SCUDDER
Scudder Large
Company Value Fund
Prospectus
February 1, 1999
Seeking maximum capital appreciation over the long term through a value-oriented
approach to investing.
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
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No Sales Charges
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NO-LOAD
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The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
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Contents
1 Fund Summary
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An overview of the fund's
goal and strategy, main
risks, performance and
expenses
4 About The Fund
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Additional information 4 Principal strategies, investments and
that you should know additional principal risks
about the fund
6 A message from the President
7 Investment adviser
8 Distributions
8 Taxes
10 Financial highlights
11 About Your Investment
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Information about 11 Transaction information
managing your fund account
12 Buying and selling shares
13 Purchases
14 Exchanges and redemptions
15 Investment products and services
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Fund Summary
Investment objective and principal strategies
Scudder Large Company Value Fund pursues maximum long-term capital appreciation
through a value-oriented approach to investing. The fund invests at least 65% of
its assets in the equity securities of large U.S. companies -- those with a
market value of $1 billion or more. In particular, the fund invests primarily in
a diversified portfolio of common stocks of large, established U.S. companies.
The fund's portfolio management team uses a value-oriented approach to selecting
large company stocks -- that is, it searches for stocks that appear to be
undervalued. A stock is undervalued if its stock price does not reflect its true
value.
Stocks trade at a discount for many reasons. Typically, these companies, or
their industries, have fallen out of favor with investors because of such things
as earnings disappointments, negative industry or economic events, or investor
skepticism. As a result, their stock prices may not accurately reflect their
long-term business potential. Accordingly, the prices of these stocks may rise
as business fundamentals improve or as market conditions change. For example,
stock prices are often affected when a company's earnings exceed general
expectations or when investors begin to appreciate the full extent of a
company's business potential.
In searching for undervalued stocks of large companies, the fund's portfolio
management team uses a disciplined investment approach which includes
quantitative valuation analysis, fundamental research and risk controls to
uncover stocks, whose market value has temporarily declined, but which appear to
be poised for a rebound. Except as otherwise indicated, the fund's investment
objective and policies may be changed without a vote of shareholders.
Principal risks
The principal risks of investing in the fund are stock market risk and, more
specifically, the risks of investing in undervalued large company stocks.
Stock Market Risk. As with all investments in the stock market, the fund's
returns and net asset value will go up and down, and it is possible to lose
money invested in the fund. Stock market movements will affect the fund's share
price on a daily basis. Declines are possible both in the overall stock market
and in the value of the types of securities held by the fund. In addition, the
portfolio management team's strategy and skill in choosing undervalued large
company stocks for the fund will determine in large part the fund's ability to
achieve its objective.
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Value Investing Risk. The determination that a stock is undervalued is
subjective; the market may not agree, and a stock's price may not rise to what
the portfolio management team believes is its full value. It may even decrease
in value. However, because of the fund's focus on undervalued stocks of large
companies, the fund's downside risk may be less than with other large company
stocks since value stocks are in theory already underpriced and large company
stocks tend to be less volatile than small company stocks.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed and comparing this
information to two broad measures of market performance. Of course, past
performance is not necessarily an indication of future performance.
Total return for years ended December 31
BAR CHART OMITTED HERE
CHART DATA
TOTAL
YEAR RETURN
1989 33.80%
1990 -16.98%
1991 42.96%
1992 7.09%
1993 20.07%
1994 -9.87%
1995 31.64%
1996 19.55%
1997 32.54%
1998 9.50%
For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 19.78% (the first quarter of 1991), and the fund's lowest
return for a calendar quarter was -22.26% (the third quarter of 1990).
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Average annual total returns
For periods ended S&P Russell 1000
December 31, 1998 Fund 500 Index Value Index
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One Year 9.50% 28.72% 15.65%
Five Years 15.54% 24.08% 20.84%
Ten Years 15.44% 19.21% 17.38%
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The Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index) is an
unmanaged capitalization-weighted measure of 500 widely held common stocks
listed on the New York Stock Exchange and American Stock Exchange and traded on
the Nasdaq Stock Market, Inc. The Russell 1000 Value Index consists of
securities with less-than- average growth orientation. Index returns assume
reinvestment of dividends and, unlike fund returns, do not reflect any fees or
expenses.
Fee and expense information
Scudder Family of Funds no-load fund
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund.
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Shareholder fees: Fees paid directly from your investment.
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Maximum sales charge (load) imposed on purchases (as % of NONE
offering price)
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Maximum deferred sales charge (load) NONE
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Maximum sales charge (load) imposed on reinvested NONE
dividends/distributions
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Redemption fee (as % of amount redeemed, if applicable) NONE*
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Exchange fee NONE
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Annual fund operating expenses (expenses that are deducted from fund assets):
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Management fee 0.63%
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Distribution (12b-1) fees NONE
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Other expenses 0.25%
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Total annual fund operating expenses 0.88%
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* You may redeem by writing or calling the fund. If you wish to receive your
redemption proceeds via wire, there is a $5 wire service fee. For
additional information, please refer to "About Your Investment -- Exchanges
and Redemptions."
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Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The expenses
would be the same whether you sold your shares at the end of each period or
continued to hold them.
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One Year $ 90
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Three Years $ 281
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Five Years $ 488
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Ten Years $1,084
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Actual fund expenses and return vary from year to year, and may be higher or
lower than those shown.
About The Fund
Principal strategies, investments and additional principal risks
Principal strategies and investments
The fund attempts to achieve its objective by investing primarily in stocks of
large U.S. companies that appear to have temporarily fallen out of favor with
investors but seem to offer the potential for attractive long-term gains. The
fund's portfolio management team determines which stocks to invest in by using a
disciplined approach that combines both valuation analysis, fundamental research
and risk controls.
The portfolio management team begins its selection process by using a
proprietary computer model to rank the 1000 stocks that comprise the Russell
1000 Index -- a widely used large stock universe -- based on their relative
valuations. A company's valuation is measured by comparing its stock price to
its business fundamentals, such as sales, earnings or book value. The higher the
valuation, the more "expensive" the stock. The portfolio management team focuses
on the "cheapest" 40% of these stocks (or the stocks with the lowest
valuations). These stocks are further analyzed and rated using fundamental
research, such as an examination of a company's historical earnings patterns,
sales growth and profit margins in order to assess the likelihood of a rebound
in the stock price if a company's business fundamentals improve or market
conditions change. In an effort to manage the risk exposure of the fund, the
portfolio management team then assesses the expected volatility of the fund and
the potential impact the most promising of
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these stocks may have on the fund's risk level. Based on this information, the
fund's portfolio management team selects approximately 60?90 stocks that the
portfolio management team believes offer the greatest potential for attractive
long-term gains.
In addition, the fund's flexible investment strategy enables it to invest in a
broadly diversified portfolio of large company stocks in all sectors of the
market, including foreign markets when the opportunity arises. By diversifying
its assets broadly among undervalued stocks of large companies, the fund may
experience less share price volatility than other funds that invest in large
company stocks.
The fund typically sells a stock when its price is no longer considered to be a
value, it is less likely to benefit from the current market or economic
environment, it experiences deteriorating fundamentals or its price performance
falls short of the portfolio management team's expectations.
From time to time, the fund may invest, without limit, in debt securities,
short-term indebtedness, cash and cash equivalents for temporary defensive
purposes. Because this defensive policy differs from the fund's investment
objective, the fund may not achieve its goal during a defensive period.
While not principal investments or strategies of the fund, the fund may, but is
not required to, utilize other investments and investment techniques which may
impact fund performance, including, but not limited to, options, futures and
other strategic transactions.
More information about these and other investments and strategies of the fund is
provided in the Statement of Additional Information. Of course, there can be no
guarantee that, by following this investment strategy, the fund will achieve its
objective.
Additional Principal Risks
Equity investing risk. An investment in the common stock of a company represents
a proportionate ownership interest in that company. Therefore, the fund
participates in the success or failure of any company in which it holds stock.
Compared to other classes of financial assets, such as bonds or cash
equivalents, common stocks have historically offered a greater potential for
gain on investment. However, the market value of common stocks can fluctuate
significantly, reflecting such things as the business performance of the issuing
company, investors' perceptions of the company or the overall stock market and
general economic or financial market movements.
Inflation risk. There is a possibility that the rising prices of goods and
services may have the effect of offsetting a fund's real return.
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A message from the President
Scudder Kemper Investments, Inc., investment adviser to the Scudder Family of
Funds, is one of the largest and most experienced investment management
organizations worldwide, managing more than $230 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts.
We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 50 no-load mutual fund portfolios or classes of
shares. We also manage mutual funds in a special program for the American
Association of Retired Persons, as well as the fund options available through
Scudder Horizon Plan, a tax-advantaged variable annuity. We also advise The
Japan Fund and numerous other open- and closed-end funds that invest in this
country and other countries around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds; IRAs; 401(k)s,
Keoghs and other retirement plans are also available.
Services available to shareholders include toll-free access to professional
representatives, easy exchange among the Scudder Family of Funds, shareholder
reports, informative newsletters and the walk-in convenience of Scudder Investor
Centers.
The Scudder Family of Funds is offered without commissions to purchase or redeem
shares or to exchange from one fund to another. There are no distribution
(12b-1) fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/Edmond D. Villani
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Investment adviser
The fund retains the investment management firm of Scudder Kemper Investments,
Inc. (the "Adviser"), 345 Park Avenue, New York, New York, to manage the fund's
daily investment and business affairs subject to the policies established by the
Board. The Adviser actively manages the fund's investments. Professional
management can be an important advantage for investors who do not have the time
or expertise to invest directly in individual securities.
For the fiscal year ended September 30, 1998, the Adviser received an annual fee
of 0.63% of the fund's average daily net assets.
Portfolio management
The fund is managed by a team of investment professionals, who each plays 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 the Adviser's
offices across the United States and abroad. The Adviser believes its team
approach benefits fund investors by bringing together many disciplines and
leveraging its extensive resources.
The following investment professionals are associated with the fund as
indicated:
<TABLE>
<CAPTION>
Name and Title Joined the Fund Responsibilities and Background
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<S> <C> <C>
Kathleen T. Millard 1995 Ms. Millard joined the Adviser in 1991 as a portfolio manager. She
Co-Lead Manager has 15 years of investment experience and has been a portfolio
manager since 1986.
Lois Friedman Roman 1995 Ms. Roman joined the Adviser in 1994 as an equity analyst. Prior to
Co-Lead Manager joining the Adviser, she was an analyst for an unaffiliated
investment management firm for three years. She has ten years of
investment experience as an equity analyst.
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</TABLE>
Year 2000 readiness
Like other mutual funds and financial and business organizations worldwide, the
fund could be adversely affected if computer systems on which the fund relies,
which primarily include those used by the fund's investment manager, its
affiliates or other service providers, are unable
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to correctly process date-related information on and after January 1, 2000. The
risk is commonly called the Year 2000 issue. Failure to successfully address the
Year 2000 issue could result in interruptions to and other material adverse
effects on the fund's business and operations, such as problems with calculating
net asset value and difficulties in implementing the fund's purchase and
redemption procedures. The fund's investment manager has commenced a review of
the Year 2000 issue as it may affect the fund and is taking steps it believes
are reasonably designed to address the Year 2000 issue, although there can be no
assurances that these steps will be sufficient. In addition, there can be no
assurances that the Year 2000 issue will not have an adverse effect on the
issuers whose securities are held by the fund or on global markets or economies
generally.
Distributions
Dividends and capital gains distributions
The fund intends to distribute dividends from its net investment income
annually, in December. The fund intends to distribute net realized capital gains
after utilization of capital loss carryforwards, if any, in December. An
additional distribution may be made at a later date, if necessary.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such month and paid during the following January
will be treated by shareholders for federal income tax purposes as if received
on December 31 of the calendar year declared.
A shareholder may choose to receive distributions in cash or have them
reinvested in additional shares of the fund. If an investment is in the form of
a retirement plan, all dividends and capital gains distributions must be
reinvested into the shareholder's account. Distributions are generally taxable,
whether received in cash or reinvested. Exchanges among funds are also taxable
events.
Taxes
Generally, dividends from net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable to
shareholders as long-term capital gains, regardless of the length of time
shareholders have owned shares. Short-term capital gains and any other taxable
income distributions are taxable as ordinary income. A portion of dividends from
ordinary income may qualify for the dividends-received deduction for
corporations.
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Unless your investment is in a tax-deferred account, you may want to avoid
investing a large amount close to the date of a distribution, because you may
receive part of your investment back as a taxable distribution.
A sale or exchange of shares is a taxable event and may result in a capital gain
or loss which may be long-term or short-term, generally depending on how long
you owned the shares.
The fund sends detailed tax information to its shareholders about the amount and
type of its distributions by January 31 of the following year.
The fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to shareholders who fail to provide the
fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the IRS that they are subject to
backup withholding. Any such withheld amounts may be credited against the
shareholder's U.S. federal income tax liability.
Shareholders may be subject to state, local and foreign taxes on fund
distributions and dispositions of fund shares. You should consult your tax
advisor regarding the particular consequences of an investment in the fund.
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Financial highlights
The financial highlights table is intended to help you understand the fund's
financial performance for the fiscal periods indicated. Certain information
reflects financial results for a single fund share. The total return figures
represent the rate that an investor would have earned (or lost) on an investment
in the fund assuming reinvestment of all dividends and distributions. This
information has been audited by PricewaterhouseCoopers LLP whose report, along
with the fund's financial statements, is included in the annual report, which is
available upon request by calling Scudder Investor Relations at 1-800-225-2470
or, for existing investors, call the Scudder Automated Information Line (SAIL)
at 1-800-343-2890.
Scudder Large Company Value Fund
<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................ $ 28.98 $ 22.64 $ 22.92 $ 19.54 $ 23.06
Income from investment
operations:
Net investment income
(loss)............................. .36 .38 .36 .13 (.02)
Net realized and
unrealized gain (loss) on
investment transactions............ (1.59) 8.60 2.94 3.98 (.88)
Total from investment
operations......................... (1.23) 8.98 3.30 4.11 (.90)
Less distributions from:
Net investment income................ (.24) (.16) (.08) -- --
Net realized gains on
investment transactions............ (1.86) (2.48) (3.50) (.73) (2.62)
Total distributions.................. (2.10) (2.64) (3.58) (.73) (2.62)
Net asset value, end of
period............................. $ 25.65 $ 28.98 $ 22.64 $ 22.92 $ 19.54
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Total Return (%)...................... (4.54) 43.06 15.94 21.96 (4.72)
Ratios and Supplemental
Data
Net assets, end of period
($ millions)........................ 1,997 2,213 1,651 1,492 1,338
Ratio of operating
expenses to average daily
net assets (%)...................... .88 .93 .92 .98 .97
Ratio of net investment
income (loss) to average
daily net assets (%)................ 1.25 1.51 1.62 .62 (.12)
Portfolio turnover rate (%)........... 39.5 43.0 150.7 153.6 75.8
</TABLE>
(a) Based on monthly average shares outstanding during the period.
* On February 1, 1997, the fund adopted its current name. Prior to that date,
the fund was known as the Scudder Capital Growth Fund.
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About Your Investment
Transaction information
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
the fund as of the close of regular trading on the New York Stock Exchange,
normally 4 p.m. eastern time, on each day the New York Stock Exchange is open
for trading. Net asset value per share is calculated by dividing the value of
total fund assets, less all liabilities, by the total number of shares
outstanding. Market prices are used to determine the value of the fund's assets.
If market prices are not readily available for a security or if a security's
price is not considered to be market indicative, that security may be valued by
another method that the Board or its delegate believes accurately reflects fair
value. In those circumstances where a security's price is not considered to be
market indicative, the security's valuation may differ from an available market
quotation.
To the extent that the fund invests in foreign securities, these securities may
be listed on foreign exchanges that trade on days when the fund does not price
its shares. As a result, the net asset value per share of the fund may change at
a time when shareholders are not able to purchase or redeem their shares.
Processing time
All purchase and redemption requests received in good order at the fund's
transfer agent by the close of regular trading on the New York Stock Exchange
are executed at the net asset value per share calculated at the close of trading
that day. All other requests that are in good order will be executed the
following business day.
Signature guarantees
A signature guarantee is required when you sell more than $100,000 worth of
shares. You can obtain a guarantee from most brokerage houses and financial
institutions, although not from a notary public. The fund will normally send
redemption proceeds within one business day following the redemption request,
but may take up to seven business days (or longer in the case of shares recently
purchased by check). For more information, please call 1-800-225-5163.
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
fund and Scudder Investor Services, Inc. each reserves the right to reject
purchases of fund shares (including exchanges) for any reason, including when
there is evidence of a pattern of frequent
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purchases and sales made in response to short-term fluctuations in the fund's
share price.
Minimum balances
Generally, shareholders who maintain a non-fiduciary account balance of less
than $2,500 in the fund and have not established an automatic investment plan
will be assessed an annual $10.00 per fund charge; this fee is paid to the fund.
The fund reserves the right, following 60 days written notice to shareholders,
to redeem all shares in accounts that have a value below $1,000 where such a
reduction in value has occurred due to a redemption, exchange or transfer out of
the account.
Third party transactions
If you buy and sell shares of the fund through a member of the National
Association of Securities Dealers, Inc. (other than Scudder Investor Services,
Inc.), that member may charge a fee for that service.
Other policies
The fund reserves the right to redeem in kind. That is, it may honor redemption
requests with readily marketable fund securities instead of cash. There may be
transaction costs associated with converting these securities to cash.
Buying and selling shares
Please refer to the following charts for information on how to buy and sell fund
shares. Additional information, including special investment features, may be
found in the Shareholder Services Guide. For information about No-Fee IRAs, Roth
IRAs and other retirement options, call Scudder Investor Relations at
1-800-225-2470. For information on establishing 401(k) and 403(b) plans, call
Scudder Defined Contribution Services at 1-800-323-6105.
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Purchases
To open an account
The minimum initial investment is $2,500; $1,000 for IRAs. Group retirement
plans (401(k), 403(b), etc.) have similar or lower minimums -- see appropriate
plan literature. Make checks payable to "The Scudder Funds."
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By Mail Send your completed and signed application and check
by regular mail to: The Scudder Funds
P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
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By Wire Call 1-800-225-5163 for instructions.
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In Person Visit one of our Investor Centers to complete your application
with the help of a Scudder representative. Investor Centers
are located in Boca Raton, Boston, Chicago, New York and San
Francisco.
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To buy additional shares
The minimum additional investment is $100; $50 for IRAs. Group retirement plans
(401(k), 403(b), etc.) have similar or lower minimums -- see appropriate plan
literature. Make checks payable to "The Scudder Funds."
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By Mail Send a check with a Scudder investment slip, or with
a letter of instruction including your account number and
the complete fund name, to the appropriate address listed
above.
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By Wire Call 1-800-225-5163 for instructions.
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In Person Visit one of our Investor Centers to make an
additional investment in your Scudder fund account.
Investor Center locations are listed above.
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By Telephone Call 1-800-225-5163 for instructions.
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By Automatic You may arrange to make investments of $50 or more on a
Investment Plan regular basis through automatic deductions from your bank
checking account. Please call 1-800-225-5163 for more
information and an enrollment form.
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Exchanges and redemptions
To exchange shares
The minimum investments are $2,500 to establish a new account and $100 to
exchange among existing accounts.
By To speak with a service representative, call 1-800-225-5163
Telephone from 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), The
Scudder Automated Information Line, call 1-800-343-2890
(24 hours a day).
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By Mail or Fax Print or type your instructions and include:
- the name of the fund and class and the account number you
are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to
exchange;
- the name of the fund and class you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions by The Scudder Funds
regular mail to: P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
or by fax to: 1-800-821-6234
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To sell shares
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By To speak with a service representative, call 1-800-225-5163
Telephone from 8 a.m. to 8 p.m. eastern time. To access SAILTM, The
Scudder Automated Information Line, call 1-800-343-2890 (24
hours a day). You may have redemption proceeds sent to your
predesignated bank account, or redemption proceeds of up to
$100,000 sent to your address of record.
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By Mail or Fax Send your instructions for redemption to the appropriate
address or fax number above and include:
- the name of the fund and class and account number you are
redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
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By Automatic You may arrange to receive automatic cash payments
Withdrawal Plan periodically. Call 1-800-225-5163 for more information and an
enrollment form.
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Investment products and services
The Scudder Family of Funds+++
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<TABLE>
<S> <C>
Money Market U.S. Growth and Income
Scudder U.S. Treasury Money Fund Scudder Balanced Fund
Scudder Cash Investment Trust Scudder Dividend & Growth Fund
Scudder Money Market Series -- Scudder Growth and Income Fund
Prime Reserve Shares* Scudder S&P 500 Index Fund
Premium Shares* Scudder Real Estate Investment Fund
Managed Shares* U.S. Growth
Scudder Government Money Market Value
Series -- Managed Shares* Scudder Large Company Value Fund
Tax Free Money Market+ Scudder Value Fund***
Scudder Tax Free Money Fund Scudder Small Company Value Fund
Scudder Tax Free Money Market Series -- Scudder Micro Cap Fund
Managed Shares* Growth
Scudder California Tax Free Money Scudder Classic Growth Fund***
Fund** Scudder Large Company Growth
Scudder New York Tax Free Money Fund
Fund** Scudder Development Fund
Tax Free+ Scudder 21st Century Growth Fund
Scudder Limited Term Tax Free Fund Global Equity
Scudder Medium Term Tax Free Fund Worldwide
Scudder Managed Municipal Bonds Scudder Global Fund
Scudder High Yield Tax Free Fund Scudder International Value Fund
Scudder California Tax Free Fund** Scudder International Growth and
Scudder Massachusetts Limited Term Tax Income Fund
Free Fund** Scudder International Fund++
Scudder Massachusetts Tax Free Fund** Scudder International Growth Fund
Scudder New York Tax Free Fund** Scudder Global Discovery Fund***
Scudder Ohio Tax Free Fund** Scudder Emerging Markets Growth
Scudder Pennsylvania Tax Free Fund** Fund
U.S. Income Scudder Gold Fund
- -----------
Scudder Short Term Bond Fund Regional
Scudder Zero Coupon 2000 Fund Scudder Greater Europe Growth
Scudder GNMA Fund Fund
Scudder Income Fund Scudder Pacific Opportunities Fund
Scudder Corporate Bond Fund Scudder Latin America Fund
Scudder High Yield Bond Fund The Japan Fund, Inc.
Global Income Industry Sector Funds
Scudder Global Bond Fund Choice Series
Scudder International Bond Fund Scudder Financial Services Fund
Scudder Emerging Markets Income Fund Scudder Health Care Fund
Asset Allocation Scudder Technology Fund
Scudder Pathway Conservative Portfolio Preferred Series
Scudder Pathway Balanced Portfolio Scudder Tax Managed Growth Fund
Scudder Pathway Growth Portfolio Scudder Tax Managed Small Company
Scudder Pathway International Portfolio Fund
</TABLE>
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Retirement Programs and Education Accounts
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Retirement Programs Education Accounts
- ------------------- ------------------
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan **+++ +++
(a variable annuity)
Closed-End Funds#
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The Argentina Fund, Inc. Scudder Global High Income Fund, Inc.
The Brazil Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Montgomery Street Income
Securities, 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 or classes thereof may not be
available for purchase or exchange.
+ A portion of the income from the tax-free funds may be subject to
federal, state and local taxes.
* A class of shares of the fund.
** Not available in all states.
*** Only the Scudder Shares of the fund are part of the Scudder Family of
Funds.
++ Only the International Shares of the fund are part of the Scudder
Family of Funds.
+++ +++ A no-load variable annuity contract provided by Charter National Life
Insurance Company and its affiliate, offered by Scudder's insurance
agencies, 1-800-225-2470. # These funds, advised by Scudder Kemper
Investments, Inc., are traded on the New York Stock Exchange and, in
some cases, on various foreign stock exchanges.
16
<PAGE>
Trustees and Officers
- --------------------------------------------------------------------------------
Daniel Pierce* Thomas J. Devine
Chairman of the Board, President and Honorary Trustee;
Trustee Consultant
Paul Bancroft III Wilson Nolen
Trustee; Venture Capitalist Honorary Trustee;
and Consultant Consultant
Sheryle J. Bolton Robert G. Stone, Jr.
Trustee; Chief Executive Officer Honorary Trustee;
and Director, Scientific Chairman Emeritus and
Learning Corporation Director, Kirby Corporation
William T. Burgin Donald E. Hall*
Trustee; General Partner, Vice President
Bessemer Venture Partners
Thomas W. Joseph*
Keith R. Fox Vice President
Trustee; Private Equity Investor,
Exeter Capital Management Ann M. McCreary*
Corporation
Vice President
William H. Luers Katherine T. Millard*
Trustee; President, Vice President
The Metropolitan
Museum of Art Thomas F. McDonough*
Vice President and Secretary
Kathryn L. Quirk* John R. Hebble*
Treasurer
Trustee, Vice President and
Assistant Secretary Caroline Pearson*
Assistant Secretary
Joan E. Spero
Trustee; President, The Doris Duke
Charitable Foundation
*Scudder Kemper Investments, Inc.
17
<PAGE>
Additional information about the fund may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries may be made by calling the toll-free number
listed below. The Statement of Additional Information contains more information
on fund investments and operations. The Shareholder Services Guide contains more
information about purchases and sales of fund shares. The semiannual and annual
shareholder reports contain a discussion of the market conditions and the
investment strategies that significantly affected the fund's performance during
the last fiscal year, as well as a listing of portfolio holdings and financial
statements. These and other fund documents may be obtained without charge from
the following sources:
- --------------------------------------------------------------------------------
By Telephone Call Scudder Investor Relations at 1-800-225-2470
or
For existing Scudder investors, call the Scudder
Automated Information Line (SAIL) at 1-800-343-2890
(24 hours a day).
- --------------------------------------------------------------------------------
By Mail Scudder Investor Services, Inc.
Two International Place
Boston, MA 02110-4103
or
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- --------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330 for more information.)
- --------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.scudder.com
- --------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file number: 811-1444
<PAGE>
SCUDDER
Scudder Value
Fund
Prospectus
February 1, 1999
Value Fund seeks to provide long-term growth of capital through investment in
undervalued equity securities.
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
- ------------------------------
No Sales Charges
- ------------------------------
NO-LOAD
- ------------------------------
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Contents
1 Fund Summary
- --------------------------------------------------------------------------------
An overview of the fund's
goal and strategy, main
risks, performance and
expenses
4 About The Fund
- --------------------------------------------------------------------------------
Additional information 4 Principal strategies, investments and
that you should know additional principal risks
about the fund
6 A message from the President
7 Investment adviser
8 Distributions
9 Taxes
10 Financial highlights
11 About Your Investment
- --------------------------------------------------------------------------------
Information about 11 Transaction information
managing your fund account
12 Buying and selling shares
12 Purchases
14 Exchanges and redemptions
15 Investment products and services
<PAGE>
Fund Summary
Investment objective and principal strategies
Value Fund seeks to provide long-term growth of capital through investment in
undervalued equity securities. The fund invests in the stock of companies that
the fund's portfolio management team believes are undervalued in the marketplace
in relation to current and estimated future earnings and dividends.
The principal factor considered by the fund's investment manager in identifying
a value stock is its price to earnings (P/E) ratio. Companies selected by the
fund generally sell at P/E ratios below the market average, as defined by the
Standard & Poor's Corporation 500 Composite Price Index. The objective of value
investing is to reduce the risk of owning stocks by investing in companies with
sound finances whose current market prices are low in relation to earnings or
other measures of value. In determining whether a company's finances are sound,
the investment manager considers, among other things, its ability to meet debt
obligations as well as other liabilities.
In selecting among stocks with low P/E ratios, the investment manager also
considers various factors about the issuer, such as: financial strength,
five-year growth rates, five-year dividend growth rates, normalized earnings per
share and the direction of current or near future earnings trends.
The fund may be appropriate for investors who seek a core holding to establish
the foundation of a value-oriented portfolio or a value fund to diversify an
existing growth-equity portfolio. Except as otherwise indicated, the fund's
investment objective and policies may be changed without a vote of shareholders.
Principal risks
There are market and investment risks with any security. The value of an
investment in the fund will fluctuate over time and it is possible to lose money
invested in the fund.
Stock Market Risk. As with all investments in the stock market, the fund's
returns and net asset value will go up and down, and it is possible to lose
money invested in the fund. Stock market movements will affect the fund's share
price on a daily basis. Declines are possible both in the overall stock market
and in the value of the types of securities held by the fund. In addition, the
portfolio management team's strategy and skill in choosing undervalued stocks
for the fund will determine in large part the fund's ability to achieve its
objective.
1
<PAGE>
Value Investing Risk. The determination that a stock is undervalued is
subjective; the market may not agree, and a stock's price may not rise to what
the investment manager believes is its full value. It may even decrease in
value. However, because of the fund's focus on undervalued stocks, the fund's
downside risk may be less than with other stocks since value stocks are in
theory already underpriced.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the Scudder Shares class of the fund has performed
and comparing this information to two broad measures of market performance. Of
course, past performance is not necessarily an indication of future performance.
Total return for years ended December 31
BAR CHART OMITTED HERE
BAR CHART DATA
TOTAL
YEAR RETURN
1993 11.60%
1994 1.65%
1995 30.17%
1996 22.99%
1997 35.35%
1998 11.90%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 17.07% (the fourth quarter of 1998), and the fund's lowest
return for a calendar quarter was -15.34% (the third quarter of 1998).
Average annual total returns
For periods ended S&P 500 Russell 1000
December 31, 1998 Fund Index Value Index
- ----------------------------------------------------------------------------
One Year 11.90% 28.72% 15.65%
Five Years 19.77% 24.08% 20.84%
Since Inception (12/31/92) 18.36% 21.62% 20.39%
- ----------------------------------------------------------------------------
The Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index) is an
unmanaged capitalization-weighted measure of 500 widely
2
<PAGE>
held common stocks listed on the New York Stock Exchange and the American Stock
Exchange, and traded on the Nasdaq Stock Market, Inc. The Russell 1000 Value
Index consists of securities with less than average growth orientation. Index
returns assume reinvestment of dividends and, unlike fund returns, do not
reflect any fees or expenses.
Fee and expense information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold Scudder Shares of the fund.
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as % of offering NONE
price)
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) NONE
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested NONE
dividends/distributions
- --------------------------------------------------------------------------------
Redemption fee (as % of amount redeemed, if applicable) NONE*
- --------------------------------------------------------------------------------
Exchange fee NONE
- --------------------------------------------------------------------------------
Annual fund operating expenses (expenses that are deducted from fund assets):
- --------------------------------------------------------------------------------
Management fee 0.70%
- --------------------------------------------------------------------------------
Distribution (12b-1) fees NONE
- --------------------------------------------------------------------------------
Other expenses 0.53%
- --------------------------------------------------------------------------------
Total annual fund operating expenses 1.23%
- --------------------------------------------------------------------------------
* You may redeem by writing or calling the fund. If you wish to receive your
redemption proceeds via wire, there is a $5 wire service fee. For
additional information, please refer to "About Your Investment -- Exchanges
and Redemptions."
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The expenses
would be the same whether you sold your shares at the end of each period or
continued to hold them.
- --------------------------------------------------------------------------------
One Year $ 125
- --------------------------------------------------------------------------------
Three Years $ 390
- --------------------------------------------------------------------------------
Five Years $ 676
- --------------------------------------------------------------------------------
Ten Years $ 1,489
- --------------------------------------------------------------------------------
Actual fund expenses and return vary from year to year, and may be higher or
lower than those shown.
3
<PAGE>
About The Fund
Principal strategies, investments and additional principal risks
Principal strategies and investments
The fund invests at least 80% of its assets in equity securities, primarily
common stocks of medium- to large-sized domestic companies with annual revenues
or market capitalization of at least $1 billion. The investment manager uses
in-depth fundamental research and a proprietary computerized quantitative model
to identify companies that are currently undervalued in relation to current and
estimated future earnings and dividends. The investment process also involves an
assessment of business risk, including analysis of:
o the strength of a company's balance sheet;
o the accounting practices a company follows;
o the volatility of a company's earnings over time; and
o the vulnerability of earnings to changes in external factors, such as the
general economy, the competitive environment, governmental action and
technological change.
While a broad range of investments is considered, only those that, in the
investment manager's opinion, are selling at comparatively large discounts to
intrinsic value are purchased for the fund. The prices of the fund's investments
may rise as a result of both earnings growth and rising price-earnings ratios
over time.
The fund is distinctive in the manner in which it combines systematic valuation
techniques with intensive, traditional fundamental research. In addition to
identifying undervalued securities, the quantitative model also provides the
discipline required to identify and sell appreciated securities as their prices
rise to reflect their earnings potential. The model relies on the investment
manager's independent equity research efforts for estimates of future earnings
and dividend growth and proprietary quality ratings, an important measure of
risk.
While the fund emphasizes U.S. investments, it can invest its assets in
securities of foreign companies which meet the same criteria applicable to the
fund's domestic investments.
For temporary defensive purposes, the fund may invest without limit in cash and
cash equivalents. Because this defensive policy differs from the fund's
investment objective, the fund may not achieve its goals during a defensive
period.
4
<PAGE>
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques that may impact fund performance,
including options, futures and other strategic transactions.
More information about these and other investments and strategies of the fund is
provided in the Statement of Additional Information. Of course, there can be no
guarantee that, by following this investment strategy, the fund will achieve its
objective.
Additional principal risks
Equity investing risk. An investment in the common stock of a company represents
a proportionate ownership interest in that company. Therefore, the fund
participates in the success or failure of any company in which it holds stock.
Compared to other classes of financial assets, such as bonds or cash
equivalents, common stocks have historically offered a greater potential for
gain on investment. However, the market value of common stocks can fluctuate
significantly, reflecting such things as the business performance of the issuing
company, investors' perceptions of the company or the overall stock market and
general economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless.
Foreign investing risk. Investing in foreign securities, and to a greater extent
emerging markets, involves risks in addition to those associated with investing
in securities in the U.S. To the extent that investments are denominated in
foreign currencies, adverse changes in the values of foreign currencies may have
a significant negative effect on any returns from these investments. Investing
in foreign securities exposes the fund to an increased risk of political and
economic instability.
Other risks of investing in foreign securities include: limited information,
higher brokerage costs, different accounting standards and thinner trading
markets as compared to U.S. markets.
Inflation risk. There is a possibility that the rising prices of goods and
services may have the effect of offsetting a fund's real return.
5
<PAGE>
A message from the President
Scudder Kemper Investments, Inc., investment adviser to the Scudder Family of
Funds, is one of the largest and most experienced investment management
organizations worldwide, managing more than $230 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts.
We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 50 no-load mutual fund portfolios or classes of
shares. We also manage mutual funds in a special program for the American
Association of Retired Persons, as well as the fund options available through
Scudder Horizon Plan, a tax-advantaged variable annuity. We also advise The
Japan Fund and numerous other open- and closed-end funds that invest in this
country and other countries around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds: IRAs, 401(k)s,
Keoghs and other retirement plans are also available.
Services available to shareholders include toll-free access to professional
representatives, easy exchange among the Scudder Family of Funds, shareholder
reports, informative newsletters and the walk-in convenience of Scudder Investor
Centers.
The Scudder Family of Funds is offered without commissions to purchase or redeem
shares or to exchange from one fund to another. There are no distribution
(12b-1) fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/Edmond D. Villani
6
<PAGE>
Investment adviser
The fund retains the investment management firm of Scudder Kemper Investments,
Inc. (the "Adviser"), 345 Park Avenue, New York, New York, to manage the fund's
daily investment and business affairs subject to the policies established by the
Board. The Adviser actively manages the fund's investments. Professional
management can be an important advantage for investors who do not have the time
or expertise to invest directly in individual securities.
Currently, the fund offers four classes of shares: Class A, Class B, Class C and
Scudder Shares. Shares from other classes may have different fees and expenses
(which will affect performance), may have different minimum investment
requirements and are entitled to different services. This prospectus offers only
the Scudder Shares of the fund.
The fund pays the Adviser an annual fee of 0.70% of the first $500 million of
the fund's average daily net assets and 0.65% of the fund's average daily net
assets in excess of $500 million. For the fiscal year ended September 30, 1998,
the Adviser received an annual fee of 0.70% of the fund's average daily net
assets.
Portfolio management
The fund is managed by a team of investment professionals, who each plays 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 the Adviser's
offices across the United States and abroad. The Adviser believes its team
approach benefits fund investors by bringing together many disciplines and
leveraging its extensive resources.
The following investment professionals are associated with the fund as
indicated:
Name and Title Joined the Fund Responsibilities and Background
- -------------- --------------- -------------------------------
Donald E. Hall 1992 Mr. Hall joined the Adviser in
Lead Manager 1982 and has 16 years of
investment industry experience.
William J. Wallace 1992 Mr. Wallace joined the Adviser in
Manager 1987 and has 18 years of
investment industry experience.
- ------------------------------------------------------------------------------
7
<PAGE>
Year 2000 readiness
Like other mutual funds and financial and business organizations worldwide, the
fund could be adversely affected if computer systems on which the fund relies,
which primarily include those used by the fund's investment manager, its
affiliates or other service providers, are unable to correctly process
date-related information on and after January 1, 2000. The risk is commonly
called the Year 2000 issue. Failure to successfully address the Year 2000 issue
could result in interruptions to and other material adverse effects on the
fund's business and operations, such as problems with calculating net asset
value and difficulties in implementing the fund's purchase and redemption
procedures. The fund's investment manager has commenced a review of the Year
2000 issue as it may affect the fund and is taking steps it believes are
reasonably designed to address the Year 2000 issue, although there can be no
assurances that these steps will be sufficient. In addition, there can be no
assurances that the Year 2000 issue will not have an adverse effect on the
issuers whose securities are held by the fund or on global markets or economies
generally.
Euro conversion
The introduction of a new European currency, the Euro, may result in
uncertainties for European securities and for the operation of the fund. The
Euro was introduced on January 1, 1999 by eleven member countries of the
European Economic and Monetary Union (EMU). The introduction of the Euro
requires the redenomination of European debt and equity securities over a period
of time, which may result in various accounting differences and/or tax
treatments. Additional questions are raised by the fact that certain European
community members, including the United Kingdom, did not officially implement
the Euro on January 1, 1999.
The Adviser is actively working to address Euro-related issues and understands
that other key service providers are taking similar steps. At this time,
however, no one knows precisely what the degree of impact will be. To the extent
that the market impact or effect on fund holdings is negative, it could hurt the
fund's performance.
Distributions
Dividends and capital gains distributions
The fund intends to distribute dividends from its net investment income
annually, in December. The fund intends to distribute net realized capital gains
after utilization of capital loss carryforwards, if any, in December. An
additional distribution may be made at a later date, if necessary.
8
<PAGE>
Any dividends or capital gains distributions declared in October, November or
December with a record date in such month and paid during the following January
will be treated by shareholders for federal income tax purposes as if received
on December 31 of the calendar year declared. Dividends ordinarily will vary
from one class of the fund to another.
A shareholder may choose to receive distributions in cash or have them
reinvested in additional shares of the same class of a fund. If an investment is
in the form of a retirement plan, all dividends and capital gains distributions
must be reinvested into the shareholder's account. Distributions are generally
taxable, whether received in cash or reinvested. Exchanges among funds are also
taxable events.
Taxes
Generally, dividends from net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable to
shareholders as long-term capital gains, regardless of the length of time
shareholders have owned shares. Short-term capital gains and any other taxable
income distributions are taxable as ordinary income. A portion of dividends from
ordinary income may qualify for the dividends-received deduction for
corporations.
Unless your investment is in a tax-deferred account, you may want to avoid
investing a large amount close to the date of a distribution, because you may
receive part of your investment back as a taxable distribution.
A sale or exchange of shares is a taxable event and may result in a capital gain
or loss which may be long-term or short-term, generally depending on how long
you owned the shares.
The fund sends detailed tax information to its shareholders about the amount and
type of its distributions by January 31 of the following year.
The fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to shareholders who fail to provide the
fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the IRS that they are subject to
backup withholding. Any such withheld amounts may be credited against the
shareholder's U.S. federal income tax liability.
Shareholders may be subject to state, local and foreign taxes on fund
distributions and dispositions of fund shares. You should consult your tax
advisor regarding the particular consequences of an investment in the fund.
9
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the fund's
financial performance for the fiscal periods indicated. Certain information
reflects financial results for a single class share. The total return figures
represent the rate that an investor would have earned (or lost) on an investment
in the class assuming reinvestment of all dividends and distributions. This
information has been audited by PricewaterhouseCoopers LLP whose report, along
with the fund's financial statements, is included in the annual report, which is
available upon request by calling Scudder Investor Relations at 1-800-225-2470
or, for existing investors, call the Scudder Automated Information Line (SAIL)
at 1-800-343-2890.
Value Fund
<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 (.72) 7.22 2.40 2.86 .11
(loss) on investments................
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.
10
<PAGE>
About Your Investment
Transaction information
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
the fund as of the close of regular trading on the New York Stock Exchange,
normally 4 p.m. eastern time, on each day the New York Stock Exchange is open
for trading. Net asset value per share is calculated by dividing the value of
total fund assets attributable to the applicable class, less all liabilities
attributable to that class, by the total number of shares outstanding. Market
prices are used to determine the value of the fund's assets. If market prices
are not readily available for a security or if a security's price is not
considered to be market indicative, that security may be valued by another
method that the Board or its delegate believes accurately reflects fair value.
In those circumstances where a security's price is not considered to be market
indicative, the security's valuation may differ from an available market
quotation.
To the extent that the fund invests in foreign securities, these securities may
be listed on foreign exchanges that trade on days when the fund does not price
its shares. As a result, the net asset value per share of the fund may change at
a time when shareholders are not able to purchase or redeem their shares.
Processing time
All purchase and redemption requests received in good order at the fund's
transfer agent by the close of regular trading on the New York Stock Exchange
are executed at the net asset value per share calculated at the close of trading
that day. All other requests that are in good order will be executed the
following business day.
Signature guarantees
A signature guarantee is required when you sell more than $100,000 worth of
shares. You can obtain a guarantee from most brokerage houses and financial
institutions, although not from a notary public. The fund will normally send
redemption proceeds within one business day following the redemption request,
but may take up to seven business days (or longer in the case of shares recently
purchased by check). For more information, please call 1-800-225-5163.
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
fund and Scudder Investor Services, Inc. each reserves the right to reject
purchases of fund shares (including exchanges) for any reason, including when
there is evidence of a pattern of frequent
11
<PAGE>
purchases and sales made in response to short-term fluctuations in the fund's
share price.
Minimum balances
Generally, shareholders who maintain a non-fiduciary account balance of less
than $2,500 in the fund and have not established an automatic investment plan
will be assessed an annual $10.00 per fund charge; this fee is paid to the fund.
The fund reserves the right, following 60 days written notice to shareholders,
to redeem all shares in accounts that have a value below $1,000 where such a
reduction in value has occurred due to a redemption, exchange or transfer out of
the account.
Third party transactions
If you buy and sell shares of the fund through a member of the National
Association of Securities Dealers, Inc. (other than Scudder Investor Services,
Inc.), that member may charge a fee for that service.
Other policies
The fund reserves the right to redeem in kind. That is, it may honor redemption
requests with readily marketable fund securities instead of cash. There may be
transaction costs associated with converting these securities to cash.
Buying and selling shares
Please refer to the following charts for information on how to buy and sell fund
shares. Additional information, including special investment features, may be
found in the Shareholder Services Guide. For information about No-Fee IRAs, Roth
IRAs and other retirement options, call Scudder Investor Relations at
1-800-225-2470. For information on establishing 401(k) and 403(b) plans, call
Scudder Defined Contribution Services at 1-800-323-6105.
Purchases
Scudder Shares are generally not available to new investors. Investors in the
fund as of April 15, 1998, can continue to purchase Scudder Shares. Shareowners
of any fund or class of a fund in the Scudder Family of Funds as of April 15,
1998, and their immediate family members at the same address, may also purchase
Scudder Shares. Certain other parties may be eligible to purchase Scudder
Shares. Please see the Scudder Shares' Statement of Additional Information for
more details, or call Scudder Investor Relations at 1-800-225-2470.
12
<PAGE>
To open an account
The minimum initial investment is $2,500; $1,000 for IRAs. Group retirement
plans (401(k), 403(b), etc.) have similar or lower minimums -- see appropriate
plan literature. Make checks payable to "The Scudder Funds."
- --------------------------------------------------------------------------------
By Mail Send your completed and signed application and check
by regular mail to: The Scudder Funds
P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
- --------------------------------------------------------------------------------
By Wire Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
In Person Visit one of our Investor Centers to complete your application
with the help of a Scudder representative. Investor Centers
are located in Boca Raton, Boston, Chicago, New York and San
Francisco.
- --------------------------------------------------------------------------------
To buy additional shares
The minimum additional investment is $100; $50 for IRAs. Group retirement plans
(401(k), 403(b), etc.) have similar or lower minimums -- see appropriate plan
literature. Make checks payable to "The Scudder Funds."
- --------------------------------------------------------------------------------
By Mail Send a check with a Scudder investment slip, or with a
letter of instruction including your account number and the
complete fund name, to the appropriate address listed above.
- --------------------------------------------------------------------------------
By Wire Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
In Person Visit one of our Investor Centers to make an additional
investment in your Scudder fund account. Investor Center
locations are listed above.
- --------------------------------------------------------------------------------
By Telephone Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
By Automatic You may arrange to make investments of $50 or more on a
Investment regular basis through automatic deductions from your bank
Plan checking account. Please call 1-800-225-5163 for more
information and an enrollment form.
- --------------------------------------------------------------------------------
13
<PAGE>
Exchanges and redemptions
To exchange shares
The minimum investments are $2,500 to establish a new account and $100 to
exchange among existing accounts.
By To speak with a service representative, call 1-800-225-5163
Telephone from 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), The
Scudder Automated Information Line, call 1-800-343-2890
(24 hours a day).
-------------------------------------------------------------------------------
By Mail Print or type your instructions and include:
or Fax - the name of the fund and class, and the account number you
are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to
exchange;
- the name of the fund and class you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions by The Scudder Funds
regular mail to: P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
or by fax to: 1-800-821-6234
- --------------------------------------------------------------------------------
To sell shares
- --------------------------------------------------------------------------------
By To speak with a service representative, call 1-800-225-5163
Telephone from 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), The
Scudder Automated Information Line, call 1-800-343-2890 (24
hours a day). You may have redemption proceeds sent to your
predesignated bank account, or redemption proceeds of up to
$100,000 sent to your address of record.
- --------------------------------------------------------------------------------
By Mail Send your instructions for redemption to the appropriate
or Fax address or fax number above and include:
- the name of the fund and class and account number you are
redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
- --------------------------------------------------------------------------------
By Automatic You may arrange to receive automatic cash payments
Withdrawal Plan periodically. Call 1-800-225-5163 for more information and an
enrollment form.
- --------------------------------------------------------------------------------
14
<PAGE>
Investment products and services
- --------------------------------------------------------------------------------
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Money Market U.S. Growth and Income
Scudder U.S. Treasury Money Fund Scudder Balanced Fund
Scudder Cash Investment Trust Scudder Dividend & Growth Fund
Scudder Money Market Series -- Scudder Growth and Income Fund
Prime Reserve Shares* Scudder S&P 500 Index Fund
Premium Shares* Scudder Real Estate Investment Fund
Managed Shares* U.S. Growth
Scudder Government Money Market Value
Series -- Managed Shares* Scudder Large Company Value Fund
Tax Free Money Market+ Scudder Value Fund***
Scudder Tax Free Money Fund Scudder Small Company Value Fund
Scudder Tax Free Money Market Series -- Scudder Micro Cap Fund
Managed Shares* Growth
Scudder California Tax Free Money Scudder Classic Growth Fund***
Fund** Scudder Large Company Growth
Scudder New York Tax Free Money Fund
Fund** Scudder Development Fund
Tax Free+ Scudder 21st Century Growth Fund
Scudder Limited Term Tax Free Fund Global Equity
Scudder Medium Term Tax Free Fund Worldwide
Scudder Managed Municipal Bonds Scudder Global Fund
Scudder High Yield Tax Free Fund Scudder International Value Fund
Scudder California Tax Free Fund** Scudder International Growth and
Scudder Massachusetts Limited Term Tax Income Fund
Free Fund** Scudder International Fund++
Scudder Massachusetts Tax Free Fund** Scudder International Growth Fund
Scudder New York Tax Free Fund** Scudder Global Discovery Fund***
Scudder Ohio Tax Free Fund** Scudder Emerging Markets Growth
Scudder Pennsylvania Tax Free Fund** Fund
U.S. Income Scudder Gold Fund
- -----------
Scudder Short Term Bond Fund Regional
Scudder Zero Coupon 2000 Fund Scudder Greater Europe Growth
Scudder GNMA Fund Fund
Scudder Income Fund Scudder Pacific Opportunities Fund
Scudder Corporate Bond Fund Scudder Latin America Fund
Scudder High Yield Bond Fund The Japan Fund, Inc.
Global Income Industry Sector Funds
Scudder Global Bond Fund Choice Series
Scudder International Bond Fund Scudder Financial Services Fund
Scudder Emerging Markets Income Fund Scudder Health Care Fund
Asset Allocation Scudder Technology Fund
Scudder Pathway Conservative Portfolio Preferred Series
Scudder Pathway Balanced Portfolio Scudder Tax Managed Growth Fund
Scudder Pathway Growth Portfolio Scudder Tax Managed Small Company
Scudder Pathway International Portfolio Fund
</TABLE>
15
<PAGE>
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs Education Accounts
- ------------------- ------------------
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan **+++ +++
(a variable annuity)
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc. Scudder Global High Income Fund, Inc.
The Brazil Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Montgomery Street Income
Securities, 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 or classes thereof may not be available
for purchase or exchange.
+ A portion of the income from the tax-free funds may be subject to federal,
state and local taxes.
* A class of shares of the fund.
** Not available in all states.
*** Only the Scudder Shares of the fund are part of the Scudder Family of
Funds.
+ + Only the International Shares of the fund are part of the Scudder Family of
Funds.
+++ +++ A no-load variable annuity contract provided by Charter National Life
Insurance Company and its affiliate, offered by Scudder's insurance
agencies, 1-800-225-2470.
# These funds, advised by Scudder Kemper Investments, Inc., are traded on the
New York Stock Exchange and, in some cases, on various foreign stock
exchanges.
16
<PAGE>
Trustees and Officers
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Daniel Pierce* Thomas J. Devine
Chairman of the Board, Honorary Trustee; Consultant
President and Trustee
Wilson Nolen
Paul Bancroft III Honorary Trustee; Consultant
Trustee; Venture Capitalist
and Consultant Robert G. Stone, Jr.
Honorary Trustee; Chairman
Sheryle J. Bolton Emeritus and Director, Kirby Corporation
Trustee; Chief Executive
Officer and Director, Donald E. Hall*
Scientific Learning Corporation Vice President
William T. Burgin Thomas W. Joseph*
Trustee; General Partner, Bessemer Vice President
Venture Partners
Ann M. McCreary*
Keith R. Fox Vice President
Trustee; Private Equity Investor,
Exeter Capital Management Katherine T. Millard*
Corporation Vice President
William H. Luers Thomas F. McDonough*
Trustee; President, The Metropolitan Vice President and Secretary
Museum of Art
John R. Hebble*
Kathryn L. Quirk* Treasurer
Trustee, Vice President and
Assistant Secretary Caroline Pearson*
Assistant Secretary
Joan E. Spero
Trustee; President, The Doris Duke
Charitable Foundation
</TABLE>
*Scudder Kemper Investments, Inc.
17
<PAGE>
Additional information about the fund may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries may be made by calling the toll-free number
listed below. The Statement of Additional Information contains more information
on fund investments and operations. The Shareholder Services Guide contains more
information about purchases and sales of fund shares. The semiannual and annual
shareholder reports contain a discussion of the market conditions and the
investment strategies that significantly affected the fund's performance during
the last fiscal year, as well as a listing of portfolio holdings and financial
statements. These and other fund documents may be obtained without charge from
the following sources:
- --------------------------------------------------------------------------------
By Telephone Call Scudder Investor Relations at 1-800-225-2470
or
For existing Scudder investors, call the Scudder Automated
Information Line (SAIL) at 1-800-343-2890 (24 hours a day).
- --------------------------------------------------------------------------------
By Mail Scudder Investor Services, Inc.
Two International Place
Boston, MA 02110-4103
or
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- --------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330 for more information.)
- --------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.scudder.com
- --------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file number: 811-4670
<PAGE>
[KEMPER LOGO] KEMPER FUNDS
Kemper Equity Funds
Value Style
PROSPECTUS February 1, 1999
KEMPER EQUITY FUNDS VALUE STYLE
222 South Riverside Plaza, Chicago, Illinois 60606 (800) 621-1048
This prospectus describes a choice of seven funds managed by Scudder Kemper
Investments, Inc.
Kemper Contrarian Fund
Kemper-Dreman Financial Services Fund
Kemper-Dreman High Return Equity Fund
Kemper Small Cap Relative Value Fund
Kemper Small Cap Value Fund
Kemper U.S. Growth and Income Fund
Kemper Value Fund*
* Kemper Value Fund refers to the Kemper shares of Value Fund.
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
VALUE STOCK INVESTING
INVESTMENT APPROACH
Each of the funds presented in this prospectus uses a value approach to
investing -- that is, they look for common stocks that the investment manager
believes are undervalued.
The principal factors considered by a manager in identifying the value of a
stock may include:
o price-to-earnings (P/E) ratio;
o price-to-book (P/B) ratio;
o price-to-cash flow (P/CF) ratio; and/or
o dividend yield.
The objective of value investing is to reduce the risk of owning stocks by
investing in companies with sound finances whose current market prices are low
in relation to earnings or other measures of value. In determining whether a
company's finances are sound, the investment manager considers, among other
things, its ability to meet debt obligations as well as other liabilities.
In selecting among stocks for the funds' portfolios, the investment manager may
consider factors such as the following about the issuer:
o financial strength;
o book-to-market value;
o earnings growth rates;
o dividend growth rates;
o return on equity; and/or
o estimates of future earnings.
PRINCIPAL RISK FACTORS
There are market and investment risks with any security. The value of an
investment in the funds will fluctuate over time and it is possible to lose
money invested in the funds.
Stock Market. Each fund's returns and net asset value will go up and down, and
it is possible to lose money invested in a fund. Stock market movements will
affect the funds' share prices on a daily basis. Declines are possible both in
the overall stock market or in the types of securities held by the funds.
Equity Investing. An investment in the common stock of a company represents a
proportionate ownership interest in that company. Therefore, the fund
participates in the success or failure of any company in which it holds stock.
Compared to other classes of financial assets, such as bonds or cash
equivalents, common stocks have historically offered a greater potential for
gain on
2 Value Stock Investing
<PAGE>
investment. However, the market value of common stocks can fluctuate
significantly, reflecting such things as the business performance of the issuing
company, investors' perceptions of the company or the overall stock market and
general economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless.
Value Investing. The determination that a stock is undervalued is subjective;
the market may not agree, and the stock's price may not rise to what the
investment manager believes is its full value. It may even decrease in value.
However, because of the fund's focus on undervalued stocks, the fund's downside
risk may be less than with other small company stocks since value stocks are in
theory already underpriced.
Portfolio Strategy. The portfolio management team's skill in choosing
appropriate investments for the funds will determine in large part the funds'
ability to achieve their respective investment objectives.
Inflation. There is a possibility that the rising prices of goods and services
may have the effect of offsetting a fund's real return.
Value Stock Investing 3
<PAGE>
ABOUT THE FUNDS
KEMPER CONTRARIAN FUND
Investment objective and strategies
Kemper Contrarian Fund seeks long-term capital appreciation with current income
as its secondary objective. Except as otherwise indicated, the fund's investment
objective and policies may be changed without a vote of shareholders.
This fund primarily invests in a diversified portfolio of the stocks of large
U.S. companies that the investment manager believes to be undervalued. Such
companies usually have a minimum market capitalization of $1 billion.
