Scudder
Value
Fund
Annual Report
September 30, 1998
For investors seeking long-term growth of capital through investment in
undervalued equity securities.
Scudder Value Fund is properly known as Value Fund.
The Fund is a diversified series of Value Equity Trust.
SCUDDER (logo)
<PAGE>
Scudder Value Fund
- --------------------------------------------------------------------------------
Total Net Assets of
Date of Inception: 12/31/92 Scudder Shares as of Ticker Symbol: SCVAX
9/30/98: $468.5 million
- --------------------------------------------------------------------------------
o For the 12-month period ended September 30, 1998, the Scudder Shares of
Scudder Value Fund returned -2.08% in an environment that was particularly
challenging for value-oriented investing.
o Throughout the period, Fund management continued to emphasize quality stocks
and maintained an overall portfolio valuation that was at a significant discount
to the market.
o The Fund's Scudder Shares were assigned an overall 4-star risk-adjusted rating
from Morningstar among 2,678 domestic equity funds as of September 30, 1998.^1
Table of Contents
3 Letter from the Fund's President 19 Financial Highlights
4 Performance Update 23 Notes to Financial Statements
5 Portfolio Summary 29 Report of Independent
6 Portfolio Management Discussion 30 Tax Information
9 Glossary of Investment Terms 32 Officers and Trustees
10 Investment Portfolio 33 Investment Products and Services
16 Financial Statements 34 Scudder Solutions
^1 Source: Morningstar. Ratings are subject to change monthly and are
calculated based on the Fund's Scudder Shares' three-, five-, and ten-year
average annual returns in excess of 90-day Treasury bill returns with
appropriate fee adjustments, and a risk factor that reflects Scudder Share
performance below 90-day T-bill returns. In an investment category, 10% of
funds receive 5 stars and the next 22.5% receive 4 stars. In the domestic
equity category, the Fund's Scudder Shares received a 4 star rating for the
three- and five- year periods. The Fund's Scudder Shares are not rated for
the ten-year period because it commenced operations on 12/31/92. Past
performance is no guarantee of future results.
2 - Scudder Value Fund
<PAGE>
Letter from the Fund's President
Dear Shareholders,
Over the 12-month period, the economic crisis in the emerging markets spread
across the globe, causing investors to seek cover in perceived safe havens such
as U.S. Treasury bonds and stocks of large, familiar growth companies. In the
process, value stocks underperformed, as individual stock selection based on
fundamentals was set aside. In a broad-based market downdraft such as this, even
shares of companies with attractive fundamentals can get hit hard.
As difficult as these sell-offs are to deal with, they can provide
extraordinary opportunities for those willing to endure short-term volatility.
Over the long-term, we believe that stocks with attractive fundamentals will
ultimately be recognized and rewarded in the marketplace. In this challenging
climate, we believe that investors should remain focused on their long-term
investment goals.
For this report, we asked fund managers Don Hall and Bill Wallace to discuss
the market environment and the Fund's performance for the 12-month period. By
sticking with their disciplined approach to selecting attractively valued
stocks, the Fund managers have helped the risk-adjusted performance of the
Fund's Scudder Shares remain above-average relative to its peers. Their
discussion begins on page 6.
For those of you who are interested in new Scudder funds, we recently
introduced two international funds: Scudder International Growth Fund--which
seeks to invest in high growth opportunities in both developed and developing
markets, and Scudder International Value Fund--which seeks to invest in
undervalued foreign securities. For further information on these new funds,
please call Scudder Investor Information at 1-800-225-2470.
Thank you for your investment in Scudder Value Fund. If you have any
questions about the Fund, please call Scudder Investor Information at the number
above, or visit our Internet Web site at http://www.scudder.com.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President,
Scudder Value Fund
3 - Scudder Value Fund
<PAGE>
PERFORMANCE UPDATE as of September 30, 1998
- ----------------------------------------------------------------
Fund Index Comparisons
- ----------------------------------------------------------------
Total Return
- --------------------------------------------
Period Ended Growth of Average
9/30/98 $10,000 Cumulative Annual
- --------------------------------------------
Scudder Value Fund -- Scudder Shares
- --------------------------------------------
1 Year $ 9,792 -2.08% -2.08%
5 Year $21,072 110.72% 16.08%
Life of Class* $23,495 134.95% 16.01%
- --------------------------------------------
S&P 500 Index
- --------------------------------------------
1 Year $10,904 9.04% 9.04%
5 Year $24,792 147.92% 19.90%
Life of Class* $26,669 166.69% 18.60%
- --------------------------------------------
* The Scudder Shares commenced operations on
December 31, 1992.
- -----------------------------------------------------------------
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 September 30
Scudder Value Fund -- Scudder Shares
Year Amount
- ----------------------
12/92* $10,000
'93 $11,150
'94 $11,360
'95 $14,043
'96 $16,456
'97 $23,993
'98 $23,495
S&P 500 INDEX
Year Amount
- ----------------------
12/92* $10,000
'93 $10,757
'94 $11,153
'95 $14,471
'96 $17,412
'97 $24,457
'98 $26,669
The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-weighted
measure of 500 widely held common stocks listed on the New York Stock Exchange,
American Stock Exchange, and Over-The-Counter market. 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 September 30
1993* 1994 1995 1996 1997 1998
----------------------------------------------------------
NET ASSET VALUE... $ 13.38 $ 13.08 $ 15.87 $ 17.52 $ 23.53 $ 21.20
INCOME DIVIDENDS.. $ -- $ .11 $ .12 $ .04 $ .07 $ .24
CAPITAL GAINS
DIVIDENDS......... $ -- $ .43 $ .13 $ .92 $ 1.48 $ 1.65
FUND TOTAL
RETURN (%)........ 11.50 1.88 23.62 17.18 45.80 -2.08
INDEX TOTAL
RETURN (%)........ 7.56 3.68 29.75 20.34 40.46 9.04
Effective April 16, 1998, the Fund changed its name from Scudder Value Fund to
Value Fund and an additional three classes of shares were offered. Existing
shares of Value Fund outstanding on that date were redesignated Scudder Shares
of the Fund. The total return information provided is for the Fund's Scudder
Share Class. The total return for Classes A, B and C would have been lower than
the Scudder Shares due to sales loads and certain class specific expenses.
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. If the Adviser had not maintained the Fund's
expenses, the total returns for the one year, five year and life of Class
periods would have been lower.
4 - Scudder Value Fund
<PAGE>
Portfolio Summary as of September 30, 1998
Asset Allocation
- ----------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
Equity Securities 85%
Cash Equivalents 15%
--------------------------------------
100%
--------------------------------------
The Fund's effective cash position was actually lower at 8.6% of assets,
reflecting the use of S&P 500 Index futures to gain market exposure as we
searched for stocks that met our valuation criteria.
Sectors
(Excludes 15% Cash Equivalents)
- -------------------------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
Financial 19%
Energy 12%
Technology 11%
Durables 11%
Communications 9%
Consumer Staples 7%
Health 7%
Transportation 6%
Media 5%
Other 13%
--------------------------------------
100%
--------------------------------------
Telecommunications services, utilities, healthcare and auto stocks were the
best performing groups; financial and manufacturing stocks were
disappointing.
Ten Largest Equity Holdings
(20% of Portfolio)
- ---------------------------
1. Texaco Inc.
Major international oil company
2. WPP Group PLC
Advertising agency
3. Bell Atlantic Corp.
Provider of telecommunication
services
4. USEC Inc. Provider of enriched uranium products and services
5. First Union Corp.
Commercial banking in the
southeast
6. Bristol-Myers Squibb Co.
Diversified pharmaceutical and
consumer products company
7. Sun Microsystems, Inc.
Producer of high-performance
workstations, servers and
networking software
8. Magna International, Inc.
Manufacturer of automotive parts
9. Parker-Hannifin Group
Fluid control components
10. AT&T
Telecommunication services and
business systems
With an overall portfolio p/e below that of the S&P 500
based on 19 earnings estimates, management believes that the
Fund should benefit significantly when market sentiment
returns to stocks with attractive valuations.
For more complete details about the Fund's investment portfolio, see page 10. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
5 - Scudder Value Fund
<PAGE>
Portfolio Management Discussion
We asked portfolio managers Donald E. Hall and William J. Wallace to
discuss the current market environment and their investment strategy over the
fiscal year.
Q: In the last annual report you characterized the 45.80% return of the
Scudder Shares versus 40.46% for the S&P 500 as extraordinary. How would you
describe its performance for the 12-month period ended September 30, 1998?
A: Also extraordinary, but in the other direction. Scudder Shares declined
2.08% on a total return basis for the 12 months. This performance compares to
the positive 3.61% return of the unmanaged Russell 1000 Value Index and the
9.04% return of the S&P 500 Index.
The Shares held up well in most of the major down drafts, but trailed
significantly on the rebounds. While value stocks historically have tended to
decline less during market corrections, it is not unusual for them to
underperform just prior to the beginning of a recession. We saw this pattern in
1990, the beginning of our last recession. Then, as now, investors gravitated to
the largest and highest quality blue-chip stocks, regardless of valuations. The
number of stocks with positive performance narrowed to a handful just prior to
the recession and then broadened out in the recovery. We believe a similar
pattern is likely going forward, whether we experience a recession or merely a
slowdown.
Q: "Growth" stocks outperformed "value" and large-caps outperformed small.
How significant was this to investors?
A: Very significant. The extent to which growth stocks outperformed was
virtually unprecedented. Also the extent to which a few of the very largest
stocks outperformed the average stock was extraordinary. The average value stock
in the S&P 500 (as defined by BARRA) trailed the overall S&P 500 (a market
capitalization weighted index) by over 17 percentage points. Both factors
provided a very strong stylistic headwind for the Fund.
Q: Given the superior performance of large growth stocks, do you expect to
change your stock selection criteria going forward?
A: We intend to stick with our disciplined approach. While the temptation
to tinker with an investment strategy is often greatest when the market has made
a sharp turn, we continue to believe that our strategy will reward shareholders
over the long term. Although stylistic influences can continue for years, the
very high price/earnings (P/E) multiples of the most popular stocks suggest a
change in relative performance may be at hand.
Q: Global influences were an important factor affecting U.S. stocks over
the 12 months. How would you summarize this environment?
A: It is helpful to think back to more than a year ago when trouble first
began in Thailand. The significance of the Southeast Asian economies to the U.S.
is small in financial terms, yet the falloff in incremental demand from these
rapidly growing economies took enough steam out of the strong U.S. economy to
allow interest rates to remain low. High confidence and low rates prompted a
boom in both capital and consumer spending, swelling U.S. profits above
expectations into the first part of 1998. Foreign buyers poured money into U.S.
equities in the first half of 1998 at a rate that exceeded even the U.S. mutual
fund buyer --
6 - Scudder Value Fund
<PAGE>
the largest incremental purchaser of U.S. equities in recent years.
However, the pace of profit growth was unsustainable, and in the second
calendar quarter, signs of softening began to show up in the manufacturing
sector. In the third quarter, the Russian devaluation and debt moratorium, and
the collapse of the hedge fund, Long Term Capital Management sparked sharp price
declines. It should be noted that neither the Russian financial crisis nor the
collapse of Long Term Capital Management was significant, per se.
Q: In general terms, what is your criteria for selecting stocks?
A: We use an intrinsic value approach to ranking stocks based on opinions
provided by our large in-house research staff. The ideal stock is an established
growing company with average to below-average risk and a defensible competitive
position. In particular, we look for companies that are selling at a discounted
price/earnings ratio versus the market. Qualifying value stocks that are
suffering from a deterioration in key fundamentals are avoided unless we can
determine when and how the fundamental problem will be resolved. Stocks which
decline to low P/E multiples because of temporary earnings disturbances are
considered buying opportunities.
Q: What contributed to or took away from performance for the period?
A: Telecommunications services, utilities, health care, and auto stocks
were the best performing groups. Star performers in these areas included Century
Telephone, Unicom, American Home Products, and Ford. Except for Sun
Microsystems, the portfolio generally missed out on the strong performance
turned in by the technology sector, especially Internet-related stocks. Our
underweighting in the technology area was a natural result of our value-oriented
approach, which tends to exclude high P/E stocks, such as those common in the
tech sector. The performance of Unicom, a modestly growing Midwestern electric
utility (up 68%) is testimony, however, to the very healthy gains available in
seemingly unexciting companies.
The most disappointing group for the portfolio was the financial sector,
which had been very productive in previous years. Financial stocks overall
suffered from broad declines based on investor concern over emerging markets or
hedge fund exposure. MBIA, Chase Manhattan, and Safeco were among those with
negative returns. Our manufacturing holdings included a number of
underperformers such as American Standard and Crown Cork and Seal, which were
sold.
Q: In the March 31st report you mentioned BankAmerica, Ford, WPP Group,
MBIA, and Harris as particularly attractive holdings. Can you give us an update
on these stocks?
