SCUDDER
INVESTMENTS(SM)
[LOGO]
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EQUITY/VALUE
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Scudder Value Fund
Fund #075
Annual Report
September 30, 1999
The fund seeks long-term growth of capital through investment in undervalued
equity securities.
Scudder Value Fund is properly known as Value Fund.
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Contents
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4 Letter from the Fund's President
6 Performance Update
8 Portfolio Summary
10 Portfolio Management Discussion
16 Glossary of Investment Terms
27 Investment Portfolio
22 Financial Statements
25 Financial Highlights
26 Notes to Financial Statements
33 Report of Independent Accountants
34 Tax Information
35 Officers and Trustees
36 Investment Products and Services
38 Scudder Solutions
2
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Scudder Value Fund
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ticker symbol SCVAX fund number 075
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Date of Inception: o In an environment marked by high volatility
12/31/92 and concerns over rising interest rates,
investors flocked to a narrow group of
Total Net companies perceived to have the most
Assets of reliable earnings growth characteristics. As
Scudder a result, value stocks continued to
Shares as of underperform the major equity indices.
9/30/99:
$407.1 million o Management employs a multifaceted approach
to stock selection, combining quantitative
modeling, fundamental analysis, and risk
assessment to construct a portfolio of
companies that they believe to be
undervalued in relation to their long-term
prospects.
o Performance was helped by our overweighted
position in the technology, energy, and
consumer discretionary sectors, but our
holdings in health care and manufacturing
stocks lagged.
3
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Letter from the Fund's President
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Dear Shareholders,
Stock market volatility has increased substantially over the past year, as the
market has grown increasingly sensitive to changes in short-term fundamentals.
As fears of deflation, and then inflation, have gripped investors, the largest,
fastest growing companies have gained strength regardless of their valuations.
On the other hand, the vast majority of stocks in the broader market has fallen,
including those that offer attractive fundamentals and reasonable valuations. As
a result, growth-oriented investments have outperformed value stocks by a wide
margin, creating a two-tiered market with extreme valuation disparities.
Although this chain of events has undoubtedly proven frustrating for
value-oriented investors, it has also created some exceptional longer term
opportunities. In the short run this sort of valuation disparity may be ignored,
but history suggests that a focus on valuation and fundamentals will be rewarded
over time.
As a result, we believe that the fund, which is utilizing a refined strategy
designed to uncover the most attractive value opportunities in the market, is
well-positioned to capitalize on what we believe is the inevitable shift in
favor of value stocks. While the fund continues to employ a value-oriented
approach, it now uses a more disciplined methodology to select undervalued
stocks with strong long-term track records and intriguing prospects for future
growth. For more information on recent
4
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market events and the fund's redefined approach, please turn to the portfolio
management discussion beginning on page 10.
Finally, it should be noted that Daniel Pierce retired in June of this year as
President of Value Fund, at which time I assumed that role and its
responsibilities. We are fortunate that Dan's longstanding affiliation with
Scudder is ongoing, and that we will continue to benefit from his counsel going
forward. I am pleased to join the fund's team in this capacity, and look forward
to serving your interests.
Thank you for your continued investment in the Scudder shares of Value Fund. If
you have any questions about your investment, please call Scudder Investor
Information at 1-800-SCUDDER (1-800-728-3337), or visit our Web site at
www.scudder.com.
Sincerely,
/s/Lynn S. Birdsong
Lynn S. Birdsong
President,
Value Fund
5
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Performance Update
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September 30, 1999
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Growth of a $10,000 Investment
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THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART DATA:
Value Fund-- S&P 500 Russell 1000
Scudder Shares Index* Value Index*
12/92** 10000 10000 10000
'93 11150 10757 11845
'94 11360 11153 11763
'95 14043 14471 15019
'96 16456 17412 17714
'97 23993 24457 25208
'98 23495 26669 26119
'99 26554 34088 31010
Yearly periods ended September 30
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Fund Index Comparison
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Total Return
Growth of Average
Period ended 9/30/1999 $10,000 Cumulative Annual
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Value Fund -- Scudder Shares
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1 year $ 11,302 13.02% 13.02%
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5 year $ 23,376 133.76% 18.51%
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Life of Class** $ 26,554 165.54% 15.57%
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Russell 1000 Value Index*
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1 year $ 11,872 18.72% 18.72%
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5 year $ 26,363 163.63% 21.38%
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Life of Class** $ 31,010 210.10% 18.25%
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S&P 500 Index*
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1 year $ 12,782 27.82% 27.82%
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5 year $ 30,564 205.64% 25.02%
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Life of Class** $ 34,088 240.88% 19.92%
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* The Standard & Poor's 500 Index is a capitalization-weighted index of 500
stocks. The index is designed to measure performance of the broad domestic
economy through changes in the aggregate market value of 500 stocks
representing all major industries. 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.