The investment manager looks for investments with the following attributes:
o low price-to-earnings ratios;
o low price-to-book ratios;
o low price-to-cash flow ratios;
o dividends yields above the market average;
o sound finances; and
o perceived intrinsic value.
The fund may invest 25% or more of its total assets in one or more market
sectors, such as the financial services sector.
The fund may be appropriate for investors who seek to add a core holding to
establish the foundation of a value-oriented portfolio or a value fund to
diversify their growth-equity investments.
Principal risks
The fund's principal risks are associated with investing in the stock market,
equity and value investing, the investment manager's skill in managing the
fund's portfolio and inflation risk. You will find a discussion of these risks
under "Value Stock Investing" at the front of this prospectus.
Sector investing. To the extent that the fund focuses its investments in a
market sector, financial, economic, business and other developments affecting
issuers in that sector may have a greater effect on the fund than if it had not
focused its assets in that sector.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year, and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance.
4 Kemper Contrarian Fund
<PAGE>
The information provided in the chart is for Class A shares, and does not
reflect sales charges, which reduce return.
Total returns for years ended December 31
[The following table was depicted as a bar chart in the printed material.]
1989.................. 18.29%
1990.................. -6.08%
1991.................. 26.53%
1992.................. 11.32%
1993.................. 9.07%
1994.................. -.03%
1995.................. 44.57%
1996.................. 14.42%
1997.................. 28.73%
1998.................. 19.17%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 18.90% (the first quarter of 1991), and the fund's lowest
return for a calendar quarter was -20.59% (the third quarter of 1990).
Average Annual Total Returns
For periods ended
December 31, 1998 Class A Class B Class C S&P 500
- ----------------- ------- ------- ------- -------
One Year 12.32% 15.08% 17.92% 28.60%
Five Years 19.05% -- -- 24.05%
Ten Years 15.11% -- -- 19.19%
Since Class Inception** 14.64% 21.58% 21.86% *
- ----------
* Index returns for the life of each class: 18.82% (3/31/88) for Class A and
28.88% (8/31/95) for Class B and C shares.
** Inception date for Class A, B and C shares is 3/18/88, 9/11/95 and
9/11/95, respectively.
The Standard and Poor's 500 Composite Stock Price Index (S&P 500) is an
unmanaged capitalization-weighted measure of 500 widely held common stocks
listed on the New York Stock Exchange and the American Stock Exchange, and
traded on the Nasdaq Stock Market, Inc. Index returns assume reinvestment of of
dividends and, unlike fund returns, do not reflect any fees or expenses.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
length of time you hold shares in the fund and the amount of your investment.
Kemper Contrarian Fund 5
<PAGE>
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
Shareholder fees: Fees paid directly from your investment.
Class A Class B Class C
------- ------- -------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 5.75% None None
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
Redemption Fee (as % of amount
redeemed, if applicable) None None None
Exchange Fee None None None
- ----------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% during the first year and 0.50% during the second year.
Annual fund operating expenses: Expenses that are deducted from fund assets.
Class A Class B Class C
------- ------- -------
Management Fee 0.75% 0.75% 0.75%
Distribution (12b-1) Fees None 0.75% 0.75%
Other expenses 0.62% 0.81% 0.90%
Total Annual Fund Operating Expenses 1.37% 2.31% 2.40%
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and returns vary from year to year, and
may be higher or lower than those shown. The example does not reflect sales
charges (loads) on reinvested dividends and other distributions. If these sales
charges were included, your costs would be higher.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $706 $634 $343
3 Years $984 $1,021 $748
5 Years $1,282 $1,435 $1,280
10 Years $2,127 $2,193 $2,736
6 Kemper Contrarian Fund
<PAGE>
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $706 $234 $243
3 Years $984 $721 $748
5 Years $1,282 $1,235 $1,280
10 Years $2,127 $2,193 $2,736
Principal strategies and investments
The fund invests primarily in a diversified portfolio of the stocks of large
U.S. companies that the investment manager believes are undervalued. Securities
may be undervalued as a result of overreaction by investors to unfavorable news
about a company, industry or the stock markets in general or as a result of a
market decline, poor economic conditions or actual or anticipated unfavorable
developments affecting the company.
The investment manager applies a disciplined investment approach for selecting
holdings for the fund. The first stage of the process seeks investments with low
price-to-earnings ratios in relationship to the market as measured by the
Standard & Poor's 500 Composite Stock Price Index (S&P 500). After the manager
screens for low price-to-earnings ratios, he analyzes and compares other value
measurements against the market. These include price-to-book value,
price-to-cash flow and dividend yield.
The fund's investment approach emphasizes companies that possess strong
financial positions. Considerable time is spent seeking potential investments
that the investment manager believes have strong potential for long-term growth.
The investment manager analyzes earnings and dividend growth of companies and
seeks those investments that have had 5- and 10-year track records of
consistent, above-market earnings and dividend growth. The fund's style is to
own strong companies, not to speculate on weak stocks or potential bankruptcies.
After the portfolio stock universe is refined, the investment manager applies
fundamental analysis. All of the research is done in-house and the portfolio
management team makes final investment decisions.
The investment manager follows all stocks in the fund's portfolio on an
intensive ongoing basis. The manager also monitors a universe of 100 to 125
potentially promising candidates for future investment.
The investment manager sells stocks or determines a strategy for selling stocks
as their price-to-earnings ratios rise above that of the market. The manager may
choose to sell a stock if the company's long-term fundamentals change
unexpectedly for the worse. A stock will also be sold if the company performs
below the investment manager's expectations for three to four years.
Kemper Contrarian Fund 7
<PAGE>
For temporary defensive purposes, the fund may invest up to 50% of its assets in
high-grade debt securities, cash and cash equivalents. Because this defensive
policy differs from the fund's investment objective, the fund may not achieve
its goals during a defensive period.
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques that may impact fund performance,
including options, futures and other strategic transactions.
More information about investments and strategies is provided in the Statement
of Additional Information. Of course, there can be no guarantee that by
following these strategies, the fund will achieve its objective.
8 Kemper Contrarian Fund
<PAGE>
KEMPER-DREMAN FINANCIAL SERVICES FUND
Investment objective and strategies
The fund seeks to provide long-term capital appreciation. Except as otherwise
indicated, the fund's investment objective and policies may be changed without a
vote of shareholders.
The fund primarily invests in a diversified portfolio of U.S. common stocks and
other equity securities of companies in the financial services sector believed
by the Fund's investment manager to be undervalued. The investment manager looks
for investments with the following attributes:
o low price-to-earnings ratios;
o low price-to-book ratios;
o low price-to-cash flow ratios;
o dividend yields above the market average;
o sound finances; and
o perceived intrinsic value.
The fund may be a good choice for more aggressive investors seeking to pursue
maximum capital appreciation, and for investors who are comfortable with a
concentrated investment in financial services stocks and other financial
services equity securities.
Principal risks
The fund's principal risks are associated with investing in the stock market,
equity and value investing, the investment manager's skill in managing the
fund's portfolio and inflation risk. You will find a discussion of these risks
under "Value Stock Investing" at the front of this prospectus.
Sector investing. The fund's concentration in investments in the financial
services sector creates greater risk than investment across various sectors or
industries, since the financial, economic, and business developments affecting
issuers in this sector may have a greater effect on the fund than if it had not
concentrated its assets in the financial services sector. In addition, an
investment in the fund may involve significantly greater risks and greater
volatility than a diversified equity mutual fund that is invested in issuers in
various sectors or industries. The fund is subject to the risk that a particular
group of related stocks will decline in price due to sector-specific
developments. As a result, the fund should only be considered a long-term
investment and part of a well-diversified portfolio.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
length of time you hold shares in the fund and the amount of your investment.
Kemper-Dreman Financial Services Fund 9
<PAGE>
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
Shareholder fees: Fees paid directly from your investment.
Class A Class B Class C
------- ------- -------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 5.75% None None
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
Redemption Fee (as % of amount
redeemed, if applicable) None None None
Exchange Fee None None None
- ----------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% during the first year and 0.50% during the second year.
Annual fund operating expenses: Expenses that are deducted from fund assets.
Class A Class B Class C
------- ------- -------
Management Fee 0.75% 0.75% 0.75%
Distribution (12b-1) Fees None 0.75% 0.75%
Other Expenses 0.80% 0.79% 0.76%
Total Annual Fund Operating Expenses 1.55% 2.29% 2.26%
Subject to the qualification described below, Scudder Kemper Investments, Inc.
has agreed to temporarily reimburse certain operating expenses to the extent
necessary to limit the fund's "Total Annual Fund Operating Expenses" of Class A
shares to 1.36%, Class B to 2.14% and Class C to 2.11%; provided, however,
transfer agency fees and related out-of-pocket expenses will not be subject to
this reimbursement. Therefore, if transfer agency fees and related out-of-pocket
expenses were to exceed the limits upon Total Operating Expenses for a
particular class during the period of the reimbursement (contrary to current
estimates), such expenses would be charged to the class in the actual amount
incurred and Total Annual Fund Operating Expenses for the class would exceed the
limits described above during the period. This arrangement has been changed for
the fiscal year ending September 30, 1999 as follows: the Total Annual Fund
Operating Expenses will be limited to 1.30% for Class A, 2.24% for Class B, and
2.21% for Class C, and this arrangement may be discontinued at any time. As a
result, for the fiscal year ended September 30, 1998, "Total Annual Fund
Operating Expenses" were reduced by 0.19%, 0.15% and 0.15% for Class A, Class B
and Class C and actual total annual fund operating expenses were 1.36% for Class
A, 2.14% for Class B and 2.11% for Class C. The information contained in the
above table and the example below reflects the expenses of the fund without
taking into account any applicable fee waivers and/or reimbursements.
10 Kemper-Dreman Financial Services Fund
<PAGE>
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and returns vary from year to year, and
may be higher or lower than those shown. The example does not reflect sales
charges (loads) on reinvested dividends and other distributions. If these sales
charges were included, your costs would be higher.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $724 $632 $329
3 Years $1,036 $1,015 $706
5 Years $1,371 $1,425 $1,210
10 Years $2,314 $2,270 $2,595
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $724 $232 $229
3 Years $1,036 $715 $706
5 Years $1,371 $1,225 $1,210
10 Years $2,314 $2,270 $2,595
Principal strategies and investments
The Fund concentrates its investments in securities of financial services
companies, including:
o commercial banks;
o insurance companies;
o thrifts;
o consumer finance companies;
o commercial finance companies;
o leasing companies;
o securities brokerage firms;
o asset management firms; and
o government-sponsored financial enterprises.
In the opinion of the Fund's investment manager, the Fund offers investors the
opportunity to participate in the substantial long-term appreciation potential
of companies in the financial services sector.
Kemper-Dreman Financial Services Fund 11
<PAGE>
Under normal circumstances, the Fund will invest at least 65% of its assets in
equity securities of companies in the financial services industry. A company
will be considered to be within the financial services industry if at least 50%
of its assets, revenues or net income are related to or derived from the
financial services industry. Earnings and cash flow analyses as well as a
company's conventional dividend payout ratio are important factors in the
investment process. The fund may invest up to 35% of its assets in
investment-grade corporate debt securities.
The fund invests principally in a diversified portfolio of financial service
companies whose prices appear to be temporarily depressed due to short-term
fundamental factors. Securities may be undervalued as a result of overreaction
by investors to unfavorable news about a company, the financial services
industry or the stock markets in general or as a result of a market decline,
poor economic conditions, or actual or anticipated unfavorable developments
affecting the company.
The investment manager applies a disciplined investment approach for selecting
holdings for the fund. The first stage of the process seeks investments with low
price-to-earnings ratios in relationship to the market as measured by the
Standard & Poor's 500 Composite Stock Price Index (S&P 500). After screening for
low price-to-earnings ratios, the manager analyzes and compares other value
measurements against the market. These include price-to-book value,
price-to-cash flow and dividend yield.
The fund's investment approach emphasizes companies that possess strong
financial positions. Considerable time is spent seeking potential investments
that have strong potential for long-term growth.
The investment manager analyzes earnings and dividends growth of companies and
seeks those investments that have had 5- and 10-year track records of consistent
above-market earnings and dividend growth. The fund's style is to own strong
companies, not to speculate on weak stocks or potential bankruptcies.
After the portfolio stock universe is refined, the investment manager applies
fundamental analysis.
The investment manager follows all stocks in the fund's portfolio on an
intensive ongoing basis. The investment manager also monitors a universe of 100
to 125 potentially promising securities for future investment.
The investment manager sells stocks or determines a strategy for selling stocks
as their P/Es rise above that of the market. The manager may choose to sell a
stock if the company's long-term fundamentals change unexpectedly for the worse.
A stock will also be sold if the company performs below the investment manager's
expectations for three to four years.
Although the fund does not presently intend to do so, it may invest up to 30% of
its total assets in foreign securities.
12 Kemper-Dreman Financial Services Fund
<PAGE>
For temporary defensive purposes, the fund may invest up to 100% of its assets
in high-grade debt securities, cash and cash equivalents. Because this defensive
policy differs from the fund's investment objective, the fund may not achieve
its goals during a defensive period.
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques that may impact fund performance,
including options, futures and other strategic transactions.
More information about investments and strategies is provided in the Statement
of Additional Information. Of course, there can be no guarantee that by
following these strategies, the fund will achieve its objective.
Additional risk
Foreign Investing. Investing in foreign securities, and to a greater extent
emerging markets, involves risks in addition to those associated with investing
in securities in the U.S. To the extent that investments are denominated in
foreign currencies, adverse changes in the values of foreign currencies may have
a significant negative effect on any returns from these investments. Investing
in foreign securities exposes the fund to an increased risk of political and
economic instability.
Other risks of investing in foreign securities include: limited information,
higher brokerage costs, different accounting standards and thinner trading
markets as compared to U.S. markets.
Kemper-Dreman Financial Services Fund 13
<PAGE>
KEMPER-DREMAN HIGH RETURN EQUITY FUND
Investment objective and strategies
Kemper-Dreman High Return Equity Fund seeks to achieve a high rate of total
return. Except as otherwise indicated, the fund's investment objective and
policies may be changed without a vote of shareholders. This fund primarily
invests in a diversified portfolio of the stocks of large U.S. companies that
the investment manager believes to be undervalued. Such companies currently have
a median market capitalization of $9 billion.
The investment manager looks for investments with the following attributes:
o low price-to-earnings ratios;
o low price-to-book ratios;
o low price-to-cash flow ratios;
o dividend yields above the market average;
o sound finances; and
o perceived intrinsic value through in-depth security analysis.
The fund is managed with a view to achieving a high rate of total return on
investors' capital primarily through appreciation of its common stock holdings,
options transactions and by acquiring and selling stock index futures and
options thereon and, to a lesser extent, through dividend and interest income,
all of which are elements of total return.
The fund may invest 25% or more of its total assets in one or more market
sectors, such as the financial services sector.
The fund may be appropriate for investors who seek a core holding to establish
the foundation of a value-oriented portfolio or a value fund to diversify an
existing growth-equity portfolio.
Principal risks
The fund's principal risks are associated with investing in the stock market,
equity and value investing, the investment manager's skill in managing the
fund's portfolio and inflation risk. You will find a discussion of these risks
under "Value Stock Investing" at the front of this prospectus.
Sector investing. To the extent that the fund focuses its investments in a
market sector, financial, economic, business and other developments affecting
issues in that sector may have a greater effect on the fund than if it had not
focused its assets in that sector.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year, and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance.
The information provided in the chart is for Class A shares, and does not
reflect sales charges, which reduce return.
14 Kemper-Dreman High Return Equity Fund
<PAGE>
Total returns for years ended December 31
[The following table was depicted as a bar chart in the printed material.]
1989.................. 18.45%
1990.................. -8.63%
1991.................. 47.57%
1992.................. 19.80%
1993.................. 9.22%
1994.................. -.99%
1995.................. 46.86%
1996.................. 28.79%
1997.................. 31.92%
1998.................. 11.96%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 33.22% (the first quarter of 1991), and the fund's lowest
return for a calendar quarter was -22.84% (the third quarter of 1990).
Average Annual Total Returns
For periods ended
December 31, 1998 Class A Class B Class C S&P 500
----------------- ------- ------- ------- -------
One Year 5.52% 8.01% 11.05% 28.60%
Five Years 21.12% -- -- 24.05%
Ten Years 18.48% -- -- 19.19%
Since Class Inception** 18.35% 24.61% 25.04% *
- ----------
* Index returns for the life of each class: 18.82% (3/31/88) for Class A and
28.88% (8/31/95) for Class B and C shares.
** Inception date for Class A, B and C shares is 3/18/88, 9/11/95 and
9/11/95, respectively.
The Standard and Poor's 500 Composite Stock Price Index (S&P 500) is an
unmanaged capitalization-weighted measure of 500 widely held common stocks
listed on the New York Stock Exchange and the American Stock Exchange, and
traded on the Nasdaq Stock Market, Inc. Index returns assume reinvestment of of
dividends and, unlike fund returns, do not reflect any fees or expenses.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
length of time you hold shares in the fund and the amount of your investment.
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
Kemper-Dreman High Return Equity Fund 15
<PAGE>
Shareholder fees: Fees paid directly from your investment.
Class A Class B Class C
------- ------- -------
Maximum Sales Charge (Load) Imposed
on Purchases (as % of offering price) 5.75% None None
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
Redemption Fee (as % of amount
redeemed, if applicable) None None None
Exchange Fee None None None
- ----------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% during the first year and 0.50% during the second year.
Annual fund operating expenses: Expenses that are deducted from fund assets.
Class A Class B Class C
------- ------- -------
Management Fee 0.68% 0.68% 0.68%
Distribution (12b-1) Fees None 0.75% 0.75%
Other Expenses 0.51% 0.63% 0.58%
Total Annual Fund Operating Expenses 1.19% 2.06% 2.01%
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and returns vary from year to year, and
may be higher or lower than those shown. The example does not reflect sales
charges (loads) on reinvested dividends and other distributions. If these sales
charges were included, your costs would be higher.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $689 $609 $304
3 Years $931 $946 $631
5 Years $1,192 $1,308 $1,083
10 Years $1,935 $1,961 $2,338
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $689 $209 $204
3 Years $931 $646 $631
5 Years $1,192 $1,108 $1,083
10 Years $1,935 $1,961 $2,338
16 Kemper-Dreman High Return Equity Fund
<PAGE>
Principal strategies and investments
The fund invests principally in a diversified portfolio of equity securities
that the investment manager believes are undervalued. Securities may be
undervalued as a result of overreaction by investors to unfavorable news about a
company, industry or the stock markets in general or as a result of a market
decline, poor economic conditions, or actual or anticipated unfavorable
developments affecting the company.
Under normal market conditions, the fund invests at least 65% of its total
assets in equity securities.
The investment manager applies a disciplined investment approach for selecting
holdings for the fund. The first stage of the process seeks investments with low
price-to-earnings ratios in relationship to the market as measured by the
Standard & Poor's 500 Composite Stock Price Index (S&P 500). After screening for
low price-to-earnings ratios, the manager analyzes and compares other value
measurements against the market. These include price-to-book value,
price-to-cash flow and dividend yield.
The fund's investment approach emphasizes companies that possess strong
financial positions. Considerable time is spent seeking potential investments
that have strong potential for long-term growth.
The investment manager analyzes earnings and dividend growth of companies and
seeks those investments that have had 5- and 10-year track records of
consistent, above-market earnings and dividend growth. The fund's style is to
own strong companies, not to speculate on weak stocks or potential bankruptcies.
After the portfolio stock universe is refined, the investment manager applies
fundamental analysis. This is followed by thorough security analysis of all
potential stock selections.
The investment manager follows all stocks in the fund's portfolio on an
intensive ongoing basis. The investment manager also monitors a universe of 100
to 125 potentially promising securities for future investment.
The investment manager sells stocks or determines a strategy for selling stocks
as their price-to-earnings ratios rise above that of the market. The manager may
choose to sell a stock if the company's long-term fundamentals change
unexpectedly for the worse. A stock will also be sold if the company performs
below the investment manager's expectations for three to four years.
Although the fund does not presently intend to do so, it may invest up to 20% of
its total assets in foreign securities.
For temporary defensive purposes, the fund may invest up to 50% of its assets in
high-grade debt securities, cash and cash equivalents. Because this defensive
policy differs from the fund's investment objective, the fund may not achieve
its goals during a defensive period.
Kemper-Dreman High Return Equity Fund 17
<PAGE>
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques that may impact fund performance,
including options, futures and other strategic transactions.
More information about investments and strategies is provided in the Statement
of Additional Information. Of course, there can be no guarantee that by
following these strategies, the fund will achieve its objective.
Additional risk
Foreign investing. Investing in foreign securities, and to a greater extent
emerging markets, involves risks in addition to those associated with investing
in securities in the U.S. To the extent that investments are denominated in
foreign currencies, adverse changes in the values of foreign currencies may have
a significant negative effect on any returns from these investments. Investing
in foreign securities exposes the fund to an increased risk of political and
economic instability.
Other risks of investing in foreign securities include: limited information,
higher brokerage costs, different accounting standards and thinner trading
markets as compared to U.S. markets.
18 Kemper-Dreman High Return Equity Fund
<PAGE>
KEMPER SMALL CAP RELATIVE VALUE FUND
Investment objective and strategies
Kemper Small Cap Relative Value Fund seeks long-term capital appreciation.
Except as otherwise indicated, the fund's investment objective and policies may
be changed without a vote of shareholders.
The fund primarily invests in a diversified portfolio of the stocks of small
U.S. companies similar in size to those comprising the Russell 2000 Index that
the investment manager believes to be undervalued relative to other stocks in
the same sector by following a relative value investment strategy. The fund may
invest 25% or more of its total assets in one or more market sectors, such as
the financial services sector.
The fund may be appropriate for investors who seek to add the higher return
potential of small company stocks to their portfolio or those investors who seek
to diversify their existing portfolio with small company stocks.
Principal risks
The fund's principal risks are associated with investing in the stock market,
equity and value investing, the investment manager's skill in managing the
fund's portfolio and inflation risk. You will find a discussion of these risks
under "Value Stock Investing" at the front of this prospectus.
Small company risk. While small company stocks have historically outperformed
large company stocks, they also have been subject to greater investment risk.
The risks generally associated with small companies include more limited product
lines, markets and financial resources, lack of management depth or experience,
dependency on key personnel and vulnerability to adverse market and economic
developments. Accordingly, the prices of small company stocks tend to be more
volatile than prices of large company stocks. Further, the prices of small
company stocks are often adversely affected by limited trading volumes and the
lack of publicly available information.
Also, because small companies normally have fewer shares outstanding and these
shares generally trade less frequently than large companies, it may be more
difficult for the fund to buy and sell significant amounts of small company
shares without having an unfavorable impact on the shares' stock market price.
Sector investing. To the extent that the fund focuses its investments in a
market sector, financial, economic, business and other developments affecting
issuers in that sector may have a greater effect on the fund than if it had not
focused its assets in that sector.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
Kemper Small Cap Relative Value Fund 19
<PAGE>
length of time you hold shares in the fund and the amount of your investment.
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
Shareholder fees: Fees paid directly from your investment.
Class A Class B Class C
------- ------- -------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 5.75% None None
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
Redemption Fee (as % of amount
redeemed, if applicable) None None None
Exchange Fee None None None
- ----------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% during the first year and 0.50% during the second year.
Annual fund operating expenses: Expenses that are deducted from fund assets.
Class A Class B Class C
------- ------- -------
Management Fee 0.75% 0.75% 0.75%
Distribution (12b-1) Fees None 0.75% 0.75%
Other Expenses(1) 11.61% 15.41% 10.93%
Total Annual Fund Operating Expenses 12.36% 16.91% 12.43%
- ----------
(1) Other expenses have been estimated for the current fiscal year.
Subject to the qualification described below, Scudder Kemper Investments, Inc.
has agreed to temporarily reimburse certain operating expenses to the extent
necessary to limit the fund's "Total Annual Fund Operating Expenses" of Class A
shares to 1.52%, Class B to 2.40% and Class C to 2.37%; provided, however,
transfer agency fees and related out-of-pocket expenses will not be subject to
this reimbursement. Therefore, if transfer agency fees and related out-of-pocket
expenses were to exceed the limits upon Total Operating Expenses for a
particular class during the period of the reimbursement (contrary to current
estimates), such expenses would be charged to the class in the actual amount
incurred and Total Annual Fund Operating Expenses for the class would exceed the
limits described above during the period. This arrangement may be discontinued
at any time. However, the investment manager has agreed to continue to waive
0.25% of its management fee until September 30, 1999. As a result, for the
fiscal year ended September 30, 1998, "Total Annual Fund Operating Expenses"
were reduced by 10.84%, 14.51% and 10.06% for Class A, Class B and Class C and
actual total annual fund operating expenses were 1.52% for Class A, 2.40% for
Class B and 2.37% for Class C. The information contained in the above table and
the example below reflects the expenses of the
20 Kemper Small Cap Relative Value Fund
<PAGE>
fund without taking into account any applicable fee waivers and/or
reimbursements.
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and returns vary from year to year, and
may be higher or lower than those shown. The example does not reflect sales
charges (loads) on reinvested dividends and other distributions. If these sales
charges were included, your costs would be higher.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $1,697 $1,990 $1,297
3 Years $3,700 $4,525 $3,330
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $1,697 $1,590 $1,197
3 Years $3,700 $4,225 $3,330
Principal strategies and investments
The fund seeks long-term capital appreciation through a diversified portfolio of
small company stocks that the investment manager believes are undervalued.
Securities may be undervalued as a result of overreaction by investors to
unfavorable news about a company, industry or the stock markets in general or as
a result of a market decline, poor economic conditions, or actual or anticipated
unfavorable developments affecting the company.
The investment manager follows a relative value investment strategy, seeking
undervalued small capitalization stocks from each major sector of the small
capitalization market as part of a well diversified, risk-managed portfolio. In
a relative value investment strategy, stocks are selected based on whether they
are undervalued relative to other stocks in the same sector. The relative value
strategy allows the fund to invest in all sectors, including technology,
healthcare and other areas of the market that typically are underweighted in an
absolute value portfolio.
Under normal market conditions, the fund invests at least 65% of its total
assets in equity securities of companies that are similar in size to those
comprising the Russell 2000 Index. Typically, most companies selected for
inclusion in the fund have market capitalizations ranging from approximately
$100 million to $1 billion. The fund sells securities of companies that have
grown in market
Kemper Small Cap Relative Value Fund 21
<PAGE>
capitalization above the maximum of the Russell 2000 Index, as necessary to keep
the fund focused on smaller companies.
The investment manager employs quantitative techniques in evaluating potential
investments and the impact each would have on the fund's portfolio. The
evaluation starts systematically by analyzing a large number of small company
stocks to uncover those with attractive valuations. Typically, the stocks
selected are:
o undervalued in the market based on measures such as earnings, sales, cash
flow and book value;
o experiencing favorable trends in sales, earnings, growth and prices; and
o considered to have acceptable financial risk and earnings predictability.
This systematic screening process is intended to enable the investment manager
to quickly respond to changes in the marketplace and reassess relative
valuations for the fund's holdings in order to make buy and sell decisions.
For temporary defensive purposes, the fund may invest up to 50% of its assets in
high-grade debt securities, cash and cash equivalents. Because this defensive
policy differs from the fund's investment objective, the fund may not achieve
its goals during a defensive period.
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques that may impact fund performance,
including options, futures and other strategic transactions.
More information about investments and strategies is provided in the Statement
of Additional Information. Of course, there can be no guarantee that by
following these strategies, the fund will achieve its objective.
22 Kemper Small Cap Relative Value Fund
<PAGE>
KEMPER SMALL CAP VALUE FUND
Investment objective and strategies
Kemper Small Cap Value Fund seeks long-term capital appreciation. Except as
otherwise indicated, the fund's investment objective and policies may be changed
without a vote of shareholders.
This fund primarily invests in a diversified portfolio of the stocks of small
U.S. companies similar in size to those comprising the Russell 2000 Index that
the investment manager believes to be undervalued. The investment manager looks
for investments with the following attributes:
o low price-to-earnings ratios;
o low price-to-book ratios;
o low price-to-cash flow ratios;
o sound finances; and
o perceived intrinsic value through in-depth security analysis.
Although the fund does not invest 25% or more of its total assets in any one
industry, it may, from time to time, invest a significant percentage of its
total assets in one or more market sectors, such as the financial services
sector.
The fund may be appropriate for investors who seek a small capitalization
investment to diversify a large capitalization portfolio.
Principal risks
The fund's principal risks are associated with investing in the stock market,
equity and value investing, the investment manager's skill in managing the
fund's portfolio and inflation risk. You will find a discussion of these risks
under "Value Stock Investing" at the front of this prospectus.
Small company risk. While small company stocks have historically outperformed
large company stocks, they also have been subject to greater investment risk.
The risks generally associated with small companies include more limited product
lines, markets and financial resources, lack of management depth or experience,
dependency on key personnel and vulnerability to adverse market and economic
developments. Accordingly, the prices of small company stocks tend to be more
volatile than prices of large company stocks. Further, the prices of small
company stocks are often adversely affected by limited trading volumes and the
lack of publicly available information.
Also, because small companies normally have fewer shares outstanding and these
shares generally trade less frequently than large companies, it may be more
difficult for the fund to buy and sell significant amounts of small company
shares without having an unfavorable impact on the shares' stock market price.
Kemper Small Cap Value Fund 23
<PAGE>
Sector investing. To the extent that the fund focuses its investments in a
market sector, financial, economic, business and other developments affecting
issuers in that sector may have a greater effect on the fund than if it had not
focused its assets in that sector.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year, and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance.
The information provided in the chart is for Class A shares, and does not
reflect sales charges, which reduce return.
Total returns for years ended December 31
[The following table was depicted as a bar chart in the printed material.]
1993.................. 2.54%
1994.................. .15%
1995.................. 43.29%
1996.................. 29.60%
1997.................. 20.02%
1998.................. -12.82%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 16.94% (the fourth quarter of 1992), and the fund's lowest
return for a calendar quarter was -24.07% (the third quarter of 1998).
Average Annual Total Returns
For periods ended Russell
December 31, 1998 Class A Class B Class C 2000 Index
----------------- ------- ------- ------- ----------
One Year -17.81% -16.22% -13.60% -2.55%
Five Years 12.89% -- -- 11.87%
Ten Years -- -- -- --
Since Class Inception** 13.08% 7.40% 8.00% *
- ----------
* Index returns for the life of each class: 13.83% (5/31/92) for Class A and
11.67% (8/31/95) for Class B and C Shares.
** Inception date for Class A, B and C shares is 5/22/92, 9/11/95 and
9/11/95, respectively.
The Russell 2000 Index is a capitalization-weighted price only index which is
comprised of 2000 of the smallest stocks (on the basis of capitalization) in the
Russell 3000 Index.
24 Kemper Small Cap Value Fund
<PAGE>
Fee and Expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
length of time you hold shares in the fund and the amount of your investment.
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
Shareholder fees: Fees paid directly from your investment.
Class A Class B Class C
------- ------- -------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 5.75% None None
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
Redemption Fee (as % of amount
redeemed, if applicable) None None None
Exchange Fee None None None
- ----------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% during the first year and 0.50% during the second year.
Annual fund operating expenses: Expenses that are deducted from fund assets.
Class A Class B Class C
------- ------- -------
Management Fee 0.72% 0.72% 0.72%
Distribution (12b-1) Fees None 0.75% 0.75%
Other Expenses 0.70% 0.87% 0.81%
Total Annual Fund Operating Expenses 1.42% 2.34% 2.28%
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and returns vary from year to year, and
may be higher or lower than those shown. The example does not reflect sales
charges (loads) on reinvested dividends and other distributions. If these sales
charges were included, your costs would be higher.
Kemper Small Cap Value Fund 25
<PAGE>
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $711 $637 $331
3 Years $999 $1,030 $712
5 Years $1,307 $1,450 $1,220
10 Years $2,179 $2,235 $2,615
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $711 $237 $231
3 Years $999 $730 $712
5 Years $1,307 $1,250 $1,220
10 Years $2,179 $2,235 $2,615
Principal strategies and investments
The fund seeks long-term capital appreciation by investing principally in a
diversified portfolio of undervalued small company equity securities. The
investment manager invests in companies whose prices appear to be temporarily
depressed due to short-term fundamental factors. Securities may be undervalued
as a result of overreaction by investors to unfavorable news about a company,
industry or the stock markets in general or as a result of a market decline,
poor economic conditions, or actual or anticipated unfavorable developments
affecting the company.
Under normal market conditions, the fund invests at least 65% of its total
assets in securities of companies that are similar in size to those comprising
the Russell 2000 Index. The fund sells securities of companies that have grown
in market capitalization above the maximum of the Russell 2000 Index, as
necessary to keep focused on smaller companies.
The investment manager applies a disciplined investment approach for selecting
holdings for the fund. The first stage of the process seeks investments with low
price-to-earnings ratios in relationship to the market as measured by the
Russell 2000 Index. After the manager screens for low price-to-earnings ratios,
he analyzes and compares other value measurements against the market. These
include price-to-book value and price-to-cash flow.
The fund's investment approach emphasizes companies that posses strong financial
positions. Considerable time is spent seeking potential investments that have
strong potential for long-term growth.
After the portfolio stock universe is refined, the investment manager applies
fundamental analysis.
The investment manager follows all stocks in the fund's portfolio on an
intensive ongoing basis. The manager also monitors a universe of 25 to 175
potentially promising candidates for future investment
The investment manager sells stocks or determines a strategy for selling stocks
as their price-to-earnings ratios rise above that of the market. The manager
then
26 Kemper Small Cap Value Fund
<PAGE>
replaces them with other low price-to-earnings stocks. The manager may also
choose to sell a stock if the company's long-term fundamentals change
unexpectedly for the worse. A stock will also be sold if the company performs
below the investment manager's expectations for three to four years.
For temporary defensive purposes, the fund may invest up to 50% of its assets in
high-grade debt securities, cash and cash equivalents. Because this defensive
policy differs from the fund's investment objective, the fund may not achieve
its goals during a defensive period.
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques that may impact fund performance,
including options, futures and other strategic transactions.
More information about investments and strategies is provided in the Statement
of Additional Information. Of course, there can be no guarantee that by
following these strategies, the fund will achieve its objective.
Kemper Small Cap Value Fund 27
<PAGE>
KEMPER U.S. GROWTH AND INCOME FUND
Investment objective and strategies
Kemper U.S. Growth and Income Fund seeks to provide long-term growth of capital,
current income and growth of income. Except as otherwise indicated, the fund's
investment objectives and policies may be changed without a vote of
shareholders.
The fund primarily invests in a diversified portfolio of common stocks of large
U.S. companies that (i) offer the prospect for growth of earnings while paying
current dividends and (ii) the investment manager believes are undervalued.
Companies in which the fund invests generally are similar in size with the
median capitalization of companies represented in the Standard & Poor's 500
Composite Stock Price Index (S&P 500). The investment manager believes that,
over time, continued growth of earnings tends to lead to higher dividends and
enhancement of capital value.
The fund may be appropriate for investors who seek a conservative value holding
to add to their portfolio.
Principal risks
The fund's principal risks are associated with investing in the stock market,
equity and value investing, the investment manager's skill in managing the
fund's portfolio and inflation risk. You will find a discussion of these risks
under "Value Stock Investing" at the front of this prospectus.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
length of time you hold shares in the fund and the amount of your investment.
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
Shareholder fees: Fees paid directly from your investment.
Class A Class B Class C
------- ------- -------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 5.75% None None
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
Redemption Fee (as % of amount
redeemed, if applicable) None None None
Exchange Fee None None None
- ----------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% during the first year and 0.50% during the second year.
28 Kemper U.S. Growth And Income Fund
<PAGE>
Annual fund operating expenses: Expenses that are deducted from fund assets.
Class A Class B Class C
------- ------- -------
Management Fee 0.60% 0.60% 0.60%
Distribution (12b-1) Fees None 0.75% 0.75%
Other Expenses 1.99% 2.14% 1.90%
Total Annual Fund Operating Expenses 2.59% 3.49% 3.25%
Subject to the qualification described below, Scudder Kemper Investments, Inc.
has agreed to temporarily reimburse certain operating expenses to the extent
necessary to limit the fund's "Total Annual Fund Operating Expenses" of Class A
shares to 1.36%, Class B to 2.01% and Class C to 1.99%; provided, however,
transfer agency fees and related out-of-pocket expenses will not be subject to
this reimbursement. Therefore, if transfer agency fees and related out-of-pocket
expenses were to exceed the limits upon Total Operating Expenses for a
particular class during the period of the reimbursement (contrary to current
estimates), such expenses would be charged to the class in the actual amount
incurred and Total Annual Fund Operating Expenses for the class would exceed the
limits described above during the period. This arrangement may be discontinued
at any time. As a result, for the fiscal year ended September 30, 1998, "Total
Annual Fund Operating Expenses" were reduced by 1.23%, 1.48% and 1.26% for Class
A, Class B and Class C and actual total annual fund operating expenses were
1.36% for Class A, 2.01% for Class B and 1.99% for Class C. The information
contained in the above table and the example below reflects the expenses of the
fund without taking into account any applicable fee waivers and/or
reimbursements.
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and returns vary from year to year, and
may be higher or lower than those shown. The example does not reflect sales
charges (loads) on reinvested dividends and other distributions. If these sales
charges were included, your costs would be higher.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $822 $752 $428
3 Years $1,334 $1,371 $1,001
5 Years $1,871 $2,012 $1,698
10 Years $3,331 $3,380 $3,549
Kemper U.S. Growth And Income Fund 29
<PAGE>
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $822 $352 $328
3 Years $1,334 $1,071 $1,001
5 Years $1,871 $1,812 $1,698
10 Years $3,331 $3,380 $3,549
Principal strategies and investments
The fund seeks to provide participation in the long-term growth of the economy
through the potential investment returns offered by U.S. common stocks and other
domestic equity securities. It maintains a diversified portfolio of equity
securities of companies with higher-than-average dividend payouts. These
companies, many of which are mainstays of the U.S. economy, may offer prospects
for future growth of earnings and dividends, and therefore may offer investors
attractive long-term investment opportunities. The fund will invest at least 80%
of its assets in the equity securities of U.S. issuers.
In the investment manager's opinion, this subset of higher relative yielding
stocks identified by applying these criteria offers the potential for returns
over time that are greater than or equal to the S&P 500, at less risk than this
market index. The investment manager believes these favorable risk and return
characteristics exist because the higher dividends offered by these stocks may
act as a "cushion" when markets are volatile and because stocks with higher
relative yields tend to sell at more attractive valuations (e.g., lower
price-to-earning ratios and lower price-to- book ratios).
Once this subset of higher relative yielding stocks is identified, the
investment manager conducts a fundamental analysis of each company's financial
strength, profitability, projected earnings, sustainability of dividends,
competitive outlook, and ability of management. The fund's portfolio may include
stocks that are out of favor in the market, but which, in the opinion of the
investment manager, offer compelling valuations and potential for long-term
appreciation in price and dividends.
In order to diversify the fund's portfolio among different industry sectors, the
investment manager evaluates how each sector reacts to broad economic factors
such as interest rates, inflation, Gross Domestic Product, and consumer
spending.
The investment manager has disciplined criteria for selling stocks as well. When
the investment manager determines that the relative yield of a stock has
declined excessively below the yield of the S&P 500, or that the relative yield
is at the lower end of the stock's historic range, the stock generally is sold
from the fund's portfolio. Similarly, if the investment manager's fundamental
analysis determines that the payment of the stock's dividend is at risk, or that
market expectations for the stock are unreasonably high, the stock is generally
targeted for sale.
In summary, the investment manager applies disciplined buy and sell criteria,
fundamental company and industry analysis, and economic forecasts in
30 Kemper U.S. Growth And Income Fund
<PAGE>
managing the fund to pursue long-term price appreciation and income with a
tendency for lower overall volatility than the market, as measured by the S&P
500.
For temporary defensive purposes, the fund may invest without limit in cash and
cash equivalents. Because this defensive policy differs from the fund's
investment objective, the fund may not achieve its goals during a defensive
period.
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques that may impact fund performance,
including options, futures and other strategic transactions.
More information about investments and strategies is provided in the Statement
of Additional Information. Of course, there can be no guarantee that by
following these strategies, the fund will achieve its objective.
Kemper U.S. Growth And Income Fund 31
<PAGE>
KEMPER VALUE FUND
Investment objective and strategies
Value Fund seeks long-term growth of capital through investment in undervalued
equity securities. Except as otherwise indicated, the fund's investment
objective and policies may be changed without a vote of shareholders.
The fund invests in the stock of companies that the investment manager believes
are undervalued in the marketplace in relation to current and estimated future
earnings and dividends. These companies generally sell at price-to-earnings
ratios below the market average, as defined by the Standard & Poor's 500
Composite Stock Price Index (S&P 500).
The fund may be appropriate for investors who seek a core holding to establish
the foundation of a value-oriented portfolio or a value fund to diversify an
existing growth-equity portfolio.
This prospectus contains information regarding Class A, B and C shares of the
fund.
Principal risks
The fund's principal risks are associated with investing in the stock market,
equity and value investing, the investment manager's skill in managing the
fund's portfolio and inflation risk. You will find a discussion of these risks
under "Value Stock Investing" at the front of this prospectus.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year, and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance. The
fund currently offers four classes of shares. The original class of shares is
designated Class S. This prospectus sets forth information about Class A, B and
C. Because Class A, B and C commenced operating during the course of 1998, the
performance information set forth below is for Class S shares, and does not
reflect sales charges, which reduce return. All 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.
32 Kemper Value Fund
<PAGE>
Total returns for years ended December 31
[The following table was depicted as a bar chart in the printed material.]
1993.................. 11.60%
1994.................. 1.65%
1995.................. 30.17%
1996.................. 22.99%
1997.................. 35.35%
1998.................. 11.90%
For the period included in the bar chart, the Class S Shares highest return for
a calendar quarter was 17.07% (the fourth quarter of 1998), and the Class S
Shares lowest return for a calendar quarter was -15.34% (the third quarter of
1998).
Average annual total returns
For periods ended Russell 1000
December 31, 1998 Fund S&P 500 Value Index
----------------- ---- ------- -----------
One Year 11.90% 28.72% 15.65%
Five Years 19.77% 24.08% 20.84%
Since Inception (12/31/92) 18.36% 21.62% 20.39%
The Standard & Poor's 500 Composite Stock Price Index (S&P 500) is an unmanaged
capitalization-weighted measure of 500 widely held common stocks listed on the
New York Stock Exchange and the American Stock Exchange, and traded on the
Nasdaq Stock Market, Inc. Index returns assume reinvestment of dividends and,
unlike fund returns, do not reflect any fees or expenses.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
length of time you hold shares in the fund and the amount of your investment.
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
Kemper Value Fund 33
<PAGE>
Shareholder fees: Fees paid directly from your investment.
Class A Class B Class C
------- ------- -------
Maximum Sales Charge (Load) Imposed
on Purchases (as % of offering price) 5.75% None None
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
Redemption Fee (as % of amount
redeemed, if applicable) None None None
Exchange Fee None None None
- ----------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% during the first year and 0.50% during the second year.
Annual fund operating expenses: Expenses that are deducted from fund
assets.
Class A Class B Class C
------- ------- -------
Management Fee 0.70% 0.70% 0.70%
Distribution (12b-1) Fees None 0.75% 0.75%
Other Expenses 0.64% 0.67% 0.66%
Total Annual Fund Operating Expenses 1.34% 2.12% 2.11%
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and returns vary from year to year, and
may be higher or lower than those shown. The example does not reflect sales
charges (loads) on reinvested dividends and other distributions. If these sales
charges were included, your costs would be higher.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $136 $627 $317
3 Years $425 $991 $661
5 Years $734 $1,139 $1,134
10 Years $1,613 $2,452 $2,441
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $136 $215 $214
3 Years $425 $664 $661
5 Years $734 $1,370 $1,134
10 Years $1,613 $2,452 $2,441
34 Kemper Value Fund
<PAGE>
Principal strategies and investments
The fund invests at least 80% of its assets in equity securities, primarily
common stocks of medium- to large-sized domestic companies with annual revenues
or market capitalization of at least $1 billion. The investment manager uses
in-depth fundamental research and a proprietary computerized quantitative model
to identify companies that are currently undervalued in relation to current and
estimated future earnings and dividends. The investment process also involves an
assessment of business risk, including analysis of:
o the strength of a company's balance sheet;
o the accounting practices a company follows;
o the volatility of a company's earnings over time; and
o the vulnerability of earnings to changes in external factors, such as the
general economy, the competitive environment, governmental action and
technological change.
While a broad range of investments is considered, only those that, in the
investment manager's opinion, are selling at comparatively large discounts to
intrinsic value are purchased for the fund. It is anticipated that the prices of
the fund's investments will rise as a result of both earnings growth and rising
price-earnings ratios over time.
The fund is distinctive in the manner in which it combines systematic valuation
techniques with intensive, traditional fundamental research. In addition to
identifying undervalued securities, the quantitative model also provides the
discipline required to identify and sell appreciated securities as their prices
rise to reflect their earnings potential. The model relies on the investment
manager's independent equity research efforts for estimates of future earnings
and dividend growth and proprietary quality ratings, an important measure of
risk.
While the fund emphasizes U.S. investments, it can invest its assets in
securities of foreign companies which meet the same criteria applicable to the
fund's domestic investments.
For temporary defensive purposes, the fund may invest without limit in cash and
cash equivalents. Because this defensive policy differs from the fund's
investment objective, the fund may not achieve its goals during a defensive
period.
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques that may impact fund performance,
including options, futures and other strategic transactions.
More information about investments and strategies is provided in the Statement
of Additional Information. Of course, there can be no guarantee that by
following these strategies, the fund will achieve its objective.
Additional principal risks
Foreign Investing. Investing in foreign securities, and to a greater extent
emerging markets, involves risks in addition to those associated with investing
Kemper Value Fund 35
<PAGE>
in securities in the U.S. To the extent that investments are denominated in
foreign currencies, adverse changes in the values of foreign currencies may have
a significant negative effect on any returns from these investments. Investing
in foreign securities exposes the fund to an increased risk of political and
economic instability.
Other risks of investing in foreign securities include: limited information,
higher brokerage costs, different accounting standards and thinner trading
markets as compared to U.S. markets.
36 Kemper Value Fund
<PAGE>
INVESTMENT MANAGER
The funds retain the investment management firm of Scudder Kemper Investments,
Inc., Two International Place, Boston, MA, to manage their daily investment and
business affairs subject to the policies established by the funds' Boards.
Scudder Kemper Investments, Inc. actively manages the funds' investments.
Professional management can be an important advantage for investors who do not
have the time or expertise to invest directly in individual securities. Scudder
Kemper Investments, Inc. is one of the largest and most experienced investment
management organizations worldwide. It manages more than $230 billion in assets
globally for mutual fund investors, retirement and pension plans, institutional
and corporate clients, and private family and individual accounts.
Each fund pays Scudder Kemper Investments, Inc. a (graduated) monthly investment
management fee. Fees paid for each fund's most recently completed fiscal year
are shown below:
As a % of average daily net assets
----------------------------------
Kemper Contrarian Fund 0.75%
Kemper-Dreman High Return Equity Fund 0.68%
Kemper Small Cap Value Fund 0.72%
Kemper Value Fund 0.70%
Kemper Small Cap Relative Value Fund and Kemper-Dreman Financial Services Fund
each pay Scudder Kemper Investments, Inc. a (graduated) monthly investment
management fee at the following annual rate:
Applicable Assets($) Annual Fee Rate
-------------------- ---------------
0-250,000,000 0.75%
250,000,000-1,000,000,000 0.72%
1,000,000,000-2,500,000,000 0.70%
2,500,000,000-5,000,000,000 0.68%
5,000,000,000-7,500,000,000 0.65%
7,500,000,000-10,000,000,000 0.64%
10,000,000,000-12,500,000,000 0.63%
More than 12,500,000,000 0.62%
Kemper U.S. Growth and Income Fund pays Scudder Kemper Investments, Inc. a
(graduated) monthly investment management fee at the following annual rate:
Applicable Assets($) Annual Fee Rate
-------------------- ---------------
0-250,000,000 0.60%
250,000,000-1,000,000,000 0.57%
1,000,000,000-2,500,000,000 0.55%
More than 2,500,000,000 0.63%
Investment Manager 37
<PAGE>
For Kemper Small Cap Relative Value Fund, the investment manager has agreed to
waive 0.25% of its management fee until September 30, 1999.
Pursuant to a sub-advisory agreement with Scudder Kemper Investments, Inc.,
Dreman Value Management L.L.C., 10 Exchange Place, Jersey City, New Jersey, is
the sub-adviser for the Kemper-Dreman High Return Equity Fund and Kemper-Dreman
Financial Services Fund and receives a fee for its services from Scudder Kemper
Investments. Founded in 1977, Dreman Value Management, L.L.C. manages over $7
billion in assets.
Dreman Value Management, L.L.C. manages the investment and reinvestment of the
Kemper-Dreman High Return Equity Fund's and Kemper-Dreman Financial Services
Fund's assets, in accordance with their investment objectives, policies and
limitations, subject to the supervision of Scudder Kemper Investments and the
Board of Directors. Dreman Value Management, L.L.C. receives a fee for its
services from Scudder Kemper Investments, Inc.
Scudder Kemper Investments, Inc. pays Dreman Value Management, L.L.C. for its
services a sub-advisory fee for each of Kemper-Dreman High Return Equity Fund
and Kemper-Dreman Financial Services Fund, payable monthly, at the annual rate
of 0.24% of the first $250 million of the fund's average daily net assets; 0.23%
of the average daily net assets between $250 million and $1 billion; 0.224% of
average daily net assets between $1 billion and $2.5 billion; 0.218% of average
daily net assets between $2.5 billion and $5 billion; 0.208% of average daily
net assets between $5 billion and $7.5 billion; 0.205% of average daily net
assets between $7.5 billion and $10 billion; 0.202% of average daily net assets
between $10 billion and $12.5 billion and 0.198% of the Fund's average daily net
assets over $12 billion.
In addition, Scudder Kemper Investments, Inc. has guaranteed to pay a minimum of
$8 million to Dreman Value Management, L.L.C. during each of the calendar years
of 2000, 2001 and 2002 that Dreman Value Management, L.L.C. serves as
sub-adviser.
38 Investment Manager
<PAGE>
PORTFOLIO MANAGEMENT
The following investment professionals are associated with the funds as
indicated:
Kemper Contrarian Fund
Name & Title Joined the Fund Background
- --------------------------------------------------------------------------------
Thomas F. Sassi, 1997 Joined Scudder Kemper in 1996. He
Lead Portfolio Manager began his investment career in
1971. Prior to joining Scudder
Kemper he was a Vice President and
Portfolio Manager for an
unaffiliated life insurance and
investment management firm.
Frederick L. Gaskin, 1997 Joined Scudder Kemper in 1996. He
Portfolio Manager began his investment career in
1986. Prior to joining Scudder
Kemper he was a Vice President and
Portfolio Manager for a bank.
- --------------------------------------------------------------------------------
Kemper-Dreman Financial Services Fund
Kemper-Dreman High Return Equity Fund
Name & Title Joined the Fund Background
- --------------------------------------------------------------------------------
David N. Dreman, Lead 1988 Chairman of Dreman Value
Portfolio Manager Management, L.L.C. since 1977. He
is a pioneer of the philosophy of
contrarian investing (buying what
is out of favor) and a leading
proponent of the low P/E investment
style. He is a columnist for Forbes
and the author of several books on
the value style of investing. He
began his investment career in
1957.
- --------------------------------------------------------------------------------
Kemper Small Cap Value Fund
Name & Title Joined the Fund Background
- --------------------------------------------------------------------------------
Thomas H. Forester, 1997 Joined Scudder Kemper in 1997. He
Co-Lead Portfolio began his investment career in
Manager 1988. Prior to joining Scudder
Kemper he was a Senior Vice
President and Senior Portfolio
Manager at an unaffiliated
investment management company.
Steven T. Stokes, 1997 Joined Scudder Kemper in 1996. He
Co-Lead Portfolio began his investment career in
Manager 1986. Prior to joining Scudder
Kemper he was an equity analyst and
part of the portfolio management
team at an unaffiliated investment
company.
- --------------------------------------------------------------------------------
Investment Manager 39
<PAGE>
Kemper Small Cap Relative Value Fund
Name & Title Joined the Fund Background
- --------------------------------------------------------------------------------
James M. Eysenbach, 1998 Joined Scudder Kemper in 1986
Lead Portfolio Manager serving as a portfolio manager on
various affiliated mutual funds. He
began his investment career in
1984.
Philip S. Fortuna, 1998 Joined Scudder Kemper in 1991
Portfolio Manager serving as a portfolio manager on
various affiliated mutual funds. He
began his investment career in
1984.
Calvin S. Young, 1998 Joined Scudder Kemper in 1990
Portfolio Manager serving as a portfolio manager on
various affiliated mutual funds. He
began his investment career in
1988.
- --------------------------------------------------------------------------------
Kemper U.S. Growth and Income Fund
Name & Title Joined the Fund Background
- --------------------------------------------------------------------------------
Lori J. Ensinger, Lead 1998 Joined Scudder Kemper in 1993. She
Portfolio Manager began her investment career in
1983. Prior to joining Scudder
Kemper she was a Senior Portfolio
Manager who managed portfolios for
both institutions and individuals
for an unaffiliated investment
management firm.
Robert T. Hoffman, 1998 Joined Scudder Kemper in 1990. He
Portfolio Manager began his investment career in
1985. Prior to joining Scudder
Kemper he was Assistant State
Treasurer for the state of New
Jersey.
Benjamin W. Thorndike, 1998 Joined Scudder Kemper in 1983. He
Portfolio Manager began his investment career in
1980. Prior to joining Scudder
Kemper he was an investment officer
for a bank.
- --------------------------------------------------------------------------------
40 Investment Manager
<PAGE>
Kemper Value Fund
Name & Title Joined the Fund Background
- --------------------------------------------------------------------------------
Donald E. Hall, 1992 Joined Scudder Kemper in 1982. He
Lead Portfolio Manager began his investment career in
1982. Prior to joining Scudder
Kemper he received an M.B.A. from
Harvard Business School after
working as a sales engineer for an
international aluminum products
manufacturer.
William J. Wallace, 1992 Joined Scudder Kemper in 1987. He
Portfolio Manager began his investment career in
1981. Prior to joining Scudder
Kemper he performed product
management and client relations for
a variety of trustee banks.
- --------------------------------------------------------------------------------
Year 2000 readiness
Like other mutual funds and financial and business organizations worldwide, the
funds could be adversely affected if computer systems on which a fund rely,
which primarily include those used by the investment manager, its affiliates or
other service providers, are unable to correctly process date-related
information on and after January 1, 2000. This risk is commonly called the Year
2000 Issue. Failure to successfully address the Year 2000 Issue could result in
interruptions to and other material adverse effects on the funds' business and
operations, such as problems with calculating net asset value and difficulties
in implementing a fund's purchase and redemption procedures. The investment
manager has commenced a review of the Year 2000 Issue as it may affect the funds
and is taking steps it believes are reasonably designed to address the Year 2000
Issue, although there can be no assurances that these steps will be sufficient.
In addition, there can be no assurances that the Year 2000 Issue will not have
an adverse effect on the issuers whose securities are held by a fund or on
global markets or economies generally.
Euro conversion
The introduction of a new European currency, the Euro, may result in
uncertainties for European securities and the operation of each fund. The Euro
was introduced on January 1, 1999 by eleven European countries that are members
of the European Economic and Monetary Union (EMU). The introduction of the Euro
will require the redenomination of European debt and equity securities over a
period of time, which may result in various accounting differences and/or tax
treatments. Additional questions are raised by the fact that certain other
European community members, including the United Kingdom, did not officially
implement the Euro on January 1, 1999.
