see chart on page 13). The timing of a shift is, of course,
the big question. Those of you who question high priced stocks without good
fundamentals should derive some comfort from the fund's strategy of investing in
companies with attractive valuations and strong operating records. Because
investor sentiment often shifts very quickly and dramatically in the small-cap
sector, you may want to consider increasing your overall exposure to small value
stocks. Before you consider such a move, I encourage you to read the detailed
discussion from your fund's portfolio management team that begins on page 10.
For current information on your fund and your account, visit our Internet Web
site at www.scudder.com. There you'll find a wealth of information, including
current fund performance, the latest news on Scudder products and services, and
the opportunity to perform account transactions. You can also call our
representatives at 1-800-SCUDDER (1-800-728-3337).
Thank you for your investment in Scudder Micro Cap Fund.
Sincerely,
/s/Lin Coughlin
Linda C. Coughlin
President,
Scudder Micro Cap Fund
^1 All indices are unmanaged and include reinvestment of dividends and capital
gains. Total returns are for the six-month period ended 2/29/00. Small growth
stocks are represented by the Russell 2000 Growth Index and small value stocks
are represented by the Russell 2000 Value Index. Past performance is no
guarantee of future results.
5
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Performance Update
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February 29, 2000
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Growth of a $10,000 Investment
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THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
Scudder Micro Cap Fund Russell 2000 Index* S&P 500 Index*
8/96** 10000 10000 10000
2/97 11422 11105 12084
8/97 13991 13163 13871
2/98 15238 14430 16316
8/98 12038 10607 14997
2/99 12821 12388 19536
8/99 13486 13616 20968
2/00 13885 18491 21831
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Fund Index Comparison
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Total Return
Growth of Average
Period ended 2/29/2000 $10,000 Cumulative Annual
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Scudder Micro Cap Fund
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1 year $ 10,830 8.30% 8.30%
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Life of Fund** $ 13,885 38.85% 9.68%
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Russell 2000 Index*
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1 year $ 14,926 49.26% 49.26%
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Life of Fund** $ 18,491 84.91% 16.24%
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S&P 500 Index*
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1 year $ 11,174 11.74% 11.74%
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Life of Fund** $ 21,831 118.31% 21.06%
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* The Russell 2000 Index is an unmanaged capitalization-weighted measure of
approximately 2000 small U.S. stocks. The Standard & Poor's 500 Index is a
capitalization-weighted index of 500 stocks. The index is designed to
measure performance of the broad domestic economy through changes in the
aggregate market value of 500 stocks representing all major industries.
Index returns assume reinvestment of dividends and, unlike Fund returns, do
not reflect any fees or expenses.
** The Fund commenced operations on August 12, 1996.
If the Adviser had not maintained the Fund's expenses, the total return for
the life of Fund period would have been lower.
6
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Returns and Per Share Information
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THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
Yearly periods ended February
Scudder Micro Cap Fund Russell 2000 Index*
14.22 11.05
33.41 29.96
-15.86 -14.14
8.30 49.26
1997** 1998 1999 2000
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Fund Total
Return (%) 14.22 33.41 -15.86 8.30
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Index Total
Return (%) 11.05 29.96 -14.15 49.26
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Net Asset
Value ($) 13.69 18.19 14.46 15.66
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Income
Dividends ($) .02 -- -- --
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Capital Gains
Distributions($) -- .07 .83 --
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* The Russell 2000 Index is an unmanaged capitalization-weighted measure of
approximately 2000 small U.S. stocks. Index returns assume reinvestment of
dividends and, unlike Fund returns, do not reflect any fees or expenses.
** The Fund commenced operations on August 12, 1996.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased.
7
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Portfolio Summary
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February 29, 2000
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Diversification
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A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
Common Stocks 98%
Cash Equivalents 2%
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100%
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Management seeks to be fully invested in micro-cap stocks.
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Stock Characteristics
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Micro Russell Fund as
Cap 2000 % of
Median Values Fund Universe Index Universe
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Market
Capitalization
($ millions) 39 62 441 63%
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Price/Earnings 10.6 34.6 19.2 31%
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Return On Equity
(3 year) 11.4 6.7 11.6 171%
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Sales Growth
(5 year) 11.0 12.7 17.5 86%
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The fund maintained one of the lowest median market capitalizations among U.S.
diversified equity funds.
8
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Sectors/Largest Holdings
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1. Consumer Discretionary (16%)
Holiday RV Superstores, Inc.
Retailing and servicing of recreational vehicles and boats
2. Manufacturing (16%) and cash flow. SL Industries, Inc.
Producer of electrical/electromechanical products
3. Technology (14%)
American Technical Ceramics Corp.
Manufacturer of ceramic and porcelain capacitors for storage and discharge
of electrical energy
4. Financial (11%).
First Cash, Inc.
Operator of pawn shops
5. Consumer Staples (10%) Salton, Inc.
Manufacturer of small kitchen and personal care appliances
6. Service Industries (6%)
Mercury Air Group, Inc.
Provider of fuel and ground support services to commercial airlines,
general aviation and U.S. military
7. Durables (6%)
Comdial Corp.
Manufacturer of business communication systems
8. Construction (4%)
Continental Materials Corp.
Manufacturer of heating, cooling and ventilation equipment
9. Health (4%) HPSC, Inc.
Financing for health care professionals
10. Utilities (3%)
Providence Energy Corp.
Natural gas utility
The fund's holdings are the result of a disciplined approach to valuing
companies that is based on fundamentals such as sales, earnings,
For more complete details about the Fund's investment portfolio, see page 15. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
9
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Portfolio Management Discussion
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February 29, 2000
In the following interview, portfolio managers James M. Eysenbach and Calvin S.
Young discuss the market environment and their approach to managing the fund.
Q: How would you characterize the investment environment for the six-month
period?
A: The primary factor affecting the fund during this period was the phenomenal
performance of a few growth stocks. The disparity of performance between growth
and value investment styles widened to unprecedented levels over the six months,
as many investors continued to buy last week's best performers regardless of
company fundamentals or earnings reliability (see table below). This phenomenon
held true for micro-cap stocks and for large- and small-cap stocks.
The strong returns of growth stocks were driven primarily by a handful of
stocks, especially technology stocks with very high valuations (high
price/earnings, or high price/revenues for companies with losses). The
preference for high priced growth stocks left little interest for the type of
stocks the fund typically holds -- those with distinct value characteristics.
Q: How did the fund perform?