** The Fund commenced operations on December 31, 1992.
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
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Returns and Per Share Information
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THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
Yearly periods ended September 30
Value Fund -- Scudder Shares Russell 1000 Value Index*
1993** 11.50 18.45
1994 1.88 -0.69
1995 23.62 27.68
1996 17.18 17.94
1997 45.80 42.31
1998 -2.08 3.49
1999 13.02 18.72
1993** 1994 1995 1996 1997 1998 1999
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Class Total
Return (%) 11.50 1.88 23.62 17.18 45.80 -2.08 13.02
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Index Total
Return (%) 18.45 -.69 27.68 17.94 42.31 3.49 18.72
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Net Asset
Value ($) 13.38 13.08 15.87 17.52 23.53 21.20 22.88
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Income
Dividends ($) -- .11 .12 .04 .07 .24 .19
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Capital Gains
Distributions ($) -- .43 .13 .92 1.48 1.65 .90
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* 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.
** The Fund commenced operations on December 31, 1992.
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. Performance is historical, assumes
reinvestment of all dividends and capital gains, and is not indicative of
future results. Total 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 expenses, the total returns
for the 5 year and Life of Class periods would have been lower.
7
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Portfolio Summary
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September 30, 1999
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Asset Allocation
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A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
Equity Securities 98% Fund management seeks to
Cash Equivalents 2% remain fully invested in
- ------------------------------------- equities at all times.
100%
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Sectors
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(Excludes 2% Cash Equivalents)
A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
Financial 19% Over the last six
Energy 13% months, weightings in
Technology 12% the energy,
Communications 11% manufacturing, and media
Durables 10% sectors have increased.
Manufacturing 9%
Consumer Discretionary 6%
Media 5%
Health 4%
Other 11%
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100%
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8
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Ten Largest Equity Holdings
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(32% of Portfolio) The fund's top holdings
illustrate management's
focus on well-established
companies with strong
earnings prospects and
attractive valuations.
1. Bell Atlantic Corp.
Telecommunication services
2. Dow Chemical Co.
Chemical producer
3. Chase Manhattan Corp.
Commercial bank
4. Citigroup Inc.
Diversified financial services company
5. Exxon Corp.
International oil and gas company
6. AT&T Corp.
Telecommunication services
7. Motorola Inc.
Manufacturer of telecommunication products and
semiconductors
8. International Business Machines Corp.
Manufacturer of computers and servicer of information
processing units
9. Corning Inc.
Specialty glass manufacturer
10. Boeing Co.
Manufacturer of jet airplanes
For more complete details about the Fund's investment portfolio, see page 17. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
9
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Portfolio Management Discussion
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September 30, 1999
In the following interview, lead portfolio manager Lois Friedman Roman discusses
the strategy of Value Fund -- Scudder Shares and the market environment during
the twelve-month period ending September 30, 1999.
Q: After a brief rally in the spring, value stocks have since given up ground.
What is the driver of the continued poor performance of this sector?
A: More than any other group, value stocks have been victimized by the high
level of uncertainty regarding the direction of the global economy. When the
markets appear vulnerable to unfavorable economic developments, investors tend
to gravitate to those stocks that have demonstrated the ability to deliver
consistent earnings growth quarter after quarter. Value stocks, whose outlooks
often tend to be more uncertain, generally suffer in such an environment.
The past twelve months have therefore proved very inhospitable to a
value-oriented investing style. From last year's autumn crisis through the end
of the first quarter of 1999, the markets were on edge due to the seemingly high
likelihood of a global recession. Not wanting to take a chance on anything but
those stocks whose earnings appeared absolutely bulletproof, investors stampeded
into a narrow group of large-cap growth names at the expense of value stocks and
smaller companies. In April and May, however, evidence began to build that the
global economy was not tipping into a recession, but was in fact staging a
strong rebound. Market participants were encouraged by this development, and
began to take a chance on stocks that had been depressed for months, such as
cyclicals. But as spring turned to summer, investors once again grew nervous.