The investment manager is actively working to address Euro-related issues and
understands that other key service providers are taking similar steps. At this
time, however, no one knows precisely what the degree of impact will be. To the
extent that the market impact or effect on a fund's holdings is negative, it
could hurt the fund's performance.
Investment Manager 41
<PAGE>
ABOUT YOUR INVESTMENT
CHOOSING A SHARE CLASS
Each fund provides investors with the option of purchasing shares in the
following ways:
- --------------------------------------------------------------------------------
Class A Shares Offered at net asset value plus a maximum sales charge
of 5.75% of the offering price. Reduced sales charges
apply to purchases of $50,000 or more. Class A shares
purchased at net asset value under the Large Order NAV
Purchase Privilege may be subject to a 1% contingent
deferred sales charge if re deemed within one year of
purchase and a .50% contingent deferred sales change if
redeemed during the second year of purchase.
Class B Shares Offered at net asset value without an initial
sales charge, but subject to a 0.75% Rule 12b-1
distribution fee and a contingent deferred sales charge
that declines from 4% to zero on certain redemptions made
within six years of purchase. Class B shares
automatically convert into Class A shares (which have
lower ongoing expenses) six years after purchase.
Class C Shares Offered at net asset value without an initial
sales charge, but subject to a 0.75% Rule 12b-1
distribution fee and a 1% contingent deferred sales
charge on redemptions made within one year of purchase.
Class C shares do not convert into another class.
- --------------------------------------------------------------------------------
When placing purchase orders, investors must specify whether the order is for
Class A, Class B or Class C shares. Each class of shares represents interests in
the same portfolio of investments of a fund.
The decision as to which class to choose depends on a number of factors,
including the amount and intended length of the investment. Investors that
qualify for reduced sales charges might consider Class A shares. Investors who
prefer not to pay an initial sales charge and who plan to hold their investment
for more than six years might consider Class B shares. Investors who prefer not
to pay an initial sales charge but who plan to redeem their shares within six
years might consider Class C shares. For more information about these sales
arrangements, consult your financial representative or Kemper Service Company,
the Shareholder Service Agent. Be aware that financial services firms may
receive different compensation depending upon which class of shares they sell.
Rule 12b-1 plan
Each fund has adopted a plan under Rule 12b-1 that provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by the
transfer agent to pay for distribution and other services provided to
shareholders of those classes. Because 12b-1 fees are paid out of fund assets on
an ongoing basis, they will, over time, increase the cost of investment and may
cost more than other types of sales charges. Long-term shareholders may pay more
than the economic equivalent of the maximum initial sales charges
42 About Your Investment
<PAGE>
permitted by the National Association of Securities Dealers, although Kemper
Distributors, Inc. believes that it is unlikely, in the case of Class B shares,
because of the automatic conversion feature of those shares
SPECIAL FEATURES
Class A Shares -- Combined Purchases. Each fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of most Kemper
Funds.
Class A Shares -- Letter of Intent. The same reduced sales charges for Class A
shares also apply to the aggregate amount of purchases made by any purchaser
within a 24-month period under a written Letter of Intent ("Letter") provided by
Kemper Distributors. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period.
Class A Shares -- Cumulative Discount. Class A shares of a fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of a fund being purchased, the value of all Class A shares of
the above mentioned Kemper Funds (computed at the maximum offering price at the
time of the purchase for which the discount is applicable) already owned by the
investor.
Class A Shares -- Large Order NAV Purchase Privilege. Class A shares of a fund
may be purchased at net asset value by any purchaser provided that the amount
invested in such fund or other Kemper Mutual Funds totals at least $1,000,000
including purchases of Class A shares pursuant to the "Combiner Purchases,"
"Letter of Intent" and "Cumulative Discount" features described above (the
"Large Order NAV Purchase Privilege").
Exchange Privilege -- General. Shareholders of Class A, Class B and Class C
shares may exchange their shares for shares of the corresponding class of Kemper
Mutual Funds. Shares of a Kemper Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Fund, or from a Money Market Fund, may not be exchanged thereafter until they
have been owned for 15 days (the "15 Day Hold Policy"). For purposes of
determining whether the 15-Day Hold Policy applies to a particular exchange, the
value of the shares to be exchanged shall be computed by aggregating the value
of shares being exchanged for all accounts under common control, direction or
advice, including without limitation accounts administered by a financial
services firm offering market timing, asset allocation or similar services.
For purposes of determining any contingent deferred sales charge that may be
imposed upon the redemption of the shares received on exchange, amounts
exchanged retain their original cost and purchase date.
About Your Investment 43
<PAGE>
BUYING SHARES
You may purchase shares of a fund by contacting the securities dealer or other
financial services firm from whom your received this prospectus.
CLASS A SHARES
Public Offering Price Including Sales Charge
Sales Charge
------------
As a % of As a % of Net
Amount of Purchase Offering Price Amount Invested*
------------------ -------------- ----------------
Less than $50,000 5.75% 6.10%
$50,000 but less than $100,000 4.50 4.71%
$100,000 but less than $250,000 3.50 3.63%
$250,000 but less than $500,000 2.60 2.67%
$500,000 but less than $1 million 2.00 2.04%
$1 million and over 0.00** 0.00**
- ----------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge
as discussed below.
NAV Purchases
Class A shares of a fund may be purchased at net asset value by:
o shareholders in connection with the investment or reinvestment of income
and capital gain dividends
o a participant-directed qualified retirement plan or a participant-directed
non-qualified deferred compensation plan or a participant-directed
qualified retirement plan which is not sponsored by a K-12 school
district, provided in each case that such plan has not less than 200
eligible employees
o any purchaser with Kemper Funds investment totals of at least $1,000,000
o unitholders of unit investment trusts sponsored by Ranson & Associates,
Inc. or its predecessors through reinvestment programs described in the
prospectuses of such trusts that have such programs
o officers, trustees, directors, employees (including retirees) and sales
representatives of a fund, its investment manager, its principal
underwriter or certain affiliated companies, for themselves or members of
their families or any trust, pension, profit-sharing or other benefit plan
for only such persons
o persons who purchase shares through bank trust departments that process
such trades through an automated, integrated mutual fund clearing program
provided by a third party clearing firm
o registered representatives and employees of broker-dealers having selling
group agreements with Kemper Distributors or any trust, pension,
profit-sharing or other benefit plan for only such persons
44 About Your Investment
<PAGE>
o officers, directors, and employees of service agents of the funds
o members of the plaintiff class in the proceeding known as Howard and
Audrey Tabankin, et al. v. Kemper Short-Term Global Income Fund, et. al.,
Case No. 93 C 5231 (N.D.IL)
o selected employees (including their spouses and dependent children) of
banks and other financial services firms that provide administrative
services related to the funds pursuant to an agreement with Kemper
Distributors or one of its affiliates
o certain professionals who assist in the promotion of Kemper Funds pursuant
to personal services contracts with Kemper Distributors, for themselves or
members of their families
o in connection with the acquisition of the assets of or merger or
consolidation with another investment company
o shareholders who owned shares of Kemper Value Series, Inc. ("KVS") on
September 8, 1995, and have continuously owned shares of KVS (or a Kemper
Fund acquired by exchange of KVS shares) since that date, for themselves
or members of their families or any trust, pension, profit-sharing or
other benefit plan for only such persons
o persons who purchase shares of the fund through Kemper Distributors as
part of an automated billing and wage deduction program administered by
RewardsPlus of America
o through certain investment advisers registered under the Investment
Advisers Act of 1940 and other financial services firms, acting solely as
agent for their clients, that adhere to certain standards established by
Kemper Distributors, including a requirement that such shares be purchased
for the benefit of their clients participating in an investment advisory
program or agency commission program under which such clients pay a fee to
the investment advisor or other firm for portfolio management or agency
brokerage services.
Contingent Deferred Sales Charge
A contingent deferred sales charge may be imposed upon redemption of Class A
shares purchased under the Large Order NAV Purchase Privilege as follows: 1% if
they are redeemed within one year of purchase and 0.50% if redeemed during the
second year following purchase. The charge will not be imposed upon redemption
of reinvested dividends or share appreciation. The charge is applied to the
value of the shares being redeemed, excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived in the event of:
o redemptions under a fund's Systematic Withdrawal Plan at a maximum of 10%
per year of the net asset value of the account
o redemption of shares of a shareholder (including a registered joint owner)
who has died
o redemption of shares of a shareholder (including a registered joint owner)
who after purchase of the shares being redeemed becomes totally disabled
About Your Investment 45
<PAGE>
(as evidenced by a determination by the federal Social Security
Administration)
o redemptions by a participant-directed qualified retirement plan or a
participant-directed non-qualified deferred compensation plan or a
participant-directed qualified retirement plan which is not sponsored by a
K-12 school district
o redemptions by employer sponsored employee benefit plans using the
subaccount record keeping system made available through the Shareholder
Service Agent or its affiliates
o redemptions of shares whose dealer of record at the time of the investment
notifies Kemper Distributors that the dealer waives the commission
applicable to such Large Order NAV Purchase.
Rule 12b-1 Fee
None
Exchange Privilege
Class A shares may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and Kemper Cash Reserves Fund acquired by
purchase (not including shares acquired by dividend reinvestment) are subject to
the applicable sales charge on exchange.
Class A shares purchased under the Large Order NAV Purchase Privilege may be
exchanged for Class A shares of any Kemper Fund or a Money Market Fund without
paying any contingent deferred sales charge. If the Class A shares received on
exchange are redeemed thereafter, a contingent deferred sales charge may be
imposed.
CLASS B SHARES
Public Offering Price
Net asset value per share without any sales charge at the time of purchase.
Contingent Deferred Sales Charge
A contingent deferred sales charge may be imposed upon redemption of Class B
shares. There is no such charge upon redemption of any share appreciation or
reinvested dividends. The charge is computed at the following rates applied to
the value of the shares redeemed excluding amounts not subject to the charge.
- -------------------------------------------------------------------------------
Year of Redemption
After Purchase: First Second Third Fourth Fifth Sixth
- -------------------------------------------------------------------------------
Contingent Deferred
Sales Charge: 4% 3% 3% 2% 2% 1%
- -------------------------------------------------------------------------------
The contingent deferred sales charge will be waived:
o for redemptions to satisfy required minimum distributions after age 70 1/2
from an IRA account (with the maximum amount subject to this waiver being
based only upon the shareholder's Kemper IRA accounts)
46 About Your Investment
<PAGE>
o for redemptions made pursuant to any IRA systematic withdrawal based on
the shareholder's life expectancy including, but not limited to,
substantially equal periodic payments described in Code Section
72(t)(2)(A)(iv) prior to age 59 1/2
o for redemptions made pursuant to a systematic withdrawal plan
o in the event of the total disability (as evidenced by a determination by
the federal Social Security Administration) of the shareholder (including
a registered joint owner) occurring after the purchase of the shares being
redeemed
o in the event of the death of the shareholder (including a registered joint
owner)
The contingent deferred sales charge will also be waived in connection with the
following redemptions of shares held by employer sponsored employee benefit
plans maintained on the subaccount record keeping system made available by the
Shareholder Service Agent:
o redemptions to satisfy participant loan advances (note that loan
repayments constitute new purchases for purposes of the contingent
deferred sales charge and the conversion privilege)
o redemptions in connection withy retirement distributions (limited at any
one time to 10% of the total value of plan assets invested in a fund)
o redemptions in connection with distributions qualifying under the hardship
provisions of the Code
o redemptions representing returns of excess contributions to such plans.
Rule 12b-1 Fee
0.75%
Conversion Feature
Class B shares of a fund will automatically convert to Class A shares of the
same fund six years after issuance on the basis of the relative net asset value
per share. Shares purchased through the reinvestment of dividends and other
distributions paid with respect to Class B shares in a shareholder's fund
account will be converted to Class A shares on a pro rata basis.
Exchange Privilege
Class B shares of a fund and Class B shares of most Kemper Funds may be
exchanged for each other at their relative net asset values without a contingent
deferred sales charge.
About Your Investment 47
<PAGE>
CLASS C SHARES
Public Offering Price
Net asset value per share without any sales charge at the time of purchase.
Contingent Deferred Sales Charge
o A contingent deferred sales charge of 1% may be imposed upon redemption of
Class C shares redeemed within one year of purchase. The charge will not
be imposed upon redemption of reinvested dividends or share appreciation.
The contingent deferred sales charge will be waived in the event of:
o redemptions by a participant-directed qualified retirement plan described
in Code Section 401(a) or a participant-directed non-qualified deferred
compensation plan described in Code Section 457
o redemptions by employer sponsored employee benefit plans (or their
participants) using the subaccount record keeping system made available
through the Shareholder Service Agent
o redemption of shares of a shareholder (including a registered joint owner)
who has died
o redemption of shares of a shareholder (including a registered joint owner)
who after purchase of the shares being redeemed becomes totally disabled
(as evidenced by a determination by the federal Social Security
Administration)
o redemptions under a fund's Systematic Withdrawal Plan at a maximum of 10%
per year of the net asset value of the account
o redemption of shares by an employer sponsored employee benefit plan that
offers funds in addition to Kemper Funds and whose dealer of record has
waived the advance of the first year administrative service and
distribution fees applicable to such shares and agrees to receive such
fees quarterly
o redemption of shares purchased through a dealer-sponsored asset allocation
program maintained on an omnibus record-keeping system provided the dealer
of record has waived the advance of the first year administrative services
and distribution fees applicable to such shares and has agreed to receive
such fees quarterly.
Rule 12b-1 Fee
0.75%
Conversion Feature
None
Exchange Privilege
Class C shares of a fund and Class C shares of most Kemper Funds may be
exchanged for each other at their relative net asset values. Class C shares may
be exchanged without a contingent deferred sales charge.
48 About Your Investment
<PAGE>
SELLING AND EXCHANGING SHARES
General
Contact your securities dealer or other financial services firm to arrange for
share redemptions or exchanges.
Any shareholder may require a fund to redeem his or her shares. When shares are
held for the account of a shareholder by the funds' transfer agent, the
shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box
419557, Kansas City, Missouri 64141-6557.
An exchange of shares entails the sale of fund shares and subsequent purchase of
shares of another Kemper Fund.
The rate of the contingent deferred charge is determined by the length of the
period of ownership. Investments are tracked on a monthly basis. The period of
ownership for this purpose begins the first day of the month in which the order
for the investment is received, For example, an investment made in December,
1996 will be eligible for the second year's charge if redeemed on or after
December 1, 1997. In the event no specific order is requested when redeeming
shares subject to a contingent deferred sales charge, the redemption will be
made first from shares representing reinvested dividends and then from the
earliest purchase of shares. KDI receives any contingent deferred sales charge
directly.
Share certificates
When certificates for shares have been issued, they must be mailed to or
deposited with Kemper Service Company, the Shareholder Service Agent along with
a duly endorsed stock power and accompanied by a written request for redemption.
Redemption requests and a stock power must be endorsed by the account holder
with signatures guaranteed. The redemption request and stock power must be
signed exactly as the account is registered, including any special capacity of
the registered owner. Additional documentation may be requested, and a signature
guarantee is normally required, from institutional and fiduciary account
holders, such as corporations, custodians (e.g., under the Uniform Transfers to
Minors Act), executors, administrators, trustees or guardians.
Reinvestment privilege
Under certain circumstances, a shareholder who has redeemed Class A shares may
reinvest up to the full amount redeemed at net asset value at the time of the
reinvestment. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge. Also, a
holder of Class B shares who has redeemed shares may reinvest up to the full
amount redeemed, less any applicable contingent deferred sales charge that may
have been imposed upon the redemption of such shares, at net asset value in
Class A shares. The reinvestment privilege may be terminated or modified at any
time. The reinvestment privilege can be used only once as to any specific shares
and reinvestment must be effected within six months of the redemption.
About Your Investment 49
<PAGE>
DISTRIBUTIONS AND TAXES
Dividends and capital gains distributions
Kemper Contrarian Fund, Kemper U.S. Growth and Income Fund and Kemper-Dreman
High Return Equity Fund normally distribute quarterly dividends of net
investment income. Kemper Small Cap Value Fund, Kemper Small Cap Relative Value
Fund and Kemper Value Fund normally distribute annual dividends of net
investment income. The Kemper-Dreman Financial Services Fund normally
distributes dividends of net investment income semi-annually. Each fund
distributes any net realized short-term and long-term capital gains at least
annually.
Income and capital gain dividends, if any, of a fund will be credited to
shareholder accounts in full and fractional shares of the same class of that
fund at net asset value on the reinvestment date, except that, upon written
request to Kemper Service Company, to the Shareholder Service Agent, a
shareholder may select one of the following options:
1. To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset
value; or
2. To receive income and capital gain dividends in cash.
Any dividends of a fund that are reinvested will normally be reinvested in
shares of the same class of that same fund. However, upon written request to
Kemper Service Company, the Shareholder Service Agent, you may choose to have
dividends of a fund invested in shares of the same class of another Kemper Fund
at the net asset value of that class and fund. To use this privilege, you must
maintain a minimum account value of $1,000 in the fund distributing the
dividends. The funds will reinvest dividend checks (and future dividends) in
shares of that same fund and class if checks are returned as undeliverable.
Dividends and other distributions in the aggregate amount of $10 or less are
automatically reinvested in shares of the same fund unless you request that such
policy not be applied to your account.
Distributions are generally taxable, whether received in cash or reinvested.
Taxes
Dividends from net investment income and net short-term capital gains, if any,
are taxable to you as ordinary income. Long-term capital gains distributions, if
any, are taxable to you as long-term capital gains, regardless of how long you
have owned shares. Short-term capital gains and any other taxable income
distributions are taxable to you as ordinary income. A portion of dividends from
ordinary income may qualify for the dividends-received deduction for
corporations.
A dividend received shortly after the purchase of shares reduces the net asset
value of the shares by the amount of the dividend and, although in effect a
return of capital, is taxable to you.
50 About Your Investment
<PAGE>
A sale or exchange of your shares is a taxable event and may result in a capital
gain or loss which may be long-term or short term, generally depending on how
long you owned the shares.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such month and paid during the following January
are taxable to you as if paid on December 31 of the calendar year in which they
were declared.
The fund sends you detailed tax information about the amount and type of its
distributions by January 31 of the following year.
Each fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to you if you fail to provide the fund with
your correct taxpayer identification number or to make required certifications,
or if you have been notified by the IRS that you are subject to backup
withholding. Any such withheld amounts may be credited against your U.S. federal
income tax liability.
You may be subject to state, local and foreign taxes on fund distributions and
dispositions of fund shares. You should consult your tax advisor regarding the
particular tax consequences of an investment in a fund.
TRANSACTION INFORMATION
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
the funds as of the close of regular trading on the New York Stock Exchange,
normally 4 p.m. eastern time, on each day the New York Stock Exchange is open
for trading. Market prices are used to determine the value of the funds' assets.
If reliable market prices are not readily available for a security or if a
security's price is not considered to be market indicative, that security may be
valued by another method that the Board or its delegate believes accurately
reflects fair value. In those circumstances where a security's price is not
considered to be market indicative, the security's valuation may differ from an
available market quotation.
The net asset value per share of each fund is the value of one share and is
determined separately for each class by dividing the value of a fund's net
assets attributable to that class, less all liabilities, by the number of shares
of that class outstanding. The per share net asset value of the Class B and
Class C shares of a fund will generally be lower than that of the Class A shares
of a fund because of the higher annual expenses borne by the Class B and Class C
shares.
To the extent that a fund invests in foreign securities, these securities may be
listed on foreign exchanges that trade on days when the fund does not price its
shares. As a result, the net asset value per share of a fund may change at a
time when shareholders are not able to purchase or redeem their shares.
About Your Investment 51
<PAGE>
Processing time
All requests to buy and sell shares that are received in good order by the
funds' transfer agent by the close of regular trading on the New York Stock
Exchange are executed at the net asset value per share calculated at the close
of trading that day (subject to any applicable sales load or contingent deferred
sales charge). Orders received by dealers or other financial services firms
prior to the determination of net asset value and received by the funds'
transfer agent prior to the close of its business day will be confirmed at a
price based on the net asset value effective on that day. If an order is
accompanied by a check drawn on a foreign bank, funds must normally be collected
before shares will be purchased.
Payment for shares you sell will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed request.
If you have share certificates, these must accompany your order in proper form
for transfer. When you place an order to sell shares for which the fund may not
yet have received good payment (i.e., purchases by check, EXPRESS-Transfer or
Bank Direct Deposit), the fund may delay transmittal of the proceeds until it
has determined that collected funds have been received for the purchase of such
shares. This may be up to 10 days from receipt by a fund of the purchase amount.
The redemption of shares within certain time periods may be subject to
contingent deferred sales charges, as noted above.
Signature guarantees
A signature guarantee is required unless you sell $50,000 or less worth of
shares (prior to the imposition of any contingent deferred sales charge) and the
proceeds are payable to the shareholders of record at the address of record. You
can obtain a guarantee from most brokerage houses and financial institutions,
although not from a notary public. The funds will normally send you the proceeds
within one business day following your request, but may take up to seven
business days (or longer in the case of shares recently purchased by check).
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
funds and Kemper Distributors, Inc. each reserves the right to reject purchases
of fund shares (including exchanges) for any reason, including when there is
evidence of a pattern of frequent purchases and sales made in response to
short-term fluctuations in a fund's share price. The funds reserve the right to
withdraw all or any part of the offering made by this prospectus and to reject
purchase orders. Also, from time to time, each fund may temporarily suspend the
offering of its shares or a class of its shares to new investors. During the
period of such suspension, persons who are already shareholders normally are
permitted to continue to purchase additional shares and to have dividends
reinvested.
Minimum balances
The minimum initial investment for each fund is $1,000 and the minimum
subsequent investment is $100. The minimum initial investment for an
52 About Your Investment
<PAGE>
Individual Retirement Account is $250 and the minimum subsequent investment is
$50. Under an automatic investment plan, such as Bank Direct Deposit, Payroll
Direct Deposit or Government Direct Deposit, the minimum initial and subsequent
investment is $50. These minimum amounts may be changed at any time in
management's discretion.
Because of the high cost of maintaining small accounts, the funds may assess a
quarterly fee of $9 on an account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer sponsored employee benefit plans
using the subaccount record keeping system made available through Kemper Service
Company, the Shareholder Service Agent.
Third party transactions
If you buy and sell shares of a fund through a member of the National
Association of Securities Dealers, Inc. (other than the funds' distributor,
Kemper Distributors), that member may charge a fee for that service. This
prospectus should be read in connection with such firms' material regarding
their fees and services.
Redemption-in-kind
The funds reserve the right to honor any request for redemption or repurchase by
making payment in whole or in part in readily marketable securities ("redemption
in kind"). These securities will be chosen by the fund and valued as they are
for purposes of computing the fund's net asset value. A shareholder may incur
transaction expenses in converting these securities to cash.
About Your Investment 53
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below are intended to help you understand the funds' or certain
classes of a fund's financial performance for the periods reflected below.
Certain information reflects financial results for a single fund share. The
total return figures show what an investor in a fund (or certain classes of a
fund) would have earned (or lost) assuming reinvestment of all distributions.
This information, for all funds except Value Fund, has been audited by Ernst &
Young LLP. With respect to Value Fund, this information has been audited by
Pricewaterhouse Coopers LLP. The report of each of the auditors, along with the
fund's financial statements, are included in the funds' annual reports, which
are available upon request by calling the Kemper Funds at 1-800-621-1048.
Kemper Contrarian Fund
<TABLE>
<CAPTION>
Eleven
Year months
ended ended
November November
30, 30, Year ended December 31,
CLASS A 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of
period $21.13 16.93 16.20 12.18 13.62
- ----------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .28 .23 .23 .26 .28
- ----------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) 3.48 4.25 2.07 5.05 (.28)
- ----------------------------------------------------------------------------------------
Total from investment
operations 3.76 4.48 2.30 5.31 --
- ----------------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income .27 .20 .22 .24 .28
- ----------------------------------------------------------------------------------------
Distribution from net
realized gain 1.72 .08 1.35 1.05 1.16
- ----------------------------------------------------------------------------------------
Total dividends 1.99 .28 1.57 1.29 1.44
- ----------------------------------------------------------------------------------------
Net asset value, end of period $22.90 21.13 16.93 16.20 12.18
- ----------------------------------------------------------------------------------------
Total return (not annualized) 19.51% 26.58 14.42 44.57 (.03)
- ----------------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 1.37% 1.35 1.23 1.25 1.25
- ----------------------------------------------------------------------------------------
Net investment income 1.36% 1.47 1.56 1.85 1.89
- ----------------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 1.37% 1.35 1.25 1.66 1.42
- ----------------------------------------------------------------------------------------
Net investment income 1.36% 1.47 1.54 1.44 1.71
- ----------------------------------------------------------------------------------------
</TABLE>
54 Financial Highlights
<PAGE>
<TABLE>
<CAPTION>
Eleven
Year months
ended ended Year Sept. 11
November November ended to
30, 30, Dec. 31, Dec. 31,
CLASS B 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $21.08 16.92 16.20 15.26
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .08 .08 .11 .07
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain 3.46 4.22 2.07 1.85
- ----------------------------------------------------------------------------------------
Total from investment operations 3.54 4.30 2.18 1.92
- ----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .08 .06 .11 .07
- ----------------------------------------------------------------------------------------
Distribution from net realized gain 1.72 .08 1.35 .91
- ----------------------------------------------------------------------------------------
Total dividends 1.80 .14 1.46 .98
- ----------------------------------------------------------------------------------------
Net asset value, end of period $22.82 21.08 16.92 16.20
- ----------------------------------------------------------------------------------------
Total return (not annualized) 18.32% 25.44 13.61 12.83
- ----------------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses 2.31% 2.26 2.11 2.00
- ----------------------------------------------------------------------------------------
Net investment income .42% .56 .68 .88
- ----------------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 2.31% 2.26 2.34 2.36
- ----------------------------------------------------------------------------------------
Net investment income .42% .56 .45 .52
- ----------------------------------------------------------------------------------------
</TABLE>
Financial Highlights 55
<PAGE>
<TABLE>
<CAPTION>
Eleven
Year months
ended ended Year Sept. 11
November November ended to
30, 30, Dec. 31, Dec. 31,
CLASS C 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $21.06 16.90 16.20 15.26
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .05 .06 .11 .08
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain 3.47 4.20 2.05 1.85
- ---------------------------------------------------------------------------------------------
Total from investment operations 3.52 4.26 2.16 1.93
- ---------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .04 .02 .11 .08
- ---------------------------------------------------------------------------------------------
Distribution from net realized gain 1.72 .08 1.35 .91
- ---------------------------------------------------------------------------------------------
Total dividends 1.76 .10 1.46 .99
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $22.82 21.06 16.90 16.20
- ---------------------------------------------------------------------------------------------
Total return (not annualized) 18.25% 25.26 13.51 12.85
- ---------------------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses 2.40% 2.47 2.12 1.95
- ---------------------------------------------------------------------------------------------
Net investment income .33% .35 .67 .93
- ---------------------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 2.40% 2.47 2.80 2.31
- ---------------------------------------------------------------------------------------------
Net investment income (loss) .33% .35 (.01) .57
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Eleven
Year months
ended ended
November November
30, 30, Year ended December 31,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Supplemental data for all classes
Net assets at end of period
(in thousands) $263,713 178,115 77,592 25,482 12,983
- -------------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(annualized) 64% 77 95 30 16
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Total return does not reflect the effect of any sales charges.
Scudder Kemper Investments, Inc. waived a portion of its management fee and
absorbed certain operating expenses of the fund through the period ended
December 31, 1996. The Other Ratios to Average Net Assets are computed without
this expense waiver or absorption.
56 Financial Highlights
<PAGE>
Kemper-Dreman Financial Services Fund
<TABLE>
<CAPTION>
For the period from March 9, 1998
(commencement of operations)
to November 30, 1998
CLASS A CLASS B CLASS C
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.50 9.50 9.50
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .03 (.01) (.01)
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain .12 .10 .12
- ---------------------------------------------------------------------------------------------
Total from investment operations .15 .09 .11
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $9.65 9.59 9.61
- ---------------------------------------------------------------------------------------------
Total return (not annualized) 1.58% .95 1.16
- ---------------------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses absorbed by the fund 1.36% 2.14 2.11
- ---------------------------------------------------------------------------------------------
Net investment income (loss) .55% (.23) (.20)
- ---------------------------------------------------------------------------------------------
Other ratios to average net assets (annualized)
Expenses 1.55% 2.29 2.26
- ---------------------------------------------------------------------------------------------
Net investment income (loss) .36% (.38) (.35)
- ---------------------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of period (in thousands) $224,161
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 5%
- ---------------------------------------------------------------------------------------------
</TABLE>
Note: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive a portion of its
management fee and absorb certain operating expenses of the fund. The Other
Ratios to Average Net Assets are computed without this expense waiver or
absorption.
Financial Highlights 57
<PAGE>
Kemper-Dreman High Return Equity Fund
<TABLE>
<CAPTION>
Eleven
Year months
ended ended
November November
30, 30, Year ended December 31,
CLASS A 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of
period $33.52 26.52 21.49 15.11 15.50
- ------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .73 .54 .39 .26 .25
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) 3.80 6.89 5.75 6.76 (.39)
- ------------------------------------------------------------------------------------------------
Total from investment
operations 4.53 7.43 6.14 7.02 (.14)
- ------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income .86 .37 .38 .24 .25
- ------------------------------------------------------------------------------------------------
Distribution from net
realized gain 1.50 .06 .73 .40 --
- ------------------------------------------------------------------------------------------------
Total dividends 2.36 .43 1.11 .64 .25
- ------------------------------------------------------------------------------------------------
Net asset value, end of period $35.69 33.52 26.52 21.49 15.11
- ------------------------------------------------------------------------------------------------
Total return (not annualized) 14.25% 28.15 28.79 46.86 (.99)
- ------------------------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 1.19% 1.22 1.21 1.25 1.25
- ------------------------------------------------------------------------------------------------
Net investment income 2.28% 2.38 2.12 1.55 1.58
- ------------------------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 1.19% 1.22 1.21 1.57 1.39
- ------------------------------------------------------------------------------------------------
Net investment income 2.28% 2.38 2.12 1.23 1.44
- ------------------------------------------------------------------------------------------------
</TABLE>
58 Financial Highlights
<PAGE>
<TABLE>
<CAPTION>
Eleven
Year months
ended ended Year Sept. 11
November November ended to
30, 30, Dec. 31, Dec. 31,
CLASS B 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $33.37 26.44 21.47 19.45
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .45 .31 .19 .07
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain 3.75 6.84 5.72 2.41
- ---------------------------------------------------------------------------------------
Total from investment operations 4.20 7.15 5.91 2.48
- ---------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .56 .16 .21 .06
- ---------------------------------------------------------------------------------------
Distribution from net realized gain 1.50 .06 .73 .40
- ---------------------------------------------------------------------------------------
Total dividends 2.06 .22 .94 .46
- ---------------------------------------------------------------------------------------
Net asset value, end of period $35.51 33.37 26.44 21.47
- ---------------------------------------------------------------------------------------
Total return (not annualized) 13.22% 27.10 27.63 12.88
- ---------------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 2.06% 2.12 2.20 2.00
- ---------------------------------------------------------------------------------------
Net investment income 1.41% 1.48 1.13 .61
- ---------------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 2.06% 2.12 2.31 2.35
- ---------------------------------------------------------------------------------------
Net investment income 1.41% 1.48 1.02 .26
- ---------------------------------------------------------------------------------------
</TABLE>
Financial Highlights 59
<PAGE>
<TABLE>
<CAPTION>
Eleven
Year months
ended ended Year Sept. 11
November November ended to
30, 30, Dec. 31, Dec. 31,
CLASS C 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $33.38 26.45 21.48 19.45
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .45 .32 .20 .09
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain 3.79 6.83 5.72 2.41
- -----------------------------------------------------------------------------------------
Total from investment operations 4.24 7.15 5.92 2.50
- -----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .58 .16 .22 .07
- -----------------------------------------------------------------------------------------
Distribution from net realized gain 1.50 .06 .73 .40
- -----------------------------------------------------------------------------------------
Total dividends 2.08 .22 .95 .47
- -----------------------------------------------------------------------------------------
Net asset value, end of period $35.54 33.38 26.45 21.48
- -----------------------------------------------------------------------------------------
Total return (not annualized) 13.32% 27.10 27.66 12.94
- -----------------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses 2.01% 2.10 2.22 1.95
- -----------------------------------------------------------------------------------------
Net investment income 1.46% 1.50 1.11 .66
- -----------------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 2.01% 2.10 2.33 2.30
- -----------------------------------------------------------------------------------------
Net investment income 1.46% 1.50 1.00 .31
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Eleven
Year months
ended ended
November November
30, 30, Year ended December 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Supplemental data for all classes
Net assets at end of period
(in thousands) $5,188,621 2,931,721 737,834 98,196 35,005
- --------------------------------------------------------------------------------------------------
Portfolio turnover rate
(annualized) 7% 5 10 18 12
- --------------------------------------------------------------------------------------------------
</TABLE>
Note: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. waived a portion of its management fee and absorbed
certain operating expenses of the fund through the year ended December 31, 1996.
The Other Ratios to Average Net Assets are computed without this expense waiver
or absorption.
60 Financial Highlights
<PAGE>
Kemper Small Cap Relative Value Fund
<TABLE>
<CAPTION>
For the period from May 6, 1998
(commencement of operations)
to September 30, 1998
CLASS A CLASS B CLASS C
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.50 9.50 9.50
- ------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss -- (.03) (.03)
- ------------------------------------------------------------------------------------------------
Net realized and unrealized loss (1.93) (1.93) (1.92)
- ------------------------------------------------------------------------------------------------
Total from investment operations (1.93) (1.96) (1.95)
- ------------------------------------------------------------------------------------------------
Net asset value, end of period $7.57 7.54 7.55
- ------------------------------------------------------------------------------------------------
Total return (not annualized) (20.32)% (20.63) (20.53)
- ------------------------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses absorbed by the Fund 1.52% 2.40 2.37
- ------------------------------------------------------------------------------------------------
Net investment loss (.15)% (1.03) (1.00)
- ------------------------------------------------------------------------------------------------
Other ratios to average net assets (annualized)
Expenses 12.36% 16.91 12.43
- ------------------------------------------------------------------------------------------------
Net investment loss (10.99)% (15.54) (11.06)
- ------------------------------------------------------------------------------------------------
Supplemental data for all classes
- ------------------------------------------------------------------------------------------------
Net assets at end of period $1,757,385
- ------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 7%
</TABLE>
Note: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive its management fee and
absorb certain operating expenses of the Fund. The Other Ratios to Average Net
Assets are computed without this expense waiver or absorption. Per share data
were determined based on average shares outstanding.
Financial Highlights 61
<PAGE>
Kemper Small Cap Value Fund
<TABLE>
<CAPTION>
Eleven
Year months
ended ended
November November
30, 30, Year ended December 31,
CLASS A 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of
period $21.83 18.28 14.50 10.85 11.23
- -----------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income
(loss) .06 .05 .14 (.02) --
- -----------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) (3.39) 3.50 4.14 4.64 .02
- -----------------------------------------------------------------------------------------------
Total from investment
operations (3.33) 3.55 4.28 4.62 .02
- -----------------------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income -- -- .07 -- --
- -----------------------------------------------------------------------------------------------
Distribution from net
realized gain .70 -- .43 .97 .40
- -----------------------------------------------------------------------------------------------
Total dividends .70 -- .50 .97 .40
- -----------------------------------------------------------------------------------------------
Net asset value, end of period $17.80 21.83 18.28 14.50 10.85
- -----------------------------------------------------------------------------------------------
Total return (not annualized) (15.69)% 19.42 29.60 43.29 .15
- -----------------------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 1.42% 1.32 1.31 1.25 1.25
- -----------------------------------------------------------------------------------------------
Net investment income (loss) .25% .51 .87 (.16) (.03)
- -----------------------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 1.42% 1.32 1.47 1.83 1.82
- -----------------------------------------------------------------------------------------------
Net investment income (loss) .25% .51 .71 (.74) (.61)
- -----------------------------------------------------------------------------------------------
</TABLE>
62 Financial Highlights
<PAGE>
<TABLE>
<CAPTION>
Eleven
months
Year ended ended Year Sept. 11
November November ended to
30, 30, Dec. 31, Dec. 31,
CLASS B 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $21.46 18.14 14.48 15.75
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.12) (.04) .01 (.02)
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (3.31) 3.36 4.11 (.41)
- -----------------------------------------------------------------------------------------
Total from investment operations (3.43) 3.32 4.12 (.43)
- -----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income -- -- .03 --
- -----------------------------------------------------------------------------------------
Distribution from net realized gain .70 -- .43 .84
- -----------------------------------------------------------------------------------------
Total dividends .70 -- .46 .84
- -----------------------------------------------------------------------------------------
Net asset value, end of period $17.33 21.46 18.14 14.48
- -----------------------------------------------------------------------------------------
Total return (not annualized) (16.45)% 18.30 28.54 (2.52)
- -----------------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses 2.34% 2.34 2.12 2.00
- -----------------------------------------------------------------------------------------
Net investment income (loss) (.67)% (.51) .06 (.99)
- -----------------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 2.34% 2.34 2.49 2.39
- -----------------------------------------------------------------------------------------
Net investment loss (.67)% (.51) (.31) (1.38)
- -----------------------------------------------------------------------------------------
</TABLE>
Financial Highlights 63
<PAGE>
<TABLE>
<CAPTION>
Eleven
months
Year ended ended Year Sept. 11
November November ended to
30, 30, Dec. 31, Dec. 31,
CLASS C 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $21.51 18.17 14.48 15.75
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.12) (.03) .01 (.02)
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (3.30) 3.37 4.14 (.41)
- -----------------------------------------------------------------------------------------
Total from investment operations (3.42) 3.34 4.15 (.43)
- -----------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income -- -- .03 --
- -----------------------------------------------------------------------------------------
Distribution from net realized gain .70 -- .43 .84
- -----------------------------------------------------------------------------------------
Total dividends .70 -- .46 .84
- -----------------------------------------------------------------------------------------
Net asset value, end of period $17.39 21.51 18.17 14.48
- -----------------------------------------------------------------------------------------
Total return (not annualized) (16.37)% 18.38 28.77 (2.51)
- -----------------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses 2.28% 2.24 2.06 1.95
- -----------------------------------------------------------------------------------------
Net investment income (loss) (.61)% (.41) .12 (.94)
- -----------------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 2.28% 2.24 2.19 2.35
- -----------------------------------------------------------------------------------------
Net investment loss (.61)% (.41) (.01) (1.34)
- -----------------------------------------------------------------------------------------
<CAPTION>
Eleven
Year months
ended ended
November November
30, 30, Year ended December 31,
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Supplemental data for all classes
Net assets at end of period
(in thousands) $980,411 1,263,144 273,222 31,606 6,931
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate
(annualized) 50% 83 23 86 140
- -----------------------------------------------------------------------------------------------
</TABLE>
Notes: Per share data for the year ended December 31, 1996 were determined based
on average shares outstanding. Total return does not reflect the effect of any
sales charges.
Scudder Kemper Investments, Inc. waived a portion of its management fee and
absorbed certain operating expenses of the fund through the period ended
December 31, 1996. The Other Ratios to Average Net Assets are computed without
this expense waiver or absorption.
64 Financial Highlights
<PAGE>
Kemper U.S. Growth and Income Fund
<TABLE>
<CAPTION>
For the period from January 30, 1998
(commencement of operations)
to September 30, 1998
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of
period $9.50 9.50 9.50
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .07 .03 .03
- --------------------------------------------------------------------------------------
Net realized and unrealized loss (.38) (.38) (.38)
- --------------------------------------------------------------------------------------
Total from investment operations (.31) (.35) (.35)
- --------------------------------------------------------------------------------------
Less distributions from net investment income .07 .03 .03
- --------------------------------------------------------------------------------------
Net asset value, end of period $9.12 9.12 9.12
- --------------------------------------------------------------------------------------
Total return (not annualized) (3.36)% (3.72) (3.71)
- --------------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses absorbed by the Fund 1.36% 2.01 1.99
- --------------------------------------------------------------------------------------
Net investment income 1.56% .91 .93
- --------------------------------------------------------------------------------------
Other ratios to average net assets (annualized)
Expenses 2.59% 3.49 3.25
- --------------------------------------------------------------------------------------
Net investment income (loss) .33% (.57) (.33)
- --------------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of period $18,563,000
- --------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 93%
- --------------------------------------------------------------------------------------
</TABLE>
Note: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive its management fee and
absorb certain operating expenses of the Fund. The Other Ratios to Average Net
Assets are computed without this expense waiver or absorption.
Financial Highlights 65
<PAGE>
Kemper Value Fund
<TABLE>
<CAPTION>
For the period April 16, 1998
(commencement of sale of
Class A , B and C shares) to August 31, 1998
CLASS A CLASS B CLASS C
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $25.42 $25.42 $25.42
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .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
66 Financial Highlights
<PAGE>
Additional information about the funds may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries may be made by calling Kemper at the toll-free
telephone number listed below. The Statement of Additional Information contains
more information on fund investments and operations. The Shareholder Services
Guide contains more information about purchases and sales of fund shares. The
semiannual and annual shareholder reports contain a discussion of the market
conditions and the investment strategies that significantly affected the funds'
performance during the last fiscal year, as well as a listing of portfolio
holdings and financial statements. These and other fund documents may be
obtained without charge from the following sources:
- --------------------------------------------------------------------------------
By Phone Call Kemper at: 1-800-621-1048
- --------------------------------------------------------------------------------
By Mail Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606-5808
or
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- --------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission,
Washington, D.C.
(Call 1-800-SEC-0330
for more information).
- --------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.kemper.com
- --------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file numbers:
Kemper Contrarian Fund 811-5385
Kemper-Dreman Financial Services Fund 811-08599
Kemper-Dreman High Return Equity Fund 811-5385
Kemper Small Cap Relative Value Fund 811-08393
Kemper Small Cap Value Fund 811-5385
Kemper U.S. Growth and Income Fund 811-08393
Kemper Value Fund 811-1444
[PRINTED WITH SOY INK LOGO] [RECYCLE LOGO] Printed on recycled paper
<PAGE>
SCUDDER LARGE COMPANY VALUE FUND
A Series of Value Equity Trust
A Pure No-Load(TM) (No Sales Charges) Diversified Mutual Fund which Seeks
Maximum Capital Appreciation Over the Long-Term Through a Value-Oriented
Approach to Investing
and
VALUE FUND -- SCUDDER SHARES
A Series of Value Equity Trust
A Diversified Mutual Fund Series which Seeks Long-Term Growth
of Capital through Investment in Undervalued Equity Securities
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1999
- --------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus. The
prospectuses of Scudder Large Company Value Fund, dated February 1, 1999, and of
the Scudder Shares class of Value Fund, dated February 1, 1999, as amended from
time to time, may be obtained without charge by writing to Scudder Investor
Services, Inc., Two International Place, Boston, Massachusetts 02110-4103.
The Annual Reports to Shareholders of Scudder Large Company Value Fund and
of the Scudder Shares of Value Fund dated September 30, 1998 are incorporated by
reference into and are hereby deemed to be part of this Statement of Additional
Information.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES.........................................................................1
General Investment Objective and Policies of Scudder Large Company Value Fund................................1
General Investment Objective and Policies of Value Fund......................................................2
Master/feeder structure......................................................................................4
Investments and Investment Techniques........................................................................4
Investment Restrictions.....................................................................................16
Other Investment Policies...................................................................................17
PURCHASES............................................................................................................17
Additional Information About Opening An Account.............................................................18
Minimum balances............................................................................................19
Additional Information About Making Subsequent Investments..................................................20
Additional Information About Making Subsequent Investments by QuickBuy......................................20
Checks......................................................................................................20
Wire Transfer of Federal Funds..............................................................................21
Share Price.................................................................................................21
Share Certificates..........................................................................................21
Other Information...........................................................................................21
EXCHANGES AND REDEMPTIONS............................................................................................22
Exchanges...................................................................................................22
Redemption by Telephone.....................................................................................22
Redemption By QuickSell.....................................................................................23
Redemption by Mail or Fax...................................................................................24
Redemption-in-Kind..........................................................................................24
Other Information...........................................................................................24
FEATURES AND SERVICES OFFERED BY THE FUNDS...........................................................................25
The Pure No-Load(TM) Concept................................................................................25
Internet access.............................................................................................26
Dividends and Capital Gains Distribution Options............................................................27
Scudder Investor Centers....................................................................................27
Reports to Shareholders.....................................................................................27
Transaction Summaries.......................................................................................27
THE SCUDDER FAMILY OF FUNDS..........................................................................................27
SPECIAL PLAN ACCOUNTS................................................................................................33
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for Corporations and
Self-Employed Individuals..............................................................................33
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and Self-Employed Individuals.........33
Scudder IRA: Individual Retirement Account.................................................................33
Scudder Roth IRA: Individual Retirement Account............................................................34
Scudder 403(b) Plan.........................................................................................35
Automatic Withdrawal Plan...................................................................................35
Group or Salary Deduction Plan..............................................................................35
Automatic Investment Plan...................................................................................36
Uniform Transfers/Gifts to Minors Act.......................................................................36
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................36
</TABLE>
i
<PAGE>
TABLE OF CONTENTS (continued)
<TABLE>
<CAPTION>
Page
<S> <C>
PERFORMANCE INFORMATION..............................................................................................36
Average Annual Total Return.................................................................................37
Cumulative Total Return.....................................................................................38
Total Return................................................................................................38
Comparison of Fund Performance..............................................................................38
ORGANIZATION OF THE FUNDS............................................................................................42
INVESTMENT ADVISER...................................................................................................43
Personal Investments by Employees of the Adviser............................................................47
TRUSTEES AND OFFICERS................................................................................................47
REMUNERATION.........................................................................................................50
Responsibilities of the Board -- Board and Committee Meetings...............................................50
Compensation of Officers and Trustees.......................................................................50
DISTRIBUTOR..........................................................................................................50
TAXES................................................................................................................52
PORTFOLIO TRANSACTIONS...............................................................................................56
Brokerage Commissions.......................................................................................56
Portfolio Turnover..........................................................................................57
NET ASSET VALUE......................................................................................................57
ADDITIONAL INFORMATION...............................................................................................58
Experts.....................................................................................................58
Shareholder Indemnification.................................................................................58
Other Information...........................................................................................58
FINANCIAL STATEMENTS.................................................................................................60
Large Company Value Fund....................................................................................60
Value Fund..................................................................................................60
APPENDIX
</TABLE>
ii
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
(See "FUND SUMMARY - Investment Objective and Principal Strategies and
Principal Risks," and "ABOUT THE FUND - Principal Strategies, Investments and
Additional Principal Risks" in each Fund's respective prospectus.)
Scudder Large Company Value Fund and Value Fund (the "Funds") is each a
diversified series of Value Equity Trust (the "Trust"), an open-end management
company. Value Fund offers the following classes of shares: Scudder Shares (the
"Scudder Shares" or "Shares") and Value Fund Class A, B and C shares (the
"Kemper Shares"). Only the shares of Scudder Large Company Value Fund and the
Scudder Shares of Value Fund are offered herein.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which a Fund may engage (such as hedging,
etc.) or a financial instrument which a Fund may purchase (such as options,
forward foreign currency contracts, etc.) are meant to describe the spectrum of
investments that Scudder Kemper Investments, Inc. ( "the Adviser"), in its
discretion, might, but is not required to, use in managing the Fund's portfolio
assets. The Adviser may, in its discretion, at any time employ such practice,
technique or instrument for one or more funds but not for all funds advised by
it. Furthermore, it is possible that certain types of financial instruments or
investment techniques described herein may not be available, permissible,
economically feasible or effective for their intended purposes in all markets.
Certain practices, techniques, or instruments may not be principal activities of
a Fund, but, to the extent employed, could from time to time have a material
impact on the Fund's performance.
General Investment Objective and Policies of Scudder Large Company Value Fund
Scudder Large Company Value Fund ("Large Company Value Fund") pursues
maximum long-term capital appreciation through a value- oriented approach to
investing. The Fund seeks to achieve its objective by investing: (i) in
marketable securities, principally common stocks; (ii) up to 20% of its assets
in debt securities where capital appreciation from debt securities is expected
to exceed the capital appreciation available from common stocks; and (iii) for
temporary defensive purposes, during periods when market or economic conditions
may warrant, in debt securities , short-term indebtedness, cash and cash
equivalents. Because this defensive policy differs from the Fund's investment
objective, the Fund may not achieve its goal during a defensive period. The Fund
may also invest in preferred stocks consistent with its objective. Additionally,
the Fund may invest in debt securities, repurchase agreements and reverse
repurchase agreements, convertible securities, rights, warrants, illiquid
securities, Standard and Poor's Depository Receipts, and may engage in strategic
transactions and derivatives.
The Fund uses a value-based investment approach to pursue a range of
investment opportunities, principally among larger, established U.S. companies.
Given this approach, the Fund may be appropriate as a core investment holding
for retirement or other long-term goals.
In seeking capital appreciation, the Fund looks for companies whose
securities appear to present a favorable relationship between market price and
opportunity. These may include securities of companies whose fundamentals or
products may be of only average promise.
Market misconceptions, temporary bad news, and other factors may cause a
security to be out of favor in the stock market and to trade at a price below
its potential value. Accordingly, the prices of such securities can raise either
as a result of improved business fundamentals, particularly when earning s grow
faster than general expectations, or as more investors come to recognize the
full extent of a company's underlying potential. These "undervalued" securities
can provide the opportunity for above-average market performance.
Investments in common stocks have a wide range of characteristics, and
management of the Fund believes that opportunity for long-term capital
appreciation may be found in all sectors of the market for publicly traded
equity securities. Thus the search for equity investments for the Fund may
encompass any sector of the market and companies of all sizes. It is a
fundamental policy of the Fund, which may not be changed without approval of a
majority of the Fund's outstanding shares, that the Fund will not concentrate
its investments in any particular industry. However, the Fund reserves the right
to invest up to 25% of its total assets (taken at market value) in any one
industry. The use of this tactic is, in the opinion of management, consistent
with the Fund's flexible approach of seeking to maximize long-term growth of
capital.
<PAGE>
The Fund will normally invest at least 65% of its assets in the equity
securities of large U.S. companies, i.e. those with $1 billion or more in total
market capitalization. The Fund's investment flexibility enables it to pursue
investment value in all sectors of the stock market, including:
o companies that generate or apply new technologies, new and improved
distribution techniques or new services, such as those in the business
equipment, electronics, specialty merchandising and health service
industries;
o companies that own or develop natural resources, such as energy
exploration companies;
o companies that may benefit from changing consumer demands and lifestyles,
such as financial service organizations and telecommunications companies;
o foreign companies, including those in countries with more rapid economic
growth than the U.S; and
o companies whose earnings are temporarily depressed and are currently out
of favor with most investors.
The Fund may purchase, for capital appreciation, investment-grade debt
securities including zero coupon bonds. Investment-grade debt securities are
those rated Aaa, Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's"), or
AAA, AA, A or BBB by Standard & Poor's Corporation ("S&P") or, if unrated, of
equivalent quality as determined by the Fund's investment adviser, Moody's
considers bonds it rates Baa to have speculative elements as well as
investment-grade characteristics.
The Fund may also purchase debt securities which are rated below
investment-grade, commonly referred to as "junk bonds," (that is, rated below
Baa by Moody's or below BBB by S&P), and unrated securities of comparable
quality in the Adviser's judgment, which usually entail greater risk (including
the possibility of default or bankruptcy of the issuers of such securities),
generally involve greater volatility of price and risk of principal and income,
and may be less liquid and more difficult to value than securities in the higher
rating categories. The Fund may invest up to 20% of its net assets in securities
rated B or lower by Moody's or S&P and may invest in securities which are rated
as low as C by Moody's or D by S&P. Securities rated B or lower involve a high
degree of speculation with respect to the payment of principal and interest and
those securities rated C or D may be in default with respect to payment of
principal or interest. (See "High Yield, High Risk Securities.")
The Fund is limited to 5% of net assets for initial margin and premium
amounts on futures positions considered speculative by the Commodities Futures
Trading Commission.
The Fund may borrow money for temporary, emergency or other purposes,
including investment leverage purposes, as determined by the Trustees. The Fund
may also engage in reverse repurchase agreements.
Changes in portfolio securities are made on the basis of investment
considerations and it is against the policy of management to make changes for
trading purposes.
Unless otherwise stated, the investment objective and policies of the Fund
is not fundamental and may be changed by the Trustees without a vote of
shareholders. The Fund cannot guarantee a gain or eliminate the risk of loss.
The net asset value of the Fund's shares will increase or decrease with changes
in the market price of the Fund's investments and there is no assurance that the
Fund's objective will be achieved.
General Investment Objective and Policies of Value Fund
Value Fund seeks to provide long-term growth of capital through investment
in undervalued equity securities. This objective is not fundamental and may be
changed by the Trustees without a shareholder vote. Also, unless otherwise
stated, the policies of the Fund are not fundamental and may be changed by the
Trustees without a shareholder vote. The Fund seeks to achieve its objective by
investing in the equity securities of companies that the Fund's portfolio
management team believes are undervalued in the marketplace in relation to
current and estimated future earnings and dividends. These companies generally
sell at price-earnings ratios below the market average, as defined by the
Standard & Poor's Corporation 500 Composite Price Index.
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The Fund invests at least 80% of its assets in equity securities
consisting of common stocks, preferred stocks , securities convertible into
common stocks , rights and warrants. The Fund changes its portfolio securities
for long-term investment considerations and not for trading purposes.
The Fund may be appropriate for investors who seek a core holding to
establish the foundation of a value-oriented portfolio or a value fund to
diversify an existing growth-equity portfolio. Except as otherwise indicated,
the Fund's investment objective and policies are not fundamental and may be
changed without a vote of shareholders. If there is a change in investment
objective, shareholders should consider whether the Fund remains an appropriate
investment in light of their then current financial position and needs. There
can be no assurance that the Fund's objective will be met.
The Fund invests primarily in common stocks of medium-to-large size
domestic companies with annual revenues or market capitalizations of at least $
1 billion. The investment manager uses in-depth fundamental research and a
proprietary computerized quantitative model to identify companies that are
currently undervalued in relation to current and estimated future earnings and
dividends. The investment process also involves an assessment of business risk,
including the analysis of the strength of a company's balance sheet, the
accounting practices a company follows, the volatility of a company's earnings
over time, and the vulnerability of earnings to changes in external factors,
such as the general economy, the competitive environment, governmental action
and technological change.
The current share price or other valuation measures of these companies may
not reflect their business potential because investors may perform incomplete
analyses, have limited time horizons, or allow emotions to influence their
investment decisions. Other similar factors can also influence short-term market
behavior. The Adviser's quantitative approach is designed to help avoid these
pitfalls.
While a broad range of investments is considered, only those that, in the
Adviser's opinion, are selling at comparatively large discounts to intrinsic
value will be purchased for the Fund. It is anticipated that the prices of the
Fund's investments will rise as a result of both earnings growth and rising
price-earnings ratios over time.
While the Fund emphasizes U.S. investments, it can invest its assets in
securities of foreign companies that meet the same criteria applicable to the
Fund's domestic investments if the performance of foreign securities is believed
by the Adviser to offer more potential than domestic investments. The Fund may
invest up to 20% of its assets in debt obligations, including zero coupon
securities and commercial paper and may enter into repurchase agreements and
reverse repurchase agreements. In addition, the Fund may engage in strategic
transactions and derivatives and invest in illiquid securities. Investment-grade
debt securities are those rated Aaa, Aa, A or Baa by Moody's, or AAA, AA, A or
BBB by S&P or, if unrated, of equivalent quality as determined by the Adviser.