A: All were still holdings as of the end of the period. Harris suffered
from the downturn in the semiconductor cycle, but more importantly, its Lanier
Business Products Division saw its competitive position eroded. We reduced our
position despite its low P/E primarily because of this weakening competitive
position. BankAmerica was still held in the portfolio, despite a substantial
write-off due to hedge fund and emerging market
7 - Scudder Value Fund
<PAGE>
loan losses in the third quarter. We believe the worst is over for the
bank, and that the lower stock price represents good value. MBIA was also down
along with most financial stocks, yet its earnings have met expectations. WPP
Group, as a large global advertising agency, has some exposure to Asia and Latin
America. Although earnings have met expectations, the stock has been weak due to
investors' concerns over the crises in the emerging markets. For Ford, low
interest rates and a strong product line have enabled the company to beat
earnings expectations and provide strong performance to the portfolio.
Q: What is your outlook for the environment and the Fund?
A: The combination of the recent market correction and lower interest rates
has significantly improved the valuation of U.S. stocks. While we believe profit
growth will be at best flat next year, many stocks are already discounting an
outright recession and represent compelling values. The portfolio is positioned
with a balance between defensive stocks (drugs and utilities) and very depressed
economically sensitive issues (airlines and railroads). As always, we require
conservative valuations for portfolio holdings. The Fund's overall P/E based on
1999 earnings estimates is 12.2x, which compares favorably to 19x for the S&P
500. Given these characteristics we believe the portfolio is well positioned to
benefit when investor sentiment returns to stocks with attractive valuations.
Scudder Value Fund:
A Team Approach to Investing
Scudder Value Fund is managed by a team of Scudder Kemper Investments, Inc.
(the "Adviser") professionals who each play an important role in the Fund's
management process. Team members work together to develop investment strategies
and select securities for the Fund's portfolio. They are supported by the
Adviser's large staff of economists, research analysts, traders, and other
investment specialists who work in our offices across the United States and
abroad. We believe our team approach benefits Fund investors by bringing
together many disciplines and leveraging our extensive resources.
Lead Portfolio Manager Donald E. Hall has had responsibility for Scudder Value
Fund's day-to-day management since its inception in 1992. Don, who joined
Scudder in 1982, has 14 years of experience in the value style of investing.
William J. Wallace, Portfolio Manager, has been a member of Scudder Value
Fund's team since 1992 and has 16 years of investment experience.
8 - Scudder Value Fund
<PAGE>
Glossary of Investment Terms
CYCLICAL STOCKS Stocks of companies whose earnings fluctuate
with the business cycle. Cyclical industries include
steel, cement, paper, machinery, and autos.
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 greater than
average earnings growth and is expected to continue
to increase profits rapidly going forward. Stocks of
such companies usually trade at a higher price
relative to earnings (higher p/e ratio) and exhibit
greater price volatility.
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/UNDER WEIGHTING Refers to the allocation of assets -- usually by
sector, industry, or country -- within a portfolio
relative to its benchmark index (i.e. the S&P 500
Index) or investment universe.
PRICE/EARNINGS RATIO A widely used gauge of a stock's valuation that
(P/E) (also "earnings indicates what investors are paying for a company's
multiple") 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 than
expected growth rate and the potential for greater
price fluctuations.
VALUE STOCK A company whose stock price does not fully reflect
its intrinsic value, as indicated by price/earnings
ratio, price/book value ratio, dividend yield, or
some other valuation measure, relative to its
industry or the market overall. Value stocks tend to
display less price volatility and may carry higher
dividend yields.
(Sources: Scudder Kemper Investments, Inc.; Barron's Dictionary of
Finance and Investment Terms)
9 - Scudder Value Fund
<PAGE>
Investment Portfolio as of September 30, 1998
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements 3.7%
- ------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement with State Street Bank and Trust Co. dated 9/30/1998 at
5.45%, to be repurchased at $19,646,973 on 10/1/1998, collateralized by a ------------
$20,205,000 U.S. Treasury Bond, 3.625%, 1/15/2007 (Cost $19,644,000) .................. 19,644,000 19,644,000
------------
Commercial Paper 11.3%
- ------------------------------------------------------------------------------------------------------------------------------
Bank of Montreal, 5.58%, 10/9/1998** .................................................... 20,000,000 19,975,200
Gotham Funding Corp, 5.73%, 10/5/1998** (b) ............................................. 2,000,000 1,998,528
International Securitization Corp., 5.75%, 10/1/1998** .................................. 15,000,000 14,997,604
Madison Funding Corp., 5.52%, 10/9/1998** ............................................... 2,100,000 2,097,424
UBS Finance Corp., 5.78%, 10/1/1998** ................................................... 20,000,000 20,000,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Commercial Paper (Cost $59,068,955) 59,068,756
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Shares
- ------------------------------------------------------------------------------------------------------------------------------
Common Stocks 85.0%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Consumer Discretionary 3.7%
Apparel & Shoes 0.4%
St. John Knits, Inc. .................................................................... 128,500 2,072,063
------------
Department & Chain Stores 2.3%
Federated Department Stores, Inc.* ...................................................... 176,100 6,405,638
J.C. Penney Co., Inc. ................................................................... 35,700 1,604,269
May Department Stores, Co. .............................................................. 16,800 865,200
Wal-Mart Stores, Inc. ................................................................... 60,000 3,277,500
------------
12,152,607
------------
Hotels & Casinos 0.4%
Royal Caribbean Cruises Ltd. ............................................................ 72,600 1,928,438
------------
Specialty Retail 0.6%
Tiffany & Co. ........................................................................... 97,400 3,055,925
------------
Consumer Staples 6.2%
Alcohol & Tobacco 0.7%
Philip Morris Companies, Inc. ........................................................... 77,900 3,588,269
------------
Consumer Specialties 1.7%
American Greeting Corp., "A" ............................................................ 224,100 8,865,956
------------
Food & Beverage 3.3%
ConAgra Inc. ............................................................................ 166,800 4,493,175
H.J. Heinz Co. .......................................................................... 48,100 2,459,113
Interstate Bakeries Corp. ............................................................... 166,900 5,173,900
</TABLE>
The accompanying notes are an integral part of the financial statements.
10 - Scudder Value Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unilever NV (New York shares) ........................................................... 83,900 5,138,875
------------
17,265,063
------------
Package Goods/Cosmetics 0.5%
Avon Products Inc. ...................................................................... 97,000 2,722,063
------------
Health 5.7%
Health Industry Services 0.6%
Humana Inc.* ............................................................................ 196,300 3,214,413
------------
Hospital Management 1.3%
Tenet Healthcare Corp.* ................................................................. 236,100 6,787,875
------------
Pharmaceuticals 3.8%
American Home Products Corp. ............................................................ 166,600 8,725,675
Bristol-Myers Squibb Co. ................................................................ 100,000 10,387,500
Schering-Plough Corp. ................................................................... 9,800 1,014,913
------------
20,128,088
------------
Communications 7.6%
Telephone/Communications
AT&T .................................................................................... 162,500 9,496,094
Alltel Corp. ............................................................................ 115,700 5,481,288
Ameritech Corp. ......................................................................... 66,800 3,164,650
Bell Atlantic Corp. ..................................................................... 231,600 11,218,125
Century Telephone Enterprises, Inc. ..................................................... 47,300 2,234,925
Tele Danmark A/S (ADR) .................................................................. 100,200 4,822,125
Tele-Communications International, Inc. "A"* ............................................ 162,300 3,367,725
------------
39,784,932
------------
Financial 15.8%
Banks 6.0%
Banc One Corp. .......................................................................... 119,590 5,097,524
BankAmerica Corp. ....................................................................... 131,100 7,882,388
Chase Manhattan Corp. ................................................................... 89,300 3,862,225
Compass Bancshares Inc. ................................................................. 63,800 2,105,400
First Union Corp. ....................................................................... 208,800 10,687,950
NationsBank Corp. ....................................................................... 35,800 1,915,300
------------
31,550,787
------------
Insurance 8.1%
AFLAC, Inc. ............................................................................. 29,400 839,738
Allstate Corp. .......................................................................... 68,400 2,851,425
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 - Scudder Value Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cigna Corp. ............................................................................. 40,500 2,678,063
EXEL Ltd. "A" ........................................................................... 41,263 2,599,569
Fremont General Corp. ................................................................... 144,200 6,921,600
General Re Corp. ........................................................................ 21,100 4,283,300
MBIA, Inc. .............................................................................. 117,900 6,329,756
PMI Group, Inc. ......................................................................... 72,000 3,294,000
PartnerRe Holdings Ltd. ................................................................. 121,600 4,871,600
Safeco Corp. ............................................................................ 62,200 2,592,963
Transamerica Corp. ...................................................................... 7,200 763,200
Travelers Property & Casualty Insurance Co. "A" ......................................... 145,700 4,653,294
------------
42,678,508
------------
Consumer Finance 0.7%
American Express Company ................................................................ 20,200 1,568,025
SLM Holding Corp. ....................................................................... 64,800 2,101,950
------------
3,669,975
------------
Other Financial Companies 1.0%
Federal National Mortgage Association ................................................... 59,300 3,810,025
Travelers Group, Inc. ................................................................... 45,400 1,702,500
------------
5,512,525
------------
Media 4.1%
Advertising 2.3%
WPP Group PLC (ADR) ..................................................................... 264,800 12,081,487
------------
Cable Television 1.8%
Tele-Communications Inc. "A" (New) ...................................................... 241,247 9,438,789
------------
Service Industries 0.8%
Investment 0.2%
Franklin Resources, Inc. ................................................................ 41,200 1,236,000
------------
Miscellaneous Commercial Services 0.6%
Modis Professional Services, Inc.* ...................................................... 200,000 2,912,500
------------
Durables 9.0%
Aerospace 1.6%
Lockheed Martin Corp. ................................................................... 22,782 2,296,710
Northrop Grumman Corp. .................................................................. 55,500 4,051,500
United Technologies Corp. ............................................................... 28,500 2,178,469
------------
8,526,679
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 - Scudder Value Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automobiles 5.8%
Coltec Industries, Inc.* ................................................................ 167,100 2,527,388
Dana Corp. .............................................................................. 127,600 4,761,075
Eaton Corp. ............................................................................. 40,500 2,538,844
Ford Motor Co. .......................................................................... 186,600 8,758,538
Genuine Parts Co. ....................................................................... 12,900 387,806
Magna International, Inc. "A" ........................................................... 172,400 10,020,750
Tower Automotive, Inc.* ................................................................. 68,800 1,358,800
------------
30,353,201
------------
Leasing Companies 1.6%
Hertz Corp. ............................................................................. 3,200 132,400
Ryder System, Inc. ...................................................................... 339,900 8,455,013
------------
8,587,413
------------
Manufacturing 3.9%
Containers & Paper 0.5%
Bowater, Inc. ........................................................................... 67,300 2,397,563
------------
Diversified Manufacturing 0.6%
Olin Corp. .............................................................................. 42,300 1,213,481
Textron, Inc. ........................................................................... 34,800 2,109,750
------------
3,323,231
------------
Electrical Products 0.4%
Thomas & Betts Corp. .................................................................... 60,400 2,298,975
------------
Industrial Specialty 0.5%
Corning Inc. ............................................................................ 88,500 2,605,219
------------
Machinery/Components/Controls 1.9%
Parker-Hannifin Group ................................................................... 327,950 9,736,016
Timken Co. .............................................................................. 23,800 359,975
------------
10,095,991
------------
Technology 9.3%
Computer Software 2.0%
Computer Associates International, Inc. ................................................. 170,000 6,290,000
Sterling Software, Inc.* ................................................................ 149,300 4,115,081
------------
10,405,081
------------
Diverse Electronic Products 0.7%
Applied Materials, Inc.* ................................................................ 80,900 2,042,725
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 - Scudder Value Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Harris Corp. ............................................................................ 47,400 1,516,800
------------
3,559,525
------------
Electronic Components/Distributors 1.0%
Arrow Electronics, Inc.* ................................................................ 136,900 1,796,813
Avnet, Inc. ............................................................................. 96,900 3,567,131
------------
5,363,944
------------
Electronic Data Processing 4.2%
Hewlett-Packard Co. ..................................................................... 94,400 4,997,300
International Business Machines Corp. ................................................... 55,200 7,065,600
Sun Microsystems, Inc.* ................................................................. 207,500 10,336,094
------------
22,398,994
------------
Military Electronics 1.4%
Raytheon Co. "A" ........................................................................ 143,202 7,419,654
------------
Energy 9.9%
Oil & Gas Production 0.3%
Imperial Oil Ltd. ....................................................................... 96,000 1,464,000
------------
Oil Companies 7.2%
Chevron Corp. ........................................................................... 35,800 3,009,438
Exxon Corp. ............................................................................. 28,100 1,972,269
Mobil Corp. ............................................................................. 97,500 7,403,906
Repsol SA (ADR) ......................................................................... 117,900 4,973,906
Texaco Inc. ............................................................................. 198,500 12,443,469
Total SA (ADR) .......................................................................... 71,084 4,464,964
YPF S.A. "D" (ADR) ...................................................................... 132,600 3,447,600
------------
37,715,552
------------
Oilfield Services/Equipment 0.4%
Santa Fe International Corp. ............................................................ 121,600 1,869,600
------------
Miscellaneous 2.0%
USEC Inc.* .............................................................................. 696,200 10,747,588
------------
Construction 0.6%
Building Materials
Southdown, Inc. ......................................................................... 71,400 3,213,000
------------
Transportation 4.8%
Airlines 1.8%
AMR Corp.* (b) .......................................................................... 21,600 1,197,450
Delta Air Lines, Inc. ................................................................... 87,000 8,460,750
------------
9,658,200
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 - Scudder Value Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Marine Transportation 1.0%
Knightsbridge Tankers Ltd. .............................................................. 86,100 1,851,150
NedLloyd Groep NV (ADR) ................................................................. 464,000 3,045,000
Teekay Shipping Corp. ................................................................... 5,800 105,488
------------
5,001,638
------------
Railroads 1.5%
CSX Corp. ............................................................................... 19,100 803,394
Canadian National Railway ............................................................... 111,500 5,025,157
Wisconsin Central Transportation Co.* ................................................... 138,400 1,937,600
------------
7,766,151
------------
Trucking 0.5%
CNF Transportation, Inc. ................................................................ 94,500 2,752,313
------------
Utilities 3.6%
Electric Utilities
CILCORP, Inc. ........................................................................... 60,800 3,188,200
Northeast Utilities* .................................................................... 271,400 4,545,950
Northern States Power Co. ............................................................... 170,800 4,793,075
TNP Enterprises, Inc. ................................................................... 85,500 2,987,156
Unicom Corp. ............................................................................ 99,100 3,703,863
------------
19,218,244
- ------------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (Cost $463,170,500) 447,388,019
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $541,883,455) (a) 526,100,775
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
** Annualized yield at time of purchase; not a coupon rate. (Unaudited)
(a) The cost for federal income tax purposes was $541,883,455. At September
30, 1998, net unrealized depreciation for all securities based on tax cost
was $15,782,680. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess of market value over tax
cost of $38,517,909 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$54,300,589.