The growing threat of inflation, two interest rate hikes by the U.S. Federal
Reserve, and the specter of higher rates overseas sparked another run into
growth stocks. This time the focus was even more narrow than it had been in the
wake of last year's crisis, as technology stocks powered ahead to the virtual
exclusion of all of other sectors. In the third quarter alone, the Russell 1000
Value
10
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Index dropped 9.80% at the same time as the high-profile tech stocks were
hitting new highs. Taken together, all of these factors have made it an
extremely difficult period for value investors.
Q: When you took over as manager of the fund, you implemented a new investment
strategy. Please tell us about it.
A: We employ a highly disciplined strategy that is designed to ferret out the
most attractive opportunities among value stocks. It combines quantitative value
screens with original research and risk analysis, with the goal of building the
optimal portfolio. We begin by applying a valuation screen to each company in
our investment universe, which is the largest 1000 companies in the U.S. (as
represented by the Russell 1000 Index), to identify "buy" and "sell" candidates.
Companies that are ranked in the top four deciles (the cheapest 40%) based on
valuation are our potential buy candidates, while those that fall into the 9th
and 10th deciles (the most expensive 20%) are likely to be sold if they are held
in the portfolio. We narrow the list further by employing intensive fundamental
analysis to determine which "buy" rated companies have the strongest financial
positions and most capable management teams. Finally, we determine which stocks
will minimize portfolio risk by contributing to overall diversification. By
combining these disciplines, we hope to build a portfolio of reasonably valued,
fundamentally strong large-cap companies that will outperform the Russell 1000
Value Index over the long term.
Q: When you are assessing a company that meets your "buy" criteria, on what do
you focus?
A: In particular, we look for management teams that are creating value for
shareholders. To accomplish this, we seek to establish the level and direction
of income statement, balance sheet, and cash flow drivers that contribute to the
creation of normalized earnings.
11
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Examples of these drivers include margins, leverage ratios, and returns on
capital. The purpose of this intensive approach is to distinguish between "value
traps," or companies whose stock prices are depressed for a reason, and "value
opportunities," where poor price performance belies positive changes taking
place within the firm. In the process, we search for companies whose actual
earnings have fallen below their normalized earnings. (Normalized earnings are
the smoothed-out level of earnings over an economic cycle, removing the peaks
and troughs associated with fluctuations in the economy.) We believe that over
time, this strategy will allow us to separate companies that are poised to
rebound from those whose difficulties are likely to continue.
Q: How did the fund perform in the adverse conditions you described earlier?
A: For the twelve months ended September 30, 1999, the Scudder Shares of Value
Fund returned 13.02%, versus 18.72% for the fund's new benchmark, the Russell
1000 Value Index. We attribute the underperformance to our overweighted
positions in the manufacturing and health care sectors, all of which lagged
substantially. Performance was helped by our underweight position in financials,
but was hurt by the weak showing of some of our individual holdings, such as
Bank One, which we no longer hold. On the plus side, we were helped by an
overweight position in the technology, energy, and consumer discretionary
groups.
Q: What are some examples of companies that you have found to be particularly
attractive?
A: One company that presented a significant value opportunity was Motorola. One
of the qualities we look for in a stock is that it has reached a trough in both
its valuation and its fundamentals, which means that both its price and earnings
have reached a bottom. Motorola fit this mold perfectly, as a poor pricing
environment for semiconductors and stiff competition in the cellular phone
division had put pressure on its earnings and driven the
12
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company to an attractive valuation level. We were encouraged by the
transformation taking place in its businesses, such as new phone products in the
cellular phone division, and new management team members. As the pricing
environment improved and revenues began to rebound, the stock staged a strong
rally, and was up more than 40% year-to-date through September 30, 1999.
Another company that illustrates our strategy is Corning, which has performed
well for the fund over the last twelve months. Corning sells optical fiber,
cable, hardware, and components for the telecommunications industry, and is
therefore ideally positioned to capitalize on the explosive buildout of the
infrastructure for the Internet. With a dominant market share in the U.S., a
strong balance sheet, and a 20-25% earnings growth rate in its
telecommunications segment, we believe that Corning remains attractively valued
even after its rise from the low 30's to near $70 over the past year.