The Fund may also purchase debt securities which are rated below
investment-grade (that is, rated below Baa by Moody's or below BBB by S&P) and
unrated securities of equivalent quality as determined by the Adviser, which
usually entail greater risk (including the possibility of default or bankruptcy
of the issues of such securities), generally involve greater volatility of price
and risk of principal and income, and may be less liquid and more difficult to
value than securities in the higher rating categories. The Fund may invest up to
20% of its assets in such securities ("high yield/high risk securities" commonly
referred to as "junk bonds") but will invest no more than 10% of its assets in
securities rated B or lower by Moody's or S&P and may not invest more than 5% of
its net assets in securities which are rated C by Moody's or D by S&P or of
equivalent quality as determined by the Adviser. Securities rated C or D may be
in default with respect to payment of principal or interest. Also, longer
maturity bonds tend to fluctuate more in price as interest rates change than do
short-term bonds, providing both opportunity and risk. (See "High Yield, High
Risk Securities.")
The Fund is limited to 5% of net assets for initial margin and premium
amounts on futures positions considered speculative by the Commodities Futures
Trading Commission.
The Fund may borrow money for temporary, emergency or other purposes,
including investment leverage purposes, as determined by the Trustees.
The Fund cannot guarantee a gain or eliminate the risk of loss. The net
asset value of a Fund's shares will increase or decrease with changes in the
market price of the Fund's investments, and there is no assurance that the
Fund's objective will be achieved.
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Master/feeder structure
The Board of Trustees has the discretion to retain the current
distribution arrangement for a Fund while investing in a master fund in a
master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Investments and Investment Techniques
Common Stocks. Under normal circumstances, the Funds invest primarily in common
stocks. Common stock is issued by companies to raise cash for business purposes
and represents a proportionate interest in the issuing companies. Therefore, a
Fund participates in the success or failure of any company in which it holds
stock. The market values of common stock can fluctuate significantly, reflecting
the business performance of the issuing company, investor perception and general
economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless. Despite the risk of
price volatility, however, common stocks also offer a greater potential for gain
on investment, compared to other classes of financial assets such as bonds or
cash equivalents.
Foreign Securities. While the Funds generally emphasize investments in companies
domiciled in the U.S., they may invest in listed and unlisted foreign securities
of the same types as the domestic securities in which they may invest, when the
anticipated performance of foreign securities is believed by the Adviser to
offer more potential than domestic alternatives, in keeping with the investment
objectives of the Funds.
Investors should recognize that investing in foreign securities involves
certain special considerations, including those set forth below, which are not
typically associated with investing in U.S. securities and which may favorably
or unfavorably affect the Funds' performance. As foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign stock markets, while growing
in volume of trading activity, have substantially less volume than the U.S.
market and securities of some foreign issuers are less liquid and more volatile
than securities of domestic companies. Similarly, volume and liquidity in most
foreign bond markets are less than the volume and liquidity in the U.S. and at
times, volatility of price can be greater than in the U.S. Further, foreign
markets have different clearance and settlement procedures and in certain
markets there have been times when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when assets
of the Funds are uninvested and no return is earned thereon. The inability of
the Funds to make intended security purchases due to settlement problems could
cause the Funds to miss attractive investment opportunities. Inability to
dispose of portfolio securities due to settlement problems either could result
in losses to the Funds due to subsequent declines in value of the portfolio
security or, if the Funds have entered into a contract to sell the security,
could result in possible liability to the purchaser. Fixed commissions on some
foreign stock exchanges and bid to asked spreads in foreign bond markets are
generally higher than negotiated commissions or bid to asked spreads on U.S.
markets although the Funds will endeavor to achieve the most favorable net
results on their portfolio transactions. Further, the Funds may encounter
difficulties or be unable to pursue legal remedies and obtain judgments in
foreign courts. There is generally less governmental supervision and regulation
of securities exchanges, brokers and listed companies in most foreign countries
than in the U.S. It may be more difficult for the Funds' agents to keep
currently informed about corporate actions in foreign countries such as stock
dividends or other matters, which may affect the prices of portfolio securities.
Communications between the U.S. and foreign countries may be less reliable than
within the U.S., thereby increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities. Payment for
securities without delivery may be required in certain foreign markets. In
addition, with respect to certain foreign countries, there is the possibility of
nationalization, expropriation, the imposition of withholding or confiscatory
taxes, political, social, or economic instability, or diplomatic development,
which could affect U.S. investments in those countries. Investments in foreign
securities may also entail certain risks, such as possible currency blockages or
transfer restrictions, and the difficulty of enforcing rights in other
countries. Moreover,
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individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
These considerations generally are more of a concern in developing
countries. For example, the possibility of revolution and the dependence on
foreign economic assistance may be greater in those countries than in developed
countries. The management of the Funds seeks to mitigate the risks associated
with these considerations through diversification and active professional
management. Although investments in companies domiciled in developing countries
may be subject to potentially greater risks than investments in developed
countries, the Funds will not invest in any securities of issuers located in
developing countries if the securities, in the judgment of the Adviser, are
speculative.
Investments in foreign securities usually will involve currencies of
foreign countries. Moreover, the Funds may temporarily hold funds in bank
deposits in foreign currencies during the completion of investment programs and
the value of the assets for the Funds, as measured in U.S. dollars, may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations, and the Funds may incur costs in connection
with conversions between various currencies. Although the Funds value their
assets daily in terms of U.S. dollars, the Funds do not intend to convert their
holdings of foreign currencies, if any, into U.S. dollars on a daily basis. The
Funds may do so from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Funds at one rate,
while offering a lesser rate of exchange should the Funds desire to resell that
currency to the dealer. The Funds will conduct their foreign currency exchange
transactions, if any, either on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market or through forward foreign
currency exchange contracts.
To the extent that the Funds invest in foreign securities, each Fund's
share price could reflect the movements of both the different stock and bond
markets in which it is invested and the currencies in which the investments are
denominated: the strength or weakness of the U.S. dollar against foreign
currencies could account for part of each Fund's investment performance.
Debt Securities. When the Adviser believes that it is appropriate to do so in
order to achieve a Fund's objective of long-term capital appreciation, the Funds
may invest in debt securities, including bonds of private issuers. Portfolio
debt investments will be selected on the basis of, among other things, credit
quality, and the fundamental outlooks for currency, economic and interest rate
trends, taking into account the ability to hedge a degree of currency or local
bond price risk. The Funds may purchase "investment-grade" bonds, rated Aaa, Aa,
A or Baa by Moody's or AAA, AA, A or BBB by S&P or, if unrated, judged to be of
equivalent quality as determined by the Adviser.
The principal risks involved with investments in bonds include interest
rate risk, credit risk and pre-payment risk. Interest rate risk refers to the
likely decline in the value of bonds as interest rates rise. Generally,
longer-term securities are more susceptible to changes in value as a result of
interest-rate changes than are shorter-term securities. Credit risk refers to
the risk that an issuer of a bond may default with respect to the payment of
principal and interest. The lower a bond is rated, the more it is considered to
be a speculative or risky investment. Pre-payment risk is commonly associated
with pooled debt securities, such as mortgage-backed securities and asset backed
securities, but may affect other debt securities as well. When the underlying
debt obligations are prepaid ahead of schedule, the return on the security will
be lower than expected. Pre-payment rates usually increase when interest rates
are falling.
High Yield, High Risk Securities. Below investment-grade securities (commonly
referred to as "junk bonds") (rated below Baa by Moody's and below BBB by S&P)
or unrated securities of equivalent quality in the Adviser's judgment, carry a
high degree of risk (including the possibility of default or bankruptcy of the
issuers of such securities), generally involve greater volatility of price and
risk of principal and income, may be less liquid and more difficult to value
than securities in the higher ratings categories and are considered speculative.
The lower the ratings of such debt securities the greater their risks render
them like equity securities. See the Appendix to this Statement of Additional
Information for a more complete description of the ratings assigned by ratings
organizations and their respective characteristics.
Each Fund may invest up to 20% of its assets in debt securities rated
below investment-grade but will invest no more than 10% of its assets in
securities rated B or lower by Moody's or by S&P and may not invest more than 5%
of its assets in securities which are rated C by Moody's or D by S&P or of
equivalent quality as determined by the Adviser.
An economic downturn could disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates could adversely affect the value of such obligations held by the
Funds. Prices and yields of high yield securities will fluctuate over time and
may affect each Fund's net asset value. In addition,
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investments in high yield zero coupon or pay-in-kind bonds, rather than
income-bearing high yield securities, may be more speculative and may be subject
to greater fluctuations in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of a
Fund to accurately value high yield securities in the Fund's portfolio and to
dispose of those securities. Adverse publicity and investor perceptions may
decrease the value and liquidity of high yield securities. These securities may
also involve special registration responsibilities, liabilities and costs.
Credit quality in the high-yield securities market can change suddenly and
unexpectedly and even recently issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of each
Fund's investment objective may be more dependent on the Adviser's credit
analysis than is the case for higher quality bonds. Should the rating of a
portfolio security be downgraded the Adviser will determine whether it is in the
best interest of a Fund to retain or dispose of the security.
Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation , which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type. For
more information regarding tax issues related to high yield securities see
"TAXES."
Convertible Securities. The Funds may each invest in convertible securities,
that is, bonds, notes, debentures, preferred stocks and other securities which
are convertible into common stock. Investments in convertible securities can
provide an opportunity for capital appreciation and/or income through interest
and dividend payments by virtue of their conversion or exchange features. The
Funds will limit their purchases of convertible securities to debt securities
convertible into common stocks.
The convertible securities in which the Funds may invest are either fixed
income or zero coupon debt securities , which may be converted or exchanged at a
stated or determinable exchange ratio into underlying shares of common stock.
The exchange ratio for any particular convertible security may be adjusted from
time to time due to stock splits, dividends, spin-offs, other corporate
distributions or scheduled changes in the exchange ratio. Convertible debt
securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stocks changes, and, therefore,
also tends to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock, although
typically not as much as the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As debt securities, convertible securities are investments , which provide
for a stream of income (or in the case of zero coupon securities, accretion of
income) with generally higher yields than common stocks. Of course, like all
debt securities, there can be no assurance of income or principal payments
because the issuers of the convertible securities may default on their
obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
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Convertible securities may be issued as fixed income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes ("LYONs"). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the purchase price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follows the
movements in the market value of the underlying common stock. Zero coupon
convertible securities are generally expected to be less volatile than the
underlying common stocks as they are usually issued with short to medium length
maturities (15 years or less) and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
Illiquid Securities. Each Fund may occasionally purchase securities other than
in the open market. While such purchases may often offer attractive
opportunities for investment not otherwise available on the open market, the
securities so purchased are often "restricted securities", i.e., securities
which cannot be sold to the public without registration under the Securities Act
of 1933 or the availability of an exemption from registration (such as Rules 144
or 144A), or which are "not readily marketable" because they are subject to
other legal or contractual delays in or restrictions on resale.
The absence of a trading market can make it difficult to ascertain a
market value for illiquid investments. Disposing of illiquid investments may
involve time-consuming negotiation and legal expenses, and it may be difficult
or impossible for the Fund to sell them promptly at an acceptable price. The
Fund may have to bear the extra expense of registering such securities for
resale and the risk of substantial delay in effecting such registration. Also
market quotations are less readily available. The judgment of the Adviser may at
times play a greater role in valuing these securities than in the case of
unrestricted securities.
Generally speaking, restricted securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held for a
specified period of time and other conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the Securities Act of 1933. The Funds may be deemed to be an
"underwriter" for purposes of the Securities Act of 1933 when selling restricted
securities to the public, and in such event the Fund may be liable to purchasers
of such securities if the registration statement prepared by the issuer, or the
prospectus forming a part of it, is materially inaccurate or misleading.
Borrowing. As a matter of fundamental policy, the Funds will not borrow money,
except as permitted under the Investment Company Act of 1940 (the "1940 Act"),
as amended, and as interpreted or modified by regulatory authority having
jurisdiction, from time to time. While the Trustees do not currently intend for
either Fund to borrow for investment leverage purposes, if such a strategy were
implemented in the future it would increase the Funds' volatility and the risk
of loss in a declining market. Borrowing by the Funds will involve special risk
considerations. Although the principal of the Funds' borrowings will be fixed,
the Funds' assets may change in value during the time a borrowing is
outstanding, thus increasing exposure to capital risk.
Repurchase Agreements. Each Fund may enter into repurchase agreements with any
member bank of the Federal Reserve System or any broker/dealer which is
recognized as a reporting government securities dealer if the creditworthiness
of the bank or broker/dealer has been determined by the Adviser to be at least
equal to that of issuers of commercial paper rated within the two highest grades
assigned by Moody's or by S&P.
A repurchase agreement provides a means for a Fund to earn income on funds
for periods as short as overnight. It is an arrangement under which a Fund
acquires a debt security ("Obligation") and the seller agrees, at the time of
sale, to repurchase the Obligation at a specified time and price. Obligations
subject to a repurchase agreement are held in a segregated account and the value
of such Obligations kept at least equal to the repurchase price on a daily
basis. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a stated rate due to the Fund together with the
repurchase price upon repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the Obligation subject to the repurchase
agreement. Obligations will be held by the Fund's custodian or in the Federal
Reserve Book Entry system.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from a Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to that Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by a Fund subject to a repurchase agreement as being owned
by the Fund or as being collateral for a loan by the Fund to the seller. In the
event of the commencement of bankruptcy or insolvency proceedings with respect
to the seller of the Obligation before repurchase of
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the Obligation under a repurchase agreement, a Fund may encounter delay and
incur costs before being able to sell the security. Delays may involve loss of
interest or decline in price of the Obligation. If the court characterizes the
transaction as a loan and the Fund has not perfected a security interest in the
Obligation, the Fund may be required to return the Obligation to the seller's
estate and be treated as an unsecured creditor of the seller. As an unsecured
creditor, the Fund would risk losing some or all of the principal and income
involved in the transaction. As with any unsecured debt instrument purchased for
the Fund, the Adviser seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the obligor, in this case the
seller of the Obligation. Apart from the risk of bankruptcy or insolvency
proceedings, there is also the risk that the seller may fail to repurchase the
Obligation, in which case the Fund may incur a loss if the proceeds to the Fund
of the sale to a third party are less than the repurchase price. However, if the
market value of the Obligation subject to the repurchase agreement becomes less
than the repurchase price (including interest), the Fund involved will direct
the seller of the Obligation to deliver additional securities so that the market
value of all securities subject to the repurchase agreement will equal or exceed
the repurchase price. It is possible that the Fund will be unsuccessful in
seeking to impose on the seller a contractual obligation to deliver additional
securities.
Depository Receipts. Large Company Value Fund may also invest in Standard and
Poor's Depository Receipts ("SPDRs"). SPDRs should typically trade like a share
of common stock and provide investment results that generally correspond to the
price and yield performance of the component common stocks of the S&P 500. There
can be no assurance, however, that this can be accomplished as it may not be
possible for the SPDRs portfolio to replicate the composition and relative
weightings of the securities of the S&P 500. SPDRs are subject to the risks of
an investment in a broadly based portfolio of large-capitalization common
stocks, including the risk that the general level of stock prices may decline,
thereby adversely affecting the value of such investment. SPDRs are also subject
to risks other than those associated with an investment in such a broadly based
portfolio in that the selection of the stocks included in the SPDRs portfolio
may affect trading in SPDRs, as compared with trading in a broadly based
portfolio of common stocks. In addition, there can be no assurance that that
SPDRs will experience similar trading patterns.
Warrants. Each Fund may invest in warrants up to 5% of the value of its
respective net assets. The holder of a warrant has the right, until the warrant
expires, to purchase a given number of shares of a particular issuer at a
specified price. Such investments can provide a greater potential for profit or
loss than an equivalent investment in the underlying security. Prices of
warrants do not necessarily move, however, in tandem with the prices of the
underlying securities and are, therefore, considered speculative investments.
Warrants pay no dividends and confer no rights other than a purchase option.
Thus, if a warrant held by a Fund were not exercised by the date of its
expiration, the Fund would lose the entire purchase price of the warrant.
Reverse Repurchase Agreements. In a reverse repurchase agreement, a Fund sells a
portfolio instrument to another party, such as a bank or broker-dealer, in
return for cash and agrees to repurchase the instrument at a particular price
and time. While a reverse repurchase agreement is outstanding, a Fund will
maintain liquid assets in a segregated custodial account to cover its obligation
under the agreement. Each Fund will enter into reverse repurchase agreements
only with parties whose creditworthiness has been found satisfactory by the
Adviser. Such transactions may increase fluctuations in the market value of a
Fund's assets and may be viewed as a form of leverage.
Zero Coupon Securities. Each Fund may invest in zero coupon securities , which
pay no cash income and are sold at substantial discounts from their value at
maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the issue price and
their value at maturity. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks as they usually are issued with short maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRS") and Certificate of Accrual on Treasuries
("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in
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the case of bearer securities (i.e., unregistered securities which are owned
ostensibly by the bearer or holder thereof), in trust on behalf of the owners
thereof. Counsel to the underwriters of these certificates or other evidences of
ownership of the U.S. Treasury securities has stated that for federal tax and
securities purposes, in their opinion purchasers of such certificates, such as
the Fund, most likely will be deemed the beneficial holders of the underlying
U.S. Government securities.
The Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program, as
established by the Treasury Department, is known as "STRIPS" or "Separate
Trading of Registered Interest and Principal of Securities." Under the STRIPS
program, the Fund will be able to have its beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells.
(See "TAXES.")
Strategic Transactions and Derivatives. Each Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates, currency exchange rates, and broad or
specific equity or fixed-income market movements), to manage the effective
maturity or duration of fixed-income securities of a Fund's portfolio, or to
enhance potential gain. These strategies may be executed through the use of
derivative contracts. Such strategies are generally accepted as a part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, a Fund may purchase
and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for a Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect a Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in a Fund's portfolio, or to establish a position in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of a Fund's assets will be committed to Strategic
Transactions entered into for non-hedging purposes. Any or all of these
investment techniques may be used at any time and in any combination, and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of a Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. Each Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management or return enhancement purposes
and not to create leveraged exposure in the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to a Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation a Fund can realize on its
investments or cause a Fund to hold a security it might otherwise sell. The use
of currency transactions can result in a Fund incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
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particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Fund might not be able to close out a transaction without incurring substantial
losses, if at all. Although the use of futures and options transactions for
hedging should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time they tend to limit any potential gain
which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
a Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. Each Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all of the terms of
an OTC option, including such
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terms as method of settlement, term, exercise price, premium, guarantees and
security, are set by negotiation of the parties. Each Fund will only sell OTC
options (other than OTC currency options) that are subject to a buy-back
provision permitting a Fund to require the Counterparty to sell the option back
to a Fund at a formula price within seven days. Each Fund expects generally to
enter into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, a Fund will
lose any premium it paid for the option as well as any anticipated benefit of
the transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. Each Fund will engage in OTC option transactions only
with U.S. government securities dealers recognized by the Federal Reserve Bank
of New York as "primary dealers" or broker/dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any nationally recognized
statistical rating organization ("NRSRO") or, in the case of OTC currency
transactions, are determined to be of equivalent credit quality by the Adviser.
The staff of the Securities and Exchange Commission ("SEC") currently takes the
position that OTC options purchased by a Fund, and portfolio securities
"covering" the amount of a Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Federal limits for investing assets in them.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase a Fund's income. The sale of put options can also provide income.
Each Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by a Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though a Fund will receive the option premium to help protect it against
loss, a call sold by a Fund exposes that Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require that Fund to hold a security
or instrument which it might otherwise have sold.
Each Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments (whether or not it holds the above securities in its portfolio), and
on securities, indices, currencies and futures contracts other than futures on
individual corporate debt and individual equity securities. Each Fund will not
sell put options if, as a result, more than 50% of a Fund's assets would be
required to be segregated to cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that a Fund may be required to buy the underlying
security at a disadvantageous price above the market price.
General Characteristics of Futures. Each Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by a Fund, as seller, to deliver to the buyer
the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
Each Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management and return enhancement purposes.
Typically, maintaining a futures contract or selling an option thereon
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requires a Fund to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the mark to market
value of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of a Fund. If a Fund exercises an option on a futures contract it will
be obligated to post initial margin (and potential subsequent variation margin)
for the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
Each Fund will not enter into a futures contract or related option (except
for closing transactions) if, immediately thereafter, the sum of the amount of
its initial margin and premiums on open futures contracts and options thereon
would exceed 5% of that Fund's total assets (taken at current value); however,
in the case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options on Securities Indices and Other Financial Indices. Each Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. Each Fund may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. Each Fund may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations which
have received) a credit rating of A-1 or P-1 by S&P or Moody's, respectively, or
that have an equivalent rating from a NRSRO or are determined to be of
equivalent credit quality by the Adviser.
Each Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of a Fund, which will generally be
used in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
Each Fund will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended wholly or partially
to offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging or cross hedging as described below.
Each Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which that Fund has or in which that Fund
expects to have portfolio exposure.
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To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, each Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which a Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of a Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of that Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
a Fund holds securities denominated in schillings and the Adviser believes that
the value of schillings will decline against the U.S. dollar, the Adviser may
enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to a Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that a Fund is engaging in proxy hedging. If a Fund
enters into a currency hedging transaction, that Fund will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, government exchange controls, blockages, and manipulations
or exchange restrictions imposed by governments can negatively affect purchases
and sales of currency and related instruments. These can result in losses to a
Fund if it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market , which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Combined Transactions. Each Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of a Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which
each Fund may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. Each Fund expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities a Fund anticipates purchasing at a later
date. Each Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream a Fund may be
obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
Each Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Adviser and the Funds believe
such obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to its borrowing restrictions.
The
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Funds will not enter into any swap, cap, floor or collar transaction unless, at
the time of entering into such transaction, the unsecured long-term debt of the
Counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or has an equivalent rating from another NRSRO or is determined to be
of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, a Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
Eurodollar Instruments. Each Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Funds might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts Many Strategic Transactions, in
addition to other requirements, require that the Funds segregate cash or liquid
assets with their custodian to the extent that obligations of the Funds are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
a Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid assets at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by a Fund will require that Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by a Fund on an index will require that Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by a Fund requires that Fund to segregate
cash or liquid assets equal to the exercise price.
Except when a Fund enters into a forward contract for the purchase or sale
of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates a Fund to buy or sell currency
will generally require that Fund to hold an amount of that currency or liquid
assets denominated in that currency equal to that Fund's obligations or to
segregate cash or liquid assets equal to the amount of that Fund's obligation.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when a
Fund sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by a Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when a Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, that Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by a Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and, in connection with such
options, that Fund will segregate an amount of cash or liquid assets equal to
the full value of the option. OTC options settling with physical delivery or
with an election of either physical delivery or cash settlement will be treated
the same as other options settling with physical delivery.
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In the case of a futures contract or an option thereon, a Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash or liquid assets sufficient to meet its obligation to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, a Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid assets having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to a Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. Each Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, a Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by that Fund. Moreover, if a Fund held a futures or forward contract
instead of segregating cash or liquid assets, it could purchase a put option on
the same futures or forward contract with a strike price as high or higher than
the price of the contract held. Other Strategic Transactions may also be offset
in combinations. If the offsetting transaction terminates at the time of or
after the primary transaction no segregation is required, but if it terminates
prior to such time, cash or liquid assets equal to any remaining obligation
would need to be segregated.
Euro Conversion
The introduction of a new European currency, the Euro, may result in
uncertainties for European securities and for the operation of each Fund. The
Euro was introduced on January 1, 1999 by eleven member countries of the
European Economic and Monetary Union (EMU). The introduction of the Euro
requires the redenomination of European debt and equity securities over a period
of time, which may result in various accounting differences and/or tax
treatments. Additional questions are raised by the fact that certain other
European Community members, including the United Kingdom, did not officially
implement the Euro on January 1, 1999.
The Adviser is actively working to address Euro-related issues and understands
that other key service providers are taking similar steps. At this time,
however, no one knows precisely what the degree of impact will be. To the extent
that the market impact or effect on fund holdings is negative, it could hurt
each Fund's performance.
Investment Restrictions
Unless specified to the contrary, the following restrictions are
fundamental policies of each Fund and may not be changed without the approval of
a majority of the outstanding voting securities of that Fund which, under the
1940 Act and the rules thereunder and as used in this Statement of Additional
Information, means the lesser of (1) 67% or more of the shares of the Fund
present at a meeting if the holders of more than 50% of the outstanding shares
of the Fund are present in person or represented by proxy; or (2) more than 50%
of the outstanding shares of the Fund.
If a percentage restriction on investment or utilization of assets as set
forth under "Investment Restrictions" and "Other Investment Policies" above is
adhered to at the time an investment is made, later change in percentage
resulting from changes in the value or the total cost of a Fund's assets will
not be considered a violation of the restriction.
Each Fund has elected to be classified as a diversified series of an
open-end investment company.
As a matter of fundamental policy, each Fund may not:
(1) borrow money, except as permitted under the 1940 Act, as amended,
and as interpreted or modified by regulatory authority having
jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time;
(3) concentrate its investments in a particular industry, as that term
is used in the 1940 Act, as amended, and as interpreted or modified
by regulatory authority having jurisdiction, from time to time;
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(4) engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an
underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include securities
of companies which deal in real estate or mortgages or investments
secured by real estate or interests therein, except that the Fund
reserves freedom of action to hold and to sell real estate acquired
as a result of the Fund's ownership of securities;
(6) purchase physical commodities or contracts relating to physical
commodities; or
(7) Make loans except as permitted under the Investment Company Act of
1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time.
Other Investment Policies
The Trustees of the Trust have voluntarily adopted certain policies and
restrictions , which are observed in the conduct of each Fund's affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from fundamental investment policies in that they may be changed or
amended by action of the Trustees without requiring prior notice to or approval
of shareholders.
As a matter of nonfundamental policy, each Fund currently does not intend
to:
(a) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by engaging
in reverse repurchase agreements, dollar rolls, or other investments
or transactions described in the Fund's registration statement which
may be deemed to be borrowings;
(b) enter into either reverse repurchase agreements or dollar rolls in
an amount greater than 5% of its total assets;
(c) purchase securities on margin or make short sales, except (i) short
sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with futures
contracts, options or other permitted investments, (iv) that
transactions in futures contracts and options shall not be deemed to
constitute selling securities short, and (v) that the Fund may
obtain such short-term credits as may be necessary for the clearance
of securities transactions;
(d) purchase options, unless the aggregate premiums paid on all such
options held by the Fund at any time do not exceed 20% of its total
assets; or sell put options, if as a result, the aggregate value of
the obligations underlying such put options would exceed 50% of its
total assets;
(e) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial
margin with respect to such futures contracts entered into on behalf
of the Fund and the premiums paid for such options on futures
contracts does not exceed 5% of the fair market value of the Fund's
total assets; provided that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be
excluded in computing the 5% limit;
(f) purchase warrants if as a result, such securities, taken at the
lower of cost or market value, would represent more than 5% of the
value of the Fund's total assets (for this purpose, warrants
acquired in units or attached to securities will be deemed to have
no value); and
(g) lend portfolio securities in an amount greater than 5% of its total
assets.
If a percentage restriction on investment or utilization of assets as set
forth under "Investment Restrictions" and "Other Investment Policies" above is
adhered to at the time an investment is made, a later change in percentage
resulting from changes in the value or the total cost of a Fund's assets will
not be considered a violation of the restriction.
In addition, other nonfundamental policies may be established from time to
time by the Trust's Trustees and would not require the approval of shareholders.
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PURCHASES
(See "Transaction Information" and "Purchases" in
the each Fund's respective prospectus.)
Large Company Value Fund and the Scudder Shares of Value Fund each require
a $2,500 minimum initial investment and a minimum subsequent investment of $100.
The minimum investment requirements may be waived or lowered for investments
effected through banks and other institutions that have entered into special
arrangements with the Funds and for investments effected on a group basis by
certain other entities and their employees, such as pursuant to a payroll
deduction plan and for investments made in an Individual Retirement Account
offered by the Funds. Investment minimums may also be waived for Trustees and
officers of the Funds. The Funds, Scudder Investor Services, Inc., Kemper
Distributors, Inc. and Scudder Financial Intermediary Services Group each
reserve the right to reject any purchase order. All funds will be invested in
full and fractional shares.
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Fund
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have certified a tax identification number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD
and banks may open an account by wire. These investors must call 1-800-225-5163
to get an account number. During the call, the investor will be asked to
indicate the Fund name, amount to be wired ($2,500 minimum), name of bank or
trust company from which the wire will be sent, the exact registration of the
new account, the tax identification or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, State Street Bank and Trust Company, Boston, MA
02110, ABA Number 011000028, DDA Account Number 9903-5552. The investor must
give the Scudder fund name, account name and the new account number. Finally,
the investor must send the completed and signed application to the Fund
promptly.
The minimum initial purchase amount may be less than $2,500 under certain
special plan accounts.
The name Scudder Value Fund as used herein and in its prospectus also
means Value Fund, which is a series of Value Equity Trust. All shares of Value
Fund purchased before April 16, 1998 are considered Scudder Shares of Value
Fund. Investors in Value Fund as of April 15, 1998 can continue to purchase
Scudder Shares. Scudder Shares are not available to new investors with the
following exceptions:
1. Existing shareholders of any fund or class of a fund in the Scudder
Family of Funds as of April 15, 1998, and their immediate family
members residing at the same address, may purchase Scudder Shares.
2. Shareholders, who owned shares of Value Fund through any
broker-dealer or service agent omnibus account as of April 15, 1998,
may continue to purchase Scudder Shares. Existing shareholders of
any fund in the Scudder Family of Funds through certain
broker-dealers or service agent omnibus accounts as of April 15,
1998 may purchase Scudder Shares when made available from that
broker-dealer or service agent. Call the broker-dealer or service
agent for more information.
3. Retirement, employee stock, bonus, pension or profit sharing plans
offering the Scudder Family of Funds as of April 15, 1998, may add
new participants and accounts. Scudder Shares are also available to
prospective plan sponsors, as well as to existing plans , which had
not previously offered Value Fund as an investment option.
4. An employee who owns Scudder Shares through a retirement, employee
stock, bonus, pension or profit sharing plan as of April 15, 1998,
may, at a later date, open a new individual account to purchase
Scudder Shares.
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5. Any employee, who owns Scudder Shares through a retirement, employee
stock, bonus, pension or profit sharing plan may complete a direct
rollover to an IRA holding Scudder Shares.
6. Scudder Shares are available to the Scudder Kemper Investments, Inc.
retirement plans.
7. Officers, Fund Trustees and Directors, and full-time employees of
Scudder Kemper Investments, Inc. and its subsidiaries, and their
family members may purchase Scudder Shares.
8. Scudder Shares are available to any accounts managed by Scudder
Kemper Investments, Inc., any advisory products offered by Scudder
Kemper Investments, Inc., or Scudder Investor Services, Inc., and to
the portfolios of Scudder Pathway Series.
9. Registered investment advisors ("RIAs") and certified financial
planners ("CFPs") with clients invested in the Scudder Family of
Funds as of April 15, 1998 may purchase additional Scudder Shares or
open new individual client or omnibus accounts purchasing Scudder
Shares. RIAs and CFPs who do not have clients invested in the Funds
as of April 15, 1998 may enter into a written agreement with Scudder
Investor Services in order to purchase Scudder Shares. Call Scudder
Financial Intermediary Services at 1-800-854-8525 for more
information.
10. Broker-dealers, RIAs and CFPs who have clients participating in
comprehensive fee programs may enter into an agreement with Scudder
Investor Services in order to purchase Scudder Shares. Call Scudder
Financial Intermediary Services at 1-800-854-8525 for more
information.
11. Institutional alliances trading through NSCC/FundServ may purchase
Scudder Shares. Call Scudder Financial Intermediary Services at
1-800-854-8525 for more information.
12. Partnership shareholders invested in Value Fund as of April 15,
1998, through an account registered in the name of a partnership may
open new accounts to purchase Scudder Shares, whether or not they
are listed on the account registration. Corporate shareholders
invested in Value Fund as of April 15, 1998 may open new accounts
using the same registration, or if the corporation is reorganized,
the new companies may purchase Scudder Shares.
Scudder Investor Services may, at its discretion, require appropriate
documentation that an investor is indeed eligible to purchase Scudder Shares.
For more information, please call Scudder Investor Relations at 1-800-225-2470.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500 ($1,000
for fiduciary accounts such as IRAs, and custodial accounts such as Uniform Gift
to Minor Act, and Uniform Trust to Minor Act accounts), which amount may be
changed by the Board of Trustees. A shareholder may open an account with at
least $1,000 ($500 for fiduciary/custodial accounts), if an automatic investment
plan (AIP) of $100/month ($50/month for fiduciary/custodial accounts) is
established. Scudder group retirement plans and certain other accounts have
similar or lower minimum share balance requirements.
Each Fund reserves the right, following 60 days' written notice to
applicable shareholders, to:
o assess an annual $10 per Fund charge (with the fee to be paid to the
Fund) for any non-fiduciary/non-custodial account without an
automatic investment plan (AIP) in place and a balance of less than
$2,500; and
o redeem all shares in a Fund account below $1,000 where a reduction
in value has occurred due to a redemption, exchange or transfer out
of the account. Each Fund will mail the proceeds of the redeemed
account to the shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
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Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Orders placed in this manner may be directed to any
office of the Distributor listed in the respective prospectus. A confirmation of
the purchase will be mailed out promptly following receipt of a request to buy.
Federal regulations require that payment be received within three business days.
If payment is not received within that time, the order is subject to
cancellation. In the event of such cancellation or cancellation at the
purchaser's request, the purchaser will be responsible for any loss incurred by
a Fund or the principal underwriter by reason of such cancellation. If the
purchaser is a shareholder, the Trust shall have the authority, as agent of the
shareholder, to redeem shares in the account in order to reimburse the relevant
Fund or the principal underwriter for the loss incurred. Net losses on such
transactions , which are not recovered from the purchaser, will be absorbed by
the principal underwriter. Any net profit on the liquidation of unpaid shares
will accrue to the relevant Fund.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of each Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
Exchange, normally 4 p.m. eastern time. Proceeds in the amount of your purchase
will be transferred from your bank checking account two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, shares will be purchased at the net asset value per share
calculated at the close of trading on the day of your call. QuickBuy requests
received after the close of regular trading on the Exchange will begin their
processing and be purchased at the net asset value calculated the following
business day. If you purchase shares by QuickBuy and redeem them within seven
days of the purchase, a Fund may hold the redemption proceeds for a period of up
to seven business days. If you purchase shares and there are insufficient funds
in your bank account the purchase will be canceled and you will be subject to
any losses or fees incurred in the transaction. QuickBuy transactions are not
available for most retirement plan accounts. However, QuickBuy transactions are
available for Scudder IRA accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to Scudder Service Corporation, the Transfer Agent
("Service Corporation" or "Transfer Agent") the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders that wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form
shareholders should allow for 15 days for this service to be available.
Each Fund employs procedures, including recording telephone calls, testing
a caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that a Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. Each Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Checks
A certified check is not necessary, but checks are accepted subject to
collection at full face value in U.S. funds and must be drawn on or payable
through, an U.S. bank.
If shares are purchased by a check , which proves to be uncollectible, the
Trust reserves the right to cancel the purchase immediately and the purchaser
will be responsible for any loss incurred by a Fund or the principal underwriter
by reason of such cancellation. If the purchaser is a shareholder, the Trust
will have the authority, as agent of the shareholder, to redeem shares in the
account in order to reimburse a Fund or the principal underwriter for the loss
incurred. Investors whose orders have been canceled may be prohibited from or
restricted in placing future orders in any of the Scudder funds.
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Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange (normally 4 p.m. eastern time) on a selected day, your
bank must forward federal funds by wire transfer and provide the required
account information so as to be available to the Fund prior to 4 p.m.
The bank sending an investor's federal funds by bank wire may charge for
the service. Presently the Distributor pays a fee for receipt by State Street
Bank and Trust Company (the "Custodian") of "wired funds," but the right to
charge investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may be
open. These holidays include: Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of a Fund.
Share Price
Purchases will be filled without sales charge at the net asset value (per
Share for Value Fund) next computed after receipt of the application in good
order. Net asset value normally will be computed as of the close of regular
trading on each day during which the Exchange is open for trading. Orders
received after the close of regular trading on the Exchange will be executed at
the next business day's net asset value. If the order has been placed by a
member of the NASD, other than the Distributor, it is the responsibility of that
member broker, rather than the Fund, to forward the purchase order to the Large
Company Value Fund and the Scudder Shares' Transfer Agent in Boston by the close
of regular trading on the Exchange.
Share Certificates
Due to the desire of Trust management to afford ease of redemption,
certificates will not be issued to indicate ownership in the Funds. With respect
to Large Company Value Fund, formerly known as Capital Growth Fund, share
certificates now in a shareholder's possession may be sent to the Large Company
Value Fund's transfer agent for cancellation and credit to such shareholder's
account. Shareholders who prefer may hold the certificates in their possession
until they wish to exchange or redeem such shares.
Other Information
The Funds have authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Funds' shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on each Fund's behalf. Orders for purchase or redemption will be deemed
to have been received by a Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between a Fund and the
broker, ordinarily orders will be priced at the respective Fund's or Scudder
Share's net asset value next computed after acceptance by such brokers or their
authorized designees. Further, if purchases or redemptions of a Fund's shares
are arranged and settlement is made at an investor's election through any other
authorized NASD member, that member may, at its discretion, charge a fee for
that service. The Board of Trustees and the Distributor, also the Funds'
principal underwriter, each has the right to limit the amount of purchases by,
and to refuse to sell to, any person. The Trustees and the Distributor may
suspend or terminate the offering of shares of a Fund at any time for any
reason.
The Tax Identification Number section of the Funds' application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g., from exempt investors, certification of exempt status) may be
returned to the investor if a certified tax identification number and certain
other required certificates are not supplied.
The Trust may issue shares of either Fund at net asset value in connection
with any merger or consolidation with, or acquisition of the assets of, any
investment company or personal holding company, subject to the requirements of
the 1940 Act.
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EXCHANGES AND REDEMPTIONS
(See "Exchanges and Redemptions" and "Transaction Information" in each Fund's
respective prospectus.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund or from the
Scudder Shares and a purchase into another Scudder fund or Scudder Shares class.
The purchase side of the exchange either may be an additional investment into an
existing account or may involve opening a new account in the other fund. When an
exchange involves a new account, the new account will be established with the
same registration, tax identification number, address, telephone redemption
option, "Scudder Automated Information Line" (SAIL) transaction authorization
and dividend option as the existing account. Other features will not carry over
automatically to the new account. Exchanges to a new fund account must be for a
minimum of $2,500. When an exchange represents an additional investment into an
existing account, the account receiving the exchange proceeds must have
identical registration, address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more. If the
account receiving the exchange proceeds is to be different in any respect, the
exchange request must be in writing and must contain an original signature
guarantee as described under "Transaction Information -- Signature guarantees"
in the Funds' prospectuses.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at the respective net
asset values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund at current net asset value through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the phone or in writing. Automatic
Exchanges will continue until the shareholder requests by telephone or in
writing to have the feature removed, or until the originating account is
depleted. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of the Automatic Exchange Program at any time.
There is no charge to the shareholder for any exchange described above. An
exchange into another Scudder fund is a redemption of shares, and therefore may
result in tax consequences (gain or loss) to the shareholder, and the proceeds
of such an exchange may be subject to backup withholding. (See "TAXES.")
Investors currently receive the exchange privilege, including exchange by
telephone, automatically without having to elect it. The Trust employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Trust does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Trust will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of exchanging by telephone or fax at any time.
The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated. The exchange privilege may not be
available for certain Scudder funds or classes thereof. For more information,
please call 1-800-225-5163.
Scudder retirement plans may have different exchange requirements. Please
refer to appropriate plan literature.
Redemption by Telephone
Shareholders currently receive the right, automatically without having to
elect it, to redeem by telephone up to $100,000 and have the proceeds mailed to
their address of record. Shareholders may request to have the proceeds mailed or
wired to their pre-designated bank account. In order to request redemptions by
telephone, shareholders must have completed and returned to the Transfer Agent
the application, including the designation of a bank account to which the
redemption proceeds are to be sent.
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(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate section on
the application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA, Scudder
Pension and Profit-Sharing, Scudder 401(k) and Scudder 403(b)
Planholders) who wish to establish telephone redemption to a
predesignated bank account or who want to change the bank account
previously designated to receive redemption payments should either
return a Telephone Redemption Option Form (available upon request)
or send a letter identifying the account and specifying the exact
information to be changed. The letter must be signed exactly as the
shareholder's name(s) appears on the account. An original signature
and an original signature guarantee are required for each person in
whose name the account is registered.
Telephone redemption is not available with respect to shares represented
by share certificates for Large Company Value Fund, formerly known as Scudder
Capital Growth Fund, or shares held in certain retirement accounts for both
Funds.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds must be
wired through a commercial bank which is a correspondent of the savings
bank. As this may delay receipt by the shareholder's account, it is
suggested that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire transfer
information with the telephone redemption authorization. If appropriate
wire information is not supplied, redemption proceeds will be mailed to
the designated bank.
Each Fund employs procedures, including recording telephone calls, testing
a caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that a Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. A Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Redemption requests by telephone (technically a repurchase by agreement
between the Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to seven
business days.
Redemption By QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickSell program may sell shares of a Fund by telephone. Redemptions
must be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account two or three business days following
your call. For requests received by the close of regular trading on the
Exchange, normally 4 p.m. eastern time, shares will be redeemed at the net asset
value per share calculated at the close of trading on the day of your call.
QuickSell requests received after the close of regular trading on the Exchange
will begin their processing and be redeemed at the net asset value calculated
the following business day. QuickSell transactions are not available for Scudder
IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which redemption proceeds will be credited .
New investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders that wish to add QuickSell to their account may do so by
completing a QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
Each Fund employs procedures, including recording telephone calls, testing
a caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that a Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. A Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
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Redemption by Mail or Fax
Any existing share certificates for Large Company Value Fund, formerly
known as Scudder Capital Growth Fund, representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signature guaranteed, as explained in each
Fund's prospectus in "About Your Investment - Signature guarantees"..
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not limited to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
It is suggested that shareholders holding certificated shares or shares
registered in other than individual names contact the Transfer Agent prior to
redemptions to ensure that all necessary documents accompany the request. When
shares are held in the name of a corporation, trust, fiduciary agent, attorney
or partnership, the Transfer Agent requires, in addition to the stock power,
certified evidence of authority to sign. These procedures are for the protection
of shareholders and should be followed to ensure prompt payment. Redemption
requests must not be conditional as to date or price of the redemption. Proceeds
of a redemption will be sent within five business days after receipt by the
Transfer Agent of a request for redemption that complies with the above
requirements. Delays of more than seven days of payment for shares tendered for
repurchase or redemption may result but only until the purchase check has
cleared.
The requirements for IRA redemptions are different from those for regular
accounts. For more information call 1-800-225-5163.
Redemption-in-Kind
The Trust reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption or repurchase order by making
payment in whole or in part in readily marketable securities chosen by a Fund
and valued as they are for purposes of computing a Fund's net asset value (a
redemption-in-kind). If payment is made in securities, a shareholder may incur
transaction expenses in converting these securities into cash. The Trust has
elected, however, to be governed by Rule 18f-1 under the 1940 Act as a result of
which a Fund is obligated to redeem shares, with respect to any one shareholder
during any 90 day period, solely in cash up to the lesser of $250,000 or 1% of
the net asset value of that Fund at the beginning of the period.
Other Information
Clients, officers or employees of the Adviser or of an affiliated
organization, and members of such clients', officers' or employees' immediate
families, banks and members of the NASD may direct redemption requests to the
Trust through Scudder Investor Services, Inc. at Two International Place,
Boston, Massachusetts 02110-4103 by letter, fax, TWX, or telephone. A two-part
confirmation will be mailed out promptly after receipt of the request. A written
request in good order as described above and any certificates with a proper
original signature guarantee(s), as described in the Funds' prospectuses under
"Transaction information -- Signature guarantees", should be sent with a copy of
the invoice to Scudder Service Corporation, Confirmed Processing Department, Two
International Place, Boston, Massachusetts 02110-4103. Failure to deliver shares
or required documents (see above) by the settlement date may result in
cancellation of the trade and the shareholder will be responsible for any loss
incurred by a Fund or the principal underwriter by reason of such cancellation.
The Trust shall have the authority, as agent of the shareholder, to redeem
shares in the account to reimburse a Fund or the principal underwriter for the
loss incurred. Net losses on such transactions , which are not recovered from
the shareholder, will be absorbed by the principal underwriter. Any net gains so
resulting will accrue to a Fund. For this group, repurchases will be carried out
at the net asset value next computed after such repurchase requests have been
received. The arrangements described in this paragraph for repurchasing shares
are discretionary and may be discontinued at any time.
If a shareholder redeems all shares in the account after the record date
of a dividend, the shareholder will receive in addition to the net asset value
thereof, all declared but unpaid dividends thereon. The value of shares redeemed
or repurchased may be more or less than the shareholder's cost depending on the
net asset value at the time of redemption or repurchase. The Funds do not impose
a redemption or repurchase charge, although a wire charge may be applicable for
redemption proceeds wired to an investor's bank account. Redemption of shares,
including an exchange into another Scudder fund, may result in tax consequences
(gain or loss) to the shareholder and the proceeds of such redemptions may be
subject to backup withholding. (See "TAXES.")
23
<PAGE>
Shareholders who wish to redeem shares from Special Plan Accounts should
contact the employer, trustee or custodian of the Plan for the requirements.
The Trust's Declaration of Trust provides that the determination of net
asset value may be suspended and a shareholder's right to redeem shares and to
receive payments may be suspended at times during which a) the Exchange is
closed, other than customary weekend and holiday closings, (b) trading on the
Exchange is restricted, (c) an emergency exists as a result of which disposal by
the Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for a Fund fairly to determine the value of its net
assets, or (d) a governmental body having jurisdiction over the Trust may, by
order, permit such a suspension for the protection of a Fund's shareholders;
provided that applicable rules and regulations of the SEC (or any succeeding
governmental authority) shall govern as to whether the conditions prescribed in
(b), (c) or (d) exist.
FEATURES AND SERVICES OFFERED BY THE FUNDS (See "Investment
Products and Services" in each Fund's respective prospectus)
The No-Load Concept
Investors are encouraged to be aware of the full ramifications of mutual
fund fee structures, and of how Scudder distinguishes its Scudder Family of
Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for the
sale and distribution of fund shares. There are three types of loads: front-end
loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of the
amount invested. A back-end load is a contingent deferred sales charge, which
can be as high as 8.50% of either the amount invested or redeemed. The maximum
front-end or back-end load varies, and depends upon whether or not a fund also
charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Conduct Rules, a mutual fund can call
itself a "no-load" fund only if the 12b-1 fee and/or service fee does not exceed
0.25% of a fund's average annual net assets.
Scudder pioneered the no-load concept when it created the nation's first
no-load fund in 1928, and later developed the nation's first family of no-load
mutual funds.
The following chart shows the potential long-term advantage of investing
$10,000 in a Scudder Family of Funds pure no-load fund over investing the same
amount in a load fund that collects an 8.50% front-end load, a load fund that
collects only a 0.75% 12b-1 and/or service fee, and a no-load fund charging only
a 0.25% 12b-1 and/or service fee. The hypothetical figures in the chart show the
value of an account assuming a constant 10% rate of return over the time periods
indicated and reinvestment of dividends and distributions.
24
<PAGE>
================================================================================
Scudder No-Load Fund
Years Pure No-Load(TM) 8.50% Load Load Fund with with 0.25%
Fund Fund 0.75% 12b-1 Fee 12b-1 Fee
- --------------------------------------------------------------------------------
10 $25,937 $23,733 $24,222 $25,354
- --------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- --------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
================================================================================
Investors are encouraged to review the fee tables on page 5 of each Fund's
respective prospectus for more specific information about the rates at which
management fees and other expenses are assessed.
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
The site is designed for interactivity, simplicity and maneuverability. A
section entitled "Planning Resources" provides information on asset allocation,
tuition, and retirement planning to users who fill out interactive "worksheets."
Investors can easily establish a "Personal Page," that presents price
information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both the Adviser and Lipper Analytical Services, Inc. is
available on the site. Also offered on the site is a news feature, which
provides timely and topical material on the Scudder Funds.
The Adviser has communicated with shareholders and other interested
parties on Prodigy since 1988 and has participated since 1994 in GALT's Networth
"financial marketplace" site on the Internet. The firm made Scudder Funds
information available on America Online in early 1996.
Account Access -- The Adviser is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
The Adviser's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders that have set up a Personal Page on the Adviser's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions for
an account, with trade dates, type and amount of transaction, share price and
number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me(TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
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<PAGE>
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of Large Company Value Fund and Scudder Shares. A
change of instructions for the method of payment must be received by the
Transfer Agent at least five days prior to a dividend record date. Shareholders
also may change their dividend option either by calling 1-800-225-5163 or by
sending written instructions to the Transfer Agent. Please include your account
number with your written request. Reinvestment is usually made at the closing
net asset value determined on the business day following the record date.
Investors may leave standing instructions with the Transfer Agent designating
their option for either reinvestment or cash distribution of any income
dividends or capital gains distributions. If no election is made, dividends and
distributions will be invested in additional shares of a Fund.
Investors may also have dividends and distributions automatically
deposited in their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after a Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal Plan
must reinvest any dividends or capital gains. For most retirement plan accounts,
the reinvestment of dividends and capital gains is also required.
Diversification
Your investment in each Fund represents an interest in a large,
diversified portfolio of carefully selected securities. Diversification may
protect you against the possible risks associated with concentrating in fewer
securities.
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor listed in each Fund's respective Prospectus. The Centers are
designed to provide individuals with services during any business day. Investors
may pick up literature or obtain assistance with opening an account, adding
monies or special options to existing accounts, making exchanges within the
Scudder Family of Funds, redeeming shares or opening retirement plans. Checks
should not be mailed to the Centers but should be mailed to "The Scudder Funds"
at the address listed under "Purchases" or "Exchanges and Redemptions" in the
prospectuses.
Reports to Shareholders
Each Fund issues to its shareholders unaudited semiannual financial
statements and annual financial statements audited by independent accountants,
including a list of investments held and statements of assets and liabilities,
operations, changes in net assets and financial highlights. Each distribution
will be accompanied by a brief explanation of the source of the distribution.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available to
shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
(See "Investment Products and Services" in each Fund's respective prospectus.)
The Scudder Family of Funds is America's first family of mutual funds and
the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
26
<PAGE>
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current income.
The Fund seeks to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible, and declares
dividends daily.
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability of
capital and, consistent therewith, to maintain the liquidity of capital
and to provide current income. SCIT seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may not
be possible, and declares dividends daily.
Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices and
with preservation of capital and liquidity. The Fund seeks to maintain a
constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.
Scudder Government Money Market Series seeks to provide investors with as
high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of shares
of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt from
regular federal income tax and stability of principal through investments
primarily in municipal securities. STFMF seeks to maintain a constant net
asset value of $1.00 per share, although in extreme circumstances this may
not be possible.
Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal income
tax by reason of federal law as is consistent with its investment policies
and with preservation of capital and liquidity. The Fund seeks to maintain
a constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value will
be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There can
be no assurance that the stable net asset value will be maintained.
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a high
degree of principal stability.
Scudder Medium Term Tax Free Fund seeks to provide a high level of income
free from regular federal income taxes and to limit principal fluctuation.
The Fund will invest primarily in high-grade, intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
- ----------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
27
<PAGE>
Scudder High Yield Tax Free Fund seeks to provide a high level of interest
income, exempt from regular federal income tax, from an actively managed
portfolio consisting primarily of investment-grade municipal securities.
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and regular
federal income tax. The Fund is a professionally managed portfolio
consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers with
income exempt from New York State and New York City personal income taxes
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of New York municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income tax.
The Fund is a professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.
Scudder GNMA Fund seeks to provide high current income primarily from U.S.
Government guaranteed mortgage-backed (Ginnie Mae) securities.
Scudder Income Fund seeks a high level of income, consistent with the
prudent investment of capital, through a flexible investment program
emphasizing high-grade bonds.
Scudder Corporate Bond Fund seeks a high level of current income through
investment primarily in investment-grade corporate debt securities.
Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.
GLOBAL INCOME
Scudder Global Bond Fund seeks to provide total return with an emphasis on
current income by investing primarily in high-grade bonds denominated in
foreign currencies and the U.S. dollar. As a secondary objective, the Fund
will seek capital appreciation.
- ----------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
28
<PAGE>
Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. As a
secondary objective, the Fund seeks protection and possible enhancement of
principal value by actively managing currency, bond market and maturity
exposure and by security selection.
Scudder Emerging Markets Income Fund seeks to provide high current income
and, secondarily, long-term capital appreciation through investments
primarily in high-yielding debt securities issued by governments and
corporations in emerging markets.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will have
some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors with
a balance of growth and income by investing in a select mix of Scudder
money market, bond and equity mutual funds.
Scudder Pathway Series: Growth Portfolio seeks to provide investors with
long-term growth of capital. In pursuing this objective, the Portfolio
will, under normal market conditions, invest predominantly in a select mix
of Scudder equity mutual funds designed to provide long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total return
for investors. Total return consists of any capital appreciation plus
dividend income and interest. To achieve this objective, the Portfolio
invests in a select mix of established international and global Scudder
funds.
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund also
seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity securities.
Scudder Growth and Income Fund seeks long-term growth of capital, current
income, and growth of income.
Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks publicly
traded in the United States, as represented by the Standard & Poor's 500
Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies in
the real estate industry.
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
Scudder Value Fund** seeks long-term growth of capital through investment
in undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of capital
by seeking out undervalued stocks of small U.S. companies.
- ----------
** Only the Scudder Shares are part of the Scudder Family of Funds.
29
<PAGE>
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund** seeks to provide long-term growth of capital
with reduced share price volatility compared to other growth mutual funds.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of seasoned,
financially strong U.S. growth companies.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in medium-size companies with the potential for sustainable
above-average earnings growth.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies poised
to be leaders in the 21st century.
GLOBAL EQUITY
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.
Scudder International Value Fund seeks long-term capital appreciation
through investment primarily in undervalued foreign equity securities.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund*** seeks long-term growth of capital primarily
through a diversified portfolio of marketable foreign equity securities.
Scudder International Growth Fund seeks long-term capital appreciation
through investment primarily in the equity securities of foreign companies
with high growth potential.
Scudder Global Discovery Fund** seeks above-average capital appreciation
over the long term by investing primarily in the equity securities of
small companies located throughout the world.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the globe.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity securities
and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital appreciation
through investment primarily in the securities of Latin American issuers.
- ----------
*** Only the International Shares are part of the Scudder Family of Funds.
30
<PAGE>
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts) of
Japanese companies.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related to
the treatment or prevention of diseases and other medical problems.
Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the development,
production or distribution of technology-related products or services.
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund seeks long-term growth of capital on an
after-tax basis by investing primarily in established, medium- to
large-sized U.S. companies with leading competitive positions.
Scudder Tax Managed Small Company Fund seeks long-term growth of capital
on an after-tax basis through investment primarily in undervalued stocks
of small U.S. companies.
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; and easy telephone
exchanges into other Scudder funds. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. For more information, please call
1-800-225-5163.
SPECIAL PLAN ACCOUNTS
(See "Transaction Information," "Purchases," and "Exchanges and
Redemptions" in each Fund's respective prospectus.)
Detailed information on any Scudder investment plan, including the applicable
charges, minimum investment requirements and disclosures made pursuant to
Internal Revenue Service (the "IRS") requirements, may be obtained by contacting
Scudder Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103 or by calling toll free, 1-800-225-2470. The discussions of the plans
below describe only certain aspects of the federal income tax treatment of the
plan. The state tax treatment may be different and may vary from state to state.
It is advisable for an investor considering the funding of the investment plans
described below to consult with an attorney or other investment or tax adviser
with respect to the suitability requirements and tax aspects thereof.