A: The fund's 2.96% return trailed the 35.77% return of the Russell 2000 Index,
which is comprised of both growth and value stocks. However, the fund slightly
outperformed the 2.82% return of small-cap value stocks. The primary
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Growth Outperformed Value by a Wide Margin
Total returns for small-cap stocks for the six months ended 2/29/00^1
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Growth Stocks Value Stocks Difference
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66.04% 2.82% -63.22%
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^1 All indices are unmanaged and include reinvestment of dividends and capital
gains. Total returns are for the six-month period ended 2/29/00. Small growth
stocks are represented by the Russell 2000 Growth Index and small value stocks
are represented by the Russell 2000 Value Index. Past performance is no
guarantee of future results.
10
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Portfolio Characteristics
As of 2/29/00
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Price/earnings Median return Median earnings
ratios on equity per share
growth rate
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Fund 10.6x 11.4% 18.6%
Russell 2000 Index 19.2x 11.6% 10.3%
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reason for the fund's dramatic shortfall versus the Russell 2000 is the fund's
stronger value orientation. This emphasis on attractive valuations is evident in
the portfolio's median "P/E" of 10.6x, which was about one-half that of its
benchmark. At the same time, the fund's holdings displayed higher profitability
and earnings growth rates than the index (see "Portfolio Characteristics" table
above).
Q: Can you elaborate on your investment discipline and its impact on
performance?
A: Our portfolio management discipline focuses on size, valuation, and
diversification. We select what we believe are attractively valued micro-cap
stocks and combine them into a portfolio with below average risk over time. We
purchase stocks from a universe of micro-cap stocks with market capitalizations
of less than $200 million and sell those that grow out of this universe.
Typically the portfolio has been broadly diversified with about 200 holdings.
Recognizing that stocks with low valuations have historically provided some of
the best returns in the micro-cap realm, we have attempted to structure the
portfolio accordingly. We focus on stocks that we feel have sound fundamentals
selling at discounted prices. This approach is designed to have a positive
impact on performance over the long term. But it can also work against the fund
in the short run, particularly during a period when valuations are largely
ignored. When stock market performance is very narrowly concentrated, as it has
been over the six months, a diversified portfolio is more likely to
underperform.
11
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Q: Which sectors contributed to or subtracted from the fund's performance?
A: The three sectors that provided the best returns were health care,
technology, and communications -- sectors that were underweighted in the
portfolio because of our emphasis on value stocks. In fact, these were the only
sectors with positive returns over the six-month period. While the fund's
holdings in these sectors reported strong absolute gains, our valuation
discipline precluded the portfolio from fully participating in their strong
returns.
The portfolio was overweighted in other areas, including consumer and
manufacturing stocks -- sectors that generally lagged the overall micro-cap
market. This weak performance goes against historical trends because typically a
robust economy benefits these kinds of stocks. The fund's significant weighting
in these sectors, combined with disappointing performance, detracted from the
fund's overall return.
Q: What are you expecting from small-cap stocks this year?
A: The most recent period of outperformance by growth stocks is unprecedented.
While it can be difficult to remain invested in an asset class that is currently
out of favor, patience is often rewarded. Asset classes such as large and small,
and growth and value have historically taken turns leading market performance.
Periods of underperformance are often followed by stretches of outperformance
(see "A Closer Look at Small Cap Styles" on page 12).
No one can say with certainty when value stocks will return to favor. In the
meantime, investors need to ask themselves which asset classes have the greatest
upside potential going forward given current valuations.
12
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A Closer Look at Small Cap Styles
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Russell 2000 Value Total Return minus Russell 2000 Growth Total Return
THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE FOR THE YEARS 1980-1999
Value Outperforming
-15.46
-21.23
-27.30
-11.11
-12.21
-14.58
-15.55
-23.48
-24.90
-28.32
-37.48
-42.56
-26.88
-14.68
-6.86
-19.33
-15.50
-19.68
-5.50
0.54
8.85
15.43
16.66
26.59
24.09
20.83
21.15
21.99
19.51
21.88
16.56
17.01
16.58
14.24
14.66
8.49
7.54
1.38
-8.59
-7.34
-4.99
-10.96
-18.62
-9.72
-5.52
-1.33
11.58
15.05
18.50
26.23
27.72
25.08
23.51
23.42
23.81
20.99
18.93
20.13
17.96
20.01
18.10
12.50
9.71
8.16
9.56
7.50
9.41
6.10
9.96
7.73
4.94
0.77
0.04
0.80
1.87
1.47
-3.03
-2.23
-3.82
0.69
1.76
3.63
1.97
2.25
3.83
3.28
0.98
0.19
2.81
3.96
5.27
3.97
1.69
-3.04
5.61
7.24
3.37
8.94
10.51
9.70
9.50
9.65
9.52
9.51
10.78
10.68
8.06
6.41
9.10
3.82
5.31
5.67
4.74
2.44
4.94
1.23
-2.48
-4.00
-6.21
-8.43
-7.74
-3.54
-6.04
-6.62
-5.59
-8.34
-11.29
-8.63
-4.55
-2.00
-2.05
-4.08
-4.36
-9.31
-9.18
-8.14
-5.53
-1.74
1.34
-0.96
-6.26
-10.79
-14.95
-7.43
-9.48
-7.67
-1.58
4.51
7.43
10.62
11.92
14.73
17.31
18.12
19.65
17.10
21.37
24.33
25.60
23.17
18.99
12.91
10.38
10.29
7.35
7.39
8.85
13.24
10.48
6.84
-0.07
0.59
0.64
5.87
6.72
6.43
4.0
3.25
0.84
-0.69
0.88
1.50
0.56
-3.78
-3.18
-4.72
-11.19
-17.07
-10.54
-9.61
-4.63
-5.59
-5.29
-5.46
-8.0
-4.78
-13.08
-17.85
-5.37
7.63
2.82
0.87
6.25
9.64
10.11
7.43
18.34
21.80
28.11
26.03
23.64
15.88
17.29
19.30
16.01
16.52
18.84
18.72
7.95
1.97
-1.93
10.82
6.69
7.36
14.34
12.04
8.17
0.90
-7.68
-14.11
-7.70
-10.99
-11.56
-13.45
-14.01
-14.64
-29.22
-26.8
-28.56
-34.08
-44.58
Growth Outperforming
12 Months Ended
Past performance is no guarantee of future results.
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Over the long term, we believe that the overall valuations of small-cap value
stocks are compelling and eventually will lead to a rebound. Given that such
recoveries can be dramatic and occur over a short period, we would urge
investors to maintain a commitment to this asset class as part of a
well-diversified portfolio.
13
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Glossary of Investment Terms
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Fundamental Analysis of companies based on the projected impact of
Research 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.
Market The value of a company's outstanding shares of common stock,
Capitalization 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/Under Refers to the allocation of assets -- usually by sector,
Weighting industry, or country -- within a portfolio relative to a
benchmark index (i.e. the Russell 2000), or an investment
universe.