We are also optimistic about the outlook for Chase Manhattan Bank, a top holding
that has been buffeted by the unfavorable interest rate environment of recent
months. We feel that Chase's management team, with its commitment to increasing
shareholder value, is one of the best in the business. In addition, the
company's product mix includes a strong U.S. consumer business, an attractive
global platform, and a rapidly growing services operation. We feel that Chase
has fallen to attractive levels, and view any additional fall in price as a
buying opportunity.
Going forward, we intend to look for opportunities in railroads, an industry
that is emerging from a trough as the benefits of consolidation begin to have an
impact on the cost structures of the leading companies. We are also seeing
values emerging in the insurance sector, which we believe will benefit from an
improvement in what has been a poor pricing environment. Looking further out,
aerospace/defense and automobile stocks may also prove to be fertile ground for
stockpicking in the months ahead.
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Q: What is the outlook for value stocks from here?
A: As long-term investors, we are confident that value stocks will come back
into favor in due course. It is difficult to say when the turn may come, but it
is important to keep in mind that in the markets, no trend remains intact
indefinitely. For that reason, we are more concerned with the fundamentals of
the companies we hold in the portfolio than with the fickle preferences of the
markets. We believe that over time, a focus on earnings, valuation, and
fundamentals will pay off. Consequently, we will stick to our discipline and
position the fund to prosper when sentiment inevitably shifts, and in the
meantime, strive to cushion the impact of market volatility.
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Scudder Value Fund:
A Team Approach to Investing
Scudder Value Fund is managed by a team of Scudder Kemper Investments, Inc. (the
"Adviser") professionals, each of whom 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 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 Lois Friedman Roman joined the Adviser in 1994 as an
equity analyst. Ms. Roman has ten years of investment experience.
Portfolio manager William J. Wallace has been a member of Scudder Value Fund's
team since 1992 and has 18 years of investment experience.
Portfolio manager Kathleen T. Millard joined the Adviser in 1991 and has 15
years of investment experience.
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Glossary of Investment Terms
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Cyclical Stocks Companies whose earnings are closely tied to the business
cycle. Cyclical industries include steel, cement, paper,
machinery, and autos.
Diversification The spreading of risk by investing in several asset
categories, industry sectors, or individual securities. An
investor with a broadly diversified portfolio will likely
receive some protection from the price declines of an
individual asset class.
Fundamental Analysis of companies based on the projected impact of
Research management, products, sales, and earnings on their 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 faster than the overall market. Stocks of such
companies usually trade at higher valuations and
experience more price volatility than the market as a
whole. Distinct from value stock.
Price/Earnings A widely used gauge of a stock's valuation that indicates
Ratio (P/E) what investors are paying for a company's earning power at
(also "earnings the current stock price. A P/E ratio may be based on a
multiple") company's projected earnings for the coming 12 months. A
higher "earnings multiple" indicates higher expected
earnings growth, along with greater risk of earnings
disappointment.
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. Distinct
from growth stock.
(Source: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
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Investment Portfolio as of September 30, 1999
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Principal Market
Amount ($) Value ($)
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Repurchase Agreements 2.2%
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Repurchase Agreement with State Street Bank & Trust Co.
dated 9/30/1999 at 5.26%, to be repurchased at
$10,541,540 on 10/1/1999, collateralized by a
$10,660,000 U.S. Treasury Bond Inflationary Index, ----------
3.875%, 1/15/2009 (Cost $10,540,000) ............ 10,540,000 10,540,000
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Shares
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Common Stocks 97.8%
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Consumer Discretionary 5.7%
Department & Chain Stores 2.8%
Federated Department Stores, Inc.* ........... 183,500 8,016,656
Wal-Mart Stores Inc. ......................... 120,000 5,707,500
----------
13,724,156
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Hotels & Casinos 1.5%
Royal Caribbean Cruises Ltd. ................. 166,000 7,470,000
----------
Recreational Products 1.4%
Electronic Arts Inc. ......................... 91,700 6,636,788
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Consumer Staples 2.1%
Alcohol & Tobacco 1.5%
Anheuser-Busch Companies, Inc.* .............. 40,600 2,844,538
Philip Morris Companies, Inc. ................ 112,900 3,859,769
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6,704,307
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Food & Beverage 0.4%
H.J. Heinz Co. ............................... 48,100 2,068,300
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Package Goods/Cosmetics 0.2%
Colgate-Palmolive Co. ........................ 27,000 1,235,250
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Health 4.2%
Medical Supply & Specialty 1.3%
Bausch & Lomb, Inc. .......................... 95,900 6,323,406
----------
The accompanying notes are an integral part of the financial statements.