Shares of each Fund may also be a permitted investment under profit
sharing and pension plans and IRA's other than those offered by the Funds'
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
31
<PAGE>
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals
Shares of the Large Company Value Fund and Scudder Shares of Value Fund
may be purchased as the investment medium under a plan in the form of a Scudder
Profit-Sharing Plan (including a version of the Plan which includes a
cash-or-deferred feature) or a Scudder Money Purchase Pension Plan (jointly
referred to as the Scudder Retirement Plans) adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietorships and partnerships), or other qualifying organization. Each of
these forms was approved by the IRS as a prototype. The IRS's approval of an
employer's plan under Section 401(a) of the Internal Revenue Code will be
greatly facilitated if it is in such approved form. Under certain circumstances,
the IRS will assume that a plan, adopted in this form, after special notice to
any employees, meets the requirements of Section 401(a) of the Internal Revenue
Code as to form.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals
Shares of the Large Company Value Fund and Scudder Shares of Value Fund
may be purchased as the investment medium under a plan in the form of a Scudder
401(k) Plan adopted by a corporation, a self-employed individual or a group of
self-employed individuals (including sole proprietors and partnerships), or
other qualifying organization. This plan has been approved as a prototype by the
IRS.
Scudder IRA: Individual Retirement Account
Shares of the Large Company Value Fund and Scudder Shares of Value Fund
may be purchased as the underlying investment for an Individual Retirement
Account that meets the requirements of Section 408(a) of the Internal Revenue
Code.
A single individual who is not an active participant in an
employer-maintained retirement plan, a simplified employee pension plan, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples even if only one spouse
has earned income). All income and capital gains derived from IRA investments
are reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
- -------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ------------------------------------------------------
Contributions 5% 10% 15%
- -------------------------------------------------------------------------
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
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This next table shows how much individuals would accumulate in non-IRA
accounts by age 65 if they start with $2,000 in pretax earned income at the
beginning of each year (which is $1,380 after taxes are paid), assuming average
annual returns of 5, 10 and 15%. (At withdrawal, a portion of the accumulation
in this table will be taxable.)
Value of a Non-IRA Account at
Age 65 Assuming $1,380 Annual Contributions
(post tax, $2,000 pretax) and a 31% Tax Bracket
- -------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ------------------------------------------------------
Contributions 5% 10% 15%
- -------------------------------------------------------------------------
25 $119,318 $287,021 $741,431
35 73,094 136,868 267,697
45 40,166 59,821 90,764
55 16,709 20,286 24,681
Scudder Roth IRA: Individual Retirement Account
Shares of the Large Company Value Fund and Scudder Shares of Value Fund
may be purchased as the underlying investment for a Roth Individual Retirement
Account which meets the requirements of Section 408A of the Internal Revenue
Code.
A single individual earning below $95,000 can contribute up to $2,000 per
year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, certain medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
An individual with an income of $100,000 or less (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
Scudder 403(b) Plan
Shares of the Large Company Value Fund and Scudder Shares of Value Fund
may also be purchased as the underlying investment for tax sheltered annuity
plans under the provisions of Section 403(b)(7) of the Internal Revenue Code. In
general, employees of tax-exempt organizations described in Section 501(c)(3) of
the Internal Revenue Code (such as hospitals, churches, religious, scientific,
or literary organizations and educational institutions) or a public school
system are eligible to participate in a 403(b) plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
33
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which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Transaction information--Redeeming shares--Signature
guarantees" in each Fund's respective Prospectus. Any such requests must be
received by each Fund's transfer agent ten days prior to the date of the first
automatic withdrawal. An Automatic Withdrawal Plan may be terminated at any time
by the shareholder, the Trust or its agent on written notice, and will be
terminated when all shares of the Fund under the Plan have been liquidated or
upon receipt by the Trust of notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where satisfactory
arrangements have been made with Scudder Investor Services, Inc. for forwarding
regular investments through a single source. The minimum annual investment is
$240 per investor , which may be made in monthly, quarterly, semiannual or
annual payments. The minimum monthly deposit per investor is $20. Except for
trustees or custodian fees for certain retirement plans, at present there is no
separate charge for maintaining group or salary deduction plans; however, the
Trust and its agents reserve the right to establish a maintenance charge in the
future depending on the services required by the investor.
The Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
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<PAGE>
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "DISTRIBUTIONS - Dividends and Capital Gains Distributions
and Taxes" in each Fund's respective prospectus.)
Each Fund intends to follow the practice of distributing substantially all
of its investment company taxable income, which includes any excess of net
realized short-term capital gains over net realized long-term capital losses. A
Fund may follow the practice of distributing the entire excess of net realized
long-term capital gains over net realized short-term capital losses. If it
appears to be in the best interest of a Fund and its shareholders, a Fund may
retain all or part of such gain for reinvestment after paying the related
federal income taxes which shareholders may then claim as a credit on their
returns. (See "TAXES.") If a Fund does not distribute the amount of capital gain
and/or ordinary income required to be distributed by an excise tax provision of
the Code, a Fund may be subject to that excise tax. (See "TAXES.") In certain
circumstances, a Fund may determine that it is in the interest of shareholders
to distribute less than the required amount.
The Funds intend to declare in December any net realized capital gains
resulting from its investment activity and any dividend from investment company
taxable income. The Funds intend to distribute the December dividends and
capital gains either in December or in the following January. Any dividends or
capital gains distributions declared in October, November, or December with a
record date in that month and paid during the following January will be treated
by shareholders for federal income tax purposes as if received on December 31 of
the calendar year declared. If a shareholder has elected to reinvest any
dividends and/or other distributions, such distributions will be made in shares
of that Fund and confirmations will be mailed to each shareholder. If a
shareholder has chosen to receive cash, a check will be sent.
PERFORMANCE INFORMATION
(See "FUND SUMMARY - Past Performance" in each Fund's respective Prospectus)
From time to time, quotations of the Funds' performance may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Effective April 16, 1998, Value Fund was divided into four classes of
shares. Shares of Value Fund outstanding on that date were redesignated Scudder
Shares of the Fund. The performance information set forth below for periods
prior to April 16, 1998 reflects the performance of Value Fund prior to such
redesignation. Performance information for Value Fund for periods subsequent to
April 16, 1998 reflects the performance of the Scudder Shares of Value Fund.
These performance figures are calculated separately for each class of shares of
Value Fund in the following manner:
Average Annual Total Return
Average annual total return is the average annual compound rate of return
for the periods of one year, five years and ten years (or such shorter periods
as may be applicable dating from the commencement of a Fund's operations), all
ended on the last day of a recent calendar quarter. Average annual total return
quotations reflect changes in the price of the Funds' shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by
computing the average annual compound rates of return of a hypothetical
investment over such periods, according to the following formula (average annual
total return is then expressed as a percentage):
T = (ERV/P)1/n - 1
Where:
T = Average Annual Total Return
P = a hypothetical initial investment of $10,000
n = number of years
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $10,000
investment made at the beginning of the applicable
period.
Average Annual Total Return for the periods ended September 30, 1998
35
<PAGE>
One year Five years Ten years
-------- ---------- ---------
Large Company Value Fund -4.54% 12.97% 14.21%
One year Five years Life of Fund (1)
-------- ---------- ----------------
Value Fund*@ -2.08% 16.08% 16.01%
(1) For the period beginning December 31, 1992 (commencement of
operations).
* The Adviser maintained Fund expenses for the period December 31,
1992 through September 30, 1993, for the three fiscal years ended
September 30, 1996 and until July 31, 1997 of the fiscal year ended
September 30, 1997. The Average Annual Total Return for one year,
five years and for the life of the Fund, had the Adviser not
maintained Fund expenses, would have been lower.
@ On April 16, 1998, Value Fund adopted its present name. Prior to
that date the Fund comprised a single class of shares and was known
as Scudder Value Fund. Performance information provided is for the
Fund's Scudder Shares class.
As described above, average annual total return is based on historical
earnings and is not intended to indicate future performance. Average annual
total return for a Fund or class will vary based on changes in market conditions
and the level of a Fund's and class' expenses.
In connection with communicating its average annual total return to
current or prospective shareholders, the Fund also may compare these figures to
the performance of other mutual funds tracked by mutual fund rating services or
to unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $10,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Funds' shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by computing the cumulative
rates of return of a hypothetical investment over such periods, according to the
following formula (cumulative total return is then expressed as a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $10,000
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $10,000
investment made at the beginning of the applicable
period.
Cumulative Total Return for the periods ended September 30, 1998
One year Five years Ten years
-------- ---------- ---------
Large Company Value Fund -4.54% 83.99% 277.62%
One year Five years Life of Fund(1)
-------- ---------- ---------------
Value Fund*@ -2.08% 110.72% 134.95%
(1) For the period beginning December 31, 1992 (commencement of
operations).
36
<PAGE>
* The Adviser maintained Fund expenses for the period December 31,
1992 through September 30, 1993 and for the three fiscal years ended
September 30, 1996 and until July 31, 1997 of the fiscal year ended
September 30, 1997. The Cumulative Total Return for one year, five
years and for the life of the Fund, had the Adviser not maintained
Fund expenses, would have been lower.
@ On April 16, 1998, Value Fund adopted its present name. Prior to
that date the Fund comprised a single class of shares and was known
as Scudder Value Fund. Performance information provided is for the
Fund's Scudder Shares class.
Total Return
Total return is the rate of return on an investment for a specified period
of time calculated in the same manner as cumulative total return.
From time to time, in advertisements, sales literature, and reports to
shareholders or prospective investors, figures relating to the growth in the
total net assets of a Fund apart from capital appreciation will be cited, as an
update to the information in this section, including, but not limited to: net
cash flow, net subscriptions, gross subscriptions, net asset growth, net account
growth, and subscription rates. Capital appreciation generally will be covered
by marketing literature as part of the Funds' and classes' performance data.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, each Fund also may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
Examples include, but are not limited to the Dow Jones Industrial Average, the
Consumer Price Index, S&P 500, the Nasdaq OTC Composite Index, the Nasdaq
Industrials Index, the Russell 2000 Index, the Wilshire Real Estate Securities
Index and statistics published by the Small Business Administration.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, the Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Trust, a Fund's portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Fund. In addition, the amount of assets that the Adviser has under management in
various geographical areas may be quoted in advertising and marketing materials.
Each Fund may be advertised as an investment choice in Scudder's college
planning program. The description may contain illustrations of projected future
college costs based on assumed rates of inflation and examples of hypothetical
fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
37
<PAGE>
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Fund. The
description may include a "risk/return spectrum" which compares each Fund to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment and
money market funds seek stability of principal, these investments are considered
to be less risky than investments in either bond or equity funds, which may
involve the loss of principal. However, all long-term investments, including
investments in bank products, may be subject to inflation risk, which is the
risk of erosion of the value of an investment as prices increase over a long
time period. The risks/returns associated with an investment in bond or equity
funds depend upon many factors. For bond funds these factors include, but are
not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both domestic
and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical information
made by independent sources may also be used in advertisements concerning the
Fund, including reprints of, or selections from, editorials or articles about
this Fund. Sources for Fund performance information and articles about the Funds
include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
38
<PAGE>
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government
Money Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
which includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
SmartMoney, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
39
<PAGE>
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
ORGANIZATION OF THE FUNDS
(See "Investment Adviser" in each Fund's respective prospectus.) The
Funds are separate series of Value Equity Trust. Value Equity Trust, formerly
Scudder Equity Trust, is a Massachusetts business trust established under a
Declaration of Trust dated October 16, 1985, as amended. The Trust's authorized
capital consists of an unlimited number of shares of beneficial interest, par
value $0.01 per share. The Trustees have the authority to issue additional
series of shares. If more than one series of shares were issued and a series
were unable to meet its obligations, the remaining series might have to assume
the unsatisfied obligations of that series.
Each Fund's activities are supervised by the Trust's Board of Trustees.
The Trust has adopted a plan pursuant to Rule 18f-3 (the "Plan") under the 1940
Act to permit the Trust to establish a multiple class distribution system. All
shares of Scudder Large Company Value Fund are of one class and have equal
rights as to voting, dividends and liquidation. All shares of Value Fund have
been subdivided into four classes: Scudder Shares and Class A, B and C shares.
The Trustees have authorized the division of the Value Fund into share classes,
permitting shares of different classes to be distributed by different methods.
Although shareholders of different classes of a series have an interest in the
same portfolio of assets, shareholders of different classes may bear different
expenses in connection with different methods of distribution. All shares issued
and outstanding will be fully paid and nonassessable by the Trust, and
redeemable as described in this Statement of Additional Information and in each
Fund's respective prospectus.
Under the Plan, shares of each class represent an equal pro rata interest
in the Fund and, generally, shall have identical voting, dividend, liquidation,
and other rights, preferences, powers, restrictions, limitations, qualifications
and terms and conditions, except that (1) each class shall have a different
designation, (2) each class of shares shall bear its own "class expenses"; (3)
each class shall have exclusive voting rights on any matter submitted to
shareholders that relates to its administrative services, shareholder services
or distribution arrangements; (4) each class shall have separate voting rights
on any matter submitted to shareholders in which the interests of one class
differ from the interest of any other class; (5) each class may have separate
and distinct exchange privileges; (6) each class may have different conversion
features, and (7) each class may have separate account size requirements.
Expenses currently designated as "Class Expenses" by the Trust's Board of
Trustees under the Plan include, for example, transfer agency fees attributable
to a specific class and certain securities registrations fees.
Each share of each class of a Fund shall be entitled to one vote (or
fraction thereof in respect of a fractional share) on matters that such shares
(or class of shares) shall be entitled to vote. Shareholders of each Fund shall
vote together on any matter, except to the extent otherwise required by the 1940
Act, or when the Board of Trustees has determined that the matter affects only
the interest of shareholders of one or more classes of a Fund, in which case
only the shareholders of such class or classes of that Fund shall be entitled to
vote thereon. Any matter shall be deemed to have been effectively acted upon
with respect to a Fund if acted upon as provided in Rule 18f-2 under the 1940
Act, or
40
<PAGE>
any successor rule, and in the Fund's Declaration of Trust. As used in this
Statement of Additional Information, the term "majority", when referring to the
approvals to be obtained from shareholders in connection with general matters
affecting the Funds and all additional portfolios (e.g., election of directors),
means the vote of the lesser of (i) 67% of the Fund's shares represented at a
meeting if the holders of more than 50% of the outstanding shares are present in
person or by proxy, or (ii) more than 50% of the Fund's outstanding shares. The
term "majority", when referring to the approvals to be obtained from
shareholders in connection with matters affecting a single Fund or any other
single portfolio (e.g., annual approval of investment management contracts),
means the vote of the lesser of (i) 67% of the shares of the portfolio
represented at a meeting if the holders of more than 50% of the outstanding
shares of the portfolio are present in person or by proxy, or (ii) more than 50%
of the outstanding shares of the portfolio. Shareholders are entitled to one
vote for each full share held and fractional votes for fractional shares held.
Each share of a Fund represents an equal proportionate interest in that
Fund with each other share of the same Fund and is entitled to such dividends
and distributions out of the income earned on the assets belonging to that Fund
as are declared in the discretion of the Fund's Board of Trustees. In the event
of the liquidation or dissolution of the Fund, shares of a Fund are entitled to
receive the assets attributable to that Fund that are available for
distribution, and a proportionate distribution, based upon the relative net
assets of the Funds, of any general assets not attributable to a Fund that are
available for distribution.
The Trustees, in their discretion, may authorize the division of shares of
a Fund (or shares of a series) into different classes, permitting shares of
different classes to be distributed by different methods. Although shareholders
of different classes of a series would have an interest in the same portfolio of
assets, shareholders of different classes may bear different expenses in
connection with different methods of distribution.
Currently, the assets of Value Equity Trust received for the issue or sale
of the shares of each series and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are specifically allocated to
such series and constitute the underlying assets of such series. The underlying
assets of each series are segregated on the books of account, and are to be
charged with the liabilities in respect to such series and with a proportionate
share of the general liabilities of Value Equity Trust. If a series were unable
to meet its obligations, the assets of all other series may in some
circumstances be available to creditors for that purpose, in which case the
assets of such other series could be used to meet liabilities which are not
otherwise properly chargeable to them. Expenses with respect to any two or more
series are to be allocated in proportion to the asset value of the respective
series except where allocations of direct expenses can otherwise be fairly made.
The officers of Value Equity Trust, subject to the general supervision of the
Trustees, have the power to determine which liabilities are allocable to a given
series, or which are general or allocable to two or more series. In the event of
the dissolution or liquidation of Value Equity Trust, the holders of the shares
of any series are entitled to receive as a class the underlying assets of such
shares available for distribution to shareholders.
The Trust's predecessor was organized in 1966 as a Delaware corporation
under the name "Scudder Duo-Vest Inc." as a closed-end, diversified dual-purpose
investment company. Effective April 1, 1982, its original dual-purpose nature
was terminated and it became an open-end investment company with only one class
of shares outstanding. At a Special Meeting of Shareholders held May 18, 1982,
the shareholders voted to amend the investment objective to seek to maximize
long-term growth of capital and to change the name of the corporation to
"Scudder Capital Growth Fund, Inc." ("SCGF, Inc."). The fiscal year end of SCGF,
Inc. was changed from March 31 to September 30 by action of its Directors on May
18, 1982. Effective as of September 30, 1982, Scudder Special Fund, Inc. was
merged into SCGF, Inc. In October 1985, the Fund's form of organization was
changed to a Massachusetts business trust upon approval of the shareholders.
Shares of Value Equity Trust entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting an
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.
The Trust has a Declaration of Trust which provides that obligations of a
Fund are not binding upon the Trustees individually but only upon the property
of that Fund, that the Trustees and officers will not be liable for errors of
judgment or mistakes of fact or law, and that a Fund involved will indemnify the
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust, except if it is determined in the manner provided in the Declaration of
Trust that they have not acted in good faith in the reasonable belief that their
actions were in the best interests of the Fund involved. Nothing in the
Declaration
41
<PAGE>
of Trust, however, protects or indemnifies a Trustee or officer against any
liability to which that person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of that person's office.
No series of the Trust shall be liable for the obligations of any other
series.
INVESTMENT ADVISER
(See "Investment Adviser" in each Fund's respective prospectus.)
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Adviser introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On June 26, 1997, Scudder,
Stevens & Clark, Inc. ("Scudder") entered into an agreement with Zurich
Insurance Company ("Zurich") pursuant to which Scudder and Zurich agreed to form
an alliance. On December 31, 1997, Zurich acquired a majority interest in
Scudder, and Zurich Kemper Investments, Inc., a Zurich subsidiary, became part
of Scudder. Scudder's name has been changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
The principal source of the Adviser's income is professional fees received
from providing continuous investment advice, and the firm derives no income from
brokerage or underwriting of securities. Today, it provides investment counsel
for many individuals and institutions, including insurance companies, colleges,
industrial corporations, and financial and banking organizations. In addition,
it manages Montgomery Street Income Securities, Inc., Scudder California Tax
Free Trust, Scudder Cash Investment Trust, Value Equity Trust, Scudder Fund,
Inc., Scudder Funds Trust, Global/International Fund, Inc., Scudder Global High
Income Fund, Inc., Scudder GNMA Fund, Scudder Portfolio Trust, Scudder
Institutional Fund, Inc., Scudder International Fund, Inc., Investment Trust,
Scudder Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia Fund,
Inc., Scudder New Europe Fund, Inc., Scudder Pathway Series, Scudder Securities
Trust, Scudder State Tax Free Trust, Scudder Tax Free Money Fund, Scudder Tax
Free Trust, Scudder U.S. Treasury Money Fund, Scudder Variable Life Investment
Fund, The Argentina Fund, Inc., The Brazil Fund, Inc., The Korea Fund, Inc. and
The Japan Fund, Inc. Some of the foregoing companies or trusts have two or more
series.
The Adviser also provides investment advisory services to the mutual funds
which comprise the AARP Investment Program from Scudder. The AARP Investment
Program from Scudder has assets over $13 billion and includes the AARP Growth
Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed Investment
Portfolios Trust and AARP Cash Investment Funds.
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
The Adviser maintains a large research department, which conducts ongoing
studies of the factors that affect the position of various industries, companies
and individual securities. In this work, the Adviser utilizes certain reports
and statistics from a wide variety of sources, including brokers and dealers who
may execute portfolio transactions for a
42
<PAGE>
Fund and other clients of the Adviser, but conclusions are based primarily on
investigations and critical analyses by its own research specialists.
Certain investments may be appropriate for more than one Fund and also for
other clients advised by the Adviser. Investment decisions for a Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same date. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by a Fund. Purchase and sale orders for a Fund may be combined with
those of other clients of the Adviser in the interest of the most favorable net
results to a Fund.
The transaction between Scudder and Zurich resulted in the assignment of
the Funds' investment management agreements with Scudder, these agreements were
deemed to be automatically terminated at the consummation of the transaction. In
anticipation of the transaction, however, new investment management agreements
between the Funds and the Adviser were approved by the Trust's Trustees. At the
special meetings of each Fund's shareholders held on October 27, 1997, the
shareholders also approved proposed the new investment management agreements.
The new investment management agreements (the "Agreements") became effective as
of December 31, 1997. On September 7, 1998, the businesses of Zurich (including
Zurich's 70% interest in the Adviser) and the financial services businesses of
B.A.T Industries p.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Funds' existing investment
management agreements with the Adviser were deemed to have been assigned and,
therefore, terminated. The Board approved new investment management agreements
with the Adviser, which are substantially identical to the investment management
agreements dated December 31, 1997, except for the dates of execution and
termination and the addition of breakpoints in the fee structures of each Fund.
These agreements became effective on September 7, 1998 and were approved at a
special shareholder meeting held on December 15, 1998 for Scudder Large Company
Value Fund and on December 17, 1998 for Value Fund.
The Agreements dated September 7, 1998 were approved by the Trustees on
August 6, 1998 and amended on September 15, 1998. The Agreements will continue
in effect until September 30, 1999 and from year to year thereafter only if
their continuance is approved annually by the vote of a majority of those
Trustees who are not parties to such Agreements or interested persons of the
Adviser or the Corporation, cast in person at a meeting called for the purpose
of voting on such approval, and either by a vote of the Trust's Trustees or of a
majority of the outstanding voting securities of the Funds. The Agreements may
be terminated at any time without payment of penalty by either party on sixty
days' notice and automatically terminates in the event of its assignment.
Under each Agreement, the Adviser regularly provides a Fund with
continuing investment management for the Fund's portfolio consistent with the
Fund's investment objective, policies and restrictions and determines which
securities shall be purchased for the portfolio of that Fund, which portfolio
securities shall be held or sold by the Fund, and what portion of the Fund's
assets shall be held uninvested, subject always to the provisions of the
Declaration of Trust and By-Laws, of the 1940 Act and the Code, and to the
Fund's investment objective, policies and restrictions, and subject, further, to
such policies and instructions as the Trustees may from time to time establish.
The Adviser also advises and assists the officers of a Fund in taking such steps
as are necessary or appropriate to carry out the decisions of its Trustees and
the appropriate committees of the Trustees regarding the conduct of the business
of a Fund.
The Adviser renders significant administrative services (not otherwise
provided by third parties) necessary for a Fund's operations as an open-end
investment company including, but not limited to, preparing reports and notices
to the Trustees and shareholders; supervising, negotiating contractual
arrangements with, and monitoring various third-party service providers to the
Funds (such as the Funds' transfer agent, pricing agents, custodian, accountants
and others); preparing and making filings with the SEC and other regulatory
agencies; assisting in the preparation and filing of the Funds' federal, state
and local tax returns; preparing and filing the Funds' federal excise tax
returns; assisting with investor and public relations matters; monitoring the
valuation of securities and the calculation of net asset value,
43
<PAGE>
monitoring the registration of shares of the Funds under applicable federal and
state securities laws; maintaining the Funds' books and records to the extent
not otherwise maintained by a third party; assisting in establishing accounting
policies of the Funds; assisting in the resolution of accounting and legal
issues; establishing and monitoring the Funds' operating budget; processing the
payment of the Funds' bills; assisting the Funds in, and otherwise arranging
for, the payment of distributions and dividends and otherwise assisting the
Funds in the conduct of its business, subject to the direction and control of
the Trustees.
The Adviser pays the compensation and expenses (except those for attending
Board and Committee meetings outside New York, New York or Boston,
Massachusetts) of all Trustees, officers and executive employees of the Trust
affiliated with the Adviser and makes available, without expense to the Funds,
the services of the Adviser's directors, officers, and employees as may duly be
elected officers, subject to their individual consent to serve and to any
limitations imposed by law, and provides the Trust's office space and facilities
and provides investment advisory, research and statistical facilities and all
clerical services relating to research, statistical and investment work.
For the Adviser's services, Large Company Value Fund pays the Adviser a
fee equal to 0.75 of 1% on the first $500 million of average daily net assets;
0.65 of 1% on the next $500 million of such assets; 0.60 of 1% on the next $500
million of such assets, 0.55 of 1% on the next $500 million of such assets and
0.50 of 1% of such net assets in excess of $ 2 billion, payable monthly,
provided the Fund will make such interim payments as may be requested by the
Adviser not to exceed 75% of the amount of the fee then accrued on the books of
the Fund and unpaid.
For the fiscal years ended September 30, 1996, 1997 and 1998, Large
Company Value Fund incurred aggregate fees pursuant to its then effective
investment advisory agreement of $10,505,409, $12,187,280 and $14,296,878,
respectively.
For the Adviser's services, Value Fund pays the Adviser an annual fee
equal to 0.70 of 1% on the first $500 million of average daily net assets and
0.65 of 1% of such net assets in excess of $500 million, payable monthly,
provided the Fund will make such interim payments as may be requested by the
Adviser not to exceed 75% of the amount of the fee then accrued on the books of
the Fund and unpaid. The Adviser voluntarily agreed to waive management fees or
reimburse the Fund to the extent necessary so that the total annualized expenses
of the Fund did not exceed 1.25% of the average daily net assets from December
31, 1997 until July 31, 1997. For the fiscal years ended September 30, 1996 and
1997, the Adviser did not impose a portion of its management fees amounting to
$43,951and $59,309 , respectively, and the amounts imposed amounted to $508,822
and $1,073,855, respectively. The net investment advisory fee for the fiscal
year ended September 30, 1998 was $3,214,035, of which $338,473 was unpaid at
September 30, 1998.
The Adviser retains the ability to be repaid by the Fund if expenses fall
below the specified limit prior to the end of the fiscal year. These expense
limitation arrangements can decrease the Fund's expenses and improve its
performance.
Under each Agreement a Fund is responsible for all of its other expenses
including broker's commissions; legal, auditing and accounting expenses; the
calculation of net asset value; taxes and governmental fees; the fees and
expenses of the Transfer Agent; the cost of preparing share certificates or any
other expenses including clerical expenses of issue, sale, underwriting,
distribution, redemption or repurchase of shares; the expenses of and the fees
for registering or qualifying securities for sale; fees and expenses incurred in
connection with membership in investment company organizations; the fees and
expenses of the Trustees, officers and employees of the Fund who are not
affiliated with the Adviser; the cost of printing and distributing reports and
notices to shareholders; and the fees and disbursements of custodians. The Trust
may arrange to have third parties assume all or part of the expenses of sale,
underwriting and distribution of shares of the Funds. The Funds are also
responsible for expenses incurred in connection with litigation, proceedings and
claims and the legal obligation it may have to indemnify its officers and
Trustees with respect thereto. Each Agreement expressly provides that the
Adviser shall not be required to pay a pricing agent of any Fund for portfolio
pricing services, if any.
The Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Fund, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of each Agreement and in discussions with the
Adviser concerning each Agreement, Trustees who are not "interested persons" of
the Trust are represented by independent counsel at the Funds' expense.
44
<PAGE>
Each Agreement provides that the Adviser shall not be liable for any error
of judgment or mistake of law or for any loss suffered by a Fund in connection
with matters to which each Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Adviser in
the performance of its duties or from reckless disregard by the Adviser of its
obligations and duties under the Agreements.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Funds' custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions were not
influenced by existing or potential custodial or other Fund relationships.
The Adviser may serve as adviser to other funds with investment objectives
and policies similar to those of the Funds that may have different distribution
arrangements or expenses, which may affect performance.
None of the officers or Trustees of the Trust may have dealings with a
Fund as principals in the purchase or sale of securities, except as individual
subscribers or holders of shares of a Fund.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Funds. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Position Principal Scudder Investor
Name and Address with Trust Occupation** Services, Inc.
- ---------------- ---------- ------------ --------------
<S> <C> <C> <C>
Daniel Pierce (64)*#+ President and Managing Director of Scudder Vice President and
Trustee Kemper Investments, Inc. Assistant Treasurer
Paul Bancroft III (68) Trustee Venture Capitalist and --
79 Pine Lane Consultant; Retired President,
Box 6639 Chief Executive Officer and
Snowmass Village, CO 81615 Director, Bessemer Securities
Corporation
Sheryle J. Bolton (52) Trustee Chief Executive Officer and --
Scientific Learning Corporation Director, Scientific Learning
1995 University Ave Corporation, Former President
Suite 400 and Chief Operating Officer,
San Francisco, CA 94704 Physicians Online, Inc.
(electronic transmission of
clinical information for
physicians (1994-1995); Member,
Senior Management Team,
Rockefeller & Co. (1990-1993)
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Position with
Underwriter,
Position Principal Scudder Investor
Name and Address with Trust Occupation** Services, Inc.
- ---------------- ---------- ------------ --------------
<S> <C> <C> <C>
William T. Burgin (55) Trustee General Partner, Bessemer --
83 Walnut Street Venture Partners; General
Wellesley, MA 02481-2101 Partner, Deer & Company;
Director, James River Corp.;
Director Galile Corp., Director
of various privately held
companies
Keith R. Fox (44) Trustee Private Equity Investor, Exeter --
Exeter Capital Management Capital Management Corporation
Corporation
10 East 53rd Street
New York, NY 10022
William H. Luers (69) Trustee President, The Metropolitan
The Metropolitan Museum of Art Museum of Art (1986 to present)
1000 Fifth Avenue
New York, NY 10028
Kathryn L. Quirk (45)*#++ Trustee, Vice Managing Director of Scudder Senior Vice
President and Kemper Investments, Inc. President, Chief Legal
Assistant Secretary Officer and Assistant
Clerk
Joan E. Spero (54) Trustee President, The Doris Duke --
Doris Duke Charitable Foundation Charitable Foundation (1997 to
650 Fifth Avenue - 19th Floor present), Undersecretary of
New York, NY 10019 State for Economic, Business and
Agricultural Affairs, (1993-1997)
Thomas J. Devine (71) Honorary Trustee Consultant --
450 Park Avenue
New York, NY 10022
Wilson Nolen (71) Honorary Trustee Consultant, June 1989 to
1120 Fifth Avenue present, Corporate Vice
New York, NY 10128-0144 President of Becton, Dickinson &
Company (manufacturer of medical
and scientific products),
from 1973 to June 1989
Robert G. Stone, Jr. (75) Honorary Trustee Chairman Emeritus and Director, --
405 Lexington Avenue Kirby Corporation (inland and
39th Floor offshore marine transportation
New York, NY 10174 and diesel repairs)
Donald E. Hall (46)@ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Position with
Underwriter,
Position Principal Scudder Investor
Name and Address with Trust Occupation** Services, Inc.
- ---------------- ---------- ------------ --------------
<S> <C> <C> <C>
Thomas W. Joseph (58)+ Vice President Senior Vice President of Scudder Vice President,
Kemper Investments, Inc. Treasurer and Assistant
Clerk
Ann M. McCreary( 48)++ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Kathleen T. Millard (37)++ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Thomas F. McDonough (52)+ Vice President and Senior Vice President of Scudder Clerk
Secretary Kemper Investments, Inc.
John R. Hebble (40)+ Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
Caroline Pearson (36)+ Assistant Secretary Senior Vice President of Scudder --
Kemper Investments, Inc.;
Associate, Dechert Price &
Rhoades (law firm) 1989 - 1997
</TABLE>
* Mr. Pierce and Ms. Quirk are considered by the Trust and its counsel to be
persons who are "interested persons" of the Adviser or of the Trust
(within the meaning of the 1940 Act).
** Unless otherwise stated, all the Trustees and officers have been
associated with their respective companies for more than five years, but
not necessarily in the same capacity.
# Mr. Pierce and Ms. Quirk are members of the Executive Committee, which may
exercise all of the powers of the Trustees when they are not in session.
+ Address: Two International Place, Boston, Massachusetts
++ Address: 345 Park Avenue, New York, New York
@ Address: 333 South Hope Street, Los Angeles, California
As of December 31, 1998, all Trustees and officers of the Trust as a group
owned beneficially (as that term is defined in Section 13(d) under the
Securities and Exchange Act of 1934) 1,047,364 shares, or 1.22% of the shares of
Large Company Value Fund.
As of December 31, 1998, all Trustees and officers of the Trust as a group
owned beneficially (as that term is defined in Section 13(d) under the
Securities and Exchange Act of 1934) 383,453 shares, or 1.68% of the shares of
the Scudder Shares of Value Fund.
As of December 31, 1998, 2,521,367 shares in the aggregate, 11.07% of the
outstanding shares of Scudder Value Fund were held in the name of Charles,
Schwab & Co., 101 Montgomery Street, San Francisco, CA 94104, who may be deemed
to be the beneficial owner of certain of these shares, but disclaims any
beneficial ownership therein.
To the best of the Trust's knowledge, as of December 31, 1998, no person
owned beneficially more than 5% of a Fund's or a Class' outstanding shares,
except as stated above.
The Trustees and officers of the Trust also serve in similar capacities
with respect to other Scudder funds.
47
<PAGE>
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of each
Fund's business. A majority of the Board's members are not affiliated with the
Adviser. These "Independent Trustees" have primary responsibility for assuring
that each Fund is managed in the best interests of its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of each Fund and other operational matters, including policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, each
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates, and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by the Funds' independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects each Fund's independent public
accountants and reviews accounting policies and controls.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from each Fund
of Value Equity Trust: an annual trustee's fee of $3,500; a fee of $325 for
attendance at each board meeting, audit committee meeting, or other meeting held
for the purposes of considering arrangements between the Trust on behalf of each
Fund and the Adviser or any affiliate of the Adviser; $100 for all other
committee meetings and reimbursement of expenses incurred for travel to and from
Board Meetings. No additional compensation is paid to any Independent Trustee
for travel time to meetings, attendance at trustees' educational seminars or
conferences, service on industry or association committees, participation as
speakers at trustees' conferences or service on special trustee task forces or
subcommittees. Independent Trustees do not receive any employee benefits such as
pension or retirement benefits or health insurance. Notwithstanding the schedule
of fees, the Independent Trustees have in the past and may in the future waive a
portion of their compensation. or other activities.
The Independent Trustees also serve in the same capacity for other funds
managed by the Adviser. These funds differ broadly in type and complexity and in
some cases have substantially different Trustee fee schedules. The following
table shows the aggregate compensation received by each Independent Trustee
during 1998 from the Trust and from all of Scudder funds as a group.
<TABLE>
<CAPTION>
Value Equity Trust* All Scudder Funds
------------------- -----------------
Paid by Paid by Paid by Paid by
Name the Trust the Adviser(1) the Funds the Adviser(1)
---- --------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Paul Bancroft III, $14,750 $850 $174,200 (23 $ 8,925 (23 funds)
Trustee funds)
Sheryle J. Bolton, $14,750 $0.00 $149,050 (23 $0.00 (23 funds)
Trustee** funds)
William T. Burgin, $14,750 $850 $150,950 (23 $8,925 (23 funds)
Trustee funds)
Thomas J. Devine, $16,650 $850 $178,000 (24 $8,925 (24 funds)
Honorary Trustee+ funds)
Keith R. Fox, Trustee $17,150 $850 $172,350 (21 $8,925 (21 funds)
funds)
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Value Equity Trust* All Scudder Funds
------------------- -----------------
Paid by Paid by Paid by Paid by
Name the Trust the Adviser(1) the Funds the Adviser(1)
---- --------- -------------- --------- --------------
<S> <C> <C> <C> <C>
William H. Luers, $13,250 $850 $157,050 (24 $8,925 (24 funds)
Trustee** funds)
Wilson Nolen, $14,750 $850 $189,075 (24 $6,375 (24 funds)
Honorary Trustee+ funds)
Joan E. Spero,*** $2,685 $0.00 $29,736 (21 $0.00 (21 funds)
Trustee funds)
Robert G. Stone, Jr $0.00 $0.00 $8,000# (1 $0.00 (1 fund)
Honorary Trustee fund)
</TABLE>
(1) The Adviser paid the compensation to the Trustees for meetings associated
with the Adviser's alliance with Zurich Insurance Company. See "Investment
Adviser" for additional information.
* Value Equity Trust consists of two funds: Scudder Large Company Value Fund
and Value Fund.
** Elected as Trustee of the Trust in October 1997.
*** Elected as Trustee of the Trust in September 1998.
+ Elected as an Honorary Trustee in December 1998, after serving as a
Trustee.
# Includes pension or retirement benefits received as Director of The Japan
Fund.
Members of the Board of Trustees who are employees of the Adviser or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Adviser, or its affiliates, as a result of which
they may be deemed to participate in fees paid by each Fund.
DISTRIBUTOR
The Trust, on behalf of each Fund, has an underwriting agreement
pertaining to Large Company Value Fund and the Scudder Shares of Value Fund with
Scudder Investor Services, Inc. Two International Place, Boston, MA 02110 (the
"Distributor"), a Massachusetts corporation, which is a subsidiary of the
Adviser. This underwriting agreement dated September 7, 1998 will remain in
effect until September 30, 1999 and from year to year thereafter only if its
continuance is approved annually by a majority of the Trustees who are not
parties to such agreement or interested persons of any such party and either by
vote of a majority of the Trustees or a majority of the outstanding voting
securities of the Trust. The underwriting agreement was last approved by the
Trustees on August 8, 1998.
Under the principal underwriting agreement, the Trust is responsible for:
the payment of all fees and expenses in connection with the preparation and
filing with the SEC of the Trust's registration statement and prospectuses and
any amendments and supplements thereto; the registration and qualification of
shares for sale in the various states, including registering the Trust or a Fund
as a broker/dealer in various states, as required; the fees and expenses of
preparing, printing and mailing prospectuses (see below for expenses relating to
prospectuses paid by the Distributor), notices, proxy statements, reports or
other communications (including newsletters) to shareholders of a Fund; the cost
of printing and mailing confirmations of purchases of shares and the
prospectuses accompanying such confirmations; any issuance taxes or any initial
transfer taxes; a portion of shareholder toll-free telephone charges and
expenses of service representatives; the cost of wiring funds for share
purchases and redemptions (unless paid by the shareholder who initiates the
transaction); the cost of printing and postage of business reply envelopes; and
a portion of the cost of computer terminals used by both a Fund and the
Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of a Fund's shares
to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of the Funds to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
service representatives, a portion of the cost of computer terminals, and of any
activity which is primarily intended to result in the sale of the Fund's shares.
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Note: Although Large Company Value Fund and the Scudder Shares of Value
Fund currently have no 12b-1 Plan and shareholder approval would be
required in order to adopt such plans, the underwriting agreement provides
that a Fund will also pay those fees and expenses permitted to be paid or
assumed by a Fund pursuant to a 12b-1 Plan, if any, adopted by a Fund,
notwithstanding any other provision to the contrary in the underwriting
agreement and a Fund or a third party will pay those fees and expenses not
specifically allocated to the Distributor in the underwriting agreement.
As agent, the Distributor currently offers shares of a Fund on a
continuous basis to investors in all states. The underwriting agreement provides
that the Distributor accepts orders for shares at net asset value as no sales
commission or load is charged the investor. The Distributor has made no firm
commitment to acquire shares of a Fund.
TAXES
(See "DISTRIBUTIONS - Dividends and Capital Gains Distributions and Taxes"
in each Fund's respective prospectus.) Each Fund has elected to be treated as a
regulated investment company under Subchapter M of the Code or a predecessor
statute and has qualified as such from its inception. Each Fund intends to
continue to qualify for such treatment. Such qualification does not involve
governmental supervision of management or investment practices or policies.
A regulated investment company qualifying under Subchapter M of the Code
is required to distribute to its shareholders at least 90% of its investment
company taxable income (including net short-term capital gain in excess of net
long-term capital loss) and generally is not subject to federal income tax to
the extent that it distributes annually its investment company taxable income
and net realized capital gains in the manner required under the Code.
Investment company taxable income generally is made up of dividends,
interest, and net short-term capital gains in excess of net long-term capital
losses, less expenses. Net capital gains (the excess of net long-term capital
gain over net short-term capital loss) are computed by taking into account any
capital loss carryforward of a Fund. Presently, each Fund has no capital loss
carryforward.
Each Fund is subject to a 4% nondeductible excise tax on amounts required
to be but not distributed under a prescribed formula. The formula requires
payment to shareholders during a calendar year of distributions at least equal
to the sum of 98% of a Fund's ordinary income for the calendar year, at least
98% of the excess of its capital gains over capital losses (adjusted for certain
ordinary losses as prescribed in the Code) realized during the one-year period
ending October 31 during such year, and all ordinary income and capital gains
for prior years that were not previously distributed.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Dividends from domestic corporations are expected to comprise a
substantial part of each Fund's gross income. To the extent that such dividends
constitute a portion of each Fund's gross income, a portion of the income
distributions of a Fund may be eligible for the dividends received deduction for
corporations. Shareholders will be informed of the portion of dividends which so
qualify. The dividends-received deduction is reduced to the extent the shares
with respect to which the dividends are received are treated as debt-financed
under the federal income tax law and is eliminated if either those shares or the
shares of the Fund are deemed to have been held by the Fund or the shareholder,
as the case may be, for less than 46 days during the 90-day period beginning 45
days before the shares become ex-dividend..
Properly designated distributions of net capital gains are taxable to
shareholders as long-term capital gain, regardless of the length of time the
shares of a Fund have been held by such shareholders. Such distributions are not
eligible for the dividends received deduction. Any loss realized upon the
redemption of shares held at the time of redemption for six months or less will
be treated as a long-term capital loss to the extent of any amounts treated as
long-term capital gain distributions during such six-month period.
If any net capital gains are retained by a Fund for reinvestment,
requiring federal income taxes to be paid thereon by that Fund, each Fund
intends to elect to treat such capital gains as having been distributed to
shareholders. As a result, each shareholder will report such capital gains as
long-term capital gains, will be able to claim a proportionate share of federal
income taxes paid by a Fund on such gains as a credit against the shareholder's
federal income tax liability, and will be entitled to increase the adjusted tax
basis of the shareholder's Fund shares by the
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difference between the shareholder's pro-rata share of such gains and the
shareholder's tax credit. However, retention of such gains by a Fund may cause
the Fund to be liable for an excise tax on all or a portion of those gains.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share on the reinvestment
date.
All distributions of investment company taxable income and net realized
capital gains, whether received in shares or cash, must be reported by each
shareholder on his or her federal income tax return. Dividends declared in
October, November or December with a record date in such a month and paid during
the following January will be treated by shareholders for federal income tax
purposes as if received on December 31 of the calendar year declared.
Redemptions of shares, including exchanges for shares of another Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.
An individual may make a deductible IRA contribution for any taxable year
only if (i) neither the individual nor his or her spouse (unless filing separate
returns) is an active participant in an employer's retirement plan, or (ii) the
individual (and his or her spouse, if applicable) has an adjusted gross income
below a certain level ($40,050 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $40,050 and
$50,000; $25,050 for a single individual, with a phase-out for adjusted gross
income between $25,050 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000 to an IRA (up to
$2,250 to IRAs for an individual and his or her non-earning spouse) for that
year. There are special rules for determining how withdrawals are to be taxed if
an IRA contains both deductible and nondeductible amounts. In general, a
proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, contributions may be made to a spousal
IRA even if the spouse has earnings in a given year, if the spouse elects to be
treated as having no earnings (for IRA contribution purposes) for the year.
Distributions by a Fund result in a reduction in the net asset value of
that Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will then receive a partial return of capital upon
the distribution, which will nevertheless be taxable to them.
If a Fund invests in stock of certain foreign investment companies, that
Fund may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
A Fund may make an election to mark to market its shares of these foreign
investment companies in lieu of being subject to U.S. federal income taxation.
At the end of each taxable year to which the election applies, a Fund would
report as ordinary income the amount by which the fair market value of the
foreign company's stock exceeds the Fund's adjusted basis in these shares. Any
mark to market losses and any loss from an actual disposition of shares would be
deductible as ordinary losses to the extent of any net mark to market gains
included in income in prior years. The effect of the election would be to treat
excess distributions and gain on dispositions as ordinary income , which is not
subject to a fund level tax when distributed to shareholders as a dividend.
Alternatively, a Fund may elect to include as income and gain its share of the
ordinary earnings and net capital gain of certain foreign investment companies
in lieu of being taxed in the manner described above.
Equity options (including covered call options written on portfolio stock)
and over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. In general, no loss will
be recognized by a Fund upon payment of a premium in connection with the
purchase of a put or call option. The
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character of any gain or loss recognized (i.e. long-term or short-term) will
generally depend, in the case of a lapse or sale of the option, on a Fund's
holding period for the option, and in the case of the exercise of a put option,
on a Fund's holding period for the underlying property. The purchase of a put
option may constitute a short sale for federal income tax purposes, causing an
adjustment in the holding period of the underlying security or a substantially
identical security in a Fund's portfolio.
If a Fund writes a covered call option on portfolio stock, no gain is
recognized upon its receipt of a premium. If the option lapses or is closed out,
any gain or loss is treated as short-term capital gain or loss. If the option is
exercised, the character of the gain or loss depends on the holding period of
the underlying stock.
Positions of a Fund which consist of at least one stock and at least one
stock option or other position with respect to a related security which
substantially diminishes a Fund's risk of loss with respect to such stock could
be treated as a "straddle" which is governed by Section 1092 of the Code, the
operation of which may cause deferral of losses, adjustments in the holding
periods of stocks or securities and conversion of short-term capital losses into
long-term capital losses. An exception to these straddle rules exists for
certain "qualified covered call options" on stock written by a Fund.
Many or all futures and forward contracts entered into by a Fund and many
or all listed non-equity options written or purchased by a Fund (including
options on debt securities, options on futures contracts, options on foreign
currencies and options on securities indices) will be governed by Section 1256
of the Code. Absent a tax election to the contrary, gain or loss attributable to
the lapse, exercise or closing out of any such position generally will be
treated as 60% long-term and 40% short-term capital gain or loss, and on the
last day of the Funds' fiscal year (as well as on October 31 for purposes of the
4% excise tax), all outstanding Section 1256 positions will be marked to market
(i.e. treated as if such positions were sold at their closing price on such
day), with any resulting gain or loss recognized as 60% long-term and 40%
short-term capital gain or loss. Under Section 988 of the Code, discussed below,
foreign currency gain or loss from foreign currency-related forward contracts,
certain futures and options, and similar financial instruments entered into or
acquired by the Fund will be treated as ordinary income. Under certain
circumstances, entry into a futures contract to sell a security may constitute a
short sale for federal income tax purposes, causing an adjustment in the holding
period of the underlying security or a substantially identical security in the
relevant Fund's portfolio.
Positions of a Fund which consist of at least one position not governed by
Section 1256 and at least one futures or forward contract or non-equity option
or other position governed by Section 1256 which substantially diminishes a
Fund's risk of loss with respect to such other position may be treated as a
"mixed straddle." Mixed straddles are subject to the straddle rules of Section
1092 of the Code and may result in the deferral of losses if the non-Section
1256 position is in an unrealized gain at the end of a reporting period.
Notwithstanding any of the foregoing, recent tax law changes may require a
Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
A portion of the difference between the issue price of zero coupon
securities and their face value ("original issue discount") is considered to be
income to a Fund each year, even though the Fund will not receive cash interest
payments from these securities. This original issue discount imputed income will
comprise a part of the investment company taxable income of the Fund which must
be distributed to shareholders in order to maintain the qualification of the
Fund as a regulated investment company and to avoid federal income tax at the
Fund's level. In addition, if a Fund invests in certain high yield original
issue discount obligations issued by corporations, a portion of the original
issue discount accruing on the obligation may be eligible for the deduction for
dividends received by corporations. In such event, dividends of investment
company taxable income received from the Fund by its corporate shareholders, to
the
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extent attributable to such portion of accrued original issue discount, may be
eligible for this deduction for dividends received by corporations if so
designated by the Fund in a written notice to shareholders.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues receivables or liabilities
denominated in a foreign currency and the time a Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain futures contracts, forward
contracts and options, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition are also treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of a Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
Income received by a Fund from sources within a foreign country may be
subject to foreign and other withholding taxes imposed by that country.
Each Fund will be required to report to the IRS all distributions of
taxable income and capital gains as well as gross proceeds from the redemption
or exchange of Fund shares, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Section 3406 of the Code
distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
nonexempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if a
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Shareholders may be subject to state and local taxes on distributions
received from a Fund and on redemptions of each Fund's shares. A brief
explanation of the form and character of the distribution accompany each
distribution. By January 31 of each year the Fund issues to each shareholder a
statement of the federal income tax status of all distributions.
The Trust is organized as a Massachusetts business trust. Neither the
Trust nor a Fund is expected to be liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that each Fund qualifies as a regulated
investment company under the Code.
The foregoing discussion of U.S. federal income tax law relates solely to
the application of that law to U.S. persons, i.e., U.S. citizens and residents
and U.S. corporations, partnerships, trusts and estates. Each shareholder who is
not a U.S. person should consider the U.S. and foreign tax consequences of
ownership of shares of the Fund, including the possibility that such a
shareholder may be subject to a U.S. withholding tax at a rate of 30% (or at a
lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her, where such amounts are treated as income
from U.S. sources under the Code.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this statement of additional information
in light of their particular tax situations.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
The Adviser supervises allocation of brokerage.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for a Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by a Fund to reported commissions paid by others.
The Adviser reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
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The Adviser generally places the Funds' purchases and sales of
fixed-income securities with primary market makers for these securities on a net
basis, without any brokerage commission being paid by a Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply research, market and statistical information to a
Fund. The term "research, market and statistical information" includes advice as
to the value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchasers or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The Adviser is authorized when placing portfolio transactions for a Fund to pay
a brokerage commission in excess of that which another broker might charge for
executing the same transaction on account of execution services and the receipt
of research, market or statistical information. With respect to Large Company
Value Fund, the Adviser will not place orders with a broker/dealer on the basis
that the broker/dealer has or has not sold shares of a Fund. In selecting among
firms believed to meet the criteria for handling a particular transaction for
Value Fund, however, the Adviser may give consideration to those firms that have
sold or are selling shares of Value Fund or other funds managed by the Adviser.
In effecting transactions in over-the-counter securities, orders are placed with
the principal market makers for the security being traded unless, after
exercising care, it appears that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker-dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Funds with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Funds for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to a Fund and to the Adviser, it is the opinion of
the Adviser that such information only supplements the Adviser's own research
effort since the information must still be analyzed, weighed, and reviewed by
the Adviser's staff. Such information may be useful to the Adviser in providing
services to clients other than a Fund, and the Adviser in connection with a Fund
uses not all such information. Conversely, such information provided to the
Adviser by broker/dealers through whom other clients of the Adviser effect
securities transactions may be useful to the Adviser in providing services to a
Fund.
The Trustees of the Fund review from time to time whether the recapture
for the benefit of the Fund of some portion of the brokerage commissions or
similar fees paid by the Fund on portfolio transactions is legally permissible
and advisable.
In the fiscal years ended September 30, 1996, 1997 and 1998, Large Company
Value Fund paid brokerage commissions of $5,768,334, $2,188,295 and $1,318,544
respectively. For the fiscal year ended September 30, 1998, $1,260,550 , (95.60%
of the total brokerage commissions paid) resulted from orders placed, consistent
with the policy of obtaining the most favorable net results, with brokers and
dealers who provided supplementary research, market and statistical information
to the Trust or Adviser. The total amount of brokerage transactions aggregated
$977,798,986 of which $874,809,855 (89.47% of all brokerage transactions) were
transactions which included research commissions.
For the fiscal years ended September 30, 1996, 1997 and 1998, Value Fund
paid brokerage commissions of $181,652, $273,545 and $354,337,, respectively.
For the fiscal year ended September 30, 1998, the $344,034 (97.09% of the total
brokerage commissions paid) resulted from orders placed consistent with the
policy of obtaining the most favorable net results, with brokers and dealers who
provided supplementary research, market and statistical information to the Trust
or Adviser. The total amount of brokerage transactions aggregated $352,379,408,
of which $316,618,010 (89.85% of all brokerage transactions) were transactions
which included research commissions. The Trustees review from time to time
whether the recapture for the benefit of a Fund of some portion of the brokerage
commissions or similar fees paid by a Fund on portfolio transactions is legally
permissible and advisable. To date no such recapture has been effected.
Portfolio Turnover
Large Company Value Fund's average annual portfolio turnover rate, i.e.
the ratio of the lesser of sales or purchases to the monthly average value of
the portfolio (excluding from both the numerator and the denominator all
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securities with maturities at the time of acquisition of one year or less), for
the fiscal years ended September 30, 1996, 1997 and 1998 was 150.7%, 43.02% and
39.5%, respectively. For the fiscal years ended September 30, 1996, 1997 and
1998, Value Fund had an annualized portfolio turnover rate of 90.8%, 47.4%and
47.0%, respectively. Higher levels of activity by the Funds result in higher
transaction costs and may also result in taxes on realized capital gains to be
borne by the Funds' shareholders. Purchases and sales are made for a Fund
whenever necessary, in management's opinion, to meet the Funds' objectives.
NET ASSET VALUE
The net asset value of shares of each Fund is computed as of the close of
regular trading on the Exchange on each day the Exchange is open for trading
(the "Value Time"). The Exchange is scheduled to be closed on the following
holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday or subsequent Monday when one of these holidays
falls on a Saturday or Sunday, respectively. With respect to Large Company Value
Fund, net asset value per share is determined by dividing the value of the total
assets of the Fund, less all liabilities, by the total number of shares
outstanding. The net asset value per share of each class of the Value Fund is
computed by dividing the value of the total assets attributable to a specific
class, less all liabilities attributable to that class, by the total number of
outstanding shares of that class.
An exchange-traded equity security is valued at its most recent sale price
on the exchange it is traded as of the Value Time. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation (the "Calculated Mean") on such exchange as
of the Value Time. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation on such exchange as of the Value Time. An equity security
which is traded on the National Association of Securities Dealers Automated
Quotation ("Nasdaq") system will be valued at its most recent sale price on such
system as of the Value Time. Lacking any sales, the security is valued at the
most recent bid quotation as of the Value Time. The value of an equity security
not quoted on the Nasdaq System, but traded in another over-the-counter market,
is its most recent sale price if there are any sales of such security on such
market as of the Value Time. Lacking any sales, the security is valued at the
Calculated Mean quotation for such security as of the Value Time. Lacking a
Calculated Mean quotation, the security is valued at the most recent bid
quotation as of the Value Time.
Debt securities, other than money market instruments, are valued at prices
supplied by the Fund's pricing agent(s), which reflect broker/dealer supplied
valuations and electronic data processing techniques. Money market instruments
with an original maturity of sixty days or less maturing at par shall be valued
by the amortized cost , which the Board believes approximates market value. If
it is not possible to value a particular debt security pursuant to these
valuation methods, the value of such security is the most recent bid quotation
supplied by a bona fide marketmaker. If it is not possible to value a particular
debt security pursuant to the above methods, the Adviser may calculate the price
of that debt security, subject to limitations established by the Board.
An exchange traded options contract on securities, currencies, futures and
other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Trust's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Fund is determined
in a manner that, in the discretion of the Valuation Committee most fairly
reflects fair market value of the property on the valuation date.