(b) At September 30, 1998, these securities, in part, have been pledged to
cover initial margin requirements for open futures contracts.
At September 30, 1998, open futures contracts purchased long were as
follows:
<TABLE>
<CAPTION>
Aggregate
---------
Futures Expiration Contracts Face Value ($) Market Value ($)
------- ---------- --------- -------------- ----------------
<S> <C> <C> <C> <C>
S&P 500 Index December 1998 94 24,591,564 24,099,250
----------- -----------
Total unrealized depreciation on open futures contracts purchased long ......... 492,314
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
15 - Scudder Value Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of September 30, 1998
<TABLE>
<S> <C> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
Investments, at market (identified cost $541,883,455) ............... $ 526,100,775
Cash ................................................................ 1,019
Receivable for Fund shares sold ..................................... 928,862
Receivable for investments sold ..................................... 1,932,517
Dividends and interest receivable ................................... 556,268
Foreign taxes recoverable ........................................... 76,957
Other assets ........................................................ 1,574
----------------
Total assets ........................................................ 529,597,972
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Payable for investments purchased ................................... 9,762,765
Payable for Fund shares redeemed .................................... 628,124
Payable for daily variation margin on open futures contracts ........ 752,010
Accrued management fee .............................................. 338,473
Other payables and accrued expenses ................................. 343,331
----------------
Total liabilities ................................................... 11,824,703
-------------------------------------------------------------------------------------------
Net assets, at market value $ 517,773,269
-------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ................................. 4,306,919
Unrealized appreciation (depreciation) on investments ............... (15,782,680)
Unrealized appreciation (depreciation) on futures ................... (492,314)
Accumulated net realized gain (loss) ................................ 22,475,916
Paid-in capital ..................................................... 507,265,428
-------------------------------------------------------------------------------------------
Net assets, at market value $ 517,773,269
-------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Scudder Shares
Net asset value, offering and redemption price per share
($468,451,931 / 22,099,599 out-standing shares of beneficial
interest, $.01 par value, unlimited number of shares ----------------
authorized) ....................................................... $21.20
----------------
Class A Shares
Net asset value and redemption price per share ($28,226,052 /
1,331,850 outstanding shares of beneficial interest, $.01 par ----------------
value, unlimited number of shares authorized) ..................... $21.19
----------------
----------------
Maximum offering price per share (100 / 94.25 of $21.19) ............ $22.48
----------------
Class B Shares
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($18,160,690 /
860,214 outstanding shares of beneficial interest, $.01 par ----------------
value, unlimited number of shares authorized) ..................... $21.11
----------------
Class C Shares
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($2,934,596 /
138,908 outstanding shares of beneficial interest, $.01 par ----------------
value, unlimited number of shares authorized) ..................... $21.13
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16 - Scudder Value Fund
<PAGE>
Statement of Operations
year ended September 30, 1998
<TABLE>
<S> <C> <C>
Investment Income
- ----------------------------------------------------------------------------------------------------------------------------
Income:
Dividends (net of foreign taxes withheld of $114,828) ................ $ 6,772,764
Interest ............................................................. 4,277,004
----------------
11,049,768
Expenses:
Management fee ....................................................... 3,214,035
Services to shareholders ............................................. 1,767,353
Custodian and accounting fees ........................................ 145,874
Distribution fees .................................................... 32,041
Administrative service fees .......................................... 22,581
Trustees' fees and expenses .......................................... 54,519
Reports to shareholders .............................................. 162,788
Auditing ............................................................. 40,156
Registration fees .................................................... 174,113
Legal ................................................................ 34,422
Amortization of organization expenses ................................ 6,965
Other ................................................................ 14,216
----------------
5,669,063
-------------------------------------------------------------------------------------------
Net investment income 5,380,705
-------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- ----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments .......................................................... 18,541,915
Futures .............................................................. 10,820,239
Foreign currency related transactions ................................ (504)
----------------
29,361,650
Net unrealized appreciation (depreciation) during the period on:
Investments .......................................................... (64,061,163)
Futures .............................................................. (1,750,397)
Foreign currency related transactions ................................ (57)
----------------
(65,811,617)
-------------------------------------------------------------------------------------------
Net gain (loss) on investment transactions (36,449,967)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ (31,069,262)
-------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17 - Scudder Value Fund
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended September 30,
Increase (Decrease) in Net Assets 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ............................................ $ 5,380,705 $ 2,709,350
Net realized gain (loss) from investment transactions ............ 29,361,650 17,587,309
Net unrealized appreciation (depreciation) on
investment transactions during the period ...................... (65,811,617) 39,472,281
---------------- ----------------
Net increase (decrease) in net assets resulting from
operations ..................................................... (31,069,262) 59,768,940
---------------- ----------------
Distributions to shareholders from:
Net investment income -- Scudder Shares .......................... (3,472,885) (370,246)
---------------- ----------------
Net realized gain from investment transactions -- Scudder
Shares ......................................................... (23,876,077) (7,822,998)
---------------- ----------------
Fund share transactions:
Proceeds from shares sold ........................................ 438,067,018 219,411,450
Net asset value of shares issued to shareholders in
reinvestment of distributions .................................. 26,526,859 8,028,455
Cost of shares redeemed .......................................... (186,382,163) (69,910,114)
---------------- ----------------
Net increase (decrease) in net assets from Fund share
transactions ................................................... 278,211,714 157,529,791
---------------- ----------------
Increase (decrease) in net assets ................................ 219,793,490 209,105,487
Net assets at beginning of period ................................ 297,979,779 88,874,292
Net assets at end of period (including undistributed
net investment income of $4,306,919 and $2,399,604, ---------------- ----------------
respectively) .................................................. $ 517,773,269 $ 297,979,779
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18 - Scudder Value Fund
<PAGE>
Financial Highlights
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Scudder Shares (b)
<TABLE>
<CAPTION>
Years Ended September 30,
1998(a) 1997(a) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------
Net asset value, beginning of period ........................ $ 23.53 $ 17.52 $ 15.87 $ 13.08 $ 13.38
------------------------------------------------------------
Income from investment operations:
Net investment income ....................................... .28 .34 .21 .18 .13
Net realized and unrealized gain (loss) on investments ...... (.72) 7.22 2.40 2.86 .11
------------------------------------------------------------
Total from investment operations ............................ (.44) 7.56 2.61 3.04 .24
------------------------------------------------------------
Less distributions from:
Net investment income ....................................... (.24) (.07) (.04) (.12) (.11)
Net realized gains on investment transactions ............... (1.65) (1.48) (.92) (.13) (.43)
------------------------------------------------------------
Total distributions ......................................... (1.89) (1.55) (.96) (.25) (.54)
------------------------------------------------------------
------------------------------------------------------------
Net asset value, end of period .............................. $ 21.20 $ 23.53 $ 17.52 $ 15.87 $ 13.08
------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Total Return (%) ............................................ (2.08) 45.80(c) 17.18(c) 23.62(c) 1.88(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ...................... 468 298 89 68 35
Ratio of operating expenses, net to average daily net
assets (%) ................................................ 1.23 1.24 1.25 1.25 1.25
Ratio of operating expenses before expense reductions, to
average daily net assets (%) .............................. 1.23 1.28 1.31 1.44 1.61
Ratio of net investment income to average daily net
assets (%) ................................................ 1.19 1.67 1.34 1.57 1.16
Portfolio turnover rate (%) ................................. 47.0 47.4 90.8 98.2 74.6
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) On April 16, 1998, existing shares of the Fund were designated as Scudder
Shares and are generally not available to new investors.
(c) Total return would have been lower had certain expenses not been reduced.
19 - Scudder Value Fund
<PAGE>
The following table includes selected data for a share outstanding (a)
throughout the period and other performance information derived from the
financial statements.
Class A
<TABLE>
<CAPTION>
For the Period
April 16, 1998
(commencement
of sale of
Class A shares)
to
September 30,
1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
------------------
Net asset value, beginning of period ............................................................. $ 25.42
------------------
Income from investment operations:
Net investment income ............................................................................ .07
Net realized and unrealized gain (loss) on investments ........................................... (4.30)
------------------
Total from investment operations ................................................................. (4.23)
------------------
------------------
Net asset value, end of period ................................................................... $ 21.19
------------------
- ----------------------------------------------------------------------------------------------------------------------------
Total Return (%) (b) ............................................................................. (16.64)**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ........................................................... 28
Ratio of operating expenses, net to average daily net assets (%) ................................. 1.34*
Ratio of net investment income to average daily net assets (%) ................................... .86*
Portfolio turnover rate (%) ...................................................................... 47.0
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
20 - Scudder Value Fund
<PAGE>
The following table includes selected data for a share outstanding (a)
throughout the period and other performance information derived from the
financial statements.
Class B
<TABLE>
<CAPTION>
For the Period
April 16, 1998
(commencement
of sale of
Class B shares)
to
September 30,
1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
------------------
Net asset value, beginning of period ............................................................. $ 25.42
------------------
Income from investment operations:
Net investment income ............................................................................ .00
Net realized and unrealized gain (loss) on investments ........................................... (4.31)
------------------
Total from investment operations ................................................................. (4.31)
------------------
------------------
Net asset value, end of period ................................................................... $ 21.11
------------------
- ----------------------------------------------------------------------------------------------------------------------------
Total Return (%) (b) ............................................................................. (16.96)**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ........................................................... 18
Ratio of operating expenses, net to average daily net assets (%) ................................. 2.12*
Ratio of net investment income to average daily net assets (%) ................................... .03*
Portfolio turnover rate (%) ...................................................................... 47.0
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
21 - Scudder Value Fund
<PAGE>
The following table includes selected data for a share outstanding (a)
throughout the period and other performance information derived from the
financial statements.
Class C
<TABLE>
<CAPTION>
For the Period
April 16, 1998
(commencement
of sale of
Class C shares)
to
September 30,
1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
------------------
Net asset value, beginning of period ............................................................. $ 25.42
------------------
Income from investment operations:
Net investment income ............................................................................ .01
Net realized and unrealized gain (loss) on investments ........................................... (4.30)
------------------
Total from investment operations ................................................................. (4.29)
------------------
------------------
Net asset value, end of period ................................................................... $ 21.13
------------------
- ----------------------------------------------------------------------------------------------------------------------------
Total Return (%) (b) ............................................................................. (16.88)**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ........................................................... 3
Ratio of operating expenses, net to average daily net assets (%) ................................. 2.11*
Ratio of net investment income to average daily net assets (%) ................................... .08*
Portfolio turnover rate (%) ...................................................................... 47.0
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
22 - Scudder Value Fund
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies
Value Fund (the "Fund") is a diversified series of Value Equity Trust (the
"Trust") (formerly Scudder Equity Trust). The Trust is organized as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as an open-end management investment company.