17
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Market
Shares Value ($)
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Pharmaceuticals 2.9%
American Home Products Corp. ................... 189,900 7,880,850
Bristol-Myers Squibb Co. ....................... 57,900 3,908,250
Pharmacia & Upjohn, Inc. ....................... 44,900 2,228,163
----------
14,017,263
----------
Communications 10.3%
Telephone/Communications
AT&T Corp. ..................................... 317,550 13,813,419
Bell Atlantic Corp. ............................ 334,300 22,502,569
BellSouth Corp. ................................ 121,900 5,485,500
SBC Communicatons, Inc. ........................ 163,300 8,338,506
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50,139,994
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Financial 18.7%
Banks 6.2%
Bank of America Corp. .......................... 146,152 8,138,840
Chase Manhattan Corp. .......................... 228,200 17,200,575
First Union Corp. .............................. 122,900 4,370,631
----------
29,710,046
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Insurance 6.5%
Allstate Corp. ................................. 221,200 5,516,175
Cigna Corp. .................................... 149,700 11,639,175
MBIA, Inc. ..................................... 97,600 4,550,600
St. Paul Companies, Inc. ....................... 203,200 5,588,000
Travelers Property Casualty Corp. "A" .......... 145,700 4,298,150
----------
31,592,100
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Consumer Finance 4.1%
American Express Credit Corp. .................. 20,200 2,719,425
Citigroup Inc. ................................. 386,400 17,001,600
----------
19,721,025
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Other Financial Companies 1.4%
Federal National Mortgage Association .......... 109,400 6,858,013
----------
Real Estate 0.5%
Post Properties Inc. (REIT) .................... 64,900 2,551,381
----------
Media 5.1%
Advertising 2.3%
WPP Group PLC (ADR) ............................ 120,400 11,197,200
----------
The accompanying notes are an integral part of the financial statements.
18
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Market
Shares Value ($)
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Cable Television 1.4%
AT&T Corp -- Liberty Media Group ................. 188,268 6,989,450
----------
Print Media 1.4%
Knight-Ridder, Inc. .............................. 120,400 6,606,950
----------
Service Industries 1.8%
EDP Services 0.8%
Reynolds and Reynolds Company .................... 192,000 3,912,000
----------
Investment 1.0%
Merrill Lynch & Co., Inc. ........................ 69,100 4,642,656
----------
Durables 10.3%
Aerospace 7.2%
Boeing Co. ....................................... 284,100 12,109,763
Lockheed Martin Corp. ............................ 213,164 6,967,798
Raytheon Co. "A" ................................. 48,902 2,371,747
Rockwell International Corp. ..................... 172,560 9,059,400
United Technologies Corp. ........................ 76,200 4,519,613
----------
35,028,321
----------
Automobiles 2.1%
Ford Motor Co. ................................... 199,000 9,987,313
----------
Construction/Agricultural Equipment 1.0%
PACCAR, Inc. ..................................... 99,600 5,067,150
----------
Manufacturing 9.1%
Chemicals 3.6%
Dow Chemical Co. ................................. 153,800 17,475,525
----------
Industrial Specialty 2.6%
Corning Inc. ..................................... 181,500 12,444,094
----------
Machinery/Components/Controls 2.0%
Parker-Hannifin Corp. ............................ 221,250 9,914,766
----------
Specialty Chemicals 0.9%
Air Products & Chemicals, Inc. ................... 151,300 4,397,156
----------
The accompanying notes are an integral part of the financial statements.