Price/Earnings Price of a stock divided by its earnings per share. A widely
Ratio (P/E) used gauge of a stock's valuation that indicates what
(also "earnings investors are paying for a company's earnings on a per share
multiple") basis. A higher earnings multiple indicates higher investor
expectations or a higher growth rate, as well as the
potential for greater price fluctuations.
Standard A statistical measure of the degree to which an investment's
Deviation return tends to vary from the mean return. Frequently used
in portfolio management to measure the variability of past
returns and to gauge the likely range of future returns.
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.
(Source: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
An expanded list of terms is located at our Web site -- www.scudder.com.
14
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Investment Portfolio as of February 29, 2000(Unaudited)
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Principal
Amount ($) Value ($)
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Repurchase Agreements 2.3%
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State Street Bank and Trust Company, 5.74%,
to be repurchased at $1,385,221 on
3/1//2000** (Cost $1,385,000) ................. 1,385,000 1,385,000
Shares
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Common Stocks 97.7%
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Consumer Discretionary 15.8%
Apparel & Shoes 2.9%
Bernard Chaus, Inc.* ........................... 49,900 90,444
Cache, Inc.* ................................... 49,300 240,333
Deckers Outdoor Corp.* ......................... 32,400 113,400
G-III Apparel Group, Ltd.* ..................... 76,600 248,950
Hampshire Group, Ltd.* ......................... 29,200 288,350
J. Jill Group Inc.* ............................ 38,800 135,800
Premiumwear, Inc.* ............................. 68,000 484,500
Steven Madden, Ltd.* ........................... 10,700 144,450
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1,746,227
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Department & Chain Stores 1.3%
Drug Emporium, Inc.* ........................... 113,300 502,769
Duckwall-ALCO Stores, Inc.* .................... 37,200 306,900
----------
809,669
----------
Home Furnishings 0.2%
Baldwin Piano & Organ Co.* ..................... 12,100 102,850
----------
Hotels & Casinos 3.1%
Buckhead America Corp.* ........................ 50,100 269,288
Humphrey Hospitality Trust, Inc. ............... 49,270 320,255
Isle of Capri Casinos, Inc.* ................... 28,600 311,025
Jackpot Enterprises, Inc.* ..................... 52,000 620,750
Sonesta International Hotels Corp. "A" ......... 48,900 372,863
----------
1,894,181
----------
Recreational Products 2.2%
American Coin Merchandising, Inc.* ............. 11,900 33,469
Escalade, Inc.* ................................ 30,800 539,000
The accompanying notes are an integral part of the financial statements.
15
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Shares Value ($)
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Holiday RV Superstores, Inc.* .................... 116,900 730,625
----------
1,303,094
----------
Restaurants 3.4%
Benihana, Inc. "A"* .............................. 33,700 492,863
Garden Fresh Restaurant Corp.* ................... 58,500 665,438
Max & Erma's Restaurants, Inc.* .................. 73,000 629,625
Rainforest Cafe Inc.* ............................ 25,400 101,600
Sizzler International, Inc.* ..................... 48,700 152,188
----------
2,041,714
----------
Specialty Retail 2.7%
Brauns Fashions Corp.* ........................... 22,500 337,500
Brookstone, Inc.* ................................ 33,900 542,400
Rag Shops, Inc.* ................................. 84,315 168,630
Reeds Jewelers, Inc.* ............................ 20,200 59,338
S & K Famous Brands, Inc.* ....................... 28,400 181,050
Wolohan Lumber Co. ............................... 27,900 317,363
----------
1,606,281
----------
Consumer Staples 9.7%
Alcohol & Tobacco 0.2%
Todhunter International, Inc.* ................... 15,600 132,600
----------
Consumer Electronic & Photographic 2.4%
Cobra Electronics Corp.* ......................... 85,800 482,625
Salton, Inc.* .................................... 20,800 980,200
----------
1,462,825
----------
Consumer Specialties 0.6%
Media Arts Group, Inc.* .......................... 46,300 387,763
----------
Farming 1.2%
AG Services of America, Inc.* .................... 18,700 462,825
Sylvan, Inc.* .................................... 27,800 257,150
----------
719,975
----------
Food & Beverage 5.3%
Foodarama Supermarkets, Inc.* .................... 14,100 292,575
J & J Snack Foods Corp.* ......................... 22,300 411,156
Schultz Sav-O Stores, Inc. ....................... 33,050 380,075
Seaway Food Town, Inc. ........................... 33,150 696,150
Smithfield Companies, Inc. ....................... 19,700 137,900
Suprema Specialties, Inc.* ....................... 88,000 924,000
Village Super Market, Inc. "A"* .................. 27,900 360,956
----------
3,202,812
----------
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
Shares Value ($)
- --------------------------------------------------------------------------------
Textiles 0.0%
Worldtex, Inc.* ................................ 3,700 7,400
----------
Health 3.8%
Health Industry Services 2.4%
Air Methods Corp.* ............................. 101,600 450,850
HPSC, Inc.* .................................... 55,800 481,275
Healthcare Services Group, Inc.* ............... 52,050 370,856
ProMedCo Management Co.* ....................... 46,800 122,850
----------
1,425,831
----------
Hospital Management 0.1%
National Home Health Care Corp.* ............... 21,890 83,456
----------
Medical Supply & Specialty 1.3%
Polymedica Industries, Inc.* ................... 7,900 365,869
Scherer Healthcare, Inc.* ...................... 31,600 96,775
Superior Uniform Group, Inc. ................... 30,500 297,375
----------
760,019
----------
Communications 1.1%
Telephone/Communications
Hector Communications Corp.* ................... 42,900 643,500
----------
Financial 11.3%
Banks 7.0%
Alliance Bancorp of New England, Inc. .......... 37,749 311,429
Columbia Banking System, Inc.* ................. 18,522 214,161
Equitable Federal Savings Bank* ................ 700 9,975
First Essex Bancorp ............................ 15,800 217,250
First Keystone Financial, Inc. ................. 6,500 58,094
First Oak Brook Bancshares, Inc. "A" ........... 29,400 459,375
Haven Bancorp, Inc. ............................ 12,200 146,400
Hingham Institution for Savings ................ 11,550 147,263
Jacksonville Bancorp, Inc. ..................... 3,000 38,625