Effective April 16, 1998, the Fund changed its name from Scudder Value Fund to
Value Fund and an additional three classes of shares were offered, namely
Classes A, B and C. Existing shares of Value Fund outstanding on that date were
redesignated Scudder Shares. Class A shares are sold to investors subject to an
initial sales charge. Class B shares are sold without an initial sales charge
but are subject to higher ongoing expenses than Class A and Scudder Shares and a
contingent deferred sales charge payable upon certain redemptions. Class B
shares automatically convert to Class A shares six years after issuance. Class C
shares are sold without an initial sales charge but are subject to higher
ongoing expenses than Class A and Scudder Shares and a contingent deferred sales
charge payable upon certain redemptions within one year of purchase. Class C
shares do not convert into another class. Scudder Shares, generally not
available to new investors, are not subject to initial or contingent deferred
sales charges.
Investment income, realized and unrealized capital gains and losses, and certain
fund-level expenses and expense reductions, if any, are borne pro rata on the
basis of relative net assets by the holders of all classes of shares except that
each class bears expenses unique to that class. Each class of shares differs in
its respective distribution, shareholder services, administrative services and
certain other class-specific expenses and expense reductions. All shares of the
Fund have equal rights with respect to voting.
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 Stock Market, Inc.
("Nasdaq"), for which there have been sales, are valued at the most recent sale
price reported on Nasdaq. 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 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.
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.
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
23 - Scudder Value Fund
<PAGE>
(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.
Futures Contracts. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of an item at a
specified price on a specific date (settlement date). During the period, the
Fund purchased securities index futures as a temporary substitute for purchasing
selected investments.
Upon entering into a futures contract, the Fund is required to deposit with a
financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction, the Fund will realize a gain
or loss equal to the difference between the value of the futures contract to
sell and the futures contract to buy. Futures contracts are valued at the most
recent settlement price.
Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out a
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly with changes in the value of the
securities or currencies hedged. When utilizing futures contracts to hedge, the
Fund gives up the opportunity to profit from favorable price movements in the
hedged positions during the term of the contract.
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.
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 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. As a result, net
investment income
24 - Scudder Value Fund
<PAGE>
(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.
Organization Costs. Costs incurred by the Fund in connection with its
organization and initial registration of shares have been deferred and are being
amortized on a straight-line basis over a five-year period.
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 an accrual basis. Original
issue discounts are accreted for both tax and financial reporting purposes.
B. Purchases and Sales of Securities
During the year ended September 30, 1998, purchases and sales of investment
securities (excluding short-term investments) aggregated $415,436,285 and
$177,067,484, respectively.
The aggregate face value of futures contracts opened and closed during the year
ended September 30, 1998 was $345,840,571 and $358,664,374, respectively.
C. Related Parties
Management Agreement. 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 "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 was 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 Agreement with Scudder Kemper, the Fund pays the Adviser a fee equal
to an annual rate of 0.70% 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
objectives, 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
Agreement. For the year ended September 30, 1998, the fee pursuant to the
Agreement amounted to $3,214,035, of which $338,473 is unpaid at September 30,
1998.
On September 7, 1998, Zurich Insurance Company ("Zurich"), majority owner of the
Adviser, entered into an agreement with B.A.T Industries p.l.c. ("B.A.T")
pursuant to which the financial services businesses of B.A.T were combined with
Zurich's businesses to form a new global insurance and financial services
company known as Zurich Financial Services. Upon
25 - Scudder Value Fund
<PAGE>
consummation of the transaction, the Fund's investment management agreement with
Scudder Kemper was deemed to have been assigned and, therefore, terminated. The
Board of Trustees of the Fund has approved a new investment management agreement
with Scudder Kemper, which is substantially identical to the former investment
management agreement, except for the dates of execution, termination, and
breakpoints in the fee structure. The Board of Trustees of the Fund will seek
shareholder approval of the new investment management agreement through a proxy
solicitation that is currently scheduled to conclude in mid-December.
Distribution Service Agreement. In accordance with Rule 12b-1 under the
Investment Company Act of 1940, Kemper Distributors, Inc. ("KDI"), a subsidiary
of the Adviser, receives a fee of .75% of average daily net assets of Classes B
and C. Pursuant to the agreement, KDI enters into related selling group
agreements with various firms at various rates for sales of Class B and C
shares. For the period beginning April 16, 1998 through September 30, 1998, the
Distribution Fee was as follows:
Unpaid at
Distribution Fees Total Aggregated September 30, 1998
----------------------------- ------------------ ---------------------
Class B...................... $ 28,003 $ 28,003
Class C...................... 4,038 4,038
------------ --------------
$ 32,041 $ 32,041
========= =========
Underwriting Agreement and Contingent Deferred Sales Charge. KDI is the
principal underwriter for Classes A, B and C. Underwriting commissions paid in
connection with the distribution of Class A shares for the period beginning
April 16, 1998 through September 30, 1998 aggregated $353,332, of which $1,446
was retained by KDI and $351,886 was paid to all other firms and affiliates.
In addition, KDI receives any contingent deferred sales charge (CDSC) from Class
B share redemptions occurring within six years of purchase and Class C share
redemptions occurring within one year of purchase. There is no such charge upon
redemption of any share appreciation or reinvested dividends. Contingent
deferred sales charges are based on declining rates ranging from 4% to 1% for
Class B and 1% for Class C, of the value of the shares redeemed. For the period
April 16, 1998 through September 30, 1998, the CDSC for Classes B and C
aggregated $9,480 and $9,606, respectively.
Administrative Service Fees. KDI provides information and administrative
services to Classes A, B and C shareholders at an annual rate of up to .25% of
average daily net assets for each such class. KDI in turn has various agreements
with financial services firms that provide these services and pays these firms
based upon the assets of shareholder accounts the firms service. For the period
beginning April 16, 1998 through September 30, 1998, the Administrative Service
Fee was as follows:
Unpaid at
Administrative Service Fees Total Aggregated September 30, 1998
--------------------------- ---------------- ------------------
Class A.................... $ 11,901 $ 11,901
Class B.................... 9,334 9,334
Class C.................... 1,346 1,346
------------ --------------
$ 22,581 $ 22,581
========= =========
26 - Scudder Value Fund
<PAGE>
Shareholder Services Fees. Kemper Service Company ("KSC"), an affiliate of the
Adviser, is the transfer, dividend-paying and shareholder service agent for the
Fund's Classes A, B and C Shares. For the period beginning April 16, 1998
through September 30, 1998, the amount charged to Classes A, B and C by KSC
aggregated $15,784, $11,967 and $1,629, respectively, of which $19,525 is unpaid
at September 30, 1998. Scudder Service Corporation ("SSC"), a subsidiary of the
Adviser, is the transfer, dividend-paying and shareholder service agent for the
Scudder Shares. For the year ended September 30, 1998, the amount charged to the
Scudder Shares by SSC for shareholder services aggregated $917,202, of which
$78,673 is unpaid at September 30, 1998.
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 Scudder Shares of the Fund. For the year
ended September 30, 1998, the amount charged to the Scudder Shares by STC
aggregated $581,273, of which $89,824 is unpaid at September 30, 1998.
Fund Accounting Fees. 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 September 30, 1998, the amount charged to the Fund by SFAC
aggregated $107,935, of which $12,046 is unpaid at September 30, 1998.
Trustees Fees. 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 September 30, 1998, the Trustees fees and
expenses aggregated $54,519.
27 - Scudder Value Fund
<PAGE>
D. Share Transactions
The following table summarizes shares of beneficial interest and dollar activity
in the Fund:
<TABLE>
<CAPTION>
Period ended Year ended
September 30, 1998 September 30, 1997
-------------------------------- ------------------------------
Shares Dollars Shares Dollars
Shares sold
<S> <C> <C> <C> <C>
Scudder Shares ................................. 15,127,170 $ 358,943,904 10,534,988 $ 219,411,450
Class A ........................................ 2,277,297 53,828,754 -- --
Class B ........................................ 924,056 21,926,576 -- --
Class C ........................................ 142,532 3,367,784 -- --
---------- ----------- ---------- -----------
18,471,055 438,067,018 10,534,988 219,411,450
---------- ----------- ---------- -----------
Shares issued to shareholders in reinvestment of
distributions
Scudder Shares ................................. 1,219,065 $ 26,526,859 446,770 $ 8,028,455
Class A ........................................ -- -- -- --
Class B ........................................ -- -- -- --
Class C ........................................ -- -- -- --
--------- ---------- ------- ---------
1,219,065 26,526,859 446,770 8,028,455
--------- ---------- ------- ---------
Shares redeemed
Scudder Shares ................................. (6,911,251) $(162,049,236) (3,388,834) $ (69,910,114)
Class A ........................................ (945,447) (22,781,139) -- --
Class B ........................................ (63,842) (1,468,241) -- --
Class C ........................................ (3,624) (83,547) -- --
---------- ------------ ---------- -----------
(7,924,164) (186,382,163) (3,388,834) (69,910,114)
---------- ------------ ---------- -----------
Net increase (decrease)
Scudder Shares ................................. 9,434,984 $ 223,421,527 7,592,924 $ 157,529,791
Class A ........................................ 1,331,850 31,047,615 -- --
Class B ........................................ 860,214 20,458,335 -- --
Class C ........................................ 138,908 3,284,237 -- --
---------- ------------- --------- -------------
11,765,956 $ 278,211,714 7,592,924 $ 157,529,791
---------- ------------- --------- -------------
</TABLE>
28 - Scudder Value Fund
<PAGE>
Report of Independent Accountants
To the Trustees of Value Equity Trust and the Shareholders of Value Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, 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 Value Fund (formerly Scudder Value
Fund) (the "Fund") at September 30, 1998, the results of its operations, the
changes in its net assets, and the financial highlights for each of the periods
indicated therein, in conformity with 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
September 30, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
November 20, 1998
29 - Scudder Value Fund
<PAGE>
Tax Information
The Scudder Shares paid distributions of $1.135 per share from net long-term
capital gains during the year ended September 30, 1998, of which 66.5%
represents 20% rate gains.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$25,000,000 as capital gain dividends for the year ended September 30, 1998.
Pursuant to section 854 of the Internal Revenue Code, the Fund designates 100%
of the income dividends paid during the Fund's fiscal year ended September 30,
1998 eligible for the dividends received deduction.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your account, please call 1-800-SCUDDER.
30 - Scudder Value Fund
<PAGE>
This Page
intentionally
left blank.
31 - Scudder Value 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; Private Equity Investor
William H. Luers
Trustee; President, The
Metropolitan Museum of Art
Wilson Nolen
Trustee; Consultant
Kathryn L. Quirk*
Trustee, Vice President and
Assistant Secretary
Joan Spero
Trustee; President, Doris Duke
Charitable Foundation
Robert G. Stone, Jr.
Honorary Trustee; Chairman
Emeritus and Director, Kirby
Corporation
Donald E. Hall*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Kathleen T. Millard*
Vice President
Thomas F. McDonough*
Vice President and Secretary
John R. Hebble*
Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
32 - Scudder Value 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--
Prime Reserve Shares*
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 Corporate Bond 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
Preferred Series
- ----------------
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small
Company 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.
33 - Scudder Value 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 -- www.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
- ------------------------------------------------------------------------------------------------------------------------------
34 - Scudder Value 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
800 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>
35 - Scudder Value 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 $230 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
[LOGO]
<PAGE>
ANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED SEPTEMBER 30, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEEKS LONG-TERM GROWTH OF CAPITAL. KEMPER VALUE FUND IS
PROPERLY KNOWN AS VALUE FUND.
KEMPER VALUE FUND
"... We are convinced that a strong price discipline is
key to our success over the long term. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
8
INDUSTRY SECTORS
9
LARGEST HOLDINGS
10
REPORT OF
INDEPENDENT ACCOUNTANTS
11
INVESTMENT
PORTFOLIO
16
FINANCIAL STATEMENTS
19
FINANCIAL HIGHLIGHTS
21
NOTES TO
FINANCIAL STATEMENTS
26
TAX INFORMATION
AT A GLANCE
- --------------------------------------------------------------------------------
ABOUT YOUR REPORT
- --------------------------------------------------------------------------------
KEMPER VALUE FUND COMMENCED OFFERING CLASS A, B AND C SHARES (THE KEMPER
CLASSES) AS OF APRIL 16, 1998. SHARES OF THE VALUE FUND (THE "FUND") OUTSTANDING
AS OF APRIL 16, 1998 WERE REDESIGNATED SCUDDER SHARES (CLASS S SHARES). THE
INCEPTION DATE OF CLASS S SHARES WAS DECEMBER 31, 1992. SHARE CLASSES INVEST IN
THE SAME UNDERLYING PORTFOLIO OF SECURITIES AND HAVE THE SAME MANAGEMENT TEAM.