19
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Market
Shares Value ($)
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Technology 10.2%
Computer Software 1.8%
Oracle Corp.* ....................................... 193,950 8,824,725
----------
Diverse Electronic Products 4.4%
Applied Materials, Inc.* ............................ 97,300 7,577,238
Motorola Inc. ....................................... 155,000 13,640,000
----------
21,217,238
----------
Electronic Data Processing 4.0%
Hewlett-Packard Co. ................................. 64,200 5,906,400
International Business Machines Corp. ............... 110,400 13,399,800
----------
19,306,200
----------
Energy 12.3%
Oil & Gas Production 3.7%
Coastal Corp. ....................................... 124,700 5,104,906
Conoco Inc. "A" ..................................... 197,800 5,488,950
Royal Dutch Petroleum Co. (New York shares).......... 124,900 7,376,906
----------
17,970,762
----------
Oil Companies 8.6%
Chevron Corp. ....................................... 87,200 7,739,000
Exxon Corp. ......................................... 187,900 14,268,656
Mobil Corp. ......................................... 95,400 9,611,550
Texaco Inc. ......................................... 160,500 10,131,563
----------
41,750,769
----------
Transportation 4.0%
Railroads
CSX Corp. ........................................... 87,500 3,707,813
Canadian National Railway Co. ....................... 357,800 10,874,936
Wisconsin Central Transportation Co.* ............... 339,300 4,644,169
----------
19,226,918
----------
Utilities 4.0%
Electric Utilities
Allegheny Energy, Inc. .............................. 186,000 5,917,125
New England Electric System ......................... 116,900 6,064,188
Peco Energy Co. ..................................... 64,500 2,418,750
Unicom Corp. ........................................ 134,100 4,953,319
----------
19,353,382
----------
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Total Common Stocks (Cost $427,659,025) 474,064,604
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Total Investment Portfolio -- 100.0% (Cost $438,199,025) (a) 484,604,604
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The accompanying notes are an integral part of the financial statements.
20
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* Non-income producing security.
(a) The cost for federal income tax purposes was $438,648,946. At September 30,
1999, net unrealized appreciation for all securities based on tax cost was
$45,955,658. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $66,739,080 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$20,783,422.
The accompanying notes are an integral part of the financial statements.
21
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Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities as of September 30, 1999
- --------------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------------
Investments, at market (identified cost $438,199,025) ........ $484,604,604
Cash ......................................................... 498
Receivable for Fund shares sold .............................. 1,412,329
Dividends and interest receivable ............................ 823,098
Foreign taxes recoverable .................................... 41,065
Other assets ................................................. 4,431
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Total assets ................................................. 486,886,025
Liabilities
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Payable for investments purchased ............................ 315,500
Payable for Fund shares redeemed ............................. 1,998,625
Accrued management fee ....................................... 292,302
Other payables and accrued expenses .......................... 519,905
------------
Total liabilities ............................................ 3,126,332
- --------------------------------------------------------------------------------
Net assets, at market value $483,759,693
- --------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income .......................... 2,922,969
Unrealized appreciation (depreciation) on investments ........ 46,405,579
Accumulated net realized gain (loss) ......................... 6,427,161
Paid-in capital .............................................. 428,003,984
- --------------------------------------------------------------------------------
Net assets, at market value $483,759,693
- --------------------------------------------------------------------------------
Net Asset Value
- --------------------------------------------------------------------------------
Scudder Shares
Net asset value, offering and redemption price per share
($407,066,280 / 17,792,302 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares ------------
authorized).................................................. $22.88
------------
Class A Shares
Net asset value and redemption price per share
($42,236,287 / 1,845,326 outstanding shares of
beneficial interest, $.01 par value, unlimited number of ------------
shares authorized)........................................... $22.89
------------
------------
Maximum offering price per share (100 / 94.25 of $22.89)....... $24.29
------------
Class B Shares
Net asset value and redemption price (subject to contingent
deferred sales charge) per share ($29,242,358 / 1,286,826
outstanding shares of beneficial interest, $.01 par value, ------------
unlimited number of shares authorized)....................... $22.72
------------
Class C Shares
Net asset value and redemption price (subject to contingent
deferred sales charge) per share ($5,214,768 / 229,229
outstanding shares of beneficial interest, $.01 par value, ------------
unlimited number of shares authorized)....................... $22.75
------------
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations for the year ended September 30, 1999
- --------------------------------------------------------------------------------
Investment Income
- --------------------------------------------------------------------------------
Income:
Dividends (net of foreign taxes withheld of $170,011) ......... $ 9,500,734
Interest ...................................................... 1,684,496
--------------
11,185,230
--------------
Expenses:
Management fee ................................................ 3,893,119
Services to shareholders ...................................... 3,029,303
Custodian and accounting fees ................................. 170,804
Distribution service fees ..................................... 262,821
Administrative service fees ................................... 181,371