Kankakee Bancorp, Inc. ......................... 4,400 93,500
Lawrence Savings Bank .......................... 45,600 330,600
MFB Corp. ...................................... 2,400 41,400
Marion Capital Holdings, Inc. .................. 7,500 118,594
Medford Bancorp Inc. ........................... 23,600 309,750
NMBT Corp. ..................................... 5,700 126,113
New Hampshire Thrift Bancshares, Inc. .......... 3,600 37,350
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
Shares Value ($)
- --------------------------------------------------------------------------------
Northrim Bank .................................... 44,898 319,898
Parkvale Financial Corp. ......................... 24,296 394,810
People's Bancshares, Inc. ........................ 17,600 279,400
Pinnacle Bancshares, Inc. ........................ 25,000 196,875
Progress Financial Corp. ......................... 18,174 209,001
Southwest Bancorp, Inc. .......................... 7,800 144,300
----------
4,204,163
----------
Insurance 2.7%
ACMAT Corp. "A"* ................................. 21,700 165,463
Atlantic American Corp.* ......................... 71,600 179,000
Cotton States Life Insurance ..................... 45,525 355,664
Investors Title Co. .............................. 24,100 283,175
Security National Financial Corp. "A"* ........... 80,334 311,293
Siebels Bruce Group, Inc.* ....................... 39,300 63,863
Standard Management Corp.* ....................... 66,100 297,450
----------
1,655,908
----------
Consumer Finance 0.2%
Bank Plus Corp.* ................................. 52,000 117,000
----------
Other Financial Companies 0.8%
First Cash, Inc.* ................................ 65,900 461,300
----------
Real Estate 0.6%
AMREP Corp.* ..................................... 65,600 352,600
----------
Media 1.7%
Broadcasting & Entertainment 0.3%
Unapix Entertainment, Inc.* ...................... 94,200 170,738
----------
Print Media 1.4%
Advanced Marketing Services, Inc. ................ 45,175 813,150
----------
Service Industries 6.3%
Environmental Services 1.0%
GZA GeoEnvironmental Technologies, Inc.* ......... 81,900 368,550
Scope Industries, Inc. ........................... 4,000 159,500
Versar, Inc.* .................................... 39,900 89,775
----------
617,825
----------
Investment 0.5%
Advest Group, Inc. ............................... 7,200 119,700
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
Shares Value ($)
- --------------------------------------------------------------------------------
M.H. Meyerson & Co, Inc.* ........................ 36,200 190,050
----------
309,750
----------
Miscellaneous Commercial Services 3.2%
American Physicians Service Group, Inc.* ......... 65,800 230,300
C.H. Heist Corp.* ................................ 58,400 339,450
Exponent, Inc.* .................................. 42,200 340,238
Joule, Inc.* ..................................... 52,700 98,813
Mercury Air Group, Inc.* ......................... 86,600 736,100
RCM Technologies, Inc.* .......................... 12,800 193,600
----------
1,938,501
----------
Miscellaneous Consumer Services 1.6%
ACE Cash Express, Inc.* .......................... 33,025 565,553
Earl Scheib, Inc.* ............................... 6,900 27,600
ICT Group, Inc.* ................................. 25,700 231,300
TEAM America Corp.* .............................. 18,800 125,725
----------
950,178
----------
Durables 5.6%
Aerospace 0.8%
AVTEAM, Inc. "A"* ................................ 15,700 97,144
Ducommun, Inc.* .................................. 24,300 226,294
Sifco Industries, Inc. ........................... 26,600 176,225
----------
499,663
----------
Automobiles 0.4%
Collins Industries Inc. .......................... 39,100 244,375
----------
Leasing Companies 1.4%
Amplicon, Inc. ................................... 31,200 374,400
Capital Associates Inc.* ......................... 36,500 79,844
PLM International Inc.* .......................... 54,300 366,525
----------
820,769
----------
Telecommunications Equipment 2.6%
Cognitronics Corp.* .............................. 23,850 545,569
Comdial Corp.* ................................... 44,400 846,375
VARI-L Company, Inc.* ............................ 7,200 193,950
----------
1,585,894
----------
Miscellaneous 0.4%
Featherlite Manufacturing, Inc.* ................. 49,700 239,181
----------
Manufacturing 15.5%
Chemicals 0.8%
Aceto Corp. ...................................... 44,400 455,100
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
Shares Value ($)
- --------------------------------------------------------------------------------
JLM Industries, Inc.* .......................... 10,200 30,600
----------
485,700
----------
Containers & Paper 0.5%
Tufco Technologies, Inc.* ...................... 6,600 70,950
UFP Technologies, Inc.* ........................ 86,500 259,500
----------
330,450
----------
Diversified Manufacturing 1.2%
Brunswick Technologies, Inc.* .................. 19,200 123,600
Cantel Industries Inc.* ........................ 22,400 127,400
McRae Industries, Inc. "A" ..................... 41,300 216,825
Pubco Corp.* ................................... 28,100 231,825
----------
699,650
----------
Electrical Products 1.8%
ACME Electric Corp.* ........................... 57,600 320,397
Axsys Technologies, Inc.* ...................... 11,600 145,000
SL Industries, Inc. ............................ 51,400 600,738
----------
1,066,135
----------
Industrial Specialty 5.5%
American Locker Group, Inc.* ................... 43,200 283,496
Ault, Inc.* .................................... 6,600 66,000
Badger Meter, Inc. ............................. 18,000 552,375
Foster (LB) Co. "A"* ........................... 105,500 468,156
Graham Corp.* .................................. 30,100 221,988
Insteel Industries, Inc. ....................... 76,300 586,556
Kinark Corp.* .................................. 134,200 201,300
Lamson & Sessions Co.* ......................... 67,700 516,213
MFRI, Inc.* .................................... 58,900 287,138
Met-Pro Corp. .................................. 13,800 133,688
----------
3,316,910
----------
Machinery/Components/Controls 3.8%
Chicago Rivet & Machine Co. .................... 18,300 393,450
Cybex International, Inc.* ..................... 46,500 148,219
Farrel Corp. ................................... 102,300 204,600
IMPCO Technologies, Inc.* ...................... 2,400 122,850
Newcor, Inc.* .................................. 20,000 58,750
O.I. Corp.* .................................... 87,600 366,825
Oilgear Co. .................................... 19,300 168,875
On-Point Technology Systems, Inc.* (b) ......... 76,000 165,300