BECAUSE OF DIFFERENT FEES AND EXPENSES, PERFORMANCE OF SHARE CLASSES WILL
DIFFER. CLASS S SHARES ARE GENERALLY NOT AVAILABLE TO NEW INVESTORS.
- --------------------------------------------------------------------------------
KEMPER VALUE FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1998 (UNADJUSTED FOR ANY SALES CHARGE)
- --------------------------------------------------------------------------------
[BAR GRAPH]
- --------------------------------------------------------------------------------
Value Fund -2.08%
Lipper Growth Funds
Category Average* -1.44%
- --------------------------------------------------------------------------------
Returns are historical for value fund. Class S shares (unlike Class A, B and C
shares) do not have any sales charges, 12b-1 fees, or other class specific
expenses like Administrative and Transfer Agent expenses. Investment returns and
principal value fluctuate. Class S shares are redeemable at current net asset
value, which may be more or less than original cost. Kemper Value Fund Class A,
B and C shares were initially offered April 16, 1998. From inception to
September 30, 1998 the total return (unadjusted for sales charge) for Class A
shares was -16.64%, for Class B shares was -16.96% and for Class C shares was
- -16.88%. The Lipper Growth Category Average for Class A, B And C shares from
April 16, 1998 through September 30, 1998 was -12.31%.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
9/30/98 4/16/98
- --------------------------------------------------------------------------------
<S> <C> <C>
VALUE FUND CLASS A $21.19 $25.42
- --------------------------------------------------------------------------------
VALUE FUND CLASS B $21.11 $25.42
- --------------------------------------------------------------------------------
VALUE FUND CLASS C $21.13 $25.42
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
VALUE FUND RANKINGS
AS OF SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER GROWTH FUNDS CATEGORY*
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
1-YEAR #547 of 934 funds
- --------------------------------------------------------------------------------
5-YEAR #131 of 359 funds
- --------------------------------------------------------------------------------
</TABLE>
* Lipper Analytical Services, Inc. returns and rankings are based upon changes
in net asset value with all dividends reinvested and do not include the effect
of sales charges. If they had, results may have been less favorable.
Ranking information is for Class S shares.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
DURING THE YEAR ENDED SEPTEMBER 30, 1998, VALUE FUND PAID THE FOLLOWING
DIVIDENDS:
<TABLE>
<CAPTION>
INCOME CAPITAL GAIN
DIVIDEND DISTRIBUTION
- --------------------------------------------------------------------------------
<S> <C> <C>
VALUE FUND $.24 $1.65
- --------------------------------------------------------------------------------
</TABLE>
Dividend information is for Class S shares.
TERMS TO KNOW
MARKET CAPITALIZATION Capitalization is a measure of the size of a publicly
traded company, determined by multiplying the current share price by the number
of shares outstanding. The market capitalization of a company has bearing on its
perceived earnings potential and risk. Small capitalization companies (less than
$1 billion) may present the potential for greater growth than larger, more
established companies. On the other hand, the stock of small cap companies may
be more volatile and therefore a greater risk to capital.
PRICE/EARNINGS RATIO A company's stock price divided by its earnings for the
past four quarters.
VALUE STYLE OF INVESTING Investors following this investment style seek to find
value among promising stocks that are currently out of favor or, in other words,
trading at prices lower than their earnings would suggest. Stocks become
undervalued as a result of overreaction by investors to unfavorable news about a
company, industry or the stock markets in general. They can also become
undervalued as a result of a market decline, poor economic conditions, tax-loss
selling or actual or anticipated unfavorable developments affecting the company.
<PAGE> 3
ECONOMIC OVERVIEW
[TIMBERS LETTER HERE]
3
<PAGE> 4
ECONOMIC OVERVIEW
[TIMBERS LETTER HERE]
4
<PAGE> 5
PERFORMANCE UPDATE
[HALL PHOTO]
LEAD PORTFOLIO MANAGER DONALD E. HALL JOINED SCUDDER KEMPER INVESTMENTS, INC. IN
1982 AND HAS HELPED MANAGE THE FUND SINCE ITS INCEPTION. HE EARNED AN M.B.A.
FROM HARVARD BUSINESS SCHOOL AND IS A CHARTERED FINANCIAL ANALYST.
[WALLACE PHOTO]
WILLIAM J. WALLACE, PORTFOLIO MANAGER, HAS BEEN A MEMBER OF THE FUND'S TEAM
SINCE 1992 AND HAS 17 YEARS OF INVESTMENT EXPERIENCE. HE EARNED A BACHELOR'S
DEGREE IN ACCOUNTING AND FINANCE FROM PURDUE UNIVERSITY AND IS A CHARTERED
FINANCIAL ANALYST.
THE TEAM IS SUPPORTED BY INVESTMENT PROFESSIONALS INCLUDING ECONOMISTS, RESEARCH
ANALYSTS, TRADERS AND OTHER INVESTMENT SPECIALISTS THROUGHOUT THE UNITED STATES
AND ABROAD.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
THE FUND FIRST OFFERED KEMPER CLASSES ON APRIL 16, 1998. (PRIOR TO APRIL 16,
1998, THE FUND OPERATED AS SCUDDER VALUE FUND ("CLASS S SHARES".) LEAD PORTFOLIO
MANAGER DONALD HALL AND PORTFOLIO MANAGER WILLIAM WALLACE HAVE BEEN MANAGERS OF
THE FUND SINCE ITS DATE OF INCEPTION ON DECEMBER 31, 1992.
Q GLOBAL INFLUENCES WERE IMPORTANT IN THE LAST YEAR. CAN YOU SUMMARIZE THEIR
IMPACT ON U.S. STOCKS?
A It is helpful to think back to a year ago when trouble first began in
Thailand. The significance of the Southeast Asian economies on the U.S. is
small, yet the fall-off in incremental demand from these rapidly growing
economies took enough steam out of the strong U.S. economy to allow interest
rates to remain low. High confidence and low rates prompted a boom in both
capital and consumer spending, swelling profits above expectations into the
first half of 1998. The global investor, recognizing the inherent risk of
emerging markets, assigned a higher risk premium to emerging markets securities
and a lower risk premium to U.S. stocks. As such, foreign buyers poured into
U.S. equities in the first half of 1998 at a rate that exceeded even the U.S.
mutual fund buyer -- the largest incremental buyer of U.S. equities in recent
years.
The pace of profit growth was unsustainable, and, indeed, in the spring,
signs of softening began to show up in the manufacturing sector. A deflating of
stock prices was exacerbated by the lack of strong political leadership in
turbulent times. Neither the Russian debt repudiation nor the collapse of the
hedge fund, Long-Term Capital Management, which marked large down days in the
market, was significant PER SE. They were symptomatic of other problems: the
stress of commodity deflation on not only Russia, but on more important
developing countries, such as Brazil; and, in the case of Long-Term Capital
Management, not so much poorly conceived investment strategies, but simply too
much leverage.
Q HOW WOULD YOU CHARACTERIZE THE RETURN OF THE FUND'S CLASS S SHARES ("THE
SHARES") OVER THE LAST 12 MONTHS?
A It was a difficult period. The shares fell 2.08 percent, significantly
trailing the Standard & Poor's 500 Stock Index (S&P 500) return of 9.04 percent
over the same period.
Q WHAT WAS BEHIND THIS UNDERPERFORMANCE?
A The extent to which the very largest growth stocks outperformed everything
else was virtually unprecedented. This provided a very strong stylistic headwind
for the fund. The average value stock in the S&P 500 actually fell by 8.36
percent for the 12-month period ended September 30, 1998. While we recognized
the strong fundamentals of large growth stocks, such as Dell Computer, Pfizer,
and General Electric, these issues were hardly bargains by our criteria.
Q GIVEN THE SUPERIOR PERFORMANCE OF THESE LARGE GROWTH STOCKS, DO YOU EXPECT
TO CHANGE YOUR SELECTION CRITERIA GOING FORWARD?
A Absolutely not. We are convinced that a strong price
5
<PAGE> 6
PERFORMANCE UPDATE
discipline is key to our success over the long term.
Q WHAT STOCKS CONTRIBUTED MOST TO THE PERFORMANCE OF THE FUND?
A Telecommunication services, utilities, healthcare, and auto stocks were
the best-performing groups for the fund. Star performers in these areas included
Century Telephone, Unicom, American Home Products, and Ford. Except for Sun
Microsystems, the fund generally missed out on the torrid performance turned in
by the technology sector, especially internet-related stocks. The performance of
Unicom, a modestly growing midwestern electric utility (up 68 percent) is
testimony, however, to the very healthy gains available in unexciting companies
when the price is right.
The key disappointment for the fund was the financial sector. MBIA, Chase
Manhattan, and Safeco were among those stocks with negative returns.
Manufacturing underperformers, such as American Standard and Crown Cork and Seal
were sold.
Q HOW DID THE FUND PERFORM DURING THE RECENT MARKET VOLATILITY?
A The fund held up well in most of the major downdrafts, but trailed
significantly on the rebound. While value portfolios tend to be less volatile in
down markets most of the time, it is not unusual for value stocks to
underperform just prior to the beginning of a recession. This was the experience
in 1990, the beginning of our last recession.
Investors gravitate to the largest, bluest blue chips, regardless of
valuations. The market narrowed prior to the recession and then broadened out in
the recovery. That is, after lagging for two years, the average stock
outperformed the index in each of the following three years "coming out of the
valley." A similar pattern may be developing, whether the "valley" is a
recession or merely a slow-down. The good news is that the market seems to be
rapidly adjusting to a lower growth view. Once investors begin to reconcile
themselves to the fact that earnings are trending downward, they may look beyond
the valley to the other side.
Q UNTIL MID-APRIL, THIS FUND WAS CALLED SCUDDER VALUE FUND. ON APRIL 16, IT
WAS RENAMED AND BEGAN OFFERING MULTIPLE SHARE CLASSES UNDER THE NAME KEMPER
VALUE FUND. HOW IS MANAGING MULTIPLE SHARE CLASSES FOR THE FUND DIFFERENT?
A Well, it's basically the same portfolio that we've managed since the
fund's inception at Scudder in December 1992. We continue to follow the same
investment process and management style now that the fund carries the Kemper
name.
Our process starts with a universe of 500 quality, medium- and large-cap
stocks that are closely followed by our research department. To identify stocks
that are incorrectly priced, we use fundamental data to rank them using more
than 50 criteria, including price/ earnings, price/book value, sales growth,
market share and earnings growth. Stocks are then compared by their market
price-to-value ratios, and divided into five levels (quintiles) of
attractiveness. Purchases are made from the top two quintiles and sales from the
bottom two.
The ideal stock is an established (intellectual capital in place) growing
company, average to below average risk with a defendable competitive position,
and selling at a discount price/earnings ratio to the market. Qualifying stocks
suffering from a deterioration in key fundamentals are avoided unless we can
determine when and how the fundamental problem will be resolved. Stocks which
declined to low price-to-earnings multiples (P/Es) because of temporary earnings
disturbances are considered buying opportunities.
Q WHAT IS YOUR MARKET OUTLOOK?
A The combination of the recent market correction and lower interest rates
has improved the valuation of U.S. stocks significantly. While we believe
earnings estimates are too high and profit growth will be flat at best next
year, many stocks are already discounting an outright recession and represent
compelling values. The portfolio is positioned with a balance between defensive
stocks (drugs and utilities) and very depressed economically sensitive issues
(airlines and railroads). As always, we require conservative valuation. The
fund's P/E on 1999 estimates is 12.2 times earnings, which compares very
favorably to 19 times earnings for the S&P 500.
6
<PAGE> 7
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED SEPTEMBER 30, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR LIFE OF CLASS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER VALUE FUND CLASS A -7.71% 14.70% 14.83% (since 12/31/92)
- -------------------------------------------------------------------------------------------------
KEMPER VALUE FUND CLASS B -5.02 15.83 15.81 (since 12/31/92)
- -------------------------------------------------------------------------------------------------
KEMPER VALUE FUND CLASS C -2.08 16.07 16.01 (since 12/31/92)
- -------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER VALUE FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class A shares from 12/31/92 to
9/30/98
<TABLE>
<CAPTION>
Standard &
Kemper Value Poor's 500
Fund Class A(1) Stock Index**
<S> <C> <C>
12/31/92 9427 10000
10306 10437
10275 10487
10511 10757
10520 11006
10217 10590
10184 10634
10708 11154
12/31/94 10693 11151
11377 12236
12695 13403
13238 14468
13919 15338
14583 16161
15114 16886
15512 17408
12/31/96 17119 18858
17917 19365
20637 22743
22617 24446
23172 25148
26149 28655
26149 29600
9/30/98 22137 26660
</TABLE>
Past performance is not a guarantee of future results. Investment return and
principal value will fluctuate so that shares when redeemed may be worth more or
less than original costs.