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Following the valuations of securities or other portfolio assets in terms
of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The Financial Highlights of each Fund included in each Fund's prospectus
and the Financial Statements incorporated by reference in this Statement of
Additional Information have been so included or incorporated by reference in
reliance on the report of PricewaterhouseCoopers L.L.P., One Post Office Square,
Boston, Massachusetts 02109, independent accountants, and given on the authority
of that firm as experts in accounting and auditing. Effective July 1, 1998,
Coopers & Lybrand L.L.P. and Price Waterhouse LLP merged to become
PricewaterhouseCoopers LLP. PricewaterhouseCoopers LLP is responsible for
performing annual audits of the financial statements and financial highlights of
each Fund in accordance with generally accepted auditing standards and the
preparation of federal tax returns.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a
"Massachusetts business trust". Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with a Fund's property or the
acts, obligations or affairs of a Fund. The Declaration of Trust also provides
for indemnification out of a Fund's property of any shareholder of a Fund held
personally liable for the claims and liabilities to which a shareholder may
become subject by reason of being or having been a shareholder of a Fund. Thus,
the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which a Fund itself would be unable to
meet its obligations.
Other Information
Many of the investment changes in a Fund will be made at prices different
from those prevailing at the time they may be reflected in regular reports to
shareholders of a Fund. These transactions will reflect investment decisions
made by the Adviser in light of the objectives and policies of a Fund, and other
factors, such as its other portfolio holdings and tax considerations should not
be construed as recommendations for similar action by other investors.
The name "Value Equity Trust" is the designation of the Trustees for the
time being under a Declaration of Trust dated October 16, 1985, as amended, and
all persons dealing with a Fund must look solely to the property of a Fund for
the enforcement of any claims against a Fund as neither the Trustees, officers,
agents, shareholders nor other series of the Trust assumes any personal
liability for obligations entered into on behalf of a Fund. Upon the initial
purchase of shares of a Fund, the shareholder agrees to be bound by the Trust's
Declaration of Trust, as amended from time to time. The Declaration of Trust is
on file at the Massachusetts Secretary of State's Office in Boston,
Massachusetts. All persons dealing with the Fund must look only to the assets of
the Fund for the enforcement of any claims against a Fund as no other series of
the Trust assumes any liabilities for obligations entered into on behalf of a
Fund.
The CUSIP number of Large Company Value Fund is 920390-50-7.
The CUSIP number of the Scudder Shares of Value Fund is 920390-10-1.
Each Fund has a fiscal year end of September 30.
The law firm of Dechert Price & Rhoads is counsel to the Funds.
The Trust employs State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110 as custodian for each Fund.
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Information set forth below for the period from December 31, 1992
(commencement of operations) to September 30, 1997 with respect to Value Fund
Series is provided at the Fund level, since that Fund consisted of one class of
shares (which class was re-designated the "Scudder Value Fund Shares" on April
16, 1998).
Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts 02110-4103, a subsidiary of the Adviser, computes net asset values
for the Funds. Each Fund pays Scudder Fund Accounting Corporation an annual fee
equal to 0.025% of the first $150 million of average daily net assets, 0.0075%
of such assets in excess of $150 million and 0.0045% of such assets in excess of
$1 billion, plus holding and transaction charges for this service. For the
fiscal years ended September 30, 1996 and 1997, Large Company Value Fund
incurred annual fees of $158,045 and $157,173, respectively. For the fiscal
years ended September 30, 1996 and 1997, Value Fund incurred annual fees of
$38,190 and $50,128, respectively. For the fiscal year ended September 30, 1998,
Large Company Value Fund and Value Fund incurred annual fees of $174,325 and
$107,935, respectively, of which $13,343 and $12,046 are unpaid
Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a subsidiary of the Adviser, is the transfer,
dividend disbursing and shareholder service agent for Large Company Value Fund
and the Scudder Shares of Value Fund. Service Corporation also provides
subaccounting and recordkeeping services for shareholder accounts in certain
retirement and employee benefit plans. Each Fund pays Service Corporation a fee
for maintaining each account for a retail participant of $26.00 and for each
retirement participant of $29.00. For the fiscal years ended September 30, 1996
and 1997, Large Company Value Fund incurred annual fees of $1,715,004 and
$2,505,046. For the fiscal years ended September 30, 1996 and 1997, Value Fund
incurred annual fees of $174,570 and $445,397. For the fiscal year ended
September 30, 1998, Large Company Value Fund and Value Fund incurred annual fees
of $2,518,178 and $917,202, respectively, of which $206,824 and $78,673,
respectively, are 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 each Fund. For the fiscal years ended
September 30, 1996 and 1997, Large Company Value Fund incurred annual fees of
$1,715,004 and $1,562,194. For the fiscal years ended September 30, 1996 and
1997, Value Fund incurred annual fees of $174,570 and $80,120. For the year
ended September 30, 1998, Large Company Value Fund and Value Fund incurred fees
of $1,835,663 and $581,273, respectively, of which $160,513 and $89,824,
respectively, are unpaid at September 30, 1998.
The Funds, or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are held in an
omnibus account.
Each of the respective prospectuses and this Statement of Additional
Information omit certain information contained in the Registration Statement
which the Trust has filed with the SEC under the Securities Act of 1933 and
reference is hereby made to the Registration Statement for further information
with respect to the Fund and the securities offered hereby. The Registration
Statement is available for inspection by the public at the SEC in Washington,
D.C.
This Statement of Additional Information combines the information of both
Scudder Large Company Value Fund and Value Fund. Each Fund, through its
individual prospectus, offers only its own shares, yet it is possible that one
Fund might become liable for a misstatement regarding the other Fund. The
Trustees of each Fund have considered this, and have approved the use of a
combined Statement of Additional Information.
FINANCIAL STATEMENTS
Large Company Value Fund
The financial statements, including the investment portfolio of Large
Company Value Fund, together with the Report of Independent Accountants,
Financial Highlights, and notes to financial statements are incorporated by
reference, and attached hereto in the Annual Report to Shareholders of the Fund
dated September 30, 1998, and are hereby deemed to be part of this Statement of
Additional Information.
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Value Fund
The financial statements, including the investment portfolio of Value Fund
- -- Scudder Shares together with the Report of Independent Accountants, Financial
Highlights and notes to financial statements are incorporated by reference, and
attached hereto in the Annual Report to Shareholders of the Fund dated September
30, 1998, and are hereby deemed to be part of this Statement of Additional
Information.
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APPENDIX
The following is a description of the ratings given by Moody's and S&P to
corporate and municipal bonds.
Ratings of Municipal and Corporate Bonds
Standard & Poor's:
Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, large
uncertainties or major exposures to adverse conditions outweigh these.
Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.
Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal in the event of adverse
business, financial, or economic conditions. It is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating. The rating CC typically is applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt that is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period had not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's:
Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues. Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high -grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
<PAGE>
Bonds that are rated Baa are considered as medium grade obligations, i.e.;
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. Bonds that are rated Ba are
judged to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during other good and bad times over
the future. Uncertainty of position characterizes bonds in this class. Bonds
that are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Bonds that are rated Ca represent obligations that are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings. Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
<PAGE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1999
KEMPER VALUE FUND
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for Class A, B and C Shares (the "Shares" or
"Kemper Shares") of Value Fund (the "Fund"), a diversified series of Scudder
Equity Trust (the "Trust"), an open-end management investment company. It should
be read in conjunction with the combined prospectus of the Kemper Shares dated
February 1, 1999. The prospectus may be obtained without charge from the Fund at
the address or telephone number on this cover or the firm from which this
Statement of Additional Information was received.
---------------
TABLE OF CONTENTS
Page
----
Investment Restrictions............. 2
Investment Policies and Techniques.. 4
Dividends, Distributions and Taxes.. 16
Investment Manager and Underwriter.. 22
Portfolio Transactions.............. 27
Purchase, Redemption and Repurchase
of Shares........................... 29
Performance......................... 41
Officers and Trustees............... 44
Shareholder Rights.................. 50
The financial statements appearing in the Fund's 1998 Annual Report to
Shareholders are incorporated herein by reference. The Annual Report for the
Fund accompanies this document. Scudder Kemper Investments, Inc. (the "Advisor")
serves as the Fund's investment manager.
KEUF-13 2/99 (RECYCLED LOGO) printed on recycled paper
2
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INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions which
cannot be changed without approval of a "majority" of its outstanding voting
Shares. As defined in the Investment Company Act of 1940, as amended (the "1940
Act"), this means the lesser of (1) 67% of the Fund's Shares present at a
meeting where more than 50% of the outstanding Shares are present in person or
by proxy; or (2) more than 50% of the Fund's outstanding Shares.
The Fund has elected to be classified as a diversified series of an open-end
investment company.
The Fund may not, as a fundamental policy:
(1) borrow money, except as permitted under the 1940 Act, as amended,
and as interpreted or modified by regulatory authority having
jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time;
(3) concentrate its investments in a particular industry, as that term
is used in the 1940 Act, as amended, and as interpreted or modified
by regulatory authority having jurisdiction, from time to time;
(4) engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an
underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include securities
of companies which deal in real estate or mortgages or investments
secured by real estate or interests therein, except that the Fund
reserves freedom of action to hold and to sell real estate acquired
as a result of the Fund's ownership of securities;
(6) purchase physical commodities or contracts relating to physical
commodities; or
(7) make loans except as permitted under the 1940 Act, as amended, and
as interpreted or modified by regulatory authority having
jurisdiction, from time to time;
Other Investment Policies
The Trustees of the Trust have voluntarily adopted certain policies and
restrictions which are observed in the conduct of each Fund's affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from fundamental investment policies in that they may be changed or
amended by action of the Trustees without requiring prior notice to or approval
of shareholders.
As a matter of nonfundamental policy, the Fund currently does not intend
to:
(a) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by engaging
in reverse repurchase agreements, dollar rolls, or other investments
or transactions described in the Fund's registration statement which
may be deemed to be borrowings;
(b) enter into either of reverse repurchase agreements or dollar rolls
in an amount greater than 5% of its total assets;
(c) purchase securities on margin or make short sales, except (i) short
sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with futures
contracts, options or other permitted investments, (iv) that
transactions in futures contracts and options shall not be deemed to
constitute selling securities short, and (v) that the Fund may
obtain such short-term credits as may be necessary for the clearance
of securities transactions;
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(d) purchase options, unless the aggregate premiums paid on all such
options held by the Fund at any time do not exceed 20% of its total
assets; or sell put options, if as a result, the aggregate value of
the obligations underlying such put options would exceed 50% of its
total assets;
(e) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial
margin with respect to such futures contracts entered into on behalf
of the Fund and the premiums paid for such options on futures
contracts does not exceed 5% of the fair market value of the Fund's
total assets; provided that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be
excluded in computing the 5% limit;
(f) purchase warrants if as a result, such securities, taken at the
lower of cost or market value, would represent more than 5% of the
value of the Fund's total assets (for this purpose, warrants
acquired in units or attached to securities will be deemed to have
no value); and
(g) lend portfolio securities in an amount greater than 5% of its total
assets.
If a percentage restriction on investment or utilization of assets as set
forth under "Investment Restrictions" and "Other Investment Policies" above is
adhered to at the time an investment is made, a later change in percentage
resulting from changes in the value or the total cost of the Fund's assets will
not be considered a violation of the restriction.
In addition, other nonfundamental policies may be established from time to
time by the Fund's Trustees and would not require the approval of shareholders.
Master/feeder fund structure. The Trust's Board of Trustees has the discretion
to retain the current distribution arrangement for a Fund while investing in a
master fund in a master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
INVESTMENT POLICIES AND TECHNIQUES
GENERAL. Value Fund seeks long-term growth of capital through investment in
undervalued equity securities. This objective is not fundamental and may be
changed by the Trustees without a shareholder vote. The Fund seeks to achieve
its objective by investing in the equity securities of companies that, in the
opinion of its Advisor, are undervalued in the marketplace in relation to
current and estimated future earnings and dividends. These companies generally
sell at price-earnings ratios below the market average, as defined by the
Standard & Poor's Corporation 500 Composite Price Index (S&P 500).
The Fund invests at least 80% of its assets in equity securities
consisting of common stocks, preferred stocks and securities convertible into
common stocks. The Fund changes its portfolio securities for long-term
investment considerations and not for trading purposes.
The Fund invests primarily in the equity securities of medium-to-large
size domestic companies with annual revenues or market capitalizations of at
least $600 million. The Advisor uses in-depth fundamental research and a
proprietary computerized quantitative model to identify companies that are
currently undervalued in relation to current and estimated future earnings and
dividends. The investment process also involves an assessment of business risk,
including the Advisor's analysis of the strength of a company's balance sheet,
the accounting practices a company
4
<PAGE>
follows, the volatility of a company's earnings over time, and the vulnerability
of earnings to changes in external factors, such as the general economy, the
competitive environment, governmental action and technological change.
While a broad range of investments are considered, only those that, in the
Advisor's opinion, are selling at comparatively large discounts to intrinsic
value will be purchased for the Fund. It is anticipated that the prices of the
Fund's investments will rise as a result of both earnings growth and rising
price-earnings ratios over time.
While the Fund emphasizes U.S. investments, it can invest in securities of
foreign companies that meet the same criteria applicable to the Fund's domestic
investments if the performance of foreign securities is believed by the Advisor
to offer more potential than domestic investments.
For capital appreciation, the Fund may use up to 20% of its assets to
purchase debt securities, including zero coupon bonds. Investment-grade debt
securities are those rated Aaa, Aa, A or Baa by Moody's, or AAA, AA, A or BBB by
S&P or, if unrated, of equivalent quality as determined by the Advisor.
The Fund may also purchase debt securities which are rated below
investment-grade (that is, rated below Baa by Moody's or below BBB by S&P) and
unrated securities of equivalent quality as determined by the Advisor, which
usually entail greater risk (including the possibility of default or bankruptcy
of the issues of such securities), generally involve greater volatility of price
and risk of principal and income, and may be less liquid and more difficult to
value than securities in the higher rating categories. The Fund may invest up to
20% of its assets in such securities ("high yield/high risk securities" commonly
referred to as "junk bonds") but will invest no more than 10% of its assets in
securities rated B or lower by Moody's or S&P and may not invest more than 5% of
its net assets in securities which are rated C by Moody's or D by S&P or of
equivalent quality as determined by the Advisor. Securities rated C or D may be
in default with respect to payment of principal or interest. Also, longer
maturity bonds tend to fluctuate more in price as interest rates change than do
short-term bonds, providing both opportunity and risk. (See "High Yield, High
Risk Securities.")
The Fund may borrow money for temporary, emergency or other purposes,
including investment leverage purposes, as determined by the Trustees. The Fund
may also engage in reverse repurchase agreements. The Investment Company Act of
1940 (the "1940 Act") requires borrowings to have 300% asset coverage.
The objective of the Fund is not fundamental and may be changed by the
Trustees without a vote of shareholders. The Fund cannot guarantee a gain or
eliminate the risk of loss. The net asset value of the Fund's shares will
increase or decrease with changes in the market price of the Fund's investments,
and there is no assurance that the Fund's objective will be achieved.
Foreign Securities. While the Fund generally emphasizes investments in companies
domiciled in the U.S., it may invest in listed and unlisted foreign securities
of the same types as the domestic securities in which it may invest, when the
anticipated performance of foreign securities is believed by the Advisor to
offer more potential than domestic alternatives, in keeping with the investment
objectives of the Fund.
Investors should recognize that investing in foreign securities involves
certain special considerations, including those set forth below, which are not
typically associated with investing in U.S. securities and which may favorably
or unfavorably affect the Fund's performance. As foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign stock markets, while growing
in volume of trading activity, have substantially less volume than the New York
Stock Exchange (the "Exchange") and securities of some foreign companies are
less liquid and more volatile than securities of domestic companies. Similarly,
volume and liquidity in most foreign bond markets are less than the volume and
liquidity in the U.S. and at times, volatility of price can be greater than in
the U.S. Further, foreign markets have different clearance and settlement
procedures and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems either
5
<PAGE>
could result in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Fixed commissions
on some foreign stock exchanges are generally higher than negotiated commissions
on U.S. exchanges although the Fund will endeavor to achieve the most favorable
net results on their portfolio transactions. Further, the Fund may encounter
difficulties or be unable to pursue legal remedies and obtain judgments in
foreign courts. There is generally less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the U.S. It may be more difficult for the Fund's agents to keep
currently informed about corporate actions such as stock dividends or other
matters which may affect the prices of portfolio securities. Communications
between the U.S. and foreign countries may be less reliable than within the U.S.
thereby increasing the risk of delayed settlements of portfolio transactions or
loss of certificates for portfolio securities. Delivery of securities without
payment is required in some foreign markets. In addition, with respect to
certain foreign countries, there is the possibility of nationalization,
expropriation, the imposition of withholding or confiscatory taxes, political,
social, or economic instability, or diplomatic developments which could affect
U.S. investments in those countries. Investments in foreign securities may also
entail certain risks, such as possible currency blockages or transfer
restrictions, and the difficulty of enforcing rights in other countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self'-sufficiency and balance of
payments position.
These considerations generally are more of a concern in developing
countries. For example, the possibility of revolution and the dependence on
foreign economic assistance may be greater in those countries than in developed
countries. The management of the Fund seeks to mitigate the risks associated
with these considerations through diversification and active professional
management. Although investments in companies domiciled in developing countries
may be subject to potentially greater risks than investments in developed
countries, the Fund will not invest in any securities of issuers located in
developing countries if the securities, in the judgment of the Advisor, are
speculative.
Investments in foreign securities usually will involve currencies of
foreign countries. Moreover, the Fund may temporarily hold funds in bank
deposits in foreign currencies during the completion of investment programs and
the value of the assets for the Fund, as measured in U.S. dollars, may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations, and the Fund may incur costs in connection
with conversions between various currencies. Although the Fund values its assets
daily in terms of U.S. dollars, the Fund does not intend to convert its holdings
of foreign currencies, if any, into U.S. dollars on a daily basis. The Fund may
do so from time to time, and investors should be aware of the costs of currency
conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer. The Fund will conduct its foreign currency exchange
transactions, if any, either on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market or through forward foreign
currency exchange contracts.
To the extent that the Fund invests in foreign securities, the Fund's
share price could reflect the movements of both the different stock and bond
markets in which it is invested and the currencies in which the investments are
denominated: the strength or weakness of the U.S. dollar against foreign
currencies could account for part of the Fund's investment performance.
High Yield, High Risk Securities. Below investment-grade securities (commonly
referred to as "junk bonds") (rated below Baa by Moody's and below BBB by S&P)
or unrated securities of equivalent quality in the Advisor's judgment, carry a
high degree of risk (including the possibility of default or bankruptcy of the
issuers of such securities), generally involve greater volatility of price and
risk of principal and income, may be less liquid and more difficult to value
than securities in the higher ratings categories and are considered speculative.
The lower the ratings of such debt securities the greater their risks render
them like equity securities. See the Appendix to this Statement of Additional
Information for a more complete description of the ratings assigned by ratings
organizations and their respective characteristics.
The Fund may invest up to 20% of its assets in debt securities rated below
investment-grade but will invest no more than 10% of its assets in securities
rated B or lower by Moody's or by S&P and may not invest more than 5% of its
assets in securities which are rated C by Moody's or D by S&P or of equivalent
quality as determined by the Advisor.
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<PAGE>
An economic downturn could disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates could adversely affect the value of such obligations held by the
Funds. Prices and yields of high yield securities will fluctuate over time and
may affect the Fund's net asset value. In addition, investments in high yield
zero coupon or pay-in-kind bonds, rather than income-bearing high yield
securities, may be more speculative and may be subject to greater fluctuations
in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of the
Fund to accurately value high yield securities in the Fund's portfolio and to
dispose of those securities. Adverse publicity and investor perceptions may
decrease the value and liquidity of high yield securities. These securities may
also involve special registration responsibilities, liabilities and costs.
Credit quality in the high-yield securities market can change suddenly and
unexpectedly and even recently issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
the policy of the Advisor not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of the Fund's
investment objective may be more dependent on the Advisor's credit analysis than
is the case for higher quality bonds. Should the rating of a portfolio security
be downgraded the Advisor will determine whether it is in the best interest of
the Fund to retain or dispose of the security.
Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type. For
more information regarding tax issues related to high yield securities see
"TAXES."
Convertible Securities. The Fund may invest in convertible securities; that is,
bonds, notes, debentures, preferred stocks and other securities which are
convertible into common stocks. Investments in convertible securities may
provide income through interest and dividend payments and/or an opportunity for
capital appreciation by virtue of their conversion or exchange features. The
Fund will limit its purchases of convertible securities to debt securities
convertible into common stocks.
The convertible securities in which the Fund may invest include
fixed-income or zero coupon debt securities which may be converted or exchanged
at a stated or determinable exchange ratio into underlying Shares of common
stock. The exchange ratio for any particular convertible security may be
adjusted from time to time due to stock splits, dividends, spin-offs, other
corporate distributions or scheduled changes in the exchange ratio. Convertible
debt securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stocks changes, and, therefore,
also tends to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis and so may not experience market value declines to
the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock, although
typically not as much as the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide
for a stream of income (or in the case of zero coupon securities, accretion of
income) with generally higher yields than common stocks. Of course, like all
debt securities, there can be no assurance of income or principal payments
because the issuers of the convertible securities may default on their
obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
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Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed-income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes (LYONS). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks as they usually are issued with shorter maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
Illiquid Securities. The Fund may occasionally purchase securities other than in
the open market. While such purchases may often offer attractive opportunities
for investment not otherwise available on the open market, the securities so
purchased are often "restricted securities", i.e., securities which cannot be
sold to the public without registration under the Securities Act of 1933 or the
availability of an exemption from registration (such as Rules 144 or 144A), or
which are "not readily marketable" because they are subject to other legal or
contractual delays in or restrictions on resale.
The absence of a trading market can make it difficult to ascertain a
market value for illiquid investments. Disposing of illiquid investments may
involve time-consuming negotiation and legal expenses, and it may be difficult
or impossible for the Fund to sell them promptly at an acceptable price. The
Fund may have to bear the extra expense of registering such securities for
resale and the risk of substantial delay in effecting such registration. Also
market quotations are less readily available. The judgment of the Advisor may at
times play a greater role in valuing these securities than in the case of
unrestricted securities.
Generally speaking, restricted securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held for a
specified period of time and other conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the Securities Act of 1933. The Fund may be deemed to be an
"underwriter" for purposes of the Securities Act of 1933 when selling restricted
securities to the public, and in such event the Fund may be liable to purchasers
of such securities if the registration statement prepared by the issuer, or the
prospectus forming a part of it, is materially inaccurate or misleading.
Borrowing. As a matter of fundamental policy, the Fund will not borrow money,
except as permitted under the 1940 Act, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time. While
the Trustees do not currently intend to borrow for investment leverage purposes,
if such a strategy were implemented in the future it would increase the Fund's
volatility and the risk of loss in a declining market. Borrowing by the Fund
will involve special risk considerations. Although the principal of the Fund's
borrowings will be fixed, the Fund's assets may change in value during the time
a borrowing is outstanding, thus increasing exposure to capital risk.
Repurchase Agreements. The Fund may enter into repurchase agreements with any
member bank of the Federal Reserve System and any broker/dealer which is
recognized as a reporting government securities dealer if the creditworthiness
of the bank or broker/dealer has been determined by the Advisor to be at least
as high as that of other obligations the Fund may purchase or to be at least
equal to that of issuers of commercial paper rated within the two highest grades
assigned by Moody's or S&P.
A repurchase agreement provides a means for the Fund to earn income on
funds for periods as short as overnight. It is an arrangement under which the
Fund acquires a security ("Obligation") and the seller agrees, at the time of
sale, to repurchase the Obligation at a specified time and price. Obligations
subject to a repurchase agreement are held in a segregated account and the value
of such obligations kept at least equal to the repurchase price on a daily
basis.
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The repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to the Fund together with the repurchase price on
repurchase. In either case, the income to the Fund is unrelated to the interest
rate on the Obligation itself. Obligations will be held by the Fund's custodian
or in the Federal Reserve Book Entry System.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from the Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to the Fund's investment restrictions
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by the Fund subject to a repurchase agreement as being
owned by the Fund or as being collateral for a loan by the Fund to the seller.
In the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, the Fund may encounter delay and incur costs
before being able to sell the security. Delays may result in loss of interest or
decline in price of the Obligation. If the court characterizes the transaction
as a loan and the Fund has not perfected a security interest in the Obligation,
the Fund may be required to return the Obligation to the seller's estate and be
treated as an unsecured creditor of the seller. As an unsecured creditor, the
Fund would be at the risk of losing some or all of the principal and income
involved in the transaction. As with any unsecured debt instrument purchased for
the Fund, the Advisor seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the obligor, in this case the
seller of the Obligation. Apart from the risk of bankruptcy or insolvency
proceedings, there is also the risk that the seller may fail to repurchase the
Obligation, in which case the Fund may incur a loss if the proceeds to the Fund
of its sale of the securities underlying the repurchase agreement to a third
party are less than the repurchase price. To protect against such potential
loss, if the market value (including interest) of the Obligation subject to the
repurchase agreement becomes less than the repurchase price (including
interest), the Fund will direct the seller of the Obligation to deliver
additional securities so that the market value (including interest) of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Fund will be unsuccessful in seeking
to enforce the seller's contractual obligation to deliver additional securities.
Warrants. The Fund may invest in warrants up to 5% of the value of its net
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by the Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant.
Zero Coupon Securities. The Fund may invest in zero coupon securities which pay
no cash income and are sold at substantial discounts from their value at
maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the issue price and
their value at maturity. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks as they usually are issued with short maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRS") and Certificate of Accrual on Treasuries
("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities has stated that for federal tax and securities purposes, in
their opinion
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purchasers of such certificates, such as the Fund, most likely will be deemed
the beneficial holders of the underlying U.S. Government securities.
The Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program, as
established by the Treasury Department, is known as "STRIPS" or "Separate
Trading of Registered Interest and Principal of Securities." Under the STRIPS
program, the Fund will be able to have its beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells.
(See "Dividends, Distributions and Taxes.")
Reverse Repurchase Agreements. In a reverse repurchase agreement, a Fund sells a
portfolio instrument to another party, such as a bank or broker-dealer, in
return for cash and agrees to repurchase the instrument at a particular price
and time. While a reverse repurchase agreement is outstanding, a Fund will
maintain liquid assets in a segregated custodial account to cover its obligation
under the agreement. Each Fund will enter into reverse repurchase agreements
only with parties whose creditworthiness has been found satisfactory by the
Advisor. Such transactions may increase fluctuations in the market value of a
Fund's assets and may be viewed as a form of leverage.
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates, currency exchange rates and broad or
specific equity or fixed-income market movements), to manage the effective
maturity or duration of the Fund's portfolio or to enhance potential gain. These
strategies may be executed through the use of derivative contracts. Such
strategies are generally accepted as a part of modern portfolio management and
are regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio or to establish a position in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of the Fund's assets will be committed to
Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Advisor's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not to create leveraged exposure in the Fund.
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Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Advisor's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of currency transactions can result in the Fund incurring losses as a result
of a number of factors including the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of
an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of
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the normal operations of the OCC or an exchange; (v) inadequacy of the
facilities of an exchange or OCC to handle current trading volume; or (vi) a
decision by one or more exchanges to discontinue the trading of options (or a
particular class or series of options), in which event the relevant market for
that option on that exchange would cease to exist, although outstanding options
on that exchange would generally continue to be exercisable in accordance with
their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Advisor must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Fund will engage in OTC option transactions only
with U.S. government securities dealers recognized by the Federal Reserve Bank
of New York as "primary dealers" or broker/dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any nationally recognized
statistical rating organization ("NRSRO") or, in the case of OTC currency
transactions, are determined to be of equivalent credit quality by the Advisor.
The staff of the SEC currently takes the position that OTC options purchased by
the Fund, and portfolio securities "covering" the amount of the Fund's
obligation pursuant to an OTC option sold by it (the cost of the sell-back plus
the in-the-money amount, if any) are illiquid, and are subject to the Fund's
limitation on investing no more than 10% of its assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments (whether or not it holds the above securities in its portfolio), and
on securities, indices, currencies and futures contracts other than futures on
individual corporate debt and individual equity securities. The Fund will not
sell put options if, as a result, more than 50% of the Fund's assets would be
required to be segregated to cover its potential
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obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by the Fund, as seller, to deliver to the
buyer the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark-to-market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except
for closing transactions) if, immediately thereafter, the sum of the amount of
its initial margin and premiums on open futures contracts and options thereon
would exceed 5% of the Fund's total assets (taken at current value); however, in
the case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options On Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest
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rate swap, which is described below. The Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or are
determined to be of equivalent credit quality by the Advisor.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended wholly or partially
to offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging or cross hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Advisor considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Advisor believes
that the value of schillings will decline against the U.S. dollar, the Advisor
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Advisor, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based
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on the Advisor's judgment that the combined strategies will reduce risk or
otherwise more effectively achieve the desired portfolio management goal, it is
possible that the combination will instead increase such risks or hinder
achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund intends to
use these transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them and an index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Advisor
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least A by S&P or Moody's or has an equivalent rating
from a NRSRO or is determined to be of equivalent credit quality by the Advisor.
If there is a default by the Counterparty, the Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities,
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instruments or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid securities at least equal to the
current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid securities denominated in that currency equal to the Fund's obligations
or to segregate cash or liquid assets equal to the amount of the Fund's
obligation.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
Trustees' Power to Change Objectives and Policies. Except as specifically stated
to the contrary, the objectives and policies of the Funds may be changed by the
Trustees without a vote of the shareholders.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends. The Fund intends to follow the practice of distributing substantially
all of its investment company taxable income, which includes any excess of net
realized short-term capital gains over net realized long-term capital losses.
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The Fund may follow the practice of distributing the entire excess of net
realized long-term capital gains over net realized short-term capital losses. If
it appears to be in the best interest of the Fund and its shareholders, the Fund
may retain all or part of such gain for reinvestment after paying the related
federal income taxes which shareholders may then claim as a credit on their
returns. (See "TAXES" hereafter.) If the Fund does not distribute the amount of
capital gain and/or ordinary income required to be distributed by an excise tax
provision of the Code, the Fund may be subject to that excise tax. (See "TAXES"
hereafter.) In certain circumstances, the Fund may determine that it is in the
interest of shareholders to distribute less than the required amount.
The Fund intends to declare in December any net realized capital gains
resulting from its investment activity and any dividend from investment company
taxable income. The Fund intends to distribute the December dividends and
capital gains either in December or in the following January. Any dividends or
capital gains distributions declared in October, November, or December with a
record date in that month and paid during the following January will be treated
by shareholders for federal income tax purposes as if received on December 31 of
the calendar year declared. If a shareholder has elected to reinvest any
dividends and/or other distributions, such distributions will be made in shares
of the Fund and confirmations will be mailed to each shareholder. If a
shareholder has chosen to receive cash, a check will be sent.
Dividends paid by the Fund with respect to each class of its shares will
be calculated in the same manner, at the same time and on the same day. The
level of income dividends per share (as a percentage of net asset value) will be
lower for Class B and Class C Shares than for Class A Shares primarily as a
result of the distribution services fee applicable to Class B and Class C
Shares. Distributions of capital gains, if any, will be paid in the same amount
for each class.
Income and capital gain dividends, if any, of the Fund will be credited to
shareholder accounts in full and fractional shares of the same class of the Fund
at net asset value on the reinvestment date, except that, upon written request
to the Shareholder Service Agent, a shareholder may select one of the following
options:
(1) To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset
value; or
(2) To receive income and capital gain dividends in cash.
Any dividends of the Fund that are reinvested normally will be reinvested in
shares of the same class of that same Fund. However, upon written request to the
Shareholder Service Agent, a shareholder may elect to have dividends of the Fund
invested in shares of the same class of another Kemper Fund at the net asset
value of such class of such other fund. See "Special Features--Class A
Shares--Combined Purchases" for a list of such other Kemper Funds. To use this
privilege of investing dividends of the Fund in shares of another Kemper Fund,
shareholders must maintain a minimum account value of $1,000 in the Fund
distributing the dividends. The Fund will reinvest dividend checks (and future
dividends) in shares of that same Fund and class if checks are returned as
undeliverable. Dividends and other distributions of the Fund in the aggregate
amount of $10 or less are automatically reinvested in shares of the same class
of the Fund unless the shareholder requests that such policy not be applied to
the shareholder's account.
Taxes. The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code or a predecessor statute and has qualified as
such from its inception. The Fund intends to continue to qualify for such
treatment. Such qualification does not involve governmental supervision of
management or investment practices or policies.
A regulated investment company qualifying under Subchapter M of the Code
is required to distribute to its shareholders at least 90% of its investment
company taxable income (including net short-term capital gain in excess of net
long-term capital loss) and generally is not subject to federal income tax to
the extent that it distributes annually its investment company taxable income
and net realized capital gains in the manner required under the Code.
Investment company taxable income generally is made up of dividends,
interest, and net short-term capital gains in excess of net long-term capital
losses, less expenses. Net capital gains (the excess of net long-term capital
gain
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over net short-term capital loss) are computed by taking into account any
capital loss carryforward of the Fund. Presently, the Fund has no capital loss
carryforward.
The Fund is subject to a 4% nondeductible excise tax on amounts required
to be but not distributed under a prescribed formula. The formula requires
payment to shareholders during a calendar year of distributions at least equal
to the sum of 98% of the Fund's ordinary income for the calendar year, at least
98% of the excess of its capital gains over capital losses (adjusted for certain
ordinary losses as prescribed in the Code) realized during the one-year period
ending October 31 during such year, and all ordinary income and capital gains
for prior years that were not previously distributed.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Dividends from domestic corporations are expected to comprise a
substantial part of the Fund's gross income. To the extent that such dividends
constitute a portion of the Fund's gross income, a portion of the income
distributions of the Fund may be eligible for the dividends received deduction
for corporations. Shareholders will be informed of the portion of dividends
which so qualify. The dividends-received deduction is reduced to the extent the
shares with respect to which the dividends are received are treated as
debt-financed under the federal income tax law and is eliminated if either those
shares or the shares of the fund are deemed to have been held by the fund or the
shareholder, as the case may be, for less than 46 days during the 90-day period
beginning 45 days before the shares become ex-dividend.
Properly designated distributions of net capital gains are taxable to
shareholders as long-term capital gain, regardless of the length of time the
shares of the Fund have been held by such shareholders. Such distributions are
not eligible for the dividends received deduction. Any loss realized upon the
redemption of shares held at the time of redemption for six months or less will
be treated as a long-term capital loss to the extent of any amounts treated as
long-term capital gain distributions during such six-month period.
If any net capital gains are retained by the Fund for reinvestment,
requiring federal income taxes to be paid thereon by the Fund, the Fund intends
to elect to treat such capital gains as having been distributed to shareholders.
As a result, each shareholder will report such capital gains as long-term
capital gains, will be able to claim a relative share of the federal income
taxes paid by the Fund on such gains as a credit against personal federal income
tax liabilities, and will be entitled to increase the adjusted tax basis on Fund
shares by the difference between such reported gains and the individual tax
credit. However, retention of such gains by the Fund may cause the Fund to be
liable for an excise tax on all or a portion of those gains.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether made in shares or in
cash. Shareholders electing to receive distributions in the form of additional
shares will have a cost basis for federal income tax purposes in each share so
received equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized
capital gains, whether received in shares or cash, must be reported by each
shareholder on his or her federal income tax return. Dividends declared in
October, November or December with a record date in such a month and paid during
the following January will be treated by shareholders for federal income tax
purposes as if received on December 31 of the calendar year declared.
Redemptions of shares, including exchanges for shares of another Kemper Mutual
fund, may result in tax consequences (gain or loss) to the shareholder and are
also subject to these reporting requirements.
An individual may make a deductible IRA contribution for any taxable year
only if (i) the individual is not an active participant in an employer's
retirement plan, or (ii) if the individual is an active participant of an
employee retirement plan, the individual has an adjusted gross income below a
certain level ($50,000 for married individuals filing a joint return, with a
phase-out of the deduction for adjusted gross income between $50,000 and
$60,000; $30,000 for a single individual, with a phase-out for adjusted gross
income between $30,000 and $40,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000 to an IRA (up to
$2,250 to IRAs for an individual and his or her nonearning spouse) for that
year. There are special rules for determining how withdrawals are to be taxed if
an IRA contains both
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deductible and nondeductible amounts. In general, a proportionate amount of each
withdrawal will be deemed to be made from nondeductible contributions; amounts
treated as a return of nondeductible contributions will not be taxable. Also,
contributions may be made to a spousal IRA even if the spouse has earnings in a
given year, if the spouse elects to be treated as having no earnings (for IRA
contribution purposes) for the year.
If shares are held in a tax-deferred account, such as a retirement plan,
income and gain will not be taxable each year. Indeed, the taxable portion of
amounts held in a tax-deferred account generally will be subject to tax as
ordinary income only when distributed from that account.
Distributions by the Fund result in a reduction in the net asset value of
that Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will then receive a partial return of capital upon
the distribution, which will nevertheless be taxable to them.
If the Fund invests in stock of certain foreign investment companies, the
Fund may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
The Fund may make an election to mark to market its shares of these
foreign investment companies in lieu of being subject to U.S. federal income
taxation. At the end of each taxable year to which the election applies, the
Fund would report as ordinary income the amount by which the fair market value
of the foreign company's stock exceeds the Fund's adjusted basis in these
shares. Any mark-to-market losses and any loss from an actual disposition of
shares would be deductible as ordinary losses to the extent of any net
mark-to-market gains included in income in prior years. The effect of the
election would be to treat excess distributions and gain on dispositions as
ordinary income which is not subject to a fund level tax when distributed to
shareholders as a dividend. Alternatively, the Fund may elect to include as
income and gain its share of the ordinary earnings and net capital gain of
certain foreign investment companies in lieu of being taxed in the manner
described above.
Equity options (including covered call options written on portfolio stock)
and over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. In general, no loss will
be recognized by the Fund upon payment of a premium in connection with the
purchase of a put or call option. The character of any gain or loss recognized
(i.e. long-term or short-term) will generally depend, in the case of a lapse or
sale of the option, on the Fund's holding period for the option, and in the case
of the exercise of a put option, on the Fund's holding period for the underlying
property. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in the Fund's
portfolio.
If the Fund writes a covered call option on portfolio stock, no gain is
recognized upon its receipt of a premium. If the option lapses or is closed out,
any gain or loss is treated as short-term capital gain or loss. If the option is
exercised, the character of the gain or loss depends on the holding period of
the underlying stock.
Positions of the Fund which consist of at least one stock and at least one
stock option or other position with respect to a related security which
substantially diminishes the Fund's risk of loss with respect to such stock
could be treated as a "straddle" which is governed by Section 1092 of the Code,
the operation of which may cause deferral of losses, adjustments in the holding
periods of stocks or securities and conversion of short-term capital losses into
long-
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<PAGE>
term capital losses. An exception to these straddle rules exists for certain
"qualified covered call options" on stock written by a Fund.
Many or all futures and forward contracts entered into by a Fund and many
or all listed nonequity options written or purchased by a Fund (including
options on debt securities, options on futures contracts, options on foreign
currencies and options on securities indices) will be governed by Section 1256
of the Code. Absent a tax election to the contrary, gain or loss attributable to
the lapse, exercise or closing out of any such position generally will be
treated as 60% long-term and 40% short-term capital gain or loss, and on the
last day of the Funds' fiscal year (as well as on October 31 for purposes of the
4% excise tax), all outstanding Section 1256 positions will be marked to market
(i.e. treated as if such positions were sold at their closing price on such
day), with any resulting gain or loss recognized as 60% long-term and 40%
short-term capital gain or loss. Under Section 988 of the Code, discussed below,
foreign currency gain or loss from foreign currency-related forward contracts,
certain futures and options, and similar financial instruments entered into or
acquired by the Fund will be treated as ordinary income. Under certain
circumstances, entry into a futures contract to sell a security may constitute a
short sale for federal income tax purposes, causing an adjustment in the holding
period of the underlying security or a substantially identical security in the
Fund's portfolio.
Positions of the Fund which consist of at least one position not governed
by Section 1256 and at least one futures or forward contract or nonequity option
or other position governed by Section 1256 which substantially diminishes the
Fund's risk of loss with respect to such other position may be treated as a
"mixed straddle." Mixed straddles are subject to the straddle rules of Section
1092 of the Code and may result in the deferral of losses if the non-Section
1256 position is in an unrealized gain at the end of a reporting period.
Notwithstanding any of the foregoing, recent tax law changes may require
the Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if the Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
A portion of the difference between the issue price of zero coupon
securities and their face value ("original issue discount") is considered to be
income to the Fund each year, even though the Fund will not receive cash
interest payments from these securities. This original issue discount imputed
income will comprise a part of the investment company taxable income of the Fund
which must be distributed to shareholders in order to maintain the qualification
of the Fund as a regulated investment company and to avoid federal income tax at
the Fund's level.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time the Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain futures contracts, forward
contracts and options, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition are also treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of the Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
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Income received by the Fund from sources within a foreign country may be
subject to foreign and other withholding taxes imposed by that country. Because
the amount of the Fund's investments in various countries will change from time
to time, it is not possible to determine the effective rate of such taxes in
advance.
The Fund will be required to report to the IRS all distributions of
taxable income and capital gains as well as gross proceeds from the redemption
or exchange of Fund shares, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Section 3406 of the Code
distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
nonexempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if the
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Shareholders may be subject to state and local taxes on distributions
received from the Fund and on redemptions of the Fund's shares. Each
distribution is accompanied by a brief explanation of the form and character of
the distribution. By January 31 of each year the Fund issues to each shareholder
a statement of the federal income tax status of all distributions.
The Trust is organized as a Massachusetts business trust. Neither the
Trust nor the Fund is expected to be liable for any income or franchise tax in
the Commonwealth of Massachusetts, provided that each Fund qualifies as a
regulated investment company under the Code.
After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction except that statements will be sent
quarterly for transactions involving reinvestment of dividends and periodic
investment and redemption programs. Information for income tax purposes will be
provided after the end of the calendar year. Shareholders are encouraged to
retain copies of their account confirmation statements or year-end statements
for tax reporting purposes. However, those who have incomplete records may
obtain historical account transaction information at a reasonable fee.
When more than one shareholder resides at the same address, certain
reports and communications to be delivered to such shareholders may be combined
in the same mailing package, and certain duplicate reports and communications
may be eliminated. Similarly, account statements to be sent to such shareholders
may be combined in the same mailing package or consolidated into a single
statement. However, a shareholder may request that the foregoing policies not be
applied to the shareholder's account.
The foregoing discussion of U.S. federal income tax law relates solely to
the application of that law to U.S. persons, i.e., U.S. citizens and residents
and U.S. corporations, partnerships, trusts and estates. Each shareholder who is
not a U.S. person should consider the U.S. and foreign tax consequences of
ownership of shares of the Fund, including the possibility that such a
shareholder may be subject to a U.S. withholding tax at a rate of 30% (or at a
lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her, where such amounts are treated as income
from U.S. sources under the Code.
Shareholders should consult their tax advisors about the application of
the provisions of tax law described in this statement of additional information
in light of their particular tax situations.
21
<PAGE>
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Scudder Kemper Investments, Inc. ("Scudder Kemper" or the
"Advisor"), 345 Park Avenue, New York, New York, is the Fund's investment
manager. Scudder Kemper is approximately 70% owned by Zurich Financial Services,
Inc., a newly formed global insurance and financial services company. The
balance of the Advisor is owned by its officers and employees. Pursuant to an
investment management agreement, Scudder Kemper acts as the Fund's investment
advisor, manages its investments, administers its business affairs, furnishes
office facilities and equipment, provides clerical, administrative services, and
permits any of its officers or employees to serve without compensation as
trustees or officers of the Fund if elected to such positions. The investment
management agreement provides that the Fund pays the charges and expenses of its
operations, including the fees and expenses of the trustees (except those who
are officers or employees of Scudder Kemper), independent auditors, counsel,
custodian and transfer agent and the cost of share certificates, reports and
notices to shareholders, brokerage commissions or transaction costs, costs of
calculating net asset value and maintaining all accounting records thereto,
taxes and membership dues. The Fund bears the expenses of registration of its
shares with the Securities and Exchange Commission, while Kemper Distributors,
Inc. ("KDI"), as principal underwriter, pays the cost of qualifying and
maintaining the qualification of the Fund's shares for sale under the securities
laws of the various states.
At December 31, 1997, pursuant to the terms of an agreement, Scudder,
Stevens & Clark, Inc. ("Scudder") and Zurich Insurance Company ("Zurich") formed
a new global organization by combining Scudder with Zurich Kemper Investments,
Inc., a former subsidiary of Zurich and former investment manager of the Fund,
and Scudder changed it name to Scudder Kemper Investments, Inc. As a result of
the transaction, Zurich owned approximately 70% of the Advisor, with the balance
owned by the Advisor's officers and employees.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in Scudder Kemper) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services, Inc. By way of a
dual holding company structure, former Zurich shareholder initially owned
approximately 57% of Zurich Financial Services, Inc., with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Fund's existing investment
management agreement with Scudder Kemper was deemed to have been assigned and,
therefore, terminated. The Board has approved a new investment management
agreement with Scudder Kemper, which is substantially identical to the current
investment management agreement, except for the date of execution and
termination. This agreement became effective upon the termination of the then
current investment management agreement and was approved by shareholders at a
special meeting that concluded in December 1998.
The investment management agreement provides that Scudder Kemper shall not
be liable for any error of judgment or of law, or for any loss suffered by the
Fund in connection with the matters to which the agreements relate, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of Scudder Kemper in the performance of its obligations and duties, or by
reason of its reckless disregard of its obligations and duties under each
agreement.
The Fund's investment management agreement continues in effect from year
to year so long as its continuation is approved at least annually (a) by a
majority of the trustees who are not parties to such agreement or interested
persons of any such party except in their capacity as trustees of the Fund and
(b) by the shareholders or the Board of Trustees. The Fund's investment
management agreement may be terminated at any time for a Portfolio upon 60 days
notice by either party, or by a majority vote of the outstanding shares of the
Portfolio, and will terminate automatically upon assignment. If additional
Portfolios become subject to the investment management agreement, the provisions
concerning continuation, amendment and termination shall be on a
Portfolio-by-Portfolio basis. Additional Portfolios may be subject to a
different agreement.
22
<PAGE>
Certain investments may be appropriate for the Fund and also for other
clients advised by the Advisor. Investment decisions for the Fund and other
clients are made with a view toward achieving their respective investment
objectives and after consideration of such factors as their current holdings,
availability of cash for investment and the size of their investments generally.
Frequently, a particular security may be bought or sold for only one client or
in different amounts and at different times for more than one but less than all
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling the security. In addition, purchases
or sales of the same security may be made for two or more clients on the same
date. In such event, such transactions will be allocated among the clients in a
manner believed by the Advisor to be equitable to each. In some cases, this
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by the Fund. Purchase and sale orders for the Fund may be
combined with those of other clients of the Advisor in the interest of achieving
the most favorable net results to the Fund.
The Investment Management Agreement between the Trust, on behalf of Value
Fund, and Scudder was last approved by the Trustees on September 4, 1996 and by
the initial shareholders of the Fund on December 30, 1992. Because the
transaction between Scudder and Zurich resulted in the assignment of the Fund's
investment management agreement with Scudder, these agreements were deemed to be
automatically terminated at the consummation of the transaction. In anticipation
of the transaction, however, new investment management agreements between the
Fund and the Advisor were approved by the Trust's Trustees. At the special
meetings of the Fund's shareholders held on October 27, 1997, the shareholders
also approved proposed new investment management agreements. The new investment
management agreement (the "Agreement") became effective as of December 31, 1997
and will be in effect for an initial term ending on September 30, 1998. The
Agreement is in all material respects on the same terms as the previous
investment management agreement which it supersedes. The Agreement incorporates
conforming changes which promote consistency among all of the funds advised by
the Advisor and which permit ease of administration. The Agreement will continue
in effect from year to year thereafter only if its continuance is approved
annually by the vote of a majority of those Trustees who are not parties to such
Agreement or interested persons of the Advisor or the Trust, cast in person at a
meeting called for the purpose of voting on such approval, and either by vote of
the Trustees or by a majority of the outstanding voting securities of the Fund.
The Agreement may be terminated at any time without payment of penalty by either
party on sixty days' written notice and automatically terminates in the event of
their assignment.
Under the Agreement, the Advisor regularly provides the Fund with
continuing investment management for the Fund's portfolio consistent with the
Fund's investment objective, policies and restrictions and determines which
securities shall be purchased for the portfolio of that Fund, which portfolio
securities shall be held or sold by the Fund, and what portion of the Fund's
assets shall be held uninvested, subject always to the provisions of the
Declaration of Trust and By-Laws, of the 1940 Act and the Code, and to the
Fund's investment objective, policies and restrictions, and subject, further, to
such policies and instructions as the Trustees may from time to time establish.
The Advisor also advises and assists the officers of a Fund in taking such steps
as are necessary or appropriate to carry out the decisions of its Trustees and
the appropriate committees of the Trustees regarding the conduct of the business
of the Fund.
The Advisor renders significant administrative services (not otherwise
provided by third parties) necessary for the Fund's operations as an open-end
investment company including, but not limited to, preparing reports and notices
to the Trustees and shareholders; supervising, negotiating contractual
arrangements with, and monitoring various third-party service providers to the
Fund (such as the Fund's transfer agents, pricing agents, custodian, accountants
and others); preparing and making filings with the SEC and other regulatory
agencies; assisting in the preparation and filing of the Fund's federal, state
and local tax returns; preparing and filing the Fund's federal excise tax
returns; assisting with investor and public relations matters; monitoring the
valuation of securities and the calculation of net asset value, monitoring the
registration of shares of the Funds under applicable federal and state
securities laws; maintaining the Fund's books and records to the extent not
otherwise maintained by a third party; assisting in establishing accounting
policies of the Fund; assisting in the resolution of accounting and legal
issues; establishing and monitoring the Fund's operating budget; processing the
payment of the Fund's bills; assisting the Fund in, and otherwise arranging for,
the payment of distributions and dividends and otherwise assisting the Funds in
the conduct of its business, subject to the direction and control of the
Trustees.
The Advisor pays the compensation and expenses (except those for attending
Board and Committee meetings outside New York, New York or Boston,
Massachusetts) of all Trustees, officers and executive employees of the Trust
23
<PAGE>
affiliated with the Advisor and makes available, without expense to the Fund,
the services of the Advisor's directors, officers, and employees as may duly be
elected officers, subject to their individual consent to serve and to any
limitations imposed by law, and provides the Trust's office space and facilities
and provides investment advisory, research and statistical facilities and all
clerical services relating to research, statistical and investment work.
For the Advisor's services, the Fund pays the Advisor an annual fee equal
to 0.70% of average daily net assets on the first $500 million in assets, and
0.65% of average daily net assets that exceed $500 million, payable monthly,
provided the Fund will make such interim payments as may be requested by the
Advisor not to exceed 75% of the amount of the fee then accrued on the books of
the Fund and unpaid. For the fiscal years ended September 30, 1996, 1997 and
1998, the Advisor did not impose a portion of its management fees amounting to
$43,951 and $59,309 respectively and the amounts imposed amounted to $508,822
and $1,073,855. The Advisor voluntarily agreed to waive management fees or
reimburse the Fund to the extent necessary so that the total annualized expenses
of the Fund did not exceed 1.25% of the average daily net assets until July 31,
1997. For the fiscal year ended September 30, 1998, the amount imposed amounted
to $3,214,035, of which $338,473 is unpaid at September 30, 1998. The Advisor
retains the ability to be repaid by the Fund if expenses fall below the
specified limit prior to the end of the fiscal year. These expense limitation
arrangements can decrease the Fund's expenses and improve its performance.
The Agreement identifies the Advisor as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Fund, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreement and in discussions with the
Advisor concerning the Agreement, Trustees who are not "interested persons" of
the Trust are represented by independent counsel at the Fund's expense.
Officers and employees of the Advisor from time to time may have
transactions with various banks, including the Fund's custodian bank. It is the
Advisor's opinion that the terms and conditions of those transactions were not
influenced by existing or potential custodial or other Fund relationships.
The Advisor may serve as advisor to other funds with investment objectives
and policies similar to those of the Fund that may have different distribution
arrangements or expenses, which may affect performance.
None of the officers or Trustees of the Trust may have dealings with the
Fund as principals in the purchase or sale of securities, except as individual
subscribers or holders of shares of the Fund.
Personal Investments by Employees of the Advisor
Employees of the Advisor are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Advisor's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Funds. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement"), Kemper Distributors, Inc. ("KDI"), 222
South Riverside Plaza, Chicago, Illinois, 60606, an affiliate of the Advisor, is
the principal underwriter and distributor for the Class A, B and C shares of the
Fund and acts as agent of the Fund in the continuous offering of its Shares. KDI
bears all of its expenses of providing services pursuant to the distribution
agreement, including the payment of any commissions. The Fund pays the cost for
the prospectus and
24
<PAGE>
shareholder reports to be set in type and printed for existing shareholders, and
KDI, as principal underwriter, pays for the printing and distribution of copies
thereof used in connection with the offering of Shares to prospective investors.
KDI also pays for supplementary sales literature and advertising costs.
The distribution agreement dated September 7, 1998, continues in effect
from year to year so long as such continuance is approved for each class at
least annually by a vote of the Board of Trustees of the Trust, including the
Trustees who are not interested persons of the Fund and who have no direct or
indirect financial interest in the agreement. The distribution agreement
automatically terminates in the event of its assignment and may be terminated
for a class at any time without penalty by the Fund or by KDI upon 60 days'
notice. Termination by the Fund with respect to a class may be by vote of a
majority of the Board of Trustees or a majority of the Trustees who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the distribution agreement or a "majority of the outstanding voting
securities" of the class of the Fund, as defined under the 1940 Act. The
distribution agreement may not be amended for a class to increase the fee to be
paid by the Fund with respect to such class without approval by a majority of
the outstanding voting securities of such class of the Fund, and all material
amendments must in any event be approved by the Board of Trustees in the manner
described above with respect to the continuation of the distribution agreement.
CLASS A SHARES. KDI receives no compensation from the Fund as principal
underwriter for Class A shares and pays all expenses of distribution of the
Fund's Class A shares under the distribution agreements not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI retains the sales charge upon the purchase of Class A shares and
pays out a portion of this sales charge or allows concessions or discounts to
firms for the sale of the Fund's Class A shares.
The following information concerns the underwriting commissions paid in
connection with the Fund's Class A shares for the fiscal period of April 16,
1998 (inception of Class A shares) through September 30, 1998.
Commissions Commissions
Fiscal Commissions KDI Paid Paid to KDI
Year Retained by KDI to All Firms Affiliated Firms
---- --------------- ------------ ----------------
1998 $1,446 $351,886 $0
CLASS B SHARES. For its services under the Rule 12b-1Plan, KDI receives a fee
from the Fund, payable monthly, at the annual rate of 0.75% of average daily net
assets of the Fund attributable to its Class B shares. This fee is accrued daily
as an expense of Class B shares. KDI also receives any contingent deferred sales
charges received on redemptions of Class B shares. See "Redemption or Repurchase
of Shares--Contingent Deferred Sales Charge--Class B Shares." KDI currently
compensates firms for sales of Class B shares at a commission rate of 3.75%.
CLASS C SHARES. For its services under the Rule 12b-1 Plan , KDI receives a fee
from the Fund, payable monthly, at the annual rate of 0.75% of average daily net
assets of the Fund attributable to its Class C shares. This fee is accrued daily
as an expense of Class C shares. KDI currently advances to firms the first year
distribution fee at a rate of 0.75% of the purchase price of Class C shares. For
periods after the first year, KDI currently pays firms for sales of Class C
shares a distribution fee, payable quarterly, at an annual rate of 0.75% of net
assets attributable to Class C shares maintained and serviced by the firm and
the fee continues until terminated by KDI or the Fund. KDI also receives any
contingent deferred sales charges. See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charges--Class C Shares."
RULE 12B-1 PLANS. Since the Rule 12b-1 Plan provides for fees payable as an
expense of each of the Class B shares and the Class C shares that are used by
KDI to pay for distribution services for those classes, each agreement is
approved and reviewed separately for the Class B shares and the Class C shares
in accordance with Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act"), which regulates the manner in which an investment company may,
directly or indirectly, bear the expenses of distributing its shares. Because
12b-1 fees are paid out of fund assets on an
25
<PAGE>
ongoing basis they will, over time, increase the cost of the investment and may
cost more than other types of sales charges. The Fund's Rule 12b-1 Plan is
separate from its distribution agreement.