Summa Industries, Inc.* ........................ 42,600 420,675
Trans-Industries, Inc.* ........................ 35,500 213,000
----------
2,262,544
----------
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
Shares Value ($)
- --------------------------------------------------------------------------------
Office Equipment/Supplies 0.8%
Dixon Ticonderoga Co.* ........................... 30,100 150,500
TAB Products Co. ................................. 51,900 308,156
----------
458,656
----------
Specialty Chemicals 0.2%
Detrex Corp.* .................................... 31,700 96,091
----------
Wholesale Distributors 0.9%
Allou Health & Beauty, Inc. "A"* ................. 71,100 551,025
----------
Miscellaneous 0.0%
American Dental Technologies, Inc.* .............. 10,300 26,395
----------
Technology 13.8%
Computer Software 0.4%
MTS Systems Corp. ................................ 4,008 30,812
Scan Optics, Inc.* ............................... 90,100 202,725
----------
233,537
----------
Diverse Electronic Products 1.0%
Reliability Inc.* ................................ 7,900 39,500
SBS Technologies, Inc.* .......................... 10,200 555,263
----------
594,763
----------
Edp Peripherals 1.1%
Printronix, Inc.* ................................ 19,900 365,663
Wells-Gardner Electronics Corp.* ................. 89,355 323,912
----------
689,575
----------
Electronic Components/Distributors 8.6%
American Technical Ceramics Corp.* ............... 36,700 1,357,900
Anaren Microwave Inc.* ........................... 8,800 667,700
Bel Fuse Inc. Class "A" .......................... 13,750 264,688
Bel Fuse Inc. Class "B" .......................... 26,650 483,031
Napco Security Systems, Inc.* .................... 48,000 150,000
Nu Horizons Electronics, Inc.* ................... 58,065 990,734
Programmer's Paradise, Inc.* ..................... 27,800 184,175
Savior Technology Group, Inc.* ................... 55,600 417,000
Sigmatron International, Inc.* ................... 52,900 343,850
Trans-Lux Corp. .................................. 31,200 202,800
Video Display Corp.* ............................. 34,500 127,219
----------
5,189,097
----------
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
Shares Value ($)
- --------------------------------------------------------------------------------
Military Electronics 1.6%
EDO Corp. ...................................... 78,400 504,700
Engineered Support Systems, Inc. ............... 35,400 460,200
----------
964,900
----------
Precision Instruments 0.3%
Barringer Technologies Inc.* ................... 35,700 187,425
----------
Semiconductors 0.8%
Zing Technologies, Inc.* ....................... 30,300 459,234
----------
Energy 1.4%
Engineering 0.1%
Abrams Industries, Inc. ........................ 18,780 68,075
----------
Oil & Gas Production 0.5%
Petroleum Development Corp.* ................... 77,600 315,250
----------
Oil Companies 0.1%
Arabian Shield Development* .................... 58,600 76,913
----------
Miscellaneous 0.7%
RGC Resources, Inc. ............................ 18,700 399,713
----------
Metals & Minerals 1.7%
Steel & Metals 1.3%
Bayou Steel Corp.* ............................. 110,900 311,906
Friedman Industries, Inc. ...................... 60,003 210,011
Webco Industries, Inc.* ........................ 61,500 238,313
----------
760,230
----------
Miscellaneous 0.4%
United States Lime & Minerals, Inc. ............ 37,300 270,425
----------
Construction 3.9%
Building Materials 0.1%
Williams Industries, Inc.* ..................... 15,000 45,938
----------
Building Products 2.5%
Baltek Corp.* .................................. 45,300 365,226
Continental Materials Corp.* ................... 35,400 785,438
Noland Co. ..................................... 20,700 349,313
----------
1,499,977
----------
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
Shares Value ($)
- --------------------------------------------------------------------------------
Homebuilding 1.3%
Engle Homes, Inc. ................................ 33,200 346,525
Fortress Group, Inc.* ............................ 113,100 116,634
Liberty Homes, Inc. "A" .......................... 18,700 126,225
Washington Homes, Inc.* .......................... 33,000 173,250
----------
762,634
----------
Transportation 2.7%
Airlines 0.2%
Hawaiian Airlines, Inc.* ......................... 80,000 150,000
----------
Marine Transportation 0.7%
International Shipholding Corp. .................. 42,200 403,538
----------
Railroads 0.3%
Providence & Worcester Railroad Co. .............. 25,000 182,813
----------
Trucking 1.1%
Boyd Brothers Transportation, Inc.* .............. 51,000 280,500
Consolidated Delivery & Logistics, Inc.* ......... 32,600 118,175
Kenan Transport Co. .............................. 8,500 187,000
Simon Transportation Services, Inc.* ............. 9,600 46,800
----------
632,475
----------
Miscellaneous 0.4%
Travel Services International Inc.* .............. 9,300 238,894
----------
Utilities 3.4%
Electric Utilities 0.3%
Unitil Corp. ..................................... 6,500 201,500
----------
Natural Gas Distribution 2.0%
Chesapeake Utilities Corp. ....................... 20,200 362,338
Energy West, Inc. ................................ 25,700 212,025
Providence Energy Corp. .......................... 17,900 658,944
----------
1,233,307
----------
Water Supply 1.0%
Southwest Water Co. .............................. 46,034 598,442
----------
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
Shares Value ($)
- --------------------------------------------------------------------------------
Miscellaneous 0.1%
Florida Public Utilities Co. ................... 4,700 68,150
----------
- --------------------------------------------------------------------------------
Total Common Stocks (Cost $53,905,829) 58,831,553
- --------------------------------------------------------------------------------
Total Investment Portfolio-- 100.0% (Cost $54,290,829) (a) 60,216,553
- --------------------------------------------------------------------------------
* Non-income producing security.
** Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
(a) The cost for federal income tax purposes was $55,290,829. At February 29,
2000, net unrealized appreciation for all securities based on tax cost was
$4,925,724. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of value over tax cost of
$14,708,749 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value of $9,783,025.
(b) Securities valued in good faith by the Valuation Committee of the Board of
Trustees at fair value amounted to $165,300 (0.27% 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 February 29, 2000 aggregated $147,877. These securities may
also have certain restrictions as to resale.