* Average annual total return measures net investment income and capital gain
or loss from portfolio investments, assuming reinvestment of all dividends.
On April 16, 1998, the fund offered an additional three classes of shares,
namely the Class A, B and C shares described herein. Prior to that date,
the fund consisted of one class of shares which, on that date, were
re-designated as Class S shares of the fund. Returns shown for Class A, B
and C shares for the periods prior to their inception are derived from the
historical performance of Class S shares of value fund during such periods
and have been adjusted to reflect the current maximum 5.75% initial sales
charge for Class A shares or the maximum contingent deferred sales charge
(CDSC), if any, currently applicable to Class B and C shares. Class S
shares have no sales charges, rule 12b-1 fees, or Administrative Service
Fees (ASF). Class B share performance is adjusted for the applicable CDSC,
which is 4% within the first year after purchase, declining to 0% after six
years. Class C share performance is adjusted for a CDSC, which is 1% within
the first year after purchase. The performance figures have not been
adjusted to reflect rule 12b-1 fees of .75%, which are applicable to each
of Class B and C shares, and ASF of up to .25%, which are applicable to
each of Class A, B and C shares from the date of each such class's
inception. The rule 12b-1 fees and ASF applicable to the respective classes
of shares of the fund will affect performance. Class S shares are subject
to certain other, or different levels of, expenses than Classes A, B, and
C. The expenses applicable to Class S have been reflected in the
performance presented. The difference in expenses will affect performance.
The performance figures reflect an expense limitation of 1.25% of average
daily net assets in effect for the period December 31, 1992 to July 31,
1997. If the adviser had not maintained expenses, the total return for the
five year and life of fund periods would have been lower. During the
periods noted, securities prices fluctuated. For additional information,
see the prospectus and statement of additional information and the
financial highlights at the end of this report.
(1) Performance is for Class S shares of Value Fund and has been adjusted to
reflect the current, maximum 5.75% initial sales charge applicable to Class
A shares of the fund. Class B and C shares of the fund, the performance of
each of which is not included in the graph, is each subject to rule 12b-1
fees and a CDSC of 4% within the first year after purchase, declining to 0%
after six years, for Class B shares and 1% within the first year after
purchase for Class C shares, which would affect performance.
** The Standard & Poor's 500 Stock Index is an unmanaged index generally
representative of the U.S. stock market. Source is Towers Data Systems.
7
<PAGE> 8
INDUSTRY SECTORS
SECTOR COMPOSITION OF KEMPER VALUE FUND*
Data show the percentage of the common stocks in the portfolio that each sector
of Kemper Value Fund represented on September 30, 1998.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER VALUE FUND
AS OF 9/30/98
<S> <C>
FINANCIAL 19
ENERGY 12
TECHNOLOGY 11
DURABLES 11
COMMUNICATIONS 9
CONSUMER STAPLES 7
HEALTH 7
TRANSPORTATION 6
MEDIA 5
OTHER 13
</TABLE>
*Portfolio composition is subject to change.
8
<PAGE> 9
LARGEST HOLDINGS
KEMPER VALUE FUND'S 10 LARGEST HOLDINGS*
Representing 20.4 percent of the Portfolio's total net assets on September 30,
1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
HOLDINGS PERCENT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. TEXACO INC. Engaged in the worldwide exploration for and 2.4%
production, transportation, refining and marketing of
crude oil, natural gas, and petroleum products.
2. WPP GROUP PLC Engaged in multinational marketing services, such as 2.3%
media advertising, public relations, market research,
non-media advertising including design, sales promotion
and audio visual communications, specialist
communications and other services.
3. BELL ATLANTIC CORP. Bell Atlantic Corporation is at the forefront of the 2.1%
new communications, entertainment and information
industry. In the mid-Atlantic region, the company is
the premier provider of local telecommunications and
advanced services. Globally, it is one of the largest
investors in the high-growth wireless communication
marketplace.
4. USEC INC. Enriches uranium for use as fuel in nuclear power 2.0%
plants. Formed in 1993 to take over federal enrichment
operations (and owned by the U.S. government until
1998) the company supplies approximately 75 percent of
U.S. and 40 percent of world demand for enriched
uranium.
5. FIRST UNION CORP. Provides retail and commercial banking, retail 2.0%
investment, mortgage, home equity, leasing, insurance,
capital markets, cash management and securities
brokerage services to 12 million customers on the east
coast.
6. BRISTOL-MYERS SQUIBB CO. Diversified worldwide health and personal care company 2.0%
whose principal businesses are pharmaceuticals,
consumer products, nutritionals and medical devices.
7. SUN MICROSYSTEMS, INC. Provides high-performance workstations, servers, and 2.0%
networking software for the engineering, scientific,
commercial, and technical industries.
8. MAGNA INTERNATIONAL, INC. Supplies original automotive components and equipment 1.9%
to North American and European manufacturers.
9. PARKER-HANNIFIN GROUP Manufactures motion control systems and related 1.9%
components including hoses, pumps, valves, cylinders,
filters and seals.
10. AMERICAN TELEPHONE & Provides long distance telecommunications services, as 1.8%
TELEGRAPH CO. well as systems, products and services combining
communications and computers and their installation,
maintenance and repair services. The company operates
39 wireless cable TV systems serving 178,000 customers.
</TABLE>
* Portfolio composition and holdings are subject to change.
9
<PAGE> 10
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF VALUE EQUITY TRUST AND THE SHAREHOLDERS OF VALUE FUND:
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, 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 Value Fund (formerly Scudder Value
Fund) (the "Fund") at September 30, 1998, the results of its operations, the
changes in its net assets, and the financial highlights for each of the periods
indicated therein, in conformity with 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
September 30, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
November 20, 1998
10
<PAGE> 11
INVESTMENT PORTFOLIO
KEMPER VALUE FUND
Investment Portfolio as of September 30, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT ($) VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS--3.7% Repurchase Agreement with State Street Bank
and Trust Co. dated 9/30/1998 at 5.45%, to
be repurchased at $19,646,973 on
10/1/1998, collateralized by a $20,205,000
U.S. Treasury Bond, 3.625%, 1/15/2007
(Cost $19,644,000) 19,644,000 19,644,000
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER--11.3% Bank of Montreal, 5.58%, 10/9/1998** 20,000,000 19,975,200
Gotham Funding Corp, 5.73%, 10/5/1998** (b) 2,000,000 1,998,528
International Securitization Corp., 5.75%,
10/1/1998** 15,000,000 14,997,604
Madison Funding Corp., 5.52%, 10/9/1998** 2,100,000 2,097,424
UBS Finance Corp., 5.78%, 10/1/1998** 20,000,000 20,000,000
---------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost $59,068,955) 59,068,756
---------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS--85.0% SHARES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER
DISCRETIONARY--3.7%
APPAREL & SHOES--0.4% St. John Knits, Inc. 128,500 2,072,063
---------------------------------------------------------------------------
DEPARTMENT & CHAIN Federated Department Stores, Inc.* 176,100 6,405,638
STORES--2.3% J.C. Penney Co., Inc. 35,700 1,604,269
May Department Stores, Co. 16,800 865,200
Wal-Mart Stores, Inc. 60,000 3,277,500
---------------------------------------------------------------------------
12,152,607
HOTELS & CASINOS--0.4% Royal Caribbean Cruises Ltd. 72,600 1,928,438
---------------------------------------------------------------------------
SPECIALTY RETAIL--0.6% Tiffany & Co. 97,400 3,055,925
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--6.2%
ALCOHOL & TOBACCO--0.7% Philip Morris Companies, Inc. 77,900 3,588,269
---------------------------------------------------------------------------
CONSUMER SPECIALTIES--1.7% American Greeting Corp., "A" 224,100 8,865,956
---------------------------------------------------------------------------
FOOD & BEVERAGE--3.3% ConAgra Inc. 166,800 4,493,175
H.J. Heinz Co. 48,100 2,459,113
Interstate Bakeries Corp. 166,900 5,173,900
Unilever NV (New York shares) 83,900 5,138,875
---------------------------------------------------------------------------
17,265,063
PACKAGE GOODS/ Avon Products Inc. 97,000 2,722,063
COSMETICS--0.5% ---------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
MARKET
SHARES VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HEALTH--5.7%
HEALTH INDUSTRY SERVICES--0.6% Humana Inc.* 196,300 3,214,413
---------------------------------------------------------------------------
HOSPITAL MANAGEMENT--1.3% Tenet Healthcare Corp.* 236,100 6,787,875
---------------------------------------------------------------------------
PHARMACEUTICALS--3.8% American Home Products Corp. 166,600 8,725,675
Bristol-Myers Squibb Co. 100,000 10,387,500
Schering-Plough Corp. 9,800 1,014,913
---------------------------------------------------------------------------
20,128,088
- ------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--7.6% AT&T 162,500 9,496,094
TELEPHONE/COMMUNICATIONS Alltel Corp. 115,700 5,481,288
Ameritech Corp. 66,800 3,164,650
Bell Atlantic Corp. 231,600 11,218,125
Century Telephone Enterprises, Inc. 47,300 2,234,925
Tele Danmark A/S (ADR) 100,200 4,822,125
Tele-Communications International, Inc. "A"* 162,300 3,367,725
---------------------------------------------------------------------------
39,784,932
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL--15.8% Banc One Corp. 119,590 5,097,524
BANKS--6.0% BankAmerica Corp. 131,100 7,882,388
Chase Manhattan Corp. 89,300 3,862,225
Compass Bancshares Inc. 63,800 2,105,400
First Union Corp. 208,800 10,687,950
NationsBank Corp. 35,800 1,915,300
---------------------------------------------------------------------------
31,550,787
INSURANCE--8.1% AFLAC, Inc. 29,400 839,738
Allstate Corp. 68,400 2,851,425
Cigna Corp. 40,500 2,678,063
EXEL Ltd. "A" 41,263 2,599,569
Fremont General Corp. 144,200 6,921,600
General Re Corp. 21,100 4,283,300
MBIA, Inc. 117,900 6,329,756
PMI Group, Inc. 72,000 3,294,000
PartnerRe Holdings Ltd. 121,600 4,871,600
Safeco Corp. 62,200 2,592,963
Transamerica Corp. 7,200 763,200
Travelers Property & Casualty Insurance Co.