Trustees' fees and expenses ................................... 47,094
Auditing ...................................................... 39,893
Registration fees ............................................. 152,588
Reports to shareholders ....................................... 338,180
Legal ......................................................... 10,003
Amortization of organization expense .......................... 2,394
Other ......................................................... 25,057
--------------
Total expenses before reductions .............................. 8,152,627
Expenses reductions ........................................... (78,566)
--------------
Expenses, net ................................................. 8,074,061
- --------------------------------------------------------------------------------
Net investment income 3,111,169
- --------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- --------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ................................................... 634,935
Futures ....................................................... 5,530,913
Foreign currency related transactions ......................... 1,150
--------------
6,166,998
Net unrealized appreciation (depreciation) during the period on:
Investments ................................................... 62,188,259
Futures ....................................................... 492,314
--------------
62,680,573
- --------------------------------------------------------------------------------
Net gain (loss) on investment transactions 68,847,571
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 71,958,740
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,
Increase (Decrease) in Net Assets 1999 1998
- ------------------------------------------------------------------------------------
Operations:
<S> <C> <C>
Net investment income ........................... $ 3,111,169 $ 5,380,705
Net realized gain (loss) from investment
transactions..................................... 6,166,998 29,361,650
Net unrealized appreciation (depreciation) on
investment transactions during the period........ 62,680,573 (65,811,617)
------------- -------------
Net increase (decrease) in net assets resulting
from operations................................ 71,958,740 (31,069,262)
------------- -------------
Distributions to shareholders from:
Net investment income -- Scudder Shares ......... (4,164,869) (3,472,885)
Net investment income -- Class A ................ (237,416) --
Net investment income -- Class B ................ (48,553) --
Net investment income -- Class C ................ (11,523) --
Net realized gain -- Scudder Shares ............. (19,711,211) (23,876,077)
Net realized gain -- Class A .................... (1,241,379) --
Net realized gain -- Class B .................... (1,035,831) --
Net realized gain -- Class C .................... (226,181) --
------------- -------------
Fund share transactions:
Proceeds from shares sold ....................... 321,600,172 438,067,018
Net asset value of shares issued to shareholders
in reinvestment of distributions.............. 25,914,793 26,526,859
Cost of shares redeemed ......................... (426,810,318) (186,382,163)
------------- -------------
Net increase (decrease) in net assets from Fund
share transactions............................. (79,295,353) 278,211,714
------------- -------------
Increase (decrease) in net assets ............... (34,013,576) 219,793,490
Net assets at beginning of period ............... 517,773,269 297,979,779
Net assets at end of period (including
undistributed net investment income of $2,922,969 ------------- -------------
and $4,306,919, respectively).................. $ 483,759,693 $ 517,773,269
------------- -------------
The accompanying notes are an integral part of the financial statements.
24
<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 (a)
- ------------------------------------------------------------------------------------
Years Ended September 30, 1999(b) 1998(b) 1997(b) 1996 1995
- ------------------------------------------------------------------------------------
Net asset value, beginning of period $21.20 $23.53 $17.52 $15.87 $13.08
--------------------------------------------
- ------------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------------
Net investment income .15 .28 .34 .21 .18
- ------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 2.62 (.72) 7.22 2.40 2.86
--------------------------------------------
- ------------------------------------------------------------------------------------
Total from investment operations 2.77 (.44) 7.56 2.61 3.04
- ------------------------------------------------------------------------------------
Less distributions from:
- ------------------------------------------------------------------------------------
Net investment income (.19) (.24) (.07) (.04) (.12)
- ------------------------------------------------------------------------------------
Net realized gains on investment
transactions (.90) (1.65) (1.48) (.92) (.13)
--------------------------------------------
- ------------------------------------------------------------------------------------
Total distributions (1.09) (1.89) (1.55) (.96) (.25)
- ------------------------------------------------------------------------------------
Net asset value, end of period $22.88 $21.20 $23.53 $17.52 $15.87
--------------------------------------------
- ------------------------------------------------------------------------------------
Total Return (%) 13.02 (2.08) 45.80(c) 17.18(c) 23.62(c)
- ------------------------------------------------------------------------------------
Ratios and Supplemental Data
- -------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 407 468 298 89 68
- ------------------------------------------------------------------------------------
Ratio of operating expenses net to 1.39 1.23 1.24 1.25 1.25
average daily net assets (%)
- ------------------------------------------------------------------------------------
Ratio of operating expenses before 1.39 1.23 1.28 1.31 1.44
expense reductions, to average daily
net assets (%)
- ------------------------------------------------------------------------------------
Ratio of net investment income to .61 1.19 1.67 1.34 1.57
average daily net assets (%)
- ------------------------------------------------------------------------------------
Portfolio turnover rate (%) 91 47 47 91 98
- ------------------------------------------------------------------------------------
</TABLE>
a) On April 16, 1998, existing shares of the Fund were designated as Scudder
Shares and are generally not available to new investors.