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities as of February 29, 2000 (Unaudited)
- --------------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------------
Investments in securities, at value (cost $55,290,829) ........ $ 60,216,553
Receivable for investments sold ............................... 177,040
Dividends receivable .......................................... 22,146
Interest receivable ........................................... 221
Receivable for Fund shares sold ............................... 32,177
Deferred organization expenses ................................ 4,050
Other assets .................................................. 946
------------
Total assets .................................................. 60,453,133
Liabilities
- --------------------------------------------------------------------------------
Due to custodian bank ......................................... 195
Payable for Fund shares redeemed .............................. 68,414
Accrued management fee ........................................ 36,696
Other accrued expenses and payables ........................... 192,090
------------
Total liabilities ............................................. 297,395
- --------------------------------------------------------------------------------
Net assets, at value $ 60,155,738
- --------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------
Net assets consist of:
Accumulated net investment loss ............................... (64,639)
Net unrealized appreciation (depreciation) on investments ..... 4,925,724
Accumulated net realized gain (loss) .......................... 2,193,951
Paid-in capital ............................................... 53,100,702
- --------------------------------------------------------------------------------
Net assets, at value $ 60,155,738
- --------------------------------------------------------------------------------
Net Asset Value
- --------------------------------------------------------------------------------
Net Asset Value, offering and redemption price (Note A)
per share ($60,155,738 / 3,840,582 outstanding shares
of beneficial interest, $.01 par value, unlimited number
of shares authorized) ........................................ $ 15.66
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations for the six months ended February 29, 2000 (Unaudited)
- --------------------------------------------------------------------------------
Investment Income
- --------------------------------------------------------------------------------
Dividends ................................................... $ 497,029
Interest .................................................... 38,842
---------
Total Income ................................................ 535,871
---------
Expenses:
Management fee .............................................. 252,942
Services to shareholders .................................... 198,117
Custodian and accounting fees ............................... 25,555
Auditing .................................................... 15,857
Legal ....................................................... 6,006
Trustees' fees and expenses ................................. 21,291
Reports to shareholders ..................................... 19,720
Registration fees ........................................... 10,010
Amortization of organization expenses ....................... 1,392
Reorganization .............................................. 48,724
Other ....................................................... 2,561
---------
Total expenses, before expense reductions ................... 602,175
Expense reductions .......................................... (1,665)
-----------
Total expenses, after expense reductions .................... 600,510
Net investment income (loss) (64,639)
Realized and unrealized gain (loss) on investment transactions
- --------------------------------------------------------------------------------
Net realized gain (loss) from investments ................... 3,596,296
Net unrealized appreciation (depreciation) during the
period on investments ...................................... (2,241,735)
- --------------------------------------------------------------------------------
Net gain (loss) on investment transactions 1,354,561
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 1,289,922
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Statements of Changes in Net Assets
- ------------------------------------------------------------------------------------
Six Months
Ended
February 29, Year Ended
2000 August 31,
Increase (Decrease) in Net Assets (Unaudited) 1999
- ------------------------------------------------------------------------------------
Operations:
<S> <C> <C>
Net investment income (loss) ..................... $ (64,639) $ (611,580)
Net realized gain (loss) on investment
transactions .................................... 3,596,296 (1,468,116)
Net unrealized appreciation (depreciation) on
investment transactions during the period ....... (2,241,735) 11,822,491
------------- -------------
Net increase (decrease) in net assets resulting
from operations .................................. 1,289,922 9,742,795
------------- -------------
Distributions to shareholders from net realized
gains on investment transactions ................. -- (5,478,575)
------------- -------------
Fund share transactions:
Proceeds from shares sold ........................ 3,356,199 15,769,689
Reinvestment of distributions .................... -- 5,236,859
Cost of shares redeemed .......................... (22,818,733) (49,482,083)
Redemption fees .................................. 11,899 24,451
------------- -------------
Net increase (decrease) in net assets from Fund
share transactions .............................. (19,450,635) (28,451,084)
------------- -------------
Increase (decrease) in net assets ................ (18,160,713) (24,186,864)
Net assets at beginning of period ................ 78,316,451 102,503,315
Net assets at end of period (including accumulated
net investment loss of ($64,639) at
February 29, 2000) .............................. $ 60,155,738 $ 78,316,451
Other Information
Shares outstanding at beginning of period ........ 5,149,376 7,131,931
------------- -------------
Shares sold ...................................... 223,376 1,077,995
Shares issued to shareholders in reinvestment of
distributions ................................... -- 370,882
Shares redeemed .................................. (1,532,170) (3,431,432)
------------- -------------
Net increase (decrease) in Fund shares ........... (1,308,794) (1,982,555)
Shares outstanding at end of period .............. 3,840,582 5,149,376
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
- -----------------------------------------------------------------------------------------
2000(b) 1999(c) 1998(c) 1997(c) 1996(d)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $15.21 $14.37 $16.77 $12.07 $12.00
-----------------------------------------------------
- -----------------------------------------------------------------------------------------
Income (loss) from investment
operations:
- -----------------------------------------------------------------------------------------
Net investment income (loss) (a) (.02) (.10) (.08) (.03) .01
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments .47 1.77 (2.28) 4.74 .06
-----------------------------------------------------
- -----------------------------------------------------------------------------------------
Total from investment operations .45 1.67 (2.36) 4.71 .07
- -----------------------------------------------------------------------------------------
Less distributions from:
- -----------------------------------------------------------------------------------------
Net investment income -- -- -- (.02) --
- -----------------------------------------------------------------------------------------
Net realized gains on investment
transactions -- (.83) (.07) -- --
-----------------------------------------------------
- -----------------------------------------------------------------------------------------
Total distributions -- (.83) (.07) (.02) --
- -----------------------------------------------------------------------------------------
Redemption fees --*** --*** .03 .01 --***
- -----------------------------------------------------------------------------------------
Net asset value, end of period $15.66 $15.21 $14.37 $16.77 $12.07
-----------------------------------------------------
- -----------------------------------------------------------------------------------------
Total Return (%) (e) 2.96** 12.03 (13.96) 39.10(f) .58(f)**
- -----------------------------------------------------------------------------------------
Ratios and Supplemental Data
- ---------------------------------------------------------------------------------------
Net assets, end of period ($ 60 78 103 92 8
millions)
- -----------------------------------------------------------------------------------------
Ratio of expenses before expense 1.71* 1.61 1.39 2.19 22.06*
reductions (%)
- -----------------------------------------------------------------------------------------
Ratio of expenses after expense 1.71(g*) 1.61 1.39 1.75 1.75*
reductions (%)
- -----------------------------------------------------------------------------------------
Ratio of net investment income (.19)* (.68) (.44) (.21) 2.58*
(loss) (%)
- -----------------------------------------------------------------------------------------
Portfolio turnover rate (%) 7* 4 34 17 --
- -----------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the six months ended February 29, 2000 (Unaudited).
(c) Year ended August 31.
(d) For the Period August 12, 1996 (commencement of operations) to August 31,
1996.
(e) Total return does not reflect the effect to the shareholder of the 1%
redemption fee on shares held less than one year.
(f) Total return would have been lower had certain expenses not been reduced.
(g) The ratio of operating expenses to average net assets excluding
reorganization costs was 1.64%, for the six months ended February 29, 2000.
* Annualized
** Not annualized
*** Amount is less than half of $.01.
28
<PAGE>
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
A. Significant Accounting Policies
Scudder Micro Cap Fund (the "Fund") is a diversified series of Scudder
Securities Trust (the "Trust") which is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end management investment
company organized as a Massachusetts business trust.
Effective September 22, 1997, the Fund suspended the sale of its shares to new
investors. Current individual shareholders of the Fund were able to continue to
invest in the Fund and the Fund remained open to investment through qualified
retirement plans. The Trustees reopened the Fund to new investors effective
October 23, 1998. The Trustees may determine to close the Fund again at some
point based on market conditions and other factors.