"A" 145,700 4,653,294
---------------------------------------------------------------------------
42,678,508
CONSUMER FINANCE--0.7% American Express Company 20,200 1,568,025
SLM Holding Corp. 64,800 2,101,950
---------------------------------------------------------------------------
3,669,975
OTHER FINANCIAL Federal National Mortgage Association 59,300 3,810,025
COMPANIES--1.0% Travelers Group, Inc. 45,400 1,702,500
---------------------------------------------------------------------------
5,512,525
</TABLE>
12
<PAGE> 13
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
MARKET
SHARES VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MEDIA--4.1%
ADVERTISING--2.3% WPP Group PLC (ADR) 264,800 12,081,487
---------------------------------------------------------------------------
CABLE TELEVISION--1.8% Tele-Communications Inc. "A" (New) 241,247 9,438,789
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--0.8%
INVESTMENT--0.2% Franklin Resources, Inc. 41,200 1,236,000
---------------------------------------------------------------------------
MISCELLANEOUS COMMERCIAL Modis Professional Services, Inc.* 200,000 2,912,500
SERVICES--0.6% ---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
DURABLES--9.0% Lockheed Martin Corp. 22,782 2,296,710
AEROSPACE--1.6% Northrop Grumman Corp. 55,500 4,051,500
United Technologies Corp. 28,500 2,178,469
---------------------------------------------------------------------------
8,526,679
AUTOMOBILES--5.8% Coltec Industries, Inc.* 167,100 2,527,388
Dana Corp. 127,600 4,761,075
Eaton Corp. 40,500 2,538,844
Ford Motor Co. 186,600 8,758,538
Genuine Parts Co. 12,900 387,806
Magna International, Inc. "A" 172,400 10,020,750
Tower Automotive, Inc.* 68,800 1,358,800
---------------------------------------------------------------------------
30,353,201
LEASING COMPANIES--1.6% Hertz Corp. 3,200 132,400
Ryder System, Inc. 339,900 8,455,013
---------------------------------------------------------------------------
8,587,413
- ------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--3.9%
CONTAINERS & PAPER--0.5% Bowater, Inc. 67,300 2,397,563
---------------------------------------------------------------------------
DIVERSIFIED Olin Corp. 42,300 1,213,481
MANUFACTURING--0.6% Textron, Inc. 34,800 2,109,750
---------------------------------------------------------------------------
3,323,231
ELECTRICAL PRODUCTS--0.4% Thomas & Betts Corp. 60,400 2,298,975
---------------------------------------------------------------------------
INDUSTRIAL SPECIALTY--0.5% Corning Inc. 88,500 2,605,219
---------------------------------------------------------------------------
MACHINERY/COMPONENTS/ Parker-Hannifin Group 327,950 9,736,016
CONTROLS--1.9% Timken Co. 23,800 359,975
---------------------------------------------------------------------------
10,095,991
</TABLE>
13
<PAGE> 14
INVESTMENT PORTFOLIO
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
MARKET
SHARES VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TECHNOLOGY--9.3% Computer Associates International, Inc. 170,000 6,290,000
COMPUTER SOFTWARE--2.0% Sterling Software, Inc.* 149,300 4,115,081
---------------------------------------------------------------------------
10,405,081
DIVERSE ELECTRONIC Applied Materials, Inc.* 80,900 2,042,725
PRODUCTS--0.7% Harris Corp. 47,400 1,516,800
---------------------------------------------------------------------------
3,559,525
ELECTRONIC COMPONENTS/ Arrow Electronics, Inc.* 136,900 1,796,813
DISTRIBUTORS--1.0% Avnet, Inc. 96,900 3,567,131
---------------------------------------------------------------------------
5,363,944
ELECTRONIC DATA Hewlett-Packard Co. 94,400 4,997,300
PROCESSING--4.2% International Business Machines Corp. 55,200 7,065,600
Sun Microsystems, Inc.* 207,500 10,336,094
---------------------------------------------------------------------------
22,398,994
MILITARY ELECTRONICS--1.4% Raytheon Co. "A" 143,202 7,419,654
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
ENERGY--9.9%
OIL & GAS PRODUCTION--0.3% Imperial Oil Ltd. 96,000 1,464,000
---------------------------------------------------------------------------
OIL COMPANIES--7.2% Chevron Corp. 35,800 3,009,438
Exxon Corp. 28,100 1,972,269
Mobil Corp. 97,500 7,403,906
Repsol SA (ADR) 117,900 4,973,906
Texaco Inc. 198,500 12,443,469
Total SA (ADR) 71,084 4,464,964
YPF SA "D" (ADR) 132,600 3,447,600
---------------------------------------------------------------------------
37,715,552
OILFIELD SERVICES/ Santa Fe International Corp. 121,600 1,869,600
EQUIPMENT--0.4% ---------------------------------------------------------------------------
MISCELLANEOUS--2.0% USEC Inc.* 696,200 10,747,588
---------------------------------------------------------------------------
CONSTRUCTION--0.6% Southdown, Inc. 71,400 3,213,000
BUILDING MATERIALS ---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--4.8% AMR Corp.* (b) 21,600 1,197,450
AIRLINES--1.8% Delta Air Lines, Inc. 87,000 8,460,750
---------------------------------------------------------------------------
9,658,200
</TABLE>
14
<PAGE> 15
INVESTMENT PORTFOLIO
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
MARKET
SHARES VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MARINE TRANSPORTATION--1.0% Knightsbridge Tankers Ltd. 86,100 1,851,150
NedLloyd Groep NV (ADR) 464,000 3,045,000
Teekay Shipping Corp. 5,800 105,488
---------------------------------------------------------------------------
5,001,638
RAILROADS--1.5% CSX Corp. 19,100 803,394
Canadian National Railway 111,500 5,025,157
Wisconsin Central Transportation Co.* 138,400 1,937,600
---------------------------------------------------------------------------
7,766,151
TRUCKING--0.5% CNF Transportation, Inc. 94,500 2,752,313
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
UTILITIES--3.6% CILCORP, Inc. 60,800 3,188,200
ELECTRIC UTILITIES Northeast Utilities* 271,400 4,545,950
Northern States Power Co. 170,800 4,793,075
TNP Enterprises, Inc. 85,500 2,987,156
Unicom Corp. 99,100 3,703,863
---------------------------------------------------------------------------
19,218,244
---------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $463,170,500) 447,388,019
---------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100.0%
(Cost $541,883,455)(a) 526,100,775
---------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
* Non-income producing security.
** Annualized yield at time of purchase; not a coupon rate. (Unaudited)
(a) The cost for federal income tax purposes was $541,883,455. At September 30,
1998, net unrealized depreciation for all securities based on tax cost was
$15,782,680. This consisted of aggregate gross unrealized appreciation for all
securities in which there was an excess of market value over tax cost of
$38,517,909 and aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over market value of $54,300,589.
(b) At September 30, 1998, these securities, in part, have been pledged to cover
initial margin requirements for open futures contracts.
At September 30, 1998, open futures contracts purchased long were as follows:
<TABLE>
<CAPTION>
AGGREGATE
FUTURES EXPIRATION CONTRACTS FACE VALUE ($) MARKET VALUE ($)
------- ------------- --------- -------------- ----------------
<S> <C> <C> <C> <C>
S&P 500 Index December 1998 94 24,591,564 24,099,250
---------- ----------
Total unrealized depreciation on open futures contracts purchased long....... 492,314
==========
</TABLE>
15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
As of September 30, 1998
<TABLE>
<S> <C>
- -------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------
Investments, at market
(Identified cost $541,883,455) $526,100,775
- -------------------------------------------------------------------------
Cash 1,019
- -------------------------------------------------------------------------
Receivable for Fund shares sold 928,862
- -------------------------------------------------------------------------
Receivable for investments sold 1,932,517
- -------------------------------------------------------------------------
Dividends and interest receivable 556,268
- -------------------------------------------------------------------------
Foreign taxes recoverable 76,957
- -------------------------------------------------------------------------
Other assets 1,574
- -------------------------------------------------------------------------
TOTAL ASSETS 529,597,972
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
LIABILITIES
- -------------------------------------------------------------------------
Payable for investments purchased 9,762,765
- -------------------------------------------------------------------------
Payable for Fund shares redeemed 628,124
- -------------------------------------------------------------------------
Payable for daily variation margin on open futures contracts 752,010
- -------------------------------------------------------------------------
Accrued management fee 338,473
- -------------------------------------------------------------------------
Other payables and accrued expenses 343,331
- -------------------------------------------------------------------------
Total liabilities 11,824,703
- -------------------------------------------------------------------------
NET ASSETS, AT MARKET VALUE $517,773,269
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income 4,306,919
- -------------------------------------------------------------------------
Unrealized appreciation (depreciation) on investments (15,782,680)
- -------------------------------------------------------------------------
Unrealized appreciation (depreciation) on futures (492,314)
- -------------------------------------------------------------------------
Accumulated net realized gain (loss) 22,475,916
- -------------------------------------------------------------------------
Paid-in capital 507,265,428
- -------------------------------------------------------------------------
NET ASSETS, AT MARKET VALUE $517,773,269
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
NET ASSET VALUE
- -------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($28,226,052 / 1,331,850 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $21.19
- -------------------------------------------------------------------------
Maximum offering price per share
(100 / 94.25 of $21.19) $22.48
- -------------------------------------------------------------------------
CLASS B SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share
($18,160,690 / 860,214 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $21.11
- -------------------------------------------------------------------------
CLASS C SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share
($2,934,596 / 138,908 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $21.13
- -------------------------------------------------------------------------
CLASS S SHARES
Net asset value, offering and redemption price per share
($468,451,931 / 22,099,599 outstanding shares of
beneficial interest, $.01 par value, unlimited number of
shares authorized) $21.20
- -------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
For the year ended September 30, 1998
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------
INVESTMENT INCOME
- ----------------------------------------------------------------------------
Income:
Dividends (net of foreign taxes withheld of $114,828) $ 6,772,764
- ----------------------------------------------------------------------------
Interest 4,277,004
- ----------------------------------------------------------------------------
11,049,768
- ----------------------------------------------------------------------------
Expenses:
Management fee 3,214,035
- ----------------------------------------------------------------------------
Services to shareholders 1,767,353
- ----------------------------------------------------------------------------
Custodian and accounting fees 145,874
- ----------------------------------------------------------------------------
Distribution fees 32,041
- ----------------------------------------------------------------------------
Administrative service fees 22,581
- ----------------------------------------------------------------------------
Trustees' fees and expenses 54,519
- ----------------------------------------------------------------------------
Reports to shareholders 162,788
- ----------------------------------------------------------------------------
Auditing 40,156
- ----------------------------------------------------------------------------
Registration fees 174,113
- ----------------------------------------------------------------------------
Legal 34,422
- ----------------------------------------------------------------------------
Amortization of organization expenses 6,965
- ----------------------------------------------------------------------------
Other 14,216
- ----------------------------------------------------------------------------
5,669,063
- ----------------------------------------------------------------------------
NET INVESTMENT INCOME 5,380,705
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
- ----------------------------------------------------------------------------
Net realized gain (loss) from:
Investments 18,541,915
- ----------------------------------------------------------------------------
Futures 10,820,239
- ----------------------------------------------------------------------------
Foreign currency related transactions (504)
- ----------------------------------------------------------------------------
29,361,650
- ----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on:
Investments (64,061,163)
- ----------------------------------------------------------------------------
Futures (1,750,397)
- ----------------------------------------------------------------------------
Foreign currency related transactions (57)
- ----------------------------------------------------------------------------
(65,811,617)
- ----------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENT TRANSACTIONS (36,449,967)
- ----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $(31,069,262)
- ----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE> 18
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------
1998 1997
- ---------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
- ---------------------------------------------------------------------------------------------
Net investment income $ 5,380,705 $ 2,709,350
- ---------------------------------------------------------------------------------------------
Net realized gain (loss) from investment transactions 29,361,650 17,587,309
- ---------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period (65,811,617) 39,472,281
- ---------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (31,069,262) 59,768,940
- ---------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income -- Class S (3,472,885) (370,246)
- ---------------------------------------------------------------------------------------------
Net realized gain from investment transactions -- Class S (23,876,077) (7,822,998)
- ---------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 438,067,018 219,411,450
- ---------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in
reinvestment of distributions 26,526,859 8,028,455
- ---------------------------------------------------------------------------------------------
Cost of shares redeemed (186,382,163) (69,910,114)
- ---------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE
TRANSACTIONS 278,211,714 157,529,791
- ---------------------------------------------------------------------------------------------
Increase (decrease) in net assets 219,793,490 209,105,487
- ---------------------------------------------------------------------------------------------
Net assets at beginning of period 297,979,779 88,874,292
- ---------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $4,306,919 and $2,399,604,
respectively) $ 517,773,269 $297,979,779
- ---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
--------------------------------------------------------
CLASS S SHARES(b)
--------------------------------------------------------
YEARS ENDED SEPTEMBER 30,
1998(a) 1997(a) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $23.53 $17.52 $15.87 $13.08 $13.38
- -------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .28 .34 .21 .18 .13
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.72) 7.22 2.40 2.86 .11
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations (.44) 7.56 2.61 3.04 .24
- -------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.24) (.07) (.04) (.12) (.11)
- -------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (1.65) (1.48) (.92) (.13) (.43)
- -------------------------------------------------------------------------------------------------------------------
Total distributions (1.89) (1.55) (.96) (.25) (.54)
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $21.20 $23.53 $17.52 $15.87 $13.08
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (2.08) 45.80(c) 17.18(c) 23.62(c) 1.88(c)
- -------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 468 298 89 68 35
- -------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses, net to average daily net
assets (%) 1.23 1.24 1.25 1.25 1.25
- -------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses before expense reductions, to
average daily net assets (%) 1.23 1.28 1.31 1.44 1.61
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average daily net assets
(%) 1.19 1.67 1.34 1.57 1.16
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 47.0 47.4 90.8 98.2 74.6
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) On April 16, 1998, existing shares of the Fund were designated as Class S
Shares and are generally not available to new investors.
(c) Total return would have been lower had certain expenses not been reduced.
19
<PAGE> 20
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding (a)
throughout the period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
---------------- ---------------- ----------------
CLASS A CLASS B CLASS C
---------------- ---------------- ----------------
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
APRIL 16, 1998 APRIL 16, 1998 APRIL 16, 1998
(COMMENCEMENT (COMMENCEMENT (COMMENCEMENT
OF SALE OF OF SALE OF OF SALE OF
CLASS A SHARES) CLASS B SHARES) CLASS C SHARES)
TO SEPTEMBER 30, TO SEPTEMBER 30, TO SEPTEMBER 30,
1998 1998 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 25.42 $ 25.42 $ 25.42
- -----------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .07 .00 .01
- -----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (4.30) (4.31) (4.30)
- -----------------------------------------------------------------------------------------------------------------
Total from investment operations (4.23) (4.31) (4.29)
- -----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 21.19 $ 21.11 $ 21.13
- -----------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%)(b) (16.64)** (16.96)** (16.88)**
- -----------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 28 18 3
- -----------------------------------------------------------------------------------------------------------------
Ratio of operating expenses, net to average daily net
assets (%) 1.34* 2.12* 2.11*
- -----------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average daily net
assets (%) .86* .03* .08*
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 47.0 47.0 47.0
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 SIGNIFICANT Value Fund (the "Fund") is a diversified series of
ACCOUNTING POLICIES Value Equity Trust (the "Trust") (formerly Scudder
Equity Trust). The Trust is organized as a
Massachusetts business trust and is registered
under the Investment Company Act of 1940, as
amended, as an open-end management investment
company.