If a Rule 12b-1 Plan (the "Plan") for a class is terminated in accordance with
its terms, the obligation of the Fund to make payments to KDI pursuant to such
Plan will cease and the Fund will not be required to make any payments past the
termination date. Thus, there is no legal obligation for the Fund to pay any
expenses incurred by KDI in excess of its fees under a Plan, if for any reason
the Plan is terminated in accordance with its terms. Future fees under a Plan
may or may not be sufficient to reimburse KDI for its expenses incurred. (See
"Principal Underwriter" for more information.)
Expenses of the Fund and of KDI, in connection with the Rule 12b-1 Plans for the
Class B and Class C shares for the period April 16, 1998 (establishment of the
Kemper Shares) through September 30, 1998:. A portion of the marketing, sales
and operating expenses shown below could be considered overhead expenses.
<TABLE>
<CAPTION>
Other Distribution Expenses paid by KDI
---------------------------------------
Contingent Total Distribution
Distribution Deferred Sales Distribution Paid by KDI to Marketing Misc.
Fiscal Fees Paid by Charges Paid Fees Paid by KDI Affiliated Advertising Prospectus and Sales Operating Interest
Year Fund to KDI to KDI KDI to Firms Firms and Literature Printing Expenses Expenses Expenses
---- ----------- ------ ------------ ----- -------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class B 1998 $28,037 $9,480 $674,408 $0 $11,890 $1,657 $36,916 $12,606 $15,135
Shares
Class C 1998 $4,063 $127 $2,833 $0 $1,880 $273 $5,906 $7,228 $161
Shares
</TABLE>
ADMINISTRATIVE SERVICES. Administrative services are provided to the Shares
under an administrative services agreement ("administrative agreement") with
KDI. KDI bears all its expenses of providing services pursuant to the
administrative agreement between KDI and the Fund, including the payment of
service fees. The Fund pays KDI an administrative services fee, payable monthly,
at an annual rate of up to 0.25% of average daily net assets of Class A, B and C
shares of the Fund.
KDI enters into related arrangements with various broker-dealer firms and
other service or administrative firms ("firms") that provide services and
facilities for their customers or clients who are investors in the Fund. The
firms provide such office space and equipment, telephone facilities and
personnel as is necessary or beneficial for providing information and services
to their clients. Such services and assistance may include, but are not limited
to, establishing and maintaining accounts and records, processing purchase and
redemption transactions, answering routine inquiries regarding the Fund,
assistance to clients in changing dividend and investment options, account
designations and addresses and such other administrative services as may be
agreed upon from time to time and permitted by applicable statute, rule or
regulation. With respect to Class A Shares, KDI pays each firm a service fee,
payable quarterly, at an annual rate of up to 0.25% of the net assets in Fund
accounts that it maintains and services attributable to Class A Shares,
commencing with the month after investment. With respect to Class B and Class C
Shares, KDI currently advances to firms the first-year service fee at a rate of
up to 0.25% of the purchase price of such Shares. For periods after the first
year, KDI currently intends to pay firms a service fee at a rate of up to 0.25%
(calculated monthly and paid quarterly) of the net assets attributable to Class
B and Class C Shares maintained and serviced by the firm. After the first year,
a firm becomes eligible for the quarterly service fee and the fee continues
until terminated by KDI or the Fund. Firms to which service fees may be paid may
include affiliates of KDI.
26
<PAGE>
The following information concerns the administrative services fee paid by the
Fund to KDI for the period April 16, 1998 (establishment of the Kemper Shares)
through September 30, 1998:
<TABLE>
<CAPTION>
Administrative Service Fees Paid by the Fund
--------------------------------------------
Total Service Fees Service Fees Paid by KDI
Fiscal Year Class A Class B Class C Paid by KDI to Firms to KDI Affiliated Firms
- ----------- ------- ------- ------- -------------------- -----------------------
<S> <C> <C> <C> <C> <C>
1998 $11,901 $9,334 $1,346 $22,581 $0
</TABLE>
KDI also may provide some of the above services and may retain any portion
of the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is based only upon Fund assets in
accounts for which a firm provides administrative services listed on the Fund's
records, and it is intended that KDI will pay all the administrative services
fee that it receives from the Fund to firms in the form of service fees. The
effective administrative services fee rate to be charged against all assets of
the Fund while this procedure is in effect will depend upon the proportion of
Fund assets that is in accounts for which a firm of record provides
administrative services. The Board of Trustees of the Fund, in its discretion,
may approve basing the fee to KDI on all Fund assets in the future.
Certain trustees or officers of the Trust are also directors or officers
of the Advisor or KDI, as indicated under "Officers and Trustees."
FUND ACCOUNTING AGENT. Scudder Fund Accounting Corporation, Two International
Place, Boston, Massachusetts 02110-4103, a subsidiary of the Advisor, computes
net asset values for the Fund. The Fund pays Scudder Fund Accounting Corporation
an annual fee equal to 0.025% of the first $150 million of average daily net
assets, 0.0075% of such assets in excess of $150 million and 0.0045% of such
assets in excess of $1 billion, plus holding and transaction charges for this
service. For the fiscal year ended September 30, 1998, Value Fund, consisting of
multiple classes of shares, incurred annual fees of $107,935, of which $12,046
was unpaid at September 30, 1998. For the fiscal year ended September 30, 1997,
Value Fund, which did not consist of multiple classes of shares during such
period, incurred annual fees of $50,128, of which $5,562 was unpaid at September
30, 1997.
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. State Street Bank and
Trust Company ("State Street"), as custodian, has custody of all securities and
cash of the Fund held outside the United States and of all securities and cash
of the Fund. The Custodian attends to the collection of principal, income and
payment for and collection of proceeds of securities bought and sold by the
Fund. Kemper Services Company ("KSvC"), an affiliate of the Advisor, is also
transfer agent for the Kemper Shares, shareholder service agent and dividend
paying agent. KSvC receives as transfer agent annual account fees of $6 per
account plus account set up, transaction and maintenance charges, annual fees
associated with the contingent deferred sales charge (Class B Shares only) and
out-of-pocket expense reimbursement.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Financial Highlights of
the Fund included in the Shares' prospectus and the Financial Statements
incorporated by reference in this Statement of Additional Information have been
so included or incorporated by reference in reliance on the report of
PricewaterhouseCoopers, L.L.P., One Post Office Square, Boston, Massachusetts
02109, independent accountants, and given on the authority of that firm as
experts in accounting and auditing.
PORTFOLIO TRANSACTIONS
Brokerage
Allocation of brokerage may be placed by the Adviser.
27
<PAGE>
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for the Fund's portfolio is to obtain the most favorable
net results taking into account such factors as price, commission where
applicable, size of order, difficulty of execution and skill required of the
executing broker/dealer. The Adviser seeks to evaluate the overall
reasonableness of brokerage commissions paid (to the extent applicable) through
familiarity with commissions charged on comparable transactions, as well as by
comparing commissions paid by the Fund to reported commissions paid by others.
The Adviser reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply research, market and statistical information to the
Fund. The term "research, market and statistical information" includes advice as
to the value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchasers or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The Adviser is not authorized when placing portfolio transactions for the Fund
to pay a brokerage commission in excess of that which another broker might
charge for executing the same transaction solely on account of the receipt of
research, market or statistical information. In effecting transactions in
over-the-counter securities, orders are placed with the principal market makers
for the security being traded unless, after exercising care, it appears that
more favorable results are available elsewhere.
In selecting among firms believed to meet the criteria for handling a
particular transaction, the Adviser may give consideration to those firms that
have sold or are selling shares of the Fund or other funds managed by the
Adviser.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through Scudder Investor Services, Inc.
("SIS"), a corporation registered as a broker-dealer and a subsidiary of the
Adviser. SIS will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. SIS will not receive any commission, fee or other
remuneration from the Fund for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to the Fund and to the Adviser, it is the opinion
of the Adviser that such information only supplements its own research effort
since the information must still be analyzed, weighed and reviewed by the
Adviser's staff. Such information may be useful to the Adviser in providing
services to clients other than the Fund and not all such information is used by
the Adviser in connection with the Fund. Conversely, such information provided
to the Adviser by broker/dealers through whom other clients of the Adviser
effect securities transactions may be useful to the Adviser in providing
services to the Fund.
The Trustees of the Fund review from time to time whether the recapture
for the benefit of the Fund of some portion of the brokerage commissions or
similar fees paid by the Fund on portfolio transactions is legally permissible
and advisable.
The Fund's average portfolio turnover rate is the ratio of the lesser of
sales or purchases to the monthly average value of the portfolio securities
owned during the year, excluding all securities with maturities or expiration
dates at the time of acquisition of one year or less. A higher rate involves
greater brokerage transaction expenses to the Fund and may result in the
realization of net capital gains, which would be taxable to shareholders when
distributed. Purchases and sales are made for the Fund's portfolio whenever
necessary, in management's opinion, to meet the Fund's objective. Under normal
investment conditions, it is anticipated that the portfolio turnover rate in the
Fund's initial fiscal year will not exceed 100%.
For the fiscal years ended September 30, 1996, 1997 and 1998, Value Fund
paid brokerage commissions of $181,652, $273,545 and $354,337 respectively. For
the fiscal year ended September 30, 1998, the Fund paid brokerage commissions of
$344,034 (97.09% of the total brokerage commissions paid), resulting from orders
placed consistent
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<PAGE>
with the policy of seeking to obtain the most favorable net results for
transactions placed with brokers and dealers who provided supplementary
research, market and statistical information to the Trust or Advisor. The amount
of such transactions aggregated $352,379,408 (89.85% of all brokerage
transactions). The balance of such brokerage was not allocated to any particular
broker or dealer or with regard to the above-mentioned or any other special
factors.
Portfolio Turnover
For the fiscal years ended September 30, 1996, 1997 and 1998, Value Fund
had an annualized portfolio turnover rate of 90.8%, 47.4% and 47.0%,
respectively. Higher levels of activity by the Fund results in higher
transaction costs and may also result in taxes on realized capital gains to be
borne by the Fund's shareholders. Purchases and sales are made for the Fund
whenever necessary, in management's opinion, to meet the Fund's objectives.
NET ASSET VALUE
The net asset value per share of a Fund is the value of one share and is
determined separately for each class by dividing the value of a Fund's net
assets attributable to the class by the number of shares of that class
outstanding. The per share net asset value of each of Class B and Class C shares
of the Fund will generally be lower than that of the Class A shares of a Fund
because of the higher expenses borne by the Class B and Class C shares. The net
asset value of shares of a Fund is computed as of the close of regular trading
(the "value time") on the New York Stock Exchange (the "Exchange") on each day
the Exchange is open for trading. The Exchange is scheduled to be closed on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
Portfolio securities for which market quotations are readily available are
generally valued at market value as of the value time in the manner described
below. All other securities may be valued at fair value as determined in good
faith by or under the direction of the Board.
With respect to the Funds with securities listed primarily on foreign exchanges,
such securities may trade on days when the Fund's net asset value is not
computed; and therefore, the net asset value of a Fund may be significantly
affected on days when the investor has no access to the Fund.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market Inc.
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities are valued at prices supplied by a pricing agent(s) which
reflect broker/dealer supplied valuations and electronic data processing
techniques. Money market instruments purchased with an original maturity of
sixty days or less, maturing at par, shall be valued at amortized cost, which
the Board believes approximates market value. If it is not possible to value a
particular debt security pursuant to these valuation methods, the value of such
security is the most recent bid quotation supplied by a bona fide marketmaker.
If it is not possible to value a particular debt security pursuant to the above
methods, the investment manager of the particular fund may calculate the price
of that debt security, subject to limitations established by the Board.
An exchange-traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate on the
valuation date.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
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<PAGE>
If, in the opinion of the Valuation Committee of the Board of Trustees, the
value of a portfolio asset as determined in accordance with these procedures
does not represent the fair market value of the portfolio asset, the value of
the portfolio asset is taken to be an amount which, in the opinion of the
Valuation Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Fund is determined
in a manner which, in the discretion of the Valuation Committee, most fairly
reflects market value of the property on the valuation date. Following the
valuations of securities or other portfolios assets in terms of the currency in
which the market quotation used is expressed ("Local Currency"), the value of
these portfolio assets in terms of U.S. dollars is calculated by converting the
Local Currency into U.S. dollars at the prevailing currency exchange rate on the
valuation date.
PURCHASE, REDEMPTION AND REPURCHASE OF SHARES
PURCHASE OF SHARES
ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of the Fund 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
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 shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of the Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. See,
also, "Summary of Expenses." Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class that
best suits their circumstances and objectives.
<TABLE>
<CAPTION>
Annual 12b-1 Fees
(as a % of average
Sales Charge daily net assets) Other Information
------------ ----------------- -----------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of None Initial sales charge
5.75% of the public offering price waived or reduced for
certain purchases (1)
Class B Maximum contingent deferred sales 0.75% Shares convert to
charge of 4% of redemption Class A shares six
proceeds; declines to zero after years after issuance
six years
Class C Contingent deferred sales charge of 0.75% No conversion feature
1% of redemption proceeds for
redemptions made during first year
after purchase
</TABLE>
- ----------
(1) Class A shares purchased at net asset value under the "Large Order NAV
Purchase Privilege" may be subject to a 1% contingent deferred sales charge if
redeemed within one year of purchase and a 0.50% contingent deferred sales
charge if redeemed within the second year of purchase.
The minimum initial investment for each of class A, B and C of the Fund is
$1,000 and the minimum subsequent investment is $100. The minimum initial
investment for an Individual Retirement Account is $250 and the minimum
subsequent investment is $50. Under an automatic investment plan, such as Bank
Direct Deposit, Payroll Direct Deposit or Government Direct Deposit, the minimum
initial and subsequent investment is $50. These minimum amounts may be changed
at any time in management's discretion.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You
30
<PAGE>
cannot redeem shares by telephone or wire transfer or use the telephone exchange
privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
INITIAL SALES CHARGE ALTERNATIVE--Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to Dealers
As a Percentage of As a Percentage of as a Percentage of
Amount of Purchase Offering Price Net Asset Value* Offering Price
------------------ -------------- ---------------- --------------
<S> <C> <C> <C>
Less than $50,000.................. 5.75% 6.10% 5.20%
$50,000 but less than $100,000..... 4.50 4.71 4.00
$100,000 but less than $250,000.... 3.50 3.63 3.00
$250,000 but less than $500,000.... 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over................ .00** .00** ***
</TABLE>
- ----------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge
as discussed below.
*** Commission is payable by KDI as discussed below.
The Fund receives the entire net asset value of all its shares sold. KDI, the
Fund's principal underwriter, retains the sales charge on sales of Class A
shares from which it allows discounts from the applicable public offering price
to investment dealers, which discounts are uniform for all dealers in the United
States and its territories. The normal discount allowed to dealers is set forth
in the above table. Upon notice to all dealers with whom it has sales
agreements, KDI may re-allow to dealers up to the full applicable sales charge,
as shown in the above table, during periods and for transactions specified in
such notice and such re-allowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is re-allowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser, provided that the amount invested in such Fund or other Kemper Fund
listed under "Special Features--Class A Shares--Combined Purchases" totals at
least $1,000,000 including purchases of Class A shares pursuant to the "Combined
Purchases," "Letter of Intent" and "Cumulative Discount" features described
under "Special Features"; or (b) a participant-directed qualified retirement
plan described in Code Section 401(a), a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district, provided in each
case that such plan has not less than 200 eligible employees (the "Large Order
NAV Purchase Privilege"). Redemption within two years of the purchase of shares
purchased under the Large Order NAV Purchase Privilege may be subject to a
contingent deferred sales charge. See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charge--Large Order NAV Purchase Privilege."
KDI may at its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of the Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
Shares pursuant to the Large Order NAV Purchase Privilege to employer-sponsored
employee benefit plans using the subaccount recordkeeping system made available
through Kemper Service Company. For purposes of determining the appropriate
commission percentage to be applied to a particular sale, KDI will consider the
cumulative amount invested by the purchaser in the Fund and other Kemper Fund
listed under "Special Features--Class A Shares--Combined Purchases," including
purchases pursuant to the "Combined Purchases," "Letter of Intent" and
"Cumulative Discount" features referred to above. The privilege of purchasing
Class A shares of the Fund at net asset value under the Large Order NAV Purchase
Privilege is not available if another net asset value purchase privilege also
applies.
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<PAGE>
Class A shares of the Fund or of any other Kemper Fund listed under "Special
Features--Class A Shares--Combined Purchases" may be purchased at net asset
value in any amount by members of the plaintiff class in the proceeding known as
Howard and Audrey Tabankin, et al. v. Kemper Short-Term Global Income Fund, et
al., Case No. 93 C 5231 (N.D. IL). This privilege is generally non-transferable
and continues for the lifetime of individual class members and for a ten year
period for non-individual class members. To make a purchase at net asset value
under this privilege, the investor must, at the time of purchase, submit a
written request that the purchase be processed at net asset value pursuant to
this privilege specifically identifying the purchaser as a member of the
"Tabankin Class." Shares purchased under this privilege will be maintained in a
separate account that includes only shares purchased under this privilege. For
more details concerning this privilege, class members should refer to the Notice
of (1) Proposed Settlement with Defendants; and (2) Hearing to Determine
Fairness of Proposed Settlement, dated August 31, 1995, issued in connection
with the aforementioned court proceeding. For sales of Fund shares at net asset
value pursuant to this privilege, KDI may in its discretion pay investment
dealers and other financial services firms a concession, payable quarterly, at
an annual rate of up to 0.25% of net assets attributable to such Shares
maintained and serviced by the firm. A firm becomes eligible for the concession
based upon assets in accounts attributable to Shares purchased under this
privilege in the month after the month of purchase and the concession continues
until terminated by KDI. The privilege of purchasing Class A shares of the Fund
at net asset value under this privilege is not available if another net asset
value purchase privilege also applies.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase such Shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of the Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with KDI, for themselves or members of their
families. KDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of 0.50% of
the amount of Class A shares purchased.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase shares of the Fund through KDI as part of an automated billing and wage
deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, employees (including retirees) and sales representatives of the Fund,
its investment manager, its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and employees of broker-dealers having selling group agreements
with KDI and officers, directors and employees of service agents of the Fund,
for themselves or their spouses or dependent children; (c) any trust, pension,
profit-sharing or other benefit plan for only such persons; (d) persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm; and (e) persons who purchase shares of the Fund
through KDI as part of an automated billing and wage deduction program
administered by RewardsPlus of America for the benefit of employees of
participating employer groups. Class A shares may be sold at net asset value in
any amount to selected employees (including their spouses and dependent
children) of banks and other financial services firms that provide
administrative services related to order placement and payment to facilitate
transactions in Shares of the Fund for their clients pursuant to an agreement
with KDI or one of its affiliates. Only those employees of such banks and other
firms who as part of their usual duties provide services related to transactions
in Fund shares may purchase Fund Class A shares at net asset value hereunder.
Class A shares may be sold at net asset value in any amount to unit investment
trusts sponsored by Ranson & Associates, Inc. In addition, unitholders of unit
investment trusts sponsored by Ranson & Associates, Inc. or its predecessors may
purchase the Fund's Class A shares at net asset value through reinvestment
programs of such trusts that have such programs. Class A shares of the Fund may
be sold at net asset value through certain investment advisors registered under
the 1940 Act and other financial services firms that adhere to certain standards
established by KDI, including a requirement that such Shares be sold for the
benefit of their clients participating in an investment advisory program under
which such clients pay a fee to the investment advisor or other firm for
portfolio management and other services. Such Shares are sold for investment
purposes and on the condition that they will not be resold except through
redemption or repurchase by the Fund. The Fund may also issue Class A shares at
net asset value in connection with the acquisition of the assets of or merger or
consolidation with another investment company, or to shareholders in connection
with the investment or reinvestment of income and capital gain dividends.
32
<PAGE>
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
DEFERRED SALES CHARGE ALTERNATIVE--Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares--Contingent Deferred
Sales Charge--Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of the Fund will automatically convert to Class A shares of the
Fund six years after issuance on the basis of the relative net asset value per
share of the Class B shares. The purpose of the conversion feature is to relieve
holders of Class B shares from the distribution services fee when they have been
outstanding long enough for KDI to have been compensated for distribution
related expenses. For purposes of conversion to Class A shares, shares purchased
through the reinvestment of dividends and other distributions paid with respect
to Class B shares in a shareholder's Fund account will be converted to Class A
shares on a pro rata basis.
PURCHASE OF CLASS C SHARES. The public offering price of the Class C shares of
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class
C Shares." KDI currently advances to firms the first year distribution fee at a
rate of 0.75% of the purchase price of such shares. For periods after the first
year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of 0.75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
GENERAL. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
Shares of the Fund for their clients, and KDI may pay them a transaction fee up
to the level of the discount or commission allowable or payable to dealers, as
described above. Banks are currently prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be appropriate. KDI does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
the Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of Shares of the Fund sold under the following conditions: (i) the purchased
Shares are held in a Kemper IRA account, (ii) the Shares are purchased as a
direct "roll over" of a distribution from a qualified retirement plan account
maintained on a participant subaccount record keeping system provided by Kemper
Service Company, (iii) the registered representative placing the trade is a
member of ProStar, a group of persons designated by KDI in acknowledgment of
their dedication to the employee benefit plan area; and (iv) the purchase is not
otherwise subject to a commission.
33
<PAGE>
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash or other compensation, to firms that sell Shares
of the Fund. Non cash compensation includes luxury merchandise and trips to
luxury resorts. In some instances, such discounts, commissions or other
incentives will be offered only to certain firms that sell during specified time
periods certain minimum amounts of shares of the Fund, or other Fund
underwritten by KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price based
on the net asset value per share of the Fund next determined after receipt in
good order by KDI of the order accompanied by payment. However, orders received
by dealers or other financial services firms prior to the determination of net
asset value (see "Net Asset Value") and received in good order by KDI prior to
the close of its business day will be confirmed at a price based on the net
asset value per Share effective on that day ("trade date"). The Fund reserves
the right to determine the net asset value more frequently than once a day if
deemed desirable. Dealers and other financial services firms are obligated to
transmit orders promptly. Collection may take significantly longer for a check
drawn on a foreign bank than for a check drawn on a domestic bank. Therefore, if
an order is accompanied by a check drawn on a foreign bank, funds must normally
be collected before shares will be purchased. See "Purchase, Redemption and
Repurchase of Shares" herein.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Fund's Shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Fund's Shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Fund through the Shareholder Service Agent for
these services. This statement of additional information should be read in
connection with such firms' material regarding their fees and services.
The Fund reserves the right to withdraw all or any part of the offering made by
this statement of additional information and to reject purchase orders for any
reason. Also, from time to time, the Fund may temporarily suspend the offering
of any class of its shares to new investors. During the period of such
suspension, persons who are already shareholders of such class of such Fund
normally are permitted to continue to purchase additional shares of such class
and to have dividends reinvested.
TAX IDENTIFICATION NUMBER. Be sure to complete the Tax Identification Number
section of the Fund's application when you open an account. Federal tax law
requires the Fund to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a correct certified Social Security or
tax identification number and certain other certified information or upon
notification from the IRS or a broker that withholding is required. The Fund
reserves the right to reject new account applications without a correct
certified Social Security or tax identification number. The Fund also reserves
the right, following 30 days' notice, to redeem all shares in accounts without a
correct certified Social Security or tax identification number. A shareholder
may avoid involuntary redemption by providing the applicable Fund with a tax
identification number during the 30-day notice period.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this statement of additional information.
As described herein, Fund Shares are sold at their public offering price,
which is the net asset value per such shares next determined after an order is
received in proper form plus, with respect to Class A Shares, an initial sales
charge. The minimum initial investment for each of class A, B and C is $1,000
and the minimum subsequent investment is $100 but such minimum amounts may be
changed at any time. The Fund may waive the minimum for purchases by
34
<PAGE>
trustees, directors, officers or employees of the Fund or the Advisor and its
affiliates. An order for the purchase of Shares that is accompanied by a check
drawn on a foreign bank (other than a check drawn on a Canadian bank in U.S.
Dollars) will not be considered in proper form and will not be processed unless
and until the Fund determines that it has received payment of the proceeds of
the check. The time required for such a determination will vary and cannot be
determined in advance.
Upon receipt by the Shareholder Service Agent of a request for redemption,
Shares of the Fund will be redeemed by the Fund at the applicable net asset
value per share of the Fund as described herein.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A Shares or the contingent deferred sales charge for
redemptions of Class B or Class C Shares by certain classes of persons or
through certain types of transactions as described herein are provided because
of anticipated economies of scale in sales and sales-related efforts.
The net asset value per Share of the Fund is determined separately for
each class by dividing the value of the Fund's net assets attributable to that
class by the number of Shares of that class outstanding. The per share net asset
value of the Class B and Class C Shares of the Fund will generally be lower than
that of the Class A Shares of the Fund because of the higher expenses borne by
the Class B and Class C Shares. The net asset value of Shares of the Fund is
computed as of the close of regular trading on the Exchange on each day the
Exchange is open for trading. The Exchange is scheduled to be closed on the
following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
The Fund has authorized certain members of the National Association of
Securities Dealers, Inc. ("NASD"), other than Kemper Distributors, Inc. ("KDI")
to accept purchase and redemption orders for the Fund's shares. Those brokers
may also designate other parties to accept purchase and redemption orders on the
Fund's behalf. Orders for purchase or redemption will be deemed to have been
received by the Fund when such brokers or their authorized designees accept the
orders. Subject to the terms of the contract between the Fund and the broker,
ordinarily orders will be priced as the Fund's net asset value next computed
after acceptance by such brokers or their authorized designees. Further, if
purchases or redemptions of the Fund's shares are arranged and settlement is
made at an investor's election through any other authorized NASD member, that
member may, at its discretion, charge a fee for that service. The Board of
Trustees or Directors as the case may be ("Board") of the Fund and KDI each has
the right to limit the amount of purchases by, and to refuse to sell to, any
person. The Board and KDI may suspend or terminate the offering of shares of the
Fund at any time for any reason. The Fund has authorized certain members of the
National Association of Securities Dealers, Inc. ("NASD"), other than Kemper
Distributors, Inc. ("KDI") to accept purchase and redemption orders for the
Fund's shares. Those brokers may also designate other parties to accept purchase
and redemption orders on the Fund's behalf. Orders for purchase or redemption
will be deemed to have been received by the Fund when such brokers or their
authorized designees accept the orders. Subject to the terms of the contract
between the Fund and the broker, ordinarily orders will be priced as the Fund's
net asset value next computed after acceptance by such brokers or their
authorized designees. Further, if purchases or redemptions of the Fund's shares
are arranged and settlement is made at an investor's election through any other
authorized NASD member, that member may, at its discretion, charge a fee for
that service. The Board of Trustees or Directors as the case may be ("Board") of
the Fund and KDI each has the right to limit the amount of purchases by, and to
refuse to sell to, any person. The Board and KDI may suspend or terminate the
offering of shares of the Fund at any time for any reason.
REDEMPTION OR REPURCHASE OF SHARES
GENERAL. Any shareholder may require the Fund to redeem his or her Shares. When
Shares are held for the account of a shareholder by the Kemper Shares' transfer
agent, the shareholder may redeem such Shares by sending a written request with
signatures guaranteed to Kemper Funds, Attention: Redemption Department, P.O.
Box 419557, Kansas City, Missouri 64141-6557. When certificates for Shares have
been issued, they must be mailed to or deposited with the Shareholder Service
Agent, along with a duly endorsed stock power and accompanied by a written
request for redemption. Redemption requests and a stock power must be endorsed
by the account holder with signatures guaranteed by a commercial bank, trust
company, savings and loan association, federal savings bank, member firm of a
national securities exchange or other eligible financial institution. The
redemption request and stock power must be signed
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exactly as the account is registered including any special capacity of the
registered owner. Additional documentation may be requested, and a signature
guarantee is normally required, from institutional and fiduciary account
holders, such as corporations, custodians (e.g., under the Uniform Transfers to
Minors Act), executors, administrators, trustees or guardians.
The redemption price for shares of a class of the Fund will be the net asset
value per share of that class of the Fund next determined following receipt by
the Shareholder Service Agent of a properly executed request with any required
documents as described above. Payment for shares redeemed will be made in cash
as promptly as practicable but in no event later than seven days after receipt
of a properly executed request accompanied by any outstanding share certificates
in proper form for transfer. When the Fund is asked to redeem shares for which
it may not have yet received good payment (i.e., purchases by check,
EXPRESS-Transfer or Bank Direct Deposit), it may delay transmittal of redemption
proceeds until it has determined that collected funds have been received for the
purchase of such shares, which will be up to 10 days from receipt by the Fund of
the purchase amount. The redemption within two years of Class A shares purchased
at net asset value under the Large Order NAV Purchase Privilege may be subject
to a contingent deferred sales charge (see "Purchase of Shares--Initial Sales
Charge Alternative--Class A Shares"), the redemption of Class B shares within
six years may be subject to a contingent deferred sales charge (see "Contingent
Deferred Sales Charge--Class B Shares" below), and the redemption of Class C
shares within the first year following purchase may be subject to a contingent
deferred sales charge (see "Contingent Deferred Sales Charge--Class C Shares"
below).
Because of the high cost of maintaining small accounts, the Fund may assess a
quarterly fee of $9 on any account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer-sponsored employee benefit plans
using the subaccount record-keeping system made available through the
Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. The Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, so long
as reasonable verification procedures are followed. Verification procedures
include recording instructions, requiring certain identifying information before
acting upon instructions and sending written confirmations.
TELEPHONE REDEMPTIONS. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Fund reserves the right to terminate or modify
this privilege at any time.
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<PAGE>
REPURCHASES (CONFIRMED REDEMPTIONS). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. The
repurchase price will be the net asset value per Share of the Fund next
determined after receipt of a request by KDI. However, requests for repurchases
received by dealers or other firms prior to the determination of net asset value
per Share (see "Net Asset Value") and received by KDI prior to the close of
KDI's business day will be confirmed at the net asset value effective on that
day. The offer to repurchase may be suspended at any time. There is no charge by
KDI with respect to repurchases; however, dealers or other firms may charge
customary commissions for their services. Dealers and other financial services
firms are obligated to transmit orders promptly. Requirements as to stock
powers, certificates, payments and delay of payments are the same as for
redemptions.
EXPEDITED WIRE TRANSFER REDEMPTIONS. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds sent by federal
wire transfer to a single previously designated account. Requests received by
the Shareholder Service Agent prior to the determination of net asset value will
result in Shares being redeemed that day at the net asset value per Share of the
Fund effective on that day and normally the proceeds will be sent to the
designated account the following business day. Delivery of the proceeds of a
wire redemption of $250,000 or more may be delayed by the Fund for up to seven
days if the Fund or the Shareholder Service Agent deems it appropriate under
then-current market conditions. Once authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048 or in writing,
subject to the limitations on liability described under "General" above. The
Fund is not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Fund currently does not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $1,000
wire redemption minimum (including any contingent deferred sales charge). To
change the designated account to receive wire redemption proceeds, send a
written request to the Shareholder Service Agent with signatures guaranteed as
described above or contact the firm through which shares of the Fund were
purchased. Shares purchased by check or through EXPRESS-Transfer or Bank Direct
Deposit may not be redeemed by wire transfer until such Shares have been owned
for at least 10 days. Account holders may not use this privilege to redeem
Shares held in certificated form. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
expedited wire transfer redemption privilege, although investors can still
redeem by mail. The Fund reserves the right to terminate or modify this
privilege at any time.
CONTINGENT DEFERRED SALES CHARGE--LARGE ORDER NAV PURCHASE PRIVILEGE. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year after purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed, excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a), a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer-sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
Shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of Shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under the Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares whose
dealer of record at the time of the investment notifies KDI that the dealer
waives the discretionary commission applicable to such Large Order NAV Purchase.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the Shares redeemed, excluding amounts not subject to the charge.
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Contingent
Deferred
Year of Redemption After Purchase Sales Charge
--------------------------------- ------------
First............................. 4%
Second............................ 3%
Third............................. 3%
Fourth............................ 2%
Fifth............................. 2%
Sixth............................. 1%
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features--Systematic Withdrawal Plan" below), (d) for redemptions made pursuant
to any IRA systematic withdrawal based on the shareholder's life expectancy
including, but not limited to, substantially equal periodic payments described
in Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for
redemptions to satisfy required minimum distributions after age 70 1/2 from an
IRA account (with the maximum amount subject to this waiver being based only
upon the shareholder's Kemper IRA accounts). The contingent deferred sales
charge will also be waived in connection with the following redemptions of
shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent: (a) redemptions to satisfy participant loan advances (note that loan
repayments constitute new purchases for purposes of the contingent deferred
sales charge and the conversion privilege), (b) redemptions in connection with
retirement distributions (limited at any one time to 10% of the total value of
plan assets invested in the Fund), (c) redemptions in connection with
distributions qualifying under the hardship provisions of the Internal Revenue
Code and (d) redemptions representing returns of excess contributions to such
plans.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the Shares redeemed, excluding amounts not subject to the
charge. The contingent deferred sales charge will be waived: (a) in the event of
the total disability (as evidenced by a determination by the federal Social
Security Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special
Features--Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed redemption
of shares held by employer-sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent, (g) for redemption of shares by an employer sponsored employee benefit
plan that (i) offers funds in addition to Kemper Funds (i.e., "multi-manager"),
and (ii) whose dealer of record has waived the advance of the first year
administrative service and distribution fees applicable to such shares and has
agreed to receive such fees quarterly, and (h) redemption of shares purchased
through a dealer-sponsored asset allocation program maintained on an omnibus
record-keeping system provided the dealer of record has waived the advance of
the first year and administrative services and distribution fees applicable to
such shares and has agreed to receive such fees quarterly.
CONTINGENT DEFERRED SALES CHARGE--GENERAL. The following example will illustrate
the operation of the contingent deferred sales charge. Assume that an investor
makes a single purchase of $10,000 of the Fund's Class B shares and that 16
months later the value of the shares has grown by $1,000 through reinvested
dividends and by an additional $1,000 of share appreciation to a total of
$12,000. If the investor were then to redeem the entire $12,000 in share value,
the contingent deferred sales charge would be payable only with respect to
$10,000 because neither the $1,000 of reinvested dividends nor the $1,000 of
share appreciation is subject to the charge. The charge would be at the rate of
3% ($300) because it was in the second year after the purchase was made.
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<PAGE>
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in May
1998 will be eligible for the second year's charge if redeemed on or after May
1, 1999. In the event no specific order is requested when redeeming shares
subject to a contingent deferred sales charge, the redemption will be made first
from shares representing reinvested dividends and then from the earliest
purchase of shares. KDI receives any contingent deferred sales charge directly.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Class A shares of the
Fund or any other Kemper Fund listed under "Special Features--Class A
Shares--Combined Purchases" (other than shares of the Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value per Share at the time of the reinvestment in Class A
shares of the Fund or of the other listed Kemper Funds. A shareholder of the
Fund or other Kemper Funds who redeems Class A shares purchased under the Large
Order NAV Purchase Privilege (see "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares") or Class B shares or Class C shares and incurs a
contingent deferred sales charge may reinvest up to the full amount redeemed at
net asset value per Share at the time of the reinvestment, in the same class of
shares as the case may be, of the Fund or of other Kemper Funds. The amount of
any contingent deferred sales charge also will be reinvested. These reinvested
shares will retain their original cost and purchase date for purposes of the
contingent deferred sales charge schedule. Also, a holder of Class B shares who
has redeemed Shares may reinvest up to the full amount redeemed, less any
applicable contingent deferred sales charge that may have been imposed upon the
redemption of such Shares, at net asset value in Class A shares of the Fund or
of the other Kemper Funds listed under "Special Features--Class A
Shares--Combined Purchases." Purchases through the reinvestment privilege are
subject to the minimum investment requirements applicable to the shares being
purchased and may only be made for Kemper Funds available for sale in the
shareholder's state of residence as listed under "Special Features--Exchange
Privilege." The reinvestment privilege can be used only once as to any specific
Shares and reinvestment must be effected within six months of the redemption. If
a loss is realized on the redemption of shares of the Fund, the reinvestment in
Shares of the Fund may be subject to the "wash sale" rules if made within 30
days of the redemption, resulting in a postponement of the recognition of such
loss for federal income tax purposes. The reinvestment privilege may be
terminated or modified at any time.
REDEMPTION IN KIND. Although it is the Fund's present policy to redeem in cash,
if the Board of Trustees determines that a material adverse effect would be
experienced by the remaining shareholders if payment were made wholly in cash,
the Fund will satisfy the redemption request in whole or in part by a
distribution of portfolio securities in lieu of cash, in conformity with the
applicable rules of the Securities and Exchange Commission, taking such
securities at the same value used to determine net asset value, and selecting
the securities in such manner as the Board of Trustees may deem fair and
equitable. If such a distribution occurred, shareholders receiving securities
and selling them could receive less than the redemption value of such securities
and in addition would incur certain transaction costs. Such a redemption would
not be as liquid as a redemption entirely in cash. The Trust has elected,
however, to be governed by Rule 18f-1 under the 1940 Act, as a result of which
the Fund is obligated to redeem shares, with respect to any one shareholder
during any 90-day period, solely in cash up to the lesser of $250,000 or 1% of
the net asset value of a Share at the beginning of the period.
SPECIAL FEATURES
CLASS A SHARES--COMBINED PURCHASES. The Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following Funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Diversified Income Fund,
Kemper High Yield Series, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Blue Chip Fund,
Kemper Global Income Fund, Kemper Target Equity Fund (series are subject to a
limited offering period), Kemper Intermediate Municipal Bond Fund, Kemper Cash
Reserves Fund, Kemper U.S. Mortgage Fund, Kemper Short-Intermediate Government
Fund, Kemper Value Series, Inc., Kemper Value+ Growth Fund Kemper Horizon Fund,
Kemper Europe Fund, Kemper Asian Growth Fund, Kemper Global/International
Series, Inc., Kemper Equity Trust, Kemper Securities Trust, Kemper Aggressive
Growth Fund, Kemper Value Fund, Kemper Global Discovery Fund, Kemper Funds
Trust, Kemper Income Trust, and Kemper Classic Growth Fund ("Kemper Funds").
Except as noted below, there is no combined purchase credit for direct purchases
of shares of Zurich Money
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<PAGE>
Funds, Cash Equivalent Fund, Tax-Exempt California Money Market Fund, Cash
Account Trust, Investor's Municipal Cash Fund or Investors Cash Trust ("Money
Market Funds"), which are not considered a "Kemper Fund" for purposes hereof.
For purposes of the Combined Purchases feature described above as well as for
the Letter of Intent and Cumulative Discount features described below, employer
sponsored employee benefit plans using the subaccount record keeping system made
available through the Shareholder Service Agent may include: (a) Money Market
Funds as "Kemper Funds", (b) all classes of shares of any Kemper Fund and (c)
the value of any other plan investment, such as guaranteed investment contracts
and employer stock, maintained on such subaccount record keeping system.
CLASS A SHARES--LETTER OF INTENT. The same reduced sales charges for Class A
shares, as shown in this statement of additional information, also apply to the
aggregate amount of purchases of such Kemper Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer-sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Funds held of record as of the initial purchase date under the
Letter as an "accumulation credit" toward the completion of the Letter, but no
price adjustment will be made on such shares. Only investments in Class A shares
are included for this privilege.
CLASS A SHARES--CUMULATIVE DISCOUNT. Class A shares of the Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of the Fund being purchased, the value of all Class A shares
of the above mentioned Kemper Funds (computed at the maximum offering price at
the time of the purchase for which the discount is applicable) already owned by
the investor.
CLASS A SHARES--AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
EXCHANGE PRIVILEGE. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Funds in accordance with the provisions below.
CLASS A SHARES. Class A shares of the Kemper Funds and shares of the Money
Market Funds listed under "Special Features--Class A Shares--Combined Purchases"
above may be exchanged for each other at their relative net asset values. Shares
of Money Market Funds and the Kemper Cash Reserves Fund that were acquired by
purchase (not including shares acquired by dividend reinvestment) are subject to
the applicable sales charge on exchange. Series of Kemper Target Equity Fund are
available on exchange only during the Offering Period for such series as
described in this statement of additional information. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investors Municipal
Cash Fund and Investors Cash Trust are available on exchange but only through a
financial services firm having a services agreement with KDI.
Class A shares of the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Kemper Fund or a Money
Market Fund under the exchange privilege described above without paying any
contingent deferred sales charge at the time of exchange. If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed in accordance with the foregoing requirements provided that the
shares redeemed will retain their original cost and purchase date for purposes
of calculating the contingent deferred sales charge.
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<PAGE>
CLASS B SHARES. Class B shares of the Fund and Class B shares of any other
Kemper Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset values. Class B
shares may be exchanged without a contingent deferred sales charge being imposed
at the time of exchange. For purposes of calculating the contingent deferred
sales charge that may be imposed upon the redemption of the Class B shares
received on exchange, amounts exchanged retain their original cost and purchase
date.
CLASS C SHARES. Class C shares of the Fund and Class C shares of any other
Kemper Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset values. Class C
shares may be exchanged without a contingent deferred sales charge being imposed
at the time of exchange. For purposes of determining whether there is a
contingent deferred sales charge that may be imposed upon the redemption of the
Class C shares received by exchange, such Shares received by exchange the cost
and purchase date of the Shares that were originally purchased and exchanged.
GENERAL. Shares of a Kemper Fund with a value in excess of $1,000,000 (except
Kemper Cash Reserves Fund) acquired by exchange through another Kemper Fund, or
from a Money Market Fund, may not be exchanged thereafter until they have been
owned for 15 days (the "15-Day Hold Policy"). For purposes of determining
whether the 15-Day Hold Policy applies to a particular exchange, the value of
the shares to be exchanged shall be computed by aggregating the value of shares
being exchanged for all accounts under common control, discretion or advice,
including, without limitation, accounts administered by a financial services
firm offering market timing, asset allocation or similar services. The total
value of shares being exchanged must at least equal the minimum investment
requirement of the Kemper Fund into which they are being exchanged. Exchanges
are made based on relative dollar values of the shares involved in the exchange.
There is no service fee for an exchange; however, dealers or other firms may
charge for their services in effecting exchange transactions. Exchanges will be
effected by redemption of shares of the fund held and purchase of shares of the
other fund. For federal income tax purposes, any such exchange constitutes a
sale upon which a gain or loss may be realized, depending upon whether the value
of the shares being exchanged is more or less than the shareholder's adjusted
cost basis of such shares. Shareholders interested in exercising the exchange
privilege may obtain prospectuses of the other Funds from dealers, other firms
or KDI. Exchanges may be accomplished by a written request to Kemper Service
Company, Attention: Exchange Department, P.O. Box 419557, Kansas City, Missouri
64141-6557, or by telephone if the shareholder has given authorization. Once the
authorization is on file, the Shareholder Service Agent will honor requests by
telephone at 1-800-621-1048, subject to the limitations on liability under
"Redemption or Repurchase of Shares--General." Any share certificates must be
deposited prior to any exchange of such shares. During periods when it is
difficult to contact the Shareholder Service Agent by telephone, it may be
difficult to use the telephone exchange privilege. The exchange privilege is not
a right and may be suspended, terminated or modified at any time. Exchanges may
only be made for Funds that are available for sale in the shareholder's state of
residence. Currently, Tax-Exempt California Money Market Fund is available for
sale only in California and Investors Municipal Cash Fund is available for sale
only in certain states. Except as otherwise permitted by applicable regulations,
60 days' prior written notice of any termination or material change will be
provided.
The Fund may suspend the right of redemption or delay payment more than
seven days (a) during any period when the New York Stock Exchange ("Exchange")
is closed other than customary weekend and holiday closings or during any period
in which trading on the Exchange is restricted, (b) during any period when an
emergency exists as a result of which (i) disposal of the Fund's investments is
not reasonably practicable, or (ii) it is not reasonably practicable for the
Fund to determine the value of its net assets, or (c) for such other periods as
the Securities and Exchange Commission may by order permit for the protection of
the Fund's shareholders.
Although it is the Fund's present policy to redeem in cash, if the Board of
Trustees determines that a material adverse effect would be experienced by the
remaining shareholders if payment were made wholly in cash, the Fund will
satisfy the redemption request in whole or in part by a distribution of
portfolio securities in lieu of cash, in conformity with the applicable rules of
the Securities and Exchange Commission, taking such securities at the same value
used to determine net asset value, and selecting the securities in such manner
as the Board of Trustees may deem fair and equitable. If such a distribution
occurred, shareholders receiving securities and selling them could receive less
than the redemption value of such securities and in addition would incur certain
transaction costs. Such a redemption would not be so liquid as a redemption
entirely in cash.
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The conversion of Class B Shares to Class A Shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to the Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B Shares and
not Class A Shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B Shares to Class A Shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B Shares to Class
A Shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B Shares would occur, and Shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described herein.
SYSTEMATIC EXCHANGE PRIVILEGE. The owner of $1,000 or more of any class of the
shares of a Kemper Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the privilege is terminated by the shareholder or the Kemper
Fund. Exchanges are subject to the terms and conditions described above under
"Exchange Privilege," except that the $1,000 minimum investment requirement for
the Kemper Fund acquired on exchange is not applicable. This privilege may not
be used for the exchange of shares held in certificated form.
EXPRESS-Transfer. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Fund. Shareholders can also redeem Shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such Shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares--General." Once enrolled in
EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048, Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable amount of time to act upon the
request. EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
BANK DIRECT DEPOSIT. A shareholder may purchase additional shares of the Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan ("Bank Direct Deposit"), investments are made automatically (maximum
$50,000) from the shareholder's account at a bank, savings and loan or credit
union into the shareholder's Fund account. By enrolling in Bank Direct Deposit,
the shareholder authorizes the Fund and its agents to either draw checks or
initiate Automated Clearing House debits against the designated account at a
bank or other financial institution. This privilege may be selected by
completing the appropriate section on the Account Application or by contacting
the Shareholder Service Agent for appropriate forms. A shareholder may terminate
his or her Plan by sending written notice to Kemper Service Company, P.O. Box
419415, Kansas City, Missouri 64141-6415. Termination by a shareholder will
become effective within thirty days after the Shareholder Service Agent has
received the request. A Fund may immediately terminate a shareholder's Plan in
the event that any item is unpaid by the shareholder's financial institution.
The Fund may terminate or modify this privilege at any time.
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may invest
in the Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in the Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) The Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
SYSTEMATIC WITHDRAWAL PLAN. The owner of $5,000 or more of a class of the Fund's
shares at the offering price (net asset value per such Share plus, in the case
of Class A shares, the initial sales charge) may provide for the payment from
the owner's account of any requested dollar amount to be paid to the owner or a
designated payee
42
<PAGE>
monthly, quarterly, semiannually or annually. The $5,000 minimum account size is
not applicable to Individual Retirement Accounts. The minimum periodic payment
is $100. The maximum annual rate at which Class B shares may be redeemed (and
Class A shares purchased under the Large Order NAV Purchase Privilege and Class
C shares in their first year following the purchase) under a systematic
withdrawal plan is 10% of the net asset value of the account. Shares are
redeemed so that the payee will receive payment approximately the first of the
month. Any income and capital gain dividends will be automatically reinvested at
net asset value. A sufficient number of full and fractional Shares will be
redeemed to make the designated payment. Depending upon the size of the payments
requested and fluctuations in the net asset value of the Shares redeemed,
redemptions for the purpose of making such payments may reduce or even exhaust
the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, the Fund will not knowingly permit additional investments of
less than $2,000 if the investor is at the same time making systematic
withdrawals. KDI will waive the contingent deferred sales charge on redemptions
of Class A shares purchased under the Large Order NAV Purchase Privilege, Class
B shares and Class C shares made pursuant to a systematic withdrawal plan. The
right is reserved to amend the systematic withdrawal plan on 30 days' notice.
The plan may be terminated at any time by the investor or the Fund.
TAX-SHELTERED RETIREMENT PLANS. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
o Traditional, Roth and Education Individual Retirement Accounts ("IRAs").
This includes Savings Incentive Match Plan for Employees of Small
Employers ("SIMPLE"), Simplified Employee Pension Plan ("SEP") IRA
accounts and prototype documents.
o 403(b)(7) Custodial Accounts. This type of plan is available to employees
of most non-profit organizations.
o Prototype money purchase pension and profit-sharing plans may be adopted
by employers. The maximum annual contribution per participant is the
lesser of 25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, simple 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. Investors should consult with their own tax advisors before
establishing a retirement plan.
PERFORMANCE
The Fund may advertise several types of performance information for a
class of shares, including "average annual total return" and "total return."
Performance information will be computed separately for each of Class A, Class B
and Class C shares. Each of these figures is based upon historical results and
is not representative of the future performance of any class of the Fund. A Fund
with fees or expenses being waived or absorbed by the Advisor may also advertise
performance information before and after the effect of the fee waiver or expense
absorption.
The Fund's historical performance or return for a class of shares may be
shown in the form of "average annual total return" and "total return" figures.
These measures of performance are described below. Performance information will
be computed separately for each class.
Average annual total return and total return measure both the net
investment income generated by, and the effect of any realized or unrealized
appreciation or depreciation of, the underlying investments in the Fund's
portfolio. The Fund's average annual total return quotation is computed in
accordance with a standardized method prescribed by rules of the SEC. The
average annual total return for each class of the Fund for a specific period is
found by first taking a hypothetical $1,000 investment ("initial investment") in
the class' shares on the first day of the period, adjusting to deduct the
maximum sales charge (in the case of Class A shares), and computing the
"redeemable value" of that
43
<PAGE>
investment at the end of the period. Average annual return quotations will be
determined to the nearest 1/100th of 1%. The redeemable value in the case of
Class B shares or Class C shares include the effect of the applicable contingent
deferred sales charge that may be imposed at the end of the period. The
redeemable value is then divided by the initial investment, and this quotient is
taken to the Nth root (N representing the number of years in the period) and 1
is subtracted from the result, which is then expressed as a percentage. Average
annual return calculated in accordance with this formula does not take into
account any required payments for federal of state income taxes. Such quotations
for Class B shares for periods over six years will reflect conversion of such
shares to Class A shares at the end of the sixth year. The calculation assumes
that all income and capital gains dividends paid by the Fund have been
reinvested at net asset value on the reinvestment dates during the period.
Average annual total return may also be calculated in a manner not consistent
with the standard formula described above, without deducting the maximum sales
charge or contingent deferred sales charge.
Average Annual Total Return for period ended September 30, 1998
(Adjusted for the maximum sales charge)
---------------------------------------
1-Year 5-Year Life of
------ ------ Fund(1)
-------
Class A shares -7.71% 14.70% 14.83%
Class B shares -5.02 15.83 15.81
Class C shares -2.08 16.07 16.01
(1) Class A, B, and C shares were first offered by the fund on April 16, 1998.
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, if any,
currently applicable to Class B and C shares.
Calculation of the Fund's total return is not subject to a standardized
formula, except when calculated for the Fund's "Financial Highlights" table in
the Fund's financial statements and prospectus. Total return performance for a
specific period is calculated by first taking a hypothetical investment
("initial investment") in the Fund's shares on the first day of the period,
either adjusting or not adjusting to deduct the maximum sales charge (in the
case of Class A shares), and computing the "ending value" of that investment at
the end of the period. The total return percentage is then determined by
subtracting the initial investment from the ending value and dividing the
remainder by the initial investment and expressing the result as a percentage.
The ending value in the case of Class B shares or Class C shares may or may not
include the effect of the applicable contingent deferred sales charge that may
be imposed at the end of the period. The calculation assumes that all income and
capital gains dividends paid by the Fund have been reinvested at net asset value
on the reinvestment dates during the period. Total return may also be shown as
the increased dollar value of the hypothetical investment over the period. Total
return calculations that do not include the effect of the sales charge for Class
A shares or the contingent deferred sales charge for Class B and Class C shares
would be reduced if such charges were included.
The Fund's performance figures are based upon historical results and are
not necessarily representative of future performance. The Fund's Class A shares
are sold at net asset value plus a maximum sales charge of 5.75% of the offering
price. Class B and Class C shares are sold at net asset value. Redemption of
Class B shares may be subject to a contingent deferred sales charge that is 4%
in the first year following the purchase, declines by a specified percentage
each year thereafter and becomes zero after six years. Redemption of Class C
shares may be subject to a 1% contingent deferred sales charge in the first year
following the purchase. Average annual total return figures do, and total return
figures may, include the effect of the contingent deferred sales charge for the
Class B shares and Class C shares that may be imposed at the end of the period
in question. Performance figures for the Class B shares and Class C shares not
including the effect of the applicable contingent deferred sales charge would be
reduced if it were included. Returns and net asset value will fluctuate. Factors
affecting the Fund's performance include general market conditions, operating
expenses and investment management. Any additional fees charged by a dealer or
other financial services firm would reduce returns described in this section.
Shares of the Fund are redeemable at the then current net asset value, which may
44
<PAGE>
be more or less than original cost.
The Fund's performance may be compared to that of the Consumer Price Index
or various unmanaged indices including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's Financial Services Index, the Standard
& Poor's 500 Composite Stock Price Index, the Russell 1000(R) Index, the Russell
1000(R) Growth Index, the Wilshire Large Company Growth Index, the Wilshire 750
Mid Cap Company Growth Index, the Standard & Poor's/Barra Value Index, the
Standard & Poor's/Barra Growth Index, the Russell 1000(R) Value Index, the
Europe/Australia/Far East Index, International Finance Corporation's Latin
America Investable Return Index, the Morgan Stanley Capital International World
Index, the J.P. Morgan Global Traded Bond Index, and the Salomon Brothers World
Government Bond Index. The performance of the Fund may also be compared to the
performance of other mutual funds or mutual fund indices with similar objectives
and policies as reported by independent mutual fund reporting services such as
Lipper Analytical Services, Inc. ("Lipper"). Lipper performance calculations are
based upon changes in net asset value with all dividends reinvested and do not
include the effect of any sales charges.
There are differences and similarities between the investments which the
Fund may purchase and the investments measured by the indices which are
described herein. The Consumer Price Index is generally considered to be a
measure of inflation. The Dow Jones Industrial Average and the Standard & Poor's
Corporation 500 Stock Index are indices of common stocks which are considered to
be generally representative of the U.S. stock market. The Financial
Times/Standard & Poor's Actuaries World Index-Europe(TM) is a managed index that
is generally representative of the equity securities of European markets. The
foregoing indices are unmanaged. The net asset value and returns of the Fund
will fluctuate.
Investors may want to compare the performance of the Fund to certificates
of deposit issued by banks and other depository institutions. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution.
Information regarding bank products may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) for certificates of deposit, which is an
unmanaged index and is based on stated rates and the annual effective yields of
certificates of deposit in the ten largest banking markets in the United States,
or the CDA Investment Technologies, Inc. Certificate of Deposit Index, which is
an unmanaged index based on the average monthly yields of certificates of
deposit.
Investors also may want to compare the performance of the Fund to that of
U.S. Treasury bills, notes or bonds. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Information regarding the performance of Treasury obligations may be
based upon, among other things, the Towers Data Systems U.S. Treasury Bill
index, which is an unmanaged index based on the average monthly yield of
treasury bills maturing in six months. Due to their short maturities, Treasury
bills generally experience very low market value volatility.
Investors may want to compare the performance of the Fund to that of money
market funds. Money market funds seek to maintain a stable net asset value and
yield fluctuates. Information regarding the performance of money market funds
may be based upon, among other things, Financial Data Inc.'s Money Fund
Averages(R) (All Taxable). As reported by Financial Data Inc., all investment
results represent total return (annualized results for the period net of
management fees and expenses) and one year investment results are effective
annual yields assuming reinvestment of dividends.