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. Investments are stated at value determined as of the close
of regular trading on the New York Stock Exchange. 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 Stock Market ("Nasdaq"), for which there have been sales, are valued at
the most recent sale price reported. If there are no such sales, the value is
the most recent bid quotation. Securities which are not quoted on Nasdaq but are
traded in another over-the-counter market are valued at the most recent sale
price, or if no sale occurred, at the calculated mean between the most recent
bid and asked quotations on such market. If there are no such bid and asked
quotations, the most recent bid quotation shall be used.
Portfolio debt securities purchased with an original maturity greater than sixty
days are valued by pricing agents approved by the officers of the Trust, whose
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.
29
<PAGE>
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 or
sub-custodian bank, 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 is equal to at least the
principal amount of the repurchase price plus accrued interest.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. Accordingly, the Fund paid no federal income taxes and no federal
income tax provision was required.
At August 31, 1999, the Fund had a net tax basis capital loss carryforward of
approximately $1,109,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until August 31,
2007, the expiration date, whichever occurs first. From November 1, 1998 through
August 31, 1999, the Fund incurred approximately $359,000 of net realized
capital losses. As permitted by tax regulations, the Fund intends to elect to
defer these losses and treat them as arising in the fiscal year ended August 31,
2000.
Distribution of Income and Gains. Distributions of net investment income, if
any, are made annually. 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 generally accepted accounting principles. As a result, net
investment income (loss) and net realized gain (loss) on investment transactions
for a reporting period may differ significantly from distributions during such
period. Accordingly, the Fund may periodically make reclassifications among
certain of its capital accounts without impacting the net asset value of the
Fund.
Investment Transactions and Investment Income. Investment transactions are
accounted for on the trade date. Interest income is recorded on the accrual
basis. Dividend income is recorded on the ex-dividend date. Realized gains
30
<PAGE>
and losses from investment transactions are recorded on an identified cost
basis.
Organization Costs. Costs incurred by the Fund in connection with its
organization have been deferred and are being amortized on a straight-line basis
over a five-year period.
Redemption Fees. In general, shares of the Fund may be redeemed at net asset
value. However, upon the redemption or exchange of shares held by shareholders
for less than one year, a fee of 1% of the current net asset value of the shares
will be assessed and retained by the Fund for the benefit of the remaining
shareholders. The redemption fee is accounted for as an addition to paid-in
capital.
B. Purchases and Sales of Securities
During the six months ended February 29, 2000, purchases and sales of investment
securities (excluding short-term investments) aggregated $2,233,297 and
$20,903,600, respectively.
C. Related Parties
Under the Investment Management Agreement (the "Management Agreement") with
Scudder Kemper Investments, Inc. ("Scudder Kemper" or the "Adviser"), the Fund
pays the Adviser a fee equal to an annual rate of 0.75% of the Fund's average
daily net assets, 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
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 Management Agreement. For the six months ended
February 29, 2000, the fee imposed amounted to $252,942, of which $36,696 is
unpaid at February 29, 2000.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
six months ended February 29, 2000, the amount charged to the Fund by SSC
aggregated $115,572, of which $34,811 is unpaid at February 29, 2000.
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 six months ended
31
<PAGE>
February 29, 2000, the amount charged to the Fund by STC aggregated $27,692, of
which $8,689 is unpaid at February 29, 2000.
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 six months
ended February 29, 2000, the amount charged to the Fund by SFAC aggregated
$21,309, of which $3,254 is unpaid at February 29, 2000.
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
the potential to be invested in the Underlying Funds. At February 29, 2000, the
Special Servicing Agreement expense charged to the Fund amounted to $45,682, of
which $31,108 is unpaid at February 29, 2000.
The Trust pays each of its Trustees not affiliated with the Adviser an annual
retainer plus specified amounts for attended board and committee meetings. For
the six months ended February 29, 2000, the Trustees' fees and expenses
aggregated $21,291.
D. Expense Off-Set Arrangements
The Fund has entered into arrangements with its custodian and transfer agent
whereby credits realized as a result of uninvested cash balances were used to
reduce a portion of the Fund's expenses. During the six months ended February
29, 2000, the Fund's custodian and transfer agent fees were reduced by $554 and
$1,111, respectively, under these arrangements.
E. Line of Credit
The Fund and several Scudder Funds (the "Participants") share in a $1 billion
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, pro rata based on net assets, among each of the
32
<PAGE>
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.
F. Plan of Reorganization
On February 7, 2000 the Trustees of the Fund approved an Agreement and Plan of
Reorganization (the "Reorganization") between the Fund and the AARP Small
Company Stock Fund, pursuant to which AARP Small Company Stock Fund would
acquire all or substantially all of the assets and liabilities of the Fund in
exchange for a new class of shares ("Class S") of the AARP Small Company Stock
Fund. The proposed transaction is part of Scudder Kemper's initiative to
restructure and streamline the management and operations of the funds it
advises. The Reorganization can be consummated only if, among other things, it
is approved by a majority vote of the shareholders of the Fund. A special
meeting of the shareholders of the Fund to approve the Reorganization will be
held on or about July 13, 2000.
As a result of the Reorganization, each shareholder of the Scudder Micro Cap
Fund will become a shareholder of the Class S shares of the AARP Small Company
Stock Fund and would hold, immediately after the closing of the Reorganization
(the "Closing"), that number of full and fractional voting shares of the Class S
shares of the AARP Small Company Stock Fund having an aggregate net asset value
equal to the aggregate net asset value of such shareholder's shares held in the
Fund as of the close of business on the business day preceding the Closing. The
Closing is expected to take place during the third quarter of 2000. In the event
the shareholders of the Fund fail to approve the Reorganization, the Fund will
continue to operate and the Fund's Trustees may resubmit the Plan for
shareholder approval or consider other proposals.
33
<PAGE>
Officers and Trustees
- --------------------------------------------------------------------------------
Linda C. Coughlin* Peter Chin*
o President o Vice President
Sheryle J. Bolton J. Brooks Dougherty*
o Trustee; Chief Executive Officer, o Vice President
Scientific Learning Corporation
James M. Eysenbach*
William T. Burgin o Vice President
o Trustee; General Partner, Bessemer
Venture Partners James E. Fenger*
o Vice President
Keith R. Fox
o Trustee; General Partner, Philip S. Fortuna*
The Exeter Group of Funds o Vice President
William H. Luers Sewall F. Hodges*
o Trustee; Chairman and President, o Vice President
U.N. Association of America
Ann M. McCreary*
Kathryn L. Quirk* o Vice President
o Trustee, Vice President and
Assistant Secretary Thaddeus Paluszek*
o Vice President
Joan E. Spero
o Trustee; President, Doris Duke Robert C. Peck*
Charitable Foundation o Vice President
Paul Bancroft III John Millette*
o Honorary Trustee; Venture o Vice President and Secretary
Capitalist and Consultant
John R. Hebble*
Wilson Nolen o Treasurer
o Honorary Trustee; Consultant
Caroline Pearson*
Robert G. Stone, Jr. o Assistant Secretary
o Honorary Trustee; Chairman
Emeritus and Director, Kirby *Scudder Kemper Investments, Inc.