Effective April 16, 1998, the Fund changed its name
from Scudder Value Fund to Value Fund and an
additional three classes of shares were offered,
namely Classes A, B and C. Existing shares of Value
Fund outstanding on that date were redesignated
Scudder Shares ("Class S"). Class A shares are sold
to investors subject to an initial sales charge.
Class B shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A and Class S and a contingent deferred
sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A
shares six years after issuance. Class C shares are
sold without an initial sales charge but are
subject to higher ongoing expenses than Class A and
Class S and a contingent deferred sales charge
payable upon certain redemptions within one year of
purchase. Class C shares do not convert into
another class. Class S, generally not available to
new investors, are not subject to initial or
contingent deferred sales charges.
Investment income, realized and unrealized capital
gains and losses, and certain fund-level expenses
and expense reductions, if any, are borne pro rata
on the basis of relative net assets by the holders
of all classes of shares except that each class
bears expenses unique to that class. Each class of
shares differs in its respective distribution,
shareholder services, administrative services and
certain other class-specific expenses and expense
reductions. All shares of the Fund have equal
rights with respect to voting.
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
Stock Market, Inc. ("Nasdaq"), for which there have
been sales, are valued at the most recent sale
price reported on Nasdaq. 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 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.
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.
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
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.
FUTURES CONTRACTS. A futures contract is an
agreement between a buyer or seller and an
established futures exchange or its clearinghouse
in which the buyer or seller agrees to take or make
a delivery of a specific amount of an item at a
specified price on a specific date (settlement
date). During the period, the Fund purchased
securities index futures as a temporary substitute
for purchasing selected investments.
Upon entering into a futures contract, the Fund is
required to deposit with a financial intermediary
an amount ("initial margin") equal to a certain
percentage of the face value indicated in the
futures contract. Subsequent payments ("variation
margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of
the underlying security, and are recorded for
financial reporting purposes as unrealized gains or
losses by the Fund. When entering into a closing
transaction, the Fund will realize a gain or loss
equal to the difference between the value of the
futures contract to sell and the futures contract
to buy. Futures contracts are valued at the most
recent settlement price.
Certain risks may arise upon entering into futures
contracts including the risk that an illiquid
secondary market will limit the Fund's ability to
close out a futures contract prior to the
settlement date and that a change in the value of a
futures contract may not correlate exactly with
changes in the value of the securities or
currencies hedged. When utilizing futures contracts
to hedge, the Fund gives up the opportunity to
profit from favorable price movements in the hedged
positions during the term of the contract.
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.
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
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
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 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. 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.
ORGANIZATION COSTS. Costs incurred by the Fund in
connection with its organization and initial
registration of shares have been deferred and are
being amortized on a straight-line basis over a
five-year period.
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 an accrual basis. Original issue
discounts are accreted for both tax and financial
reporting purposes.
- --------------------------------------------------------------------------------
2 PURCHASES AND SALES During the year ended September 30, 1998, purchases
OF SECURITIES and sales of investment securities (excluding
short-term investments) aggregated $415,436,285 and
$177,067,484, respectively.
The aggregate face value of futures contracts
opened and closed during the year ended September
30, 1998 was $345,840,571 and $358,664,374,
respectively.
- --------------------------------------------------------------------------------
3 RELATED PARTIES MANAGEMENT AGREEMENT. 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
"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 was
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.
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
Under the Agreement with Scudder Kemper, the Fund
pays the Adviser a fee equal to an annual rate of
0.70% 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 objectives, 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
Agreement. For the year ended September 30, 1998,
the fee pursuant to the Agreement amounted to
$3,214,035, of which $338,473 is unpaid at
September 30, 1998.
On September 7, 1998, Zurich Insurance Company
("Zurich"), majority owner of the Adviser, entered
into an agreement with B.A.T Industries p.l.c.
("B.A.T") pursuant to which the financial services
businesses of B.A.T were combined with Zurich's
businesses to form a new global insurance and
financial services company known as Zurich
Financial Services. Upon consummation of the
transaction, the Fund's investment management
agreement with Scudder Kemper was deemed to have
been assigned and, therefore, terminated. The Board
of Trustees of the Fund has approved a new
investment management agreement with Scudder
Kemper, which is substantially identical to the
former investment management agreement, except for
the dates of execution, termination, and
breakpoints in the fee structure. The Board of
Trustees of the Fund will seek shareholder approval
of the new investment management agreement through
a proxy solicitation that is currently scheduled to
conclude in mid-December.
DISTRIBUTION SERVICE AGREEMENT. In accordance with
Rule 12b-1 under the Investment Company Act of
1940, Kemper Distributors, Inc. ("KDI"), a
subsidiary of the Adviser, receives a fee of .75%
of average daily net assets of Classes B and C.
Pursuant to the agreement, KDI enters into related
selling group agreements with various firms at
various rates for sales of Class B and C shares.
For the period beginning April 16, 1998 through
September 30, 1998, the Distribution Fee was as
follows:
<TABLE>
<CAPTION>
DISTRIBUTION TOTAL UNPAID AT
FEES AGGREGATED SEPTEMBER 30, 1998
------------ ---------- ------------------
<S> <C> <C>
Class B $28,003 $28,003
Class C 4,038 4,038
------- -------
$32,041 $32,041
======= =======
</TABLE>
UNDERWRITING AGREEMENT AND CONTINGENT DEFERRED
SALES CHARGE. KDI is the principal underwriter for
Classes A, B and C. Underwriting commissions paid
in connection with the distribution of Class A
shares for the period beginning April 16, 1998
through September 30, 1998 aggregated $353,332, of
which $1,446 was retained by KDI and $351,886 was
paid to all other firms and affiliates.
In addition, KDI receives any contingent deferred
sales charge (CDSC) from Class B share redemptions
occurring within six years of purchase and Class C
share redemptions occurring within one year of
purchase. There is no such charge upon redemption
of any share appreciation or reinvested dividends.
Contingent deferred sales charges are based on
declining rates ranging from 4% to 1% for Class B
and 1% for Class C, of the value of the shares
redeemed. For the period April 16, 1998 through
September 30, 1998, the CDSC for Classes B and C
aggregated $9,480 and $9,606, respectively.
24
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
ADMINISTRATIVE SERVICE FEES. KDI provides
information and administrative services to Classes
A, B and C shareholders at an annual rate of up to
.25% of average daily net assets for each such
class. KDI in turn has various agreements with
financial services firms that provide these
services and pays these firms based upon the assets
of shareholder accounts the firms service. For the
period beginning April 16, 1998 through September
30, 1998, the Administrative Service Fee was as
follows:
<TABLE>
<CAPTION>
ADMINISTRATIVE TOTAL UNPAID AT
SERVICE FEES AGGREGATED SEPTEMBER 30, 1998
-------------- ---------- ------------------
<S> <C> <C>
Class A $11,901 $11,901
Class B 9,334 9,334
Class C 1,346 1,346
------- -------
$22,581 $22,581
======= =======
</TABLE>
SHAREHOLDER SERVICES FEES. Kemper Service Company
("KSC"), an affiliate of the Adviser, is the
transfer, dividend-paying and shareholder service
agent for the Fund's Classes A, B and C Shares. For
the period beginning April 16, 1998 through
September 30, 1998, the amount charged to Classes
A, B and C by KSC aggregated $15,784, $11,967 and
$1,629, respectively, of which $19,525 is unpaid at
September 30, 1998. Scudder Service Corporation
("SSC"), a subsidiary of the Adviser, is the
transfer, dividend-paying and shareholder service
agent for the Class S. For the year ended September
30, 1998, the amount charged to the Class S by SSC
for shareholder services aggregated $917,202, of
which $78,673 is unpaid at September 30, 1998.
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 Class S of the Fund.
For the year ended September 30, 1998, the amount
charged to the Class S by STC aggregated $581,273,
of which $89,824 is unpaid at September 30, 1998.
FUND ACCOUNTING FEES. 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 September 30, 1998, the amount charged
to the Fund by SFAC aggregated $107,935, of which
$12,046 is unpaid at September 30, 1998.
TRUSTEES FEES. 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 September
30, 1998, the Trustees fees and expenses aggregated
$54,519.
25
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4 SHARE TRANSACTIONS The following table summarizes shares of beneficial
interest and dollar activity in the Fund:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
--------------------------- --------------------------
SHARES DOLLARS SHARES DOLLARS
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------
SHARES SOLD
-----------------------------------------------------------------------------------
Class A 2,277,297 $ 53,828,754 -- $ --
-----------------------------------------------------------------------------------
Class B 924,056 21,926,576 -- --
-----------------------------------------------------------------------------------
Class C 142,532 3,367,784 -- --
-----------------------------------------------------------------------------------
Class S 15,127,170 358,943,904 10,534,988 219,411,450
-----------------------------------------------------------------------------------
18,471,055 438,067,018 10,534,988 219,411,450
-----------------------------------------------------------------------------------
SHARES ISSUED TO SHAREHOLDERS IN REINVESTMENT OF DISTRIBUTIONS
-----------------------------------------------------------------------------------
Class A -- $ -- -- $ --
-----------------------------------------------------------------------------------
Class B -- -- -- --
-----------------------------------------------------------------------------------
Class C -- -- -- --
-----------------------------------------------------------------------------------
Class S 1,219,065 26,526,859 446,770 8,028,455
-----------------------------------------------------------------------------------
1,219,065 26,526,859 446,770 8,028,455
-----------------------------------------------------------------------------------
SHARES REDEEMED
-----------------------------------------------------------------------------------
Class A (945,447) $ (22,781,139) -- $ --
-----------------------------------------------------------------------------------
Class B (63,842) (1,468,241) -- --
-----------------------------------------------------------------------------------
Class C (3,624) (83,547) -- --
-----------------------------------------------------------------------------------
Class S (6,911,251) (162,049,236) (3,388,834) (69,910,114)
-----------------------------------------------------------------------------------
(7,924,164) (186,382,163) (3,388,834) (69,910,114)
-----------------------------------------------------------------------------------
NET INCREASE (DECREASE)
-----------------------------------------------------------------------------------
Class A 1,331,850 $ 31,047,615 -- $ --
-----------------------------------------------------------------------------------
Class B 860,214 20,458,335 -- --
-----------------------------------------------------------------------------------
Class C 138,908 3,284,237 -- --
-----------------------------------------------------------------------------------
Class S 9,434,984 223,421,527 7,592,924 157,529,791
-----------------------------------------------------------------------------------
11,765,956 278,211,714 7,592,924 157,529,791
-----------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
Class S paid distributions of $1.135 per share from net long-term capital gains
during the year ended September 30, 1998, of which 66.5% represents 20% rate
gains.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$25,000,000 as capital gain dividends for the year ended September 30, 1998.
Pursuant to section 854 of the Internal Revenue Code, the Fund designates 100%
of the income dividends paid during the Fund's fiscal year ended September 30,
1998 eligible for the dividends received deduction.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns If you have specific questions
about your account, please call 1-800-621-1048.
26
<PAGE> 27
NOTES
27
<PAGE> 28
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE WILLIAM H. LUERS JERARD K. HARTMAN
President and Trustee Trustee Vice President
PAUL BANCROFT III WILSON NOLEN DONALD E. HALL
Trustee Trustee Vice President
SHERYL J. BOLTON KATHRYN L. QUIRK THOMAS W. JOSEPH
Trustee Trustee, Vice President Vice President
and Secretary
WILLIAM T. BURGIN THOMAS F. MCDONOUGH
Trustee JOAN SPERO Vice President and Secretary
Trustee
THOMAS J. DEVINE KATHLEEN MILLARD
Trustee ROBERT G. STONE JR. Vice President
Honorary Trustee
KEITH R. FOX JOHN R. HEBBLE
Trustee Treasurer
CAROLINE PEARSON
Assistant Secretary
- -------------------------------------------------------------------------------
LEGAL COUNSEL DECHERT PRICE & RHOADS
Ten Post Office Square South
Boston, MA 02109
- -------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- -------------------------------------------------------------------------------
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02110
- -------------------------------------------------------------------------------
INDEPENDENT PRICEWATERHOUSECOOPERS LLP
ACCOUNTANTS One Post Office Square
Boston, MA 02109
- -------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Value Fund prospectus.
KVF - 2(11/98) 1059750