Information may be quoted from publications such as Morningstar, Inc., The
Wall Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago
Tribune, USA Today, Institutional Investor and Registered Representative. Also,
investors may want to compare the historical returns of various investments,
performance indexes of those investments or economic indicators, including but
not limited to stocks, bonds, certificates of deposit, money market fund and
U.S. Treasury obligations. Bank product performance may be based upon, among
other things, the BANK RATE MONITOR National Index(TM) or various certificate of
deposit indexes. Money market fund performance may be based upon, among other
things, the IBC Financial Data Inc.'s Money Fund Report(R) or Money Market
45
<PAGE>
Insight(R), reporting services on money market funds. Performance of U.S.
Treasury obligations may be based upon, among other things, various U.S.
Treasury bill indexes. Certain of these alternative investments may offer fixed
rates of return and guaranteed principal and may be insured.
The Fund may depict the historical performance of the securities in which
the Fund may invest over periods reflecting a variety of market or economic
conditions either alone or in comparison with alternative investments,
performance indexes of those investments or economic indicators. The Fund may
also describe its portfolio holdings and depict its size or relative size
compared to other mutual funds, the number and make-up of its shareholder base
and other descriptive factors concerning the Fund. The relative performance of
growth stocks versus value stocks may also be discussed.
Because some of the Fund's investments are denominated in foreign
currencies, the strength or weakness of the U.S. dollar as against these
currencies may account for part of the Fund's investment performance. Historical
information on the value of the dollar versus foreign currencies may be used
from time to time in advertisements concerning the Fund. Such historical
information is not indicative of future fluctuations in the value of the U.S.
dollar against these currencies. In addition, marketing materials may cite
country and economic statistics and historical stock market performance for any
of the countries in which the Fund invests, including, but not limited to, the
following: population growth, gross domestic product, inflation rate, average
stock market price-earnings ratios and the total value of stock markets. Sources
for such statistics may include official publications of various foreign
governments and exchanges.
The Fund's Class A shares are sold at net asset value plus a maximum sales
charge of 5.75% of the offering price. While the maximum sales charge is
normally reflected in the Fund's Class A performance figures, certain total
return calculations may not include such charge and those results would be
reduced if it were included. Class B shares and Class C shares are sold at net
asset value. Redemptions of Class B shares within the first six years after
purchase may be subject to a contingent deferred sales charge that ranges from
4% during the first year to 0% after six years. Redemption of Class C shares
within the first year after purchase may be subject to a 1% contingent deferred
sales charge. Average annual total return figures do, and total return figures
may, include the effect of the contingent deferred sales charge for the Class B
shares and Class C shares that may be imposed at the end of the period in
question. Performance figures for the Class B shares and Class C shares not
including the effect of the applicable contingent deferred sales charge would be
reduced if it were included.
The Fund's returns and net asset value will fluctuate. Shares of a class
of the Fund are redeemable by an investor at the then current net asset value of
such Shares, which may be more or less than original cost. Redemption of Class B
shares and Class C shares may be subject to a contingent deferred sales charge
as described above. Additional information concerning the Fund's performance
appears in the Statement of Additional Information. Additional information about
the Fund's performance also appears in its Annual Report to Shareholders, which
is available without charge from the Fund.
OFFICERS AND TRUSTEES
The officers and trustees of the Trust, their ages, their principal occupations
and other affiliations, if any, with the Advisor and Kemper Distributors, Inc.
are as follows:
<TABLE>
<CAPTION>
Position with
Underwriter,
Name Position Principal Scudder Investor
and Address with Trust Occupation** Services, Inc.
- ----------- ---------- ------------ --------------
<S> <C> <C> <C>
Daniel Pierce (64)*#+ President and Managing Director of Scudder --
Trustee Kemper Investments, Inc.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Position with
Underwriter,
Name Position Principal Scudder Investor
and Address with Trust Occupation** Services, Inc.
- ----------- ---------- ------------ --------------
<S> <C> <C> <C>
Paul Bancroft III (68) Trustee Venture Capitalist and --
1120 Cheston Lane Consultant; Retired President
Queenstown, MD and Chief Executive Officer of
Bessemer Securities Corporation
Sheryle J. Bolton (52) Trustee Chief Executive Officer and --
Scientific Learning Corporation Director, Scientific Learning
1995 University Avenue Corporation; Former President
Suite 400 and Chief Operating Officer,
San Francisco, CA 94704 Physicians Online, Inc.
(electronic transmission of
clinical information for
physicians (1994-1995); Member,
Senior Management Team,
Rockefeller & Co. (1990-1993)
William T. Burgin (55) Trustee General Partner, Bessemer
85 Walnut Street Venture Partners; General
Wellesley, MA 02481-2101 Partner, Deer & Company;
Director, James
River Corp.;
Director of Galile
Corp.; Director of
various privately
held companies.
Keith R. Fox (44) Trustee Private Equity Investor, Exeter --
Exeter Capital Management Capital Management Corporation
Corporation
10 East 53rd Street
New York, NY 10022
William H. Luers (69) Trustee President, The Metropolitan
The Metropolitan Museum of Art Museum of Art (1986 to present)
1000 Fifth Avenue
New York, NY 10028
Wilson Nolen (71) Honorary Trustee Consultant, June 1989 to --
1120 Fifth Avenue present, Corporate Vice
New York, NY 10128-0144 President of Becton, Dickinson &
Company (manufacturer of medical
and scientific products), from
1973 to June 1989
Kathryn L. Quirk(45)*#++ Trustee, Vice Managing Director of Scudder Senior Vice President,
President and Kemper Investments, Inc. Chief Legal Officer and
Assistant Secretary Assistant Clerk
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Position with
Underwriter,
Name Position Principal Scudder Investor
and Address with Trust Occupation** Services, Inc.
- ----------- ---------- ------------ --------------
<S> <C> <C> <C>
Joan E. Spero (54) Trustee President, The Doris Duke
Doris Duke Charitable Foundation Charitable Foundation (1997 to
650 Fifth Avenue- 19th Floor present), Undersecretary of
New York, NY 10019 State for Economic, Business,
and Agricultural Affairs
(1993-1997)
Thomas J. Devine (71) Honorary Trustee Consultant
450 Park Avenue
New York, NY 10022
Robert G. Stone, Jr. (75) Honorary Trustee Chairman Emeritus and Director, --
405 Lexington Avenue Kirby Corporation (inland and
39th Floor offshore marine transportation
New York, NY 10174 and diesel repairs)
Donald E. Hall (46)@ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Thomas W. Joseph (58)+ Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
Ann M. McCreary (48)++ Vice President Managing Director of Scudder
Kemper Investments, Inc.
Kathleen T. Millard (37)++ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Thomas F. McDonough (52)+ Vice President and Senior Vice President of Scudder Clerk
Secretary Kemper Investments, Inc.
Caroline Pearson (36)+ Assistant Secretary Director of Mutual Fund --
Administration, Scudder Kemper
Investments, Inc.; Associate,
Dechert Price & Rhoades (law
firm) 1989-1997
John R. Hebble (40)+ Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
</TABLE>
* Mr. Pierce and Ms. Quirk are considered by the Trust and its counsel to be
persons who are "interested persons" of the Advisor or of the Trust
(within the meaning of the 1940 Act).
** Unless otherwise stated, all the Trustees and officers have been
associated with their respective companies for more than five years, but
not necessarily in the same capacity.
48
<PAGE>
# Mr. Pierce and Ms. Quirk are members of the Executive Committee, which may
exercise all of the powers of the Trustees when they are not in session.
+ Address: Two International Place, Boston, Massachusetts
++ Address: 345 Park Avenue, New York, New York
@ Address: 333 South Hope Street, Los Angeles, California
As of December 31, 1998, all Trustees and officers of the Trust as a group
owned beneficially (as that term is defined in Section 13(d) under the
Securities and Exchange Act of 1934) less than 1% of the Kemper Shares of Value
Fund, and no person owned of record more than 5% of the Kemper shares in the
fund, except as stated below.
Name and Address Class Percentage
- ---------------- ----- ----------
National Financial Svcs Corp., A 6.20
200 Liberty Street
New York, NY 10281
Donaldson Lufkin Jenrette A 8.76
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
National Financial Svcs Corp., B 10.86
200 Liberty Street
New York, NY 10281
Donaldson Lufkin Jenrette B 12.19
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
National Financial Svcs Corp., C 8.71
200 Liberty Street
New York, NY 10281
Donaldson Lufkin Jenrette C 7.59
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
J.C. Bradford & Co. Cust FBO C 26.00
330 Commerce St.,
Nashville, TN 37201
The Trustees and officers of the Trust also serve in similar capacities
with respect to other Scudder funds.
49
<PAGE>
REMUNERATION
Responsibilities of the Board--Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of each
Fund's business. A majority of the Board's members are not affiliated with the
Advisor. These "Independent Trustees" have primary responsibility for assuring
that each Fund is managed in the best interests of its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of each Fund and other operational matters, including policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Advisor
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, each
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Advisor and its affiliates, and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by the Funds' independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects each Fund's independent public
accountants and reviews accounting policies and controls.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from each
Fund: an annual trustee's fee of $4,000; a fee of $400 for attendance at each
Board meeting, audit committee meeting, or other meeting held for the purposes
of considering arrangements between each Fund and the Advisor or any affiliate
of the Advisor; $150 for any other committee meeting (although in some cases the
Independent Trustees have waived committee meeting fees); and reimbursement of
expenses incurred for travel to and from Board Meetings. No additional
compensation is paid to any Independent Trustee for travel time to meetings or
other activities.
The Independent Trustees may also serve in the same capacity for other
funds managed by the Advisor. These funds differ broadly in type and complexity
and in some cases have substantially different Trustee fee schedules. The
following table shows the aggregate compensation received by each Independent
Trustee during 1997 from the Trust and from all of Scudder funds as a group.
50
<PAGE>
<TABLE>
<CAPTION>
Value Equity Trust* All Scudder Funds
------------------- -----------------
Paid by Paid by Paid by Paid by
Name the Trust the Adviser(1) the Funds the Adviser(1)
---- --------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Paul Bancroft III, $14,750 $850 $174,200 (23 $8,925 (23 funds)
Trustee funds)
Sheryle J. Bolton, $14,750 $0.00 $149,050 (23 $0.00 (23 funds)
Trustee** funds)
William T. Burgin, $14,750 $850 $150,950 (23 $8,925 (23 funds)
Trustee funds)
Thomas J. Devine, $16,650 $850 $178,000 (24 $8,925 (24 funds)
Honorary Trustee+ funds)
Keith R. Fox, Trustee $17,150 $850 $172,350 (21 $8,925 (21 funds)
funds)
William H. Luers, $13,250 $850 $157,050 (24 $8,925 (24 funds)
Trustee** funds)
Wilson Nolen, $14,750 $850 $189,075 (24 $6,375 (24 funds)
Honorary Trustee+ funds)
Joan E. Spero,*** $2,685 $0.00 $29,736 (21 $0.00 (21 funds)
Trustee funds)
Robert G. Stone, Jr $0.00 $0.00 $8,000# (1 $0.00 (1 fund)
Honorary Trustee fund)
</TABLE>
(1) The Adviser paid the compensation to the Trustees for meetings associated
with the Adviser's alliance with Zurich Insurance Company. See "Investment
Adviser" for additional information.
* Value Equity Trust consists of two funds: Scudder Large Company Value Fund
and Value Fund.
** Elected as Trustee of the Trust in October 1997.
*** Elected as Trustee of the Trust in September 1998.
+ Elected as an Honorary Trustee in December 1998, after serving as a
Trustee.
# Includes pension or retirement benefits received as Director of The Japan
Fund.
Members of the Board of Trustees who are employees of the Adviser or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Adviser, or its affiliates, as a result of which
they may be deemed to participate in fees paid by each Fund.
51
<PAGE>
SHAREHOLDER RIGHTS
The Fund is a diversified series of Value Equity Trust (the "Trust"), an
open-end management investment company registered under the 1940 Act. The
Trust's predecessor was organized as a Delaware corporation in May 1966. The
Trust was reorganized as a Massachusetts business trust in October, 1985. As
used herein, the name Kemper Value Fund also means Value Fund.
The Trust may issue an unlimited number of shares of beneficial interest in one
or more series or "Portfolios," all having a par value of $.01, which may be
divided by the Board of Trustees into classes of shares. The Board of Trustees
of the Fund may authorize the issuance of additional classes and additional
Portfolios if deemed desirable, each with its own investment objective, policies
and restrictions. Since the Trust may offer multiple Portfolios, it is known as
a "series company." Currently, the Trust offers four classes of shares of the
Fund. These are Class A, Class B, Class C and Scudder Shares. Shares of a
Portfolio have equal noncumulative voting rights except that Class B and Class C
shares have separate and exclusive voting rights with respect to each such
class' Rule 12b-1 Plan. Shares of each class also have equal rights with respect
to dividends, assets and liquidation of the Fund subject to any preferences
(such as resulting from different Rule 12b-1 distribution fees), rights or
privileges of any classes of shares of the Fund. Shares are fully paid and
nonassessable when issued, are transferable without restriction and have no
preemptive or conversion rights. If shares of more than one Portfolio are
outstanding, shareholders will vote by Portfolio and not in the aggregate or by
class except when voting in the aggregate is required under the 1940 Act, such
as for the election of trustees, or when voting by class is appropriate.
The Fund's activities are supervised by the Trust's Board of Trustees. The Trust
is not required to hold and has no current intention of holding annual
shareholder meetings, although special meetings may be called for purposes such
as electing or removing Trustees, changing fundamental investment policies or
approving an investment management contract. Subject to the Declaration of Trust
and By Laws of the Trust, shareholders may remove Trustees. Shareholders will be
assisted in communicating with other shareholders in connection with removing a
Trustee as if Section 16(c) of the 1940 Act were applicable. Under the Agreement
and Declaration of Trust of the Fund ("Declaration of Trust"), shareholder
meetings will be held in connection with the following matters: (a) the election
or removal of trustees if a meeting is called for such purpose; (b) the adoption
of any contract for which approval by shareholders is required by the 1940 Act;
(c) any termination of the Fund or a class to the extent and as provided in the
Declaration of Trust; (d) any amendment of the Declaration of Trust (other than
amendments changing the name of the Fund, supplying any omission, curing any
ambiguity or curing, correcting or supplementing any defective or inconsistent
provision thereof); and (e) such additional matters as may be required by law,
the Declaration of Trust, the By-laws of the Trust, or any registration of the
Fund with the Securities and Exchange Commission or any state, or as the
trustees may consider necessary or desirable. The shareholders also would vote
upon changes in fundamental policies or restrictions.
Any matter shall be deemed to have been effectively acted upon with
respect to a Fund if acted upon as provided in Rule 18f-2 under the 1940 Act, or
any successor rule, and in the Trust's Declaration of Trust. As used in the
Shares' Prospectus and in this Statement of Additional Information, the term
"majority", when referring to the approvals to be obtained from shareholders in
connection with general matters affecting the Funds and all additional
portfolios (e.g., election of directors), means the vote of the lesser of (i)
67% of the Trust's Shares represented at a meeting if the holders of more than
50% of the outstanding Shares are present in person or by proxy, or (ii) more
than 50% of the Trust's outstanding Shares. The term "majority", when referring
to the approvals to be obtained from shareholders in connection with matters
affecting a single Fund or any other single portfolio (e.g., annual approval of
investment management contracts), means the vote of the lesser of (i) 67% of the
Shares of the portfolio represented at a meeting if the holders of more than 50%
of the outstanding Shares of the portfolio are present in person or by proxy, or
(ii) more than 50% of the outstanding Shares of the portfolio.
Each trustee serves until the next meeting of shareholders, if any, called
for the purpose of electing trustees and until the election and qualification of
a successor or until such trustee sooner dies, resigns, retires or is removed by
a majority vote of the Shares entitled to vote (as described below) or a
majority of the trustees. In accordance with the 1940 Act (a) the Fund will hold
a shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
52
<PAGE>
Any of the Trustees may be removed (provided the aggregate number of
Trustees after such removal shall not be less than one) with cause, by the
action of two-thirds of the remaining Trustees. Any Trustee may be removed at
any meeting of shareholders by vote of two-thirds of the Outstanding Shares. The
Trustees shall promptly call a meeting of the shareholders for the purpose of
voting upon the question of removal of any such Trustee or Trustees when
requested in writing to do so by the holders of not less than ten percent of the
Outstanding Shares, and in that connection, the Trustees will assist shareholder
communications to the extent provided for in Section 16(c) under the 1940 Act.
The Trust's Declaration of Trust specifically authorizes the Board of
Trustees to terminate the Fund or any Portfolio or class by notice to the
shareholders without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for obligations of
the Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of the Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
the Fund or the Fund's trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder held personally liable for the obligations of the Fund and the Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by the Advisor remote and
not material, since it is limited to circumstances in which a disclaimer is
inoperative and the Fund itself is unable to meet its obligations.
The assets of the Trust received for the issue or sale of the Shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account and are to be charged with the
liabilities in respect to such series and with a proportionate share of the
general liabilities of the Trust. If a series were unable to meet its
obligations, the assets of all other series may in some circumstances be
available to creditors for that purpose, in which case the assets of such other
series could be used to meet liabilities which are not otherwise properly
chargeable to them. Expenses with respect to any two or more series are to be
allocated in proportion to the asset value of the respective series except where
allocations of direct expenses can otherwise be fairly made. The officers of the
Trust, subject to the general supervision of the Trustees, have the power to
determine which liabilities are allocable to a given series, or which are
general or allocable to two or more series. In the event of the dissolution or
liquidation of the Trust or any series, the holders of the Shares of any series
are entitled to receive as a class the underlying assets of such Shares
available for distribution to shareholders.
Further, the Trust's Board of Trustees may determine, without prior
shareholder approval, in the future that the objectives of the Fund would be
achieved more effectively by investing in a master fund in a master/feeder fund
structure.
ADDITIONAL INFORMATION
Other Information
The CUSIP number of each class of the Fund is Class A, 8114T-30-7; Class
B, 81114T-40-6; and Class C, 8114T-50-5.
The Fund has a fiscal year ending September 30.
Many of the investment changes in the Fund will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders of the Fund. These transactions will reflect investment
decisions made by the Advisor in light of the Fund's investment objectives and
policies, its other portfolio holdings and tax considerations, and should not be
construed as recommendations for similar action by other investors.
Portfolio securities of the Fund are held separately pursuant to a
custodian agreement, by the Fund's custodian, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02110.
The law firm of Dechert Price & Rhoads is counsel to the Fund.
53
<PAGE>
The name "Value Equity Trust" is the designation of the Trust for the time being
under a Declaration of Trust dated October 16, 1985, as amended from time to
time, and all persons dealing with the Fund must look solely to the property of
the Fund for the enforcement of any claims against the Fund as neither the
Trustees, officers, agents, shareholders nor other series of the Trust assume
any personal liability for obligations entered into on behalf of the Fund. No
other series of the Trust assumes any liabilities for obligations entered into
on behalf of the Fund. Upon the initial purchase of shares, the shareholder
agrees to be bound by the Trust's Declaration of Trust, as amended from time to
time. The Declaration of Trust is on file at the Massachusetts Secretary of
State's Office in Boston, Massachusetts.
The Fund's Kemper Shares prospectus and this Statement of Additional
Information omit certain information contained in the Registration Statement and
its amendments which the Fund has filed with the SEC under the Securities Act of
1933 and reference is hereby made to the Registration Statement for further
information with respect to the Fund and the securities offered hereby. The
Registration Statement and its amendments, are available for inspection by the
public at the SEC in Washington, D.C.
FINANCIAL STATEMENTS
The financial statements, including the investment portfolio of the Fund,
together with the Report of Independent Accountants, Financial Highlights and
notes to financial statements in the Annual Report to the Shareholders of the
Trust dated September 30, 1998, are incorporated herein by reference and are
hereby deemed to be a part of this Statement of Additional Information.
Effective April 16, 1998, the Trust's Board of Trustees approved a name
change of the Fund from Scudder Value Fund to Value Fund. In addition, the Board
of Trustees has subdivided the Fund into classes. Shares of the Fund outstanding
on such date were redesignated as Scudder Shares of the Fund. The financial
statements incorporated herein reflect the investment performance of the Fund
prior to the aforementioned redesignation of shares.
54
<PAGE>
APPENDIX
The following is a description of the ratings given by Moody's and
Standard & Poor's to corporate and municipal bonds.
Ratings of Municipal and Corporate Bonds
Standard & Poor's:
Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.
Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal in the event of adverse
business, financial, or economic conditions. It is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating. The rating CC typically is applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period had not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's:
Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues. Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to
55
<PAGE>
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. Bonds which are rated Ba are
judged to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during other good and bad times over
the future. Uncertainty of position characterizes bonds in this class. Bonds
which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings. Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
<PAGE>
Scudder
Large Company
Value Fund
Annual Report
September 30, 1998
Pure No-Load(TM) Funds
A fund which seeks to maximize long-term capital appreciation through a
value-driven investment program.
A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
SCUDDER (logo)
<PAGE>
Scudder Large Company Value Fund
- --------------------------------------------------------------------------------
Date of Inception: 4/5/67 Total Net Assets as of Ticker Symbol: SCDUX
9/30/98: $2.0 billion
- --------------------------------------------------------------------------------
o For the trailing twelve-month period ended September 30, 1998, Scudder Large
Company Value Fund returned -4.54% in an environment that was particularly
challenging for value-oriented investing.
o Value stocks underperformed growth stocks as the crises in the emerging
markets deepened over the period and investors fled to the relative safety of
Treasury securities and stocks of large, familiar growth companies.
o With valuations near historical lows at the end of the period, value stocks
appeared increasingly attractive.
Table of Contents
3 Letter from the Fund's President 19 Financial Highlights
4 Performance Update 20 Notes to Financial Statements
5 Portfolio Summary 23 Report of Independent Accountants
6 Portfolio Management Discussion 24 Tax Information
10 Glossary of Investment Terms 24 Officers and Trustees
11 Investment Portfolio 25 Investment Products and Services
16 Financial Statements 26 Scudder Solutions
2 - Scudder Large Company Value Fund
<PAGE>
Dear Shareholders,
Over the 12-month period, the economic crises 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, large-cap 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 Kathleen Millard and Lois Roman 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 large-cap stocks, the Fund has produced impressive performance relative
to its peers over the last three years. 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 Large Company Value Fund. If you
have any questions about your Fund, please call Scudder Investor Information at
the number above, or visit our Internet Web site at www.scudder.com.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President,
Scudder Large Company Value Fund
3 - Scudder Large Company Value Fund
<PAGE>
PERFORMANCE UPDATE as of September 30, 1998
- ----------------------------------------------------------------
Fund Index Comparisons
- ----------------------------------------------------------------
Total Return
--------------
Period Growth
Ended of Average
9/30/98 $10,000 Cumulative Annual
- --------------------------------------------
Scudder Large Company Value Fund
- ---------------------------------------------
1 Year $ 9,546 -4.54% -4.54%
5 year $ 18,399 83.99% 12.97%
10 Year $ 37,762 277.62% 14.21%
- ---------------------------------------------
Russell 1000 Value Index
- ---------------------------------------------
1 Year $ 10,361 3.61% 3.61%
5 Year $ 22,051 120.51% 17.12%
10 Year $ 43,584 335.84% 15.85%
- ---------------------------------------------
S&P 500 Index
- ---------------------------------------------
1 Year $ 10,904 9.04% 9.04%
5 Year $ 24,792 147.92% 19.90%
10 Year $ 49,258 392.58% 17.28%
- ---------------------------------------------
- -----------------------------------------------------------------
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:
SCUDDER LARGE COMPANY VALUE FUND
Year Amount
- ----------------------
88 $10,000
89 $14,404
90 $10,392
91 $15,084
92 $15,930
93 $20,524
94 $19,555
95 $23,849
96 $27,652
97 $39,557
98 $37,762
S&P 500 INDEX
Year Amount
- ----------------------
88 $10,000
89 $13,297
90 $12,070
91 $18,530
92 $17,583
93 $19,869
94 $20,601
95 $26,728
96 $32,160
97 $45,173
98 $49,258
RUSSELL 1000 VALUE INDEX
Year Amount
- ----------------------
88 $10,000
89 $12,842
90 $10,881
91 $14,027
92 $15,767
93 $19,765
94 $19,628
95 $25,061
96 $29,558
97 $42,064
98 $43,584
Yearly periods ended September 30
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. The Russell 1000 Value Index consists of securities with less than
average growth orientation.
With this report, the Fund has adopted the Russell 1000 Value Index for its
primary securities market index over the S&P Index, as the Russell 1000 Value
Index better represents the securities and markets in which the Fund typically
invests.
- -----------------------------------------------------------------
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
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
------------------------------------------------------------------------------------------------
NET ASSET VALUE... $ 22.30 $ 14.77 $ 19.30 $ 19.12 $ 23.06 $ 19.54 $ 22.92 $ 22.64 $ 28.98 $ 25.65
INCOME DIVIDENDS.. $ .07 $ .16 $ .37 $ .22 $ .10 $ -- $ -- $ .08 $ .16 $ .24
CAPITAL GAINS
DISTRIBUTIONS... $ .55 $ 1.45 $ 1.35 $ .98 $ 1.25 $ 2.62 $ .73 $ 3.50 $ 2.48 $ 1.86
FUND TOTAL
RETURN (%)...... 44.05 -28.20 45.85 5.61 28.83 -4.72 21.96 15.94 43.06 -4.54
INDEX TOTAL
RETURN (%)...... 28.42 -15.27 28.91 12.40 25.36 -.69 27.68 17.94 42.31 3.61
</TABLE>
On February 1, 1997, the Fund adopted its current name. Prior to that date,
the Fund was known as the Scudder Capital Growth Fund. All performance is
historical, assumes reinvestment of all dividends and capital gains, and is not
indicative of future results. Investment return and principal value will
fluctuate, so an investor's shares, when redeemed, may be worth more or less
than when purchased.
4 - Scudder Large Company Value Fund
<PAGE>
Portfolio Summary as of September 30, 1998
Diversification
- ----------------------------------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
Equity 97%
Cash Equivalents 3%
----------------------------------------
100%
----------------------------------------
Management pursues a fully-invested approach to investing in attractively
valued large-cap value stocks.
Sectors
(Excludes 3% Cash Equivalents)
- ----------------------------------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
Financial 24%
Energy 14%
Consumer Staples 10%
Technology 10%
Communications 8%
Utilities 7%
Manufacturing 7%
Health 5%
Durables 4%
Other 11%
----------------------------------------
100%
----------------------------------------
The Fund's bottom-up, individual stock selection approach is the primary
driver of its sector weights.
Ten Largest Equity Holdings
(26% of Portfolio)
- ----------------------------------------
1. International Business Machines
Corp.
Principal manufacturer and
servicer of business and
computing machines
2. Bell Atlantic Corp.
Telecommunication services
3. Exxon Corp.
Integrated oil company
4. AT&T Corp. Telecommunication services
5. Chase Manhattan Corp.
Commercial banking
6. Dow Chemical Co.
Chemical producer
7. BellSouth Corp.
Telephone operating company serving south central U.S.
8. Duke Energy Corp.
Electric utility
9. BankAmerica Corp.
Commercial banking
10. Allstate Corp.
Life insurance
Remaining true to its value orientation, the portfolio's price/earnings
multiple was significantly lower than that of the S&P 500.
For more complete details about the Fund's investment portfolio, see page 11. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
5 - Scudder Large Company Value Fund
<PAGE>
Portfolio Management Discussion
We asked Kathleen T. Millard and Lois Friedman Roman, portfolio managers of
Scudder Large Company Value Fund, to discuss the market environment and their
current investment strategy for the Fund.
Q: How did the Fund perform for the 12-month period ended September 30, 1998?
A: Despite an above average three-year track record using value disciplines, the
Fund underperformed, declining 4.54% for the 12-month period. The primary reason
for the relative underperformance is the wide margin of outperformance of richly
valued mega-capitalization growth stocks over almost all other types of stocks
during the period. The outperformance of "growth" over "value" stocks was
evident in the 11.11% return of the unmanaged Russell 1000 Growth Index versus
the 3.61% return of the Russell 1000 Value Index. During this period, stocks
with the highest P/Es outperformed those with the lowest P/Es.*
Q: Given the Fund's value focus, what do you think about overall stock
valuations today?
A: The recent price declines have dramatically improved the attractiveness of
many companies in our investment universe, returning them to valuations not seen
since the recessionary period of 1990-91. Values are especially compelling when
one looks beyond the big growth stocks that have dominated the popular averages.
The portfolio reflects the current attractive valuation environment, with an
overall P/E 20% lower than the S&P 500 based on 1999 estimated earnings.
Q: Individual company fundamentals are an important driver of your stock
selection approach. What variables do you focus on?
A: Our analysts determine the financial statement developments and the
management strategies that influence changes in normalized earnings for a
company. (Normalized earnings are the smoothed out level of earnings over an
economic cycle, which removes the peaks and troughs for cyclical companies whose
businesses rise and fall with the economy.) A successful value stock investment
typically requires normalized earnings above current company earnings, which
could be driven by sales or operating margin changes, or magnified by
adjustments in the balance sheet.
Q: Cyclical stocks, which are sensitive to changes in economic growth, took a
beating toward the end of the period. At what point are these stocks attractive?
A: Although finding the exact trough point for cyclicals is difficult, this
group of stocks is one of the most interesting long-term opportunities today.
During the period, we began to increase our exposure to cyclicals. We added
Raytheon, the defense contractor, which declined because of fears that the
company's engineering and construction business, which has exposure to Asia,
would continue to slump. The stock price reached a low 12x earnings based on a
1999 estimate of $3.50 per share. The company also produces significant free
cash flow. Another example is Motorola, the telecommunications and semiconductor
company. The semiconductor business is depressed globally, but, we believe, is
likely to revive in the coming years, and the stock was very undervalued,
selling near an all-time low price-to-sales ratio at the end of the period. We
- ----------
* With this report, the Fund has adopted the Russell 1000 Value Index for its
primary securities market index over the S&P 500 Index, as the Russell 1000
Value Index better represents the securities and markets in which the Fund
typically invests.
6 - Scudder Large Company Value Fund
<PAGE>
also added railroad company Union Pacific. The stock fell to very attractive
valuation levels due to the company's logistical problems, which are now
improving, and the earnings power of this company is likely to improve
dramatically over the coming years.
Q: With market volatility on the rise, and the markets declining, how did you
manage risk?
A: It was a challenging period to manage systematic (market) risk. Volatility
soared during the period and correlations among stocks rose because of the
broad-based macroeconomic shock of the crises in the emerging markets. The
declines touched every sector, limiting the value of traditional portfolio
diversification efforts. Money center bank stocks were especially volatile as
they were among the best performing stocks in the first half of 1998, only to
plunge in August. Since the end of the fiscal period on September 30, many
financials have rebounded dramatically. On a longer term basis, the downside
volatility of this Fund has been much lower than the overall market and its peer
funds.
THE PRINTED DOCUMENT CONTAINS A FLOW DIAGRAM HERE:
TITLE:
Portfolio Management Process
FLOW DIAGRAM
Universe: Russell 1000 Index
(arrows point to both quadrants)
<TABLE>
<CAPTION>
Valuation Disciplines Fundamental Research
<S> <C>
Buy: Deciles 1-4 Buy: Internal analyst expects the stock to
Neutral: Deciles 5-8 outperform
Sell: Deciles 9-10 Sell: Internal analyst expects the stock to
underperform
</TABLE>
(arrows point from both quadrants to following subheads)
Portfolio Risk Decisions
Portfolio of 60-90 stocks
DIAGRAM CAPTION
The process begins by screening the Russell 1000 Index for companies with
attractive valuations that meet our investment criteria. The universe is divided
into ten groups (deciles) ranked from most attractive (1-4) to least (9-10).
From a fundamental research standpoint, we also review the ratings of our
internal research analysts. Then we review the risk profile of the portfolio and
the potential effect of additions or deletions. The final result is a portfolio
of 60-90 stocks with what we view as attractive valuation characteristics.
7 - Scudder Large Company Value Fund
<PAGE>
Q: Do you have an example of how your stock selection criteria work?
A: IBM is a good example of our long-term portfolio management disciplines. We
bought the stock in mid-1995 at $44 a share when our quantitative valuation
model identified it as attractive. The normalized earnings per share at the time
was about $3.00 and our fundamental research analyst rated the stock a "buy" as
a restructuring story. Since then, the normalized earnings have risen to about
$5.50 per share, driven by improving revenue growth from the services business
and by share repurchases. The stock has outperformed during this holding period
as the market accorded the rising earnings a higher P/E multiple. Today the
stock is fairly valued based on our quantitative model (in our "hold" zone), and
our analysts have a neutral opinion. The risk profile of IBM has also changed
dynamically, as the company has been transformed from a turnaround to a growth
story.
Q: How about on the sell side?
A: Costco is an example of how our disciplines also led us to sell a stock. We
initially purchased Costco, a discount warehouse retailer, in 1996 at $23 per
share. The stock was in the "buy" zone of our valuation model. Additionally, the
earnings forecast for 1996 was $1.20 per share while normalized earnings were
$1.75. Our analysts also rated Costco a "buy." The company was finally beginning
to integrate the merger with Price Club, revenues were expected to rise with
store expansions, and hence, margins were also poised to improve. During our
holding period, same store sales for the company accelerated as the management
successfully introduced additional merchandise through the stores. Finally, a
8 - Scudder Large Company Value Fund
<PAGE>
membership fee increase was initiated in 1998, further enhancing earnings.
During 1998, we began to believe that the strong performance of the company was
becoming fully reflected in the share price, which reached a high of $65, or a
P/E ratio of nearly 33. The stock was approaching our model's "sell" zone, and
the current level of earnings is well above the company's normalized rate of
profits. Our fundamental research also suggested that the pace of growth might
begin to slow. Finally, the risk profile of the stock had increased
significantly, given the premium valuation. By the end of the period we had
completely exited our position in Costco, which was a strong contributor to Fund
performance during the two-year holding period.
Q: With valuations lower, has your outlook for value investing improved versus a
year ago?
A: We believe value stocks are a compelling opportunity. First, valuations are
very attractive in many segments of the market that have fallen in price during
the 12-month period. Second, the difficult economic environment, which has a
pervasive influence on corporate profits for the companies in which we invest,
is now well known, and has been priced into most stocks, even touching the large
consumer growth stocks previously believed to be immune to profit concerns.
Stock prices are forward-looking; just as they began falling over a year ago,
they may reflect anticipated improvements in global conditions before concrete
evidence is at hand.
Finally, we believe the bond market backdrop is also supportive of investing in
lower P/E, value-oriented stocks. With long-term dollar-denominated Treasuries
perceived as one of the few safe havens amidst the global turmoil during the
period, we believe the bulk of the bond market rally is now behind us. Long bond
yields are near historically low levels, returning real (after inflation)
interest rates to more normal levels. We also think the recent extremely high
valuations of growth stocks are unlikely to rise further, and the market's
overall P/E may have peaked for this market cycle. These factors suggest the
possibility of renewed investor interest in value stocks.
Scudder Large Company
Value Fund:
A Team Approach to Investing
Scudder Large Company 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 Kathleen T. Millard assumed responsibility for the
Fund's day-to-day management in 1995. Ms. Millard, who joined Scudder in 1991,
has been involved in the investment industry since 1983 and has worked as a
portfolio manager since 1986. Lois Friedman Roman, Portfolio Manager, joined
the Fund in 1995 and Scudder in 1994 and has ten years of experience as an
equity analyst.
9 - Scudder Large Company Value Fund
<PAGE>
Glossary of Investment Terms
FUNDAMENTAL RESEARCH Analysis of companies based on the projected
impact of management, products, sales, and earnings
on balance sheets and income statements. Distinct
from technical analysis, which evaluates the
attractiveness of a stock based on historical price
and trading volume movements, rather than the
financial results of the underlying company.
GROWTH STOCK Stock of a company that has displayed above average
earnings growth and is expected to continue to
increase profits rapidly going forward. Stocks of
such companies usually trade at a higher price
relative to earnings and exhibit greater price
volatility.
LIQUIDITY A characteristic of an investment or an asset
referring to the ease of convertibility into cash
within a reasonably short period of time.
MARKET CAPITALIZATION The value of a company's outstanding shares of
common stock, determined by multiplying the
number of shares outstanding by the share price
(Shares x Price = Market Capitalization). The
universe of publicly traded companies is frequently
divided into large-, mid-, and small-capitalizations.
OVER/UNDER WEIGHTING Refers to the allocation of assets -- usually by
sector, industry, or country -- within a
portfolio relative to a benchmark index (i.e. the
Russell 1000 Value Index), or an 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
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)
10 - Scudder Large Company Value Fund
<PAGE>
Investment Portfolio as of September 30, 1998
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements 2.7%
- ------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement with State Street Bank and Trust Co. dated 9/30/1998 at
5.45%, to be repurchased at $54,120,192 on 10/1/1998, collateralized by a -------------
$55,645,000 U.S. Treasury Note, 3.625%, 1/15/2007 (Cost $54,112,000) .................. 54,112,000 54,112,000
-------------
<CAPTION>
Shares
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks 97.3%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 2.6%
Department & Chain Stores
Dayton Hudson Corp. ..................................................................... 684,600 24,474,450
Federated Department Stores, Inc.* ...................................................... 758,800 27,601,350
-------------
52,075,800
-------------
Consumer Staples 9.7%
Alcohol & Tobacco 2.6%
Philip Morris Companies, Inc. ........................................................... 907,300 41,792,506
Universal Corp.-- VA .................................................................... 303,200 10,839,400
-------------
52,631,906
-------------
Consumer Electronic & Photographic Products 1.6%
Whirlpool Corp. ......................................................................... 654,000 30,738,000
-------------
Consumer Specialties 0.6%
American Greeting Corp., "A" ............................................................ 299,600 11,852,925
-------------
Food & Beverage 3.6%
ConAgra Inc. ............................................................................ 960,500 25,873,469
H.J. Heinz Co. .......................................................................... 327,900 16,763,888
Unilever NV (New York shares) ........................................................... 490,200 30,024,750
-------------
72,662,107
-------------
Textiles 1.3%
VF Corporation .......................................................................... 705,000 26,173,125
-------------
Health 4.4%
Health Industry Services 0.9%
Humana Inc.* ............................................................................ 1,141,600 18,693,700
-------------
Hospital Management 1.1%
Tenet Healthcare Corp. .................................................................. 769,400 22,120,250
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 - Scudder Large Company Value Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Pharmaceuticals 2.4%
American Home Products Corp. ............................................................ 699,900 36,657,263
Bristol-Myers Squibb Co. ................................................................ 103,000 10,699,125
-------------
47,356,388
-------------
Communications 8.0%
Telephone/Communications
AT & T Corp. ............................................................................ 941,700 55,030,586
Bell Atlantic Corp. ..................................................................... 1,246,000 60,353,125
BellSouth Corp. ......................................................................... 609,500 45,864,875
-------------
161,248,586
-------------
Financial 23.3%
Banks 11.9%
Banc One Corp. .......................................................................... 317,590 13,537,274
BankAmerica Corp. ....................................................................... 729,700 43,873,213
BankBoston Corp. ........................................................................ 931,200 30,729,600
Chase Manhattan Corp. ................................................................... 1,090,000 47,142,500
First Chicago NBD Corp. ................................................................. 220,200 15,083,700
First Union Corp. ....................................................................... 492,800 25,225,200
J.P. Morgan & Co., Inc. ................................................................. 204,500 17,305,813
KeyCorp ................................................................................. 913,800 26,385,975
NationsBank Corp. ....................................................................... 385,900 20,645,650
-------------
239,928,925
-------------
Insurance 6.9%
Allstate Corp. .......................................................................... 1,037,200 43,238,275
Chubb Corp. ............................................................................. 235,000 14,805,000
Cigna Corp. ............................................................................. 615,700 40,713,163
EXEL Limited (ADR) ...................................................................... 346,100 21,804,300
General Re Corp. ........................................................................ 88,300 17,924,900
-------------
138,485,638
-------------
Consumer Finance 1.8%
American Express Company ................................................................ 464,100 36,025,763
-------------
Other Financial Companies 2.7%
Federal National Mortgage Association ................................................... 396,700 25,487,975
Travelers Group, Inc. ................................................................... 742,899 27,858,713
-------------
53,346,688
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 - Scudder Large Company Value Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Media 3.7%
Advertising 0.8%
WPP Group PLC (ADR) ..................................................................... 335,900 15,325,438
-------------
Broadcasting & Entertainment 1.7%
Viacom Inc. "B"* ........................................................................ 588,200 34,115,600
-------------
Print Media 1.2%
Knight-Ridder, Inc. ..................................................................... 548,000 24,386,000
-------------
Service Industries 1.4%
Environmental Services 0.8%
Browning Ferris Industries Inc. ......................................................... 543,600 16,443,900
-------------
Investment 0.6%
Merrill Lynch & Co., Inc. ............................................................... 258,600 12,251,175
-------------
Durables 4.3%
Aerospace 1.5%
United Technologies Corp. ............................................................... 393,300 30,062,869
-------------
Automobiles 1.3%
Ford Motor Co. .......................................................................... 565,000 26,519,688
-------------
Tires 1.5%
Goodyear Tire & Rubber Co. .............................................................. 581,500 29,874,563
-------------
Manufacturing 6.5%
Chemicals 3.3%
Dow Chemical Co. ........................................................................ 551,600 47,127,390
E.I. du Pont de Nemours & Co. ........................................................... 328,600 18,442,675
-------------
65,570,065
-------------
Containers & Paper 0.8%
Sonoco Products Co. ..................................................................... 705,510 16,932,240
-------------
Diversified Manufacturing 1.5%
Textron, Inc. ........................................................................... 514,900 31,215,813
-------------
Hand Tools 0.9%
Black & Decker Corp. .................................................................... 417,500 17,378,438
-------------
Technology 9.9%
Diverse Electronic Products 0.9%
Motorola Inc. ........................................................................... 408,700 17,446,381
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 - Scudder Large Company Value Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
EDP Peripherals 2.1%
Seagate Technology, Inc. ................................................................ 1,656,000 41,503,500
-------------
Electronic Data Processing 5.1%
Hewlett-Packard Co. ..................................................................... 491,600 26,024,075
International Business Machines Corp. ................................................... 589,800 75,494,400
-------------
101,518,475
-------------
Military Electronics 1.8%
General Dynamics Corp. .................................................................. 251,200 12,607,100
Raytheon Co. "A" ........................................................................ 447,600 23,191,275
-------------
35,798,375
-------------
Energy 13.8%
Oil & Gas Production 2.7%
Coastal Corp. ........................................................................... 981,600 33,129,000
Royal Dutch Petroleum Co. ............................................................... 140,000 6,951,304
Royal Dutch Petroleum Co. (New York shares) ............................................. 284,800 13,563,600
-------------
53,643,904
-------------
Oil Companies 10.0%
Atlantic Richfield Co. .................................................................. 311,700 22,111,219
British Petroleum PLC (ADR) ............................................................. 187,800 16,385,550
Chevron Corp. ........................................................................... 294,300 24,739,594
Exxon Corp. ............................................................................. 799,400 56,107,888
Mobil Corp. ............................................................................. 542,800 41,218,875
Texaco Inc. ............................................................................. 639,800 40,107,463
-------------
200,670,589
-------------
Oil/Gas Transmission 1.1%
Sempra Energy ........................................................................... 882,129 22,990,487
-------------
Construction 1.7%
Forest Products
Weyerhaeuser Co. ........................................................................ 802,700 33,863,906
-------------
Transportation 1.4%
Railroads
Canadian National Railway ............................................................... 380,700 17,157,642
Union Pacific Corp. ..................................................................... 233,000 9,931,625
-------------
27,089,267
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 - Scudder Large Company Value Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Utilities 6.6%
Electric Utilities
American Electric Power Co. ............................................................. 374,800 18,294,925
Duke Energy Corp. ....................................................................... 684,500 45,305,344
FPL Group, Inc. ......................................................................... 470,100 32,760,094
P G & E Corp. ........................................................................... 654,000 20,887,125
Wisconsin Energy Corp. .................................................................. 470,300 14,843,844
-------------
132,091,332
-------------
Other 0.0%
Miscellaneous securities ................................................................ 1,252 26,096
-------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (Cost $1,518,477,369) 1,950,057,902
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $1,572,589,369) (a) 2,004,169,902
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) The cost for federal income tax purposes was $1,575,850,147. At September
30, 1998, net unrealized appreciation for all securities based on tax cost
was $428,319,755. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of market
value over tax cost of $479,461,230 and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax cost
over market value of $51,141,475.
The accompanying notes are an integral part of the financial statements.
15 - Scudder Large Company 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 $1,572,589,369) ............ $ 2,004,169,902
Cash ............................................................... 331
Receivable for investments sold .................................... 2,468,276
Dividends and interest receivable .................................. 3,429,614
Receivable on Fund shares sold ..................................... 1,286,819
Receivable on foreign taxes recoverable ............................ 36,090
Other assets ....................................................... 22,712
-------------------
Total assets ....................................................... 2,011,413,744
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Payable for investments purchased .................................. 11,496,318
Payable for Fund shares redeemed ................................... 1,048,234
Accrued management fee ............................................. 1,066,788
Other payables and accrued expenses ................................ 636,530
-------------------
Total liabilities .................................................. 14,247,870
-------------------------------------------------------------------------------------------
Net assets, at market value $ 1,997,165,874
-------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ................................ 23,122,144
Unrealized appreciation on investments ............................. 431,580,533
Accumulated net realized gain ...................................... 131,121,385
Paid-in capital .................................................... 1,411,341,812
-------------------------------------------------------------------------------------------
Net assets, at market value $ 1,997,165,874
-------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($1,997,165,874 / 77,857,803 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares -------------------
authorized) ...................................................... $25.65
-------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16 - Scudder Large Company 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 $353,509) .............. $ 46,619,949
Interest ........................................................... 1,968,420
----------------
48,588,369
Expenses:
Management fee ..................................................... 14,296,878
Services to shareholders ........................................... 4,958,834
Trustees' fees and expenses ........................................ 53,462
Custodian and accounting fees ...................................... 287,686
Reports to shareholders ............................................ 338,620
Auditing ........................................................... 45,801
Legal .............................................................. 30,998
Registration fees .................................................. 100,019
Other .............................................................. 54,313
----------------
20,166,611
-------------------------------------------------------------------------------------------
Net investment income 28,421,758
-------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- ----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ........................................................ 162,386,553
Foreign currency related transactions .............................. 1,775
----------------
162,388,328
Net unrealized appreciation (depreciation) during the period on:
Investments ........................................................ (280,820,721)
-------------------------------------------------------------------------------------------
Net gain (loss) on investment transactions (118,432,393)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ (90,010,635)
-------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17 - Scudder Large Company 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> <C>
Operations:
Net investment income ....................................... $ 28,421,758 $ 28,697,289
Net realized gain from investment transactions .............. 162,388,328 134,428,197
Net unrealized appreciation (depreciation) on investment
transactions during the period ............................ (280,820,721) 519,790,788
------------------ ------------------
Net increase (decrease) in net assets resulting from
operations ................................................ (90,010,635) 682,916,274
------------------ ------------------
Distributions to shareholders from:
Net investment income ....................................... (18,248,388) (11,553,936)
------------------ ------------------
Net realized gain (loss) on investment transactions ......... (141,425,011) (179,180,946)
------------------ ------------------
Fund share transactions:
Proceeds from shares sold ................................... 349,010,684 255,862,093
Net asset value of shares issued to shareholders in
reinvestment of distributions ............................. 152,377,751 182,941,443
Cost of shares redeemed ..................................... (467,271,665) (369,711,587)
------------------ ------------------
Net increase (decrease) in net assets from Fund share
transactions .............................................. 34,116,770 69,091,949
------------------ ------------------
Increase in net assets ...................................... (215,567,264) 561,273,341
Net assets at beginning of period ........................... 2,212,733,138 1,651,459,797
Net assets at end of period (including undistributed
net investment income of $23,122,144 and $22,560,347, ------------------ ------------------
respectively) ............................................. $ 1,997,165,874 $ 2,212,733,138
------------------ ------------------
Other Information
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period ................... 76,343,193 72,934,700
------------------ ------------------
Shares sold ................................................. 12,220,382 10,356,988
Shares issued to shareholders in reinvestment of
distributions ............................................. 5,700,627 8,148,839
Shares redeemed ............................................. (16,406,399) (15,097,334)
------------------ ------------------
Net increase in Fund shares ................................. 1,514,610 3,408,493
------------------ ------------------
Shares outstanding at end of period ......................... 77,857,803 76,343,193
------------------ ------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18 - Scudder Large Company 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.
<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 ................................ $ 28.98 $ 22.64 $ 22.92 $ 19.54 $ 23.06
------------------------------------------------------------
Income from investment operations:
Net investment income (loss) ........................................ .36 .38 .36 .13 (.02)
Net realized and unrealized gain (loss) on investment
transactions ...................................................... (1.59) 8.60 2.94 3.98 (.88)
------------------------------------------------------------
Total from investment operations .................................... (1.23) 8.98 3.30 4.11 (.90)
------------------------------------------------------------
Less distributions from:
Net investment income ............................................... (.24) (.16) (.08) -- --
Net realized gains on investment transactions ....................... (1.86) (2.48) (3.50) (.73) (2.62)
------------------------------------------------------------
Total distributions ................................................. (2.10) (2.64) (3.58) (.73) (2.62)
------------------------------------------------------------
------------------------------------------------------------
Net asset value, end of period ...................................... $ 25.65 $ 28.98 $ 22.64 $ 22.92 $ 19.54
------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (%) .................................................... (4.54) 43.06 15.94 21.96 (4.72)
Ratios and Supplemental Data
Net assets, end of period ($ millions) .............................. 1,997 2,213 1,651 1,492 1,338
Ratio of operating expenses to average daily net assets (%) ......... .88 .93 .92 .98 .97
Ratio of net investment income (loss) to average daily net
assets (%) ........................................................ 1.25 1.51 1.62 .62 (.12)
Portfolio turnover rate (%) ......................................... 39.5 43.0 150.7 153.6 75.8
</TABLE>
(a) Based on monthly average shares outstanding during the period.
* On February 1, 1997, the Fund adopted its current name. Prior to that
date, the Fund was known as the Scudder Capital Growth Fund.
19 - Scudder Large Company Value Fund
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies
Scudder Large Company Value Fund (formerly Scudder Capital Growth Fund) (the
"Fund") is a diversified series of the 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.
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 such system. If there are no such sales, the value is the most
recent bid quotation. Securities which are not quoted on the Nasdaq System but
are traded in another over-the-counter market are valued at the most recent sale
price on such market. If no sale occurred, the security is then valued at the
calculated mean between the most recent bid and asked quotations. If there are
no such bid and asked quotations, the most recent bid quotation shall be used.
Portfolio debt securities other than money market securities are valued by
pricing agents approved by the officers of the Trust, which quotations reflect
broker/dealer-supplied valuations and electronic data processing techniques. If
the pricing agents are unable to provide such quotations, the most recent bid
quotation supplied by a bona fide market maker shall be used. Money market
instruments purchased with an original maturity of sixty days or less are valued
at amortized cost. All other securities are valued at their fair value as
determined in good faith by the Valuation Committee of the Board of Trustees.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian,
receives delivery of the underlying securities, the amount of which at the time
of purchase and each subsequent business day is required to be maintained at
such a level that the market value, depending on the maturity of the repurchase
agreement, is equal to at least 100.5% of the repurchase price.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, 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. Earnings
and profits distributed to shareholders on redemption of Fund shares ("tax
equalization") may be utilized by the Fund, to the extent permissible, as part
of the Fund's dividends paid deduction on its federal tax return.
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. The differences
primarily relate to the
20 - Scudder Large Company Value Fund
<PAGE>
deferral of certain losses for tax purposes. As a result, net investment income
(loss) and net realized gain (loss) on investment transactions for a reporting
period may differ significantly from distributions during such period.
Accordingly, the Fund may periodically make reclassifications among certain of
its capital accounts without impacting the net asset value of the Fund.
The Fund uses the identified cost method for determining realized gain or loss
on investments for both financial and federal income tax reporting purposes.
Other. Investment security transactions are accounted for on a trade-date basis.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on an accrual basis. Original
issue discounts and market 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 $876,216,850 and
$985,398,506, respectively.
C. Related Parties
Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, formed a new global investment organization by combining
Scudder's business with that of Zurich's subsidiary, Zurich Kemper Investments,
Inc. As a result of the transaction, Scudder changed its name to Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"). The transaction between
Scudder and Zurich resulted in the termination of the Fund's Investment
Management Agreement with Scudder. However, a new Investment Management
Agreement (the "Management Agreement") between the Fund and Scudder Kemper was
approved by the Trust's Board of Trustees and by the Fund's Shareholders. The
Management Agreement, which is effective December 31, 1997, is the same in all
material respects as the corresponding previous Investment Management Agreement,
except that Scudder Kemper is the new investment adviser to the Fund.
Under the Investment Management Agreement (the "Agreement") with Scudder Kemper
Investments, Inc. (the "Adviser"), the Fund has agreed to pay to the Adviser a
fee equal to an annual rate of approximately 0.75% of the first $500,000,000 of
average daily net assets, 0.65% of the next $500,000,000 of such net assets,
0.60% of the next $500,000,000 of such net assets and 0.55% of such net assets
in excess of $1,500,000,000, 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 Management Agreement. For the year ended
September 30, 1998, the fees pursuant to these agreements amounted to
$14,296,878 which was equivalent to an annual effective rate of .63% of the
Fund's average daily net assets.
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
21 - Scudder Large Company Value Fund
<PAGE>
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 and termination. 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.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. Included
in services to shareholders is $2,518,178 charged to the Fund by SSC for the
year ended September 30, 1998, of which $206,824 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 Fund. For the year ended September 30,
1998, the amount charged to the Fund by STC aggregated $1,835,663, of which
$160,513 is unpaid at September 30, 1998.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
September 30, 1998, the amount charged to the Fund by SFAC aggregated $174,325,
of which $13,343 is unpaid at September 30, 1998.
The Fund is one of several Scudder Funds (the "Underlying Funds") in which the
Scudder Pathway Series Portfolios (the "Portfolios") invest. In accordance with
the Special Servicing Agreement entered into by the Adviser, the Portfolios, the
Underlying Funds, SSC, SFAC, STC, and Scudder Investor Services, Inc., expenses
from the operation of the Portfolios are borne by the Underlying Funds based on
each Underlying Fund's proportionate share of assets owned by the Portfolios. No
Underlying Funds will be charged expenses that exceed the estimated savings to
each respective Underlying Fund. These estimated savings result from the
elimination of separate shareholder accounts which either currently are or have
potential to be invested in the Underlying Funds. At September 30, 1998, the
Special Servicing Agreement expense charged to the Fund amounted to $18,102, of
which $4,275 is unpaid at September 30, 1998.
The Fund pays each of its Trustees not affiliated with the Adviser an annual
retainer plus specified amounts for attended board and committee meetings. For
the year ended September 30, 1998, Trustees' fees and expenses aggregated
$53,462.
22 - Scudder Large Company Value Fund
<PAGE>
Report of Independent Accountants
To the Trustees of Value Equity Trust and the Shareholders of Scudder Large
Company Value Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Scudder Large Company Value Fund
(the "Fund") at September 30, 1998, the results of its operations for the year
then ended and the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
Boston, Massachusetts PricewaterhouseCoopers LLP
November 6, 1998
23 - Scudder Large Company Value Fund
<PAGE>
Tax Information
The Fund paid distributions of $1.23 per share from net long-term capital gains
during its year ended September 30, 1998, of which 47% represents 20% rate
gains. Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$170,000,000 as capital gain dividends for its year ended September 30, 1998.
For corporate shareholders, 100% of the income dividends paid during the Fund's
fiscal year ended September 30, 1998 qualified 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.
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.
24 - Scudder Large Company 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.
25 - Scudder Large Company 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
- ------------------------------------------------------------------------------------------------------------------------------
26 - Scudder Large Company 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>
27 - Scudder Large Company 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>
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:
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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
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