Corporation
Edmund R. Swanberg
o Honorary Trustee
34
<PAGE>
Investment Products and Services
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
<S> <C>
Money Market U.S. Growth and Income
Scudder U.S. Treasury Money Fund Scudder Balanced Fund
Scudder Cash Investment Trust Scudder Dividend & Growth Fund
Scudder Money Market Series -- Scudder Growth and Income Fund***
Prime Reserve Shares* Scudder Select 500 Fund
Premium Shares* Scudder S&P 500 Index Fund
Managed Shares* Scudder Real Estate Investment Fund
Scudder Government Money Market
Series -- Managed Shares* U.S. Growth
Value
Tax Free Money Market+ Scudder Large Company Value Fund
Scudder Tax Free Money Fund Scudder Value Fund***
Scudder Tax Free Money Market Scudder Small Company Value Fund
Series -- Managed Shares* Scudder Micro Cap Fund
Scudder California Tax Free Money Fund** Growth
Scudder New York Tax Free Money Fund** Scudder Classic Growth Fund***
Scudder Large Company Growth Fund***
Tax Free+ Scudder Select 1000 Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Medium Term Tax Free Fund Scudder 21st Century Growth Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund Global Equity
Scudder California Tax Free Fund** Worldwide
Scudder Massachusetts Limited Term Scudder Global Fund
Tax Free Fund** Scudder International Value Fund
Scudder Massachusetts Tax Free Fund** Scudder International Growth and
Scudder New York Tax Free Fund** Income Fund
Scudder Ohio Tax Free Fund** Scudder International Fund++
Scudder International Growth Fund
U.S. Income Scudder Global Discovery Fund***
Scudder Short Term Bond Fund Scudder Emerging Markets Growth Fund
Scudder GNMA Fund Scudder Gold Fund
Scudder Income Fund Regional
Scudder Corporate Bond Fund Scudder Greater Europe Growth Fund
Scudder High Yield Bond Fund Scudder Pacific Opportunities Fund
Scudder Latin America Fund
Global Income The Japan Fund, Inc.
Scudder Global Bond Fund
Scudder International Bond Fund Industry Sector Funds
Scudder Emerging Markets Income Fund Choice Series
Scudder Financial Services Fund
Asset Allocation Scudder Health Care Fund
Scudder Pathway Conservative Portfolio Scudder Technology Fund
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio Preferred Series
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
</TABLE>
35
<PAGE>
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
- --------------------------------------------------------------------------------
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs Education Accounts
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Variable Annuities
Scudder Horizon Plan**+++ +++
Scudder Horizon Advantage**+++ +++ +++
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Closed-End Funds#
- -----------------------------------------------------------------------------------------
<S> <C>
The Argentina Fund, Inc. Montgomery Street Income Securities, Inc.
The Brazil Fund, Inc. Scudder Global High Income Fund, Inc.
The Korea Fund, Inc. Scudder New Asia Fund, Inc.
</TABLE>
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 or classes thereof 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.
+++ +++ +++ A no-load variable annuity contract issued by Glenbrook Life and
Annuity Company and underwritten by Allstate Financial Services,
Inc., sold 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.
36
<PAGE>
Scudder Solutions
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
Convenient Automatic Investment Plan
ways to invest,
quickly and A convenient investment program in which money is
reliably electronically debited from your bank account monthly to
regularly purchase fund shares and "dollar cost average" --
buy more shares when the fund's price is lower and fewer
when it's higher, which can reduce your average purchase
price over time.*
Automatic Dividend Transfer
The most timely, reliable, and convenient way to purchase
shares -- use distributions from one Scudder fund to
purchase shares in another, automatically (accounts with
identical registrations or the same social security or tax
identification number).
QuickBuy
Lets you purchase Scudder fund shares electronically,
avoiding potential mailing delays; money for each of your
transactions is electronically debited from a previously
designated bank account.
Payroll Deduction and Direct Deposit
Have all or part of your paycheck -- even government checks
-- invested in up to four Scudder funds at one time.
* Dollar cost averaging involves continuous investment in
securities regardless of price fluctuations and does not
assure a profit or protect against loss in declining
markets. Investors should consider their ability to
continue such a plan through periods of low price
levels.
Around-the- Scudder Automated Information Line: SAIL(TM) --
clock electronic 1-800-343-2890
account
service and Personalized account information, the ability to exchange
information, or redeem shares, and information on other Scudder funds
including some and services via touchtone telephone.
transactions
Scudder's Web Site -- www.scudder.com
Personal Investment Organizer: Offering account information
and transactions, interactive worksheets, prospectuses and
applications for all Scudder funds, plus your current asset
allocation, whenever your need them. Scudder's site also
provides news about Scudder funds, retirement planning
information, and more.
37
<PAGE>
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
Retirees and Automatic Withdrawal Plan
those who depend
on investment You designate the bank account, determine the schedule (as
proceeds for frequently as once a month) and amount of the redemptions,
living expenses and Scudder does the rest.
can enjoy these
convenient, Distributions Direct
timely, and
reliable Automatically deposits your fund distributions into the
automated bank account you designate within three business days after
withdrawal each distribution is paid.
programs
QuickSell
Provides speedy access to your money by electronically
crediting your redemption proceeds to the bank account you
previously designated.
For more Call a Scudder representative at
information about 1-800-SCUDDER
these services
Or visit our Web site at
www.scudder.com
Please address The Scudder Funds
all written PO Box 2291
correspondence Boston, Massachusetts
to 02107-2291
38
<PAGE>
Notes
- --------------------------------------------------------------------------------
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc. is one of the largest and most experienced
investment management organizations worldwide, managing more than $290 billion
in assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded over 80
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Financial Services Group. As a result, Zurich's subsidiary, Zurich
Kemper Investments, Inc., with 50 years of mutual fund and investment management
experience, was combined with Scudder. Headquartered in New York, Scudder Kemper
Investments offers a full range of investment counsel and asset management
capabilities, based on a combination of proprietary research and disciplined,
long-term investment strategies. With its global investment resources and
perspective, the firm seeks opportunities in markets throughout the world to
meet the needs of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Financial Services Group. The Zurich Financial Services Group is
an internationally recognized leader in financial services, including
property/casualty and life insurance, reinsurance, and asset management.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
RT048200
335-6-20
SCUDDER
INVESTEMENTS(SM)
[LOGO]
PO Box 2291
Boston, MA 02107-2291
1-800-SCUDDER
www.scudder.com
A member of the [LOGO] Zurich Financial Services Group