(b) Based on monthly average shares outstanding during the period.
(c) Total return would have been lower had certain expenses not been reduced.
25
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
September 30, 1999
A. Significant Accounting Policies
Value Fund, (the "Fund") is a diversified series of Value Equity Trust ("Trust")
which is registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), as an open-end management investment company organized as a
Massachusetts business trust.
Effective 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 offered to investors subject to
an initial sales charge. Class B shares are offered 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 offered 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 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.
Certain detailed financial information for the Class A, B, and C shares is
provided separately and is available upon request.
Investment income, realized and unrealized 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 certain expenses unique to that class such as distribution
services, shareholder services, administrative services and certain other class
specific expenses. Differences in class expenses may result in payment of
different per share dividends by class. All shares of the Fund have equal rights
with respect to voting subject to class specific arrangements.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
Security Valuation. Investments are stated at value determined as of the close
of regular trading on the New York Stock Exchange. Securities which are traded
on U.S. or foreign stock exchanges are valued at the most recent sale price
reported on the exchange on which the security is traded most extensively. If no
sale occurred, the security is then valued at the calculated
26
<PAGE>
mean between the most recent bid and asked quotations. If there are no such bid
and asked quotations, the most recent bid quotation is used. Securities quoted
on the Nasdaq Stock Market ("Nasdaq"), for which there have been sales, are
valued at the most recent sale price reported. If there are no such sales, the
value is the most recent bid quotation. Securities which are not quoted on
Nasdaq but are traded in another over-the-counter market are valued at the most
recent sale price, or if no sale occurred, at the calculated mean between the
most recent bid and asked quotations on such market. If there are no such bid
and asked quotations, the most recent bid quotation shall be used.
Portfolio debt securities purchased with an original maturity greater than sixty
days are valued by pricing agents approved by the officers of the Trust, whose
quotations reflect broker 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.
Foreign Currency Translations. The books and records of the Fund are maintained
in U.S. dollars. Investment securities and other assets and liabilities
denominated in a foreign currency are translated into U.S. dollars at the
prevailing exchange rates at period end. Purchases and sales of investment
securities, income and expenses are translated into U.S. dollars at the
prevailing exchange rates on the respective dates of the transactions.
Net realized and unrealized gains and losses on foreign currency transactions
represent net gains and losses between trade and settlement dates on securities
transactions, the disposition of forward foreign currency exchange contracts and
foreign currencies, and the difference between the amount of net investment
income accrued and the U.S. dollar amount actually received. That portion of
both realized and unrealized gains and losses on investments that results from
fluctuations in foreign currency exchange rates is not separately disclosed but
is included with net realized and unrealized gains and losses on investment
securities.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian or
sub-custodian bank, receives delivery of the underlying securities, the amount
27
<PAGE>
of which at the time of purchase and each subsequent business day is required to
be maintained at such a level that the market value is equal to at least the
principal amount of the repurchase price plus accrued interest.
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 a financial
instrument 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 dependent upon
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 the 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.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. Accordingly, the Fund paid no federal income taxes and no federal
income tax provision was required
Distribution of Income and Gains. Distributions of net investment income, if
any, are made annually. Net realized gains from investment transactions, in
excess of available capital loss carryforwards, would be taxable to the Fund if
not distributed, and, therefore, will be distributed to shareholders at least
annually.
28
<PAGE>
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. As a result, net
investment income (loss) and net realized gain (loss) on investment transactions
for a reporting period may differ significantly from distributions during such
period. Accordingly, the Fund may periodically make reclassifications among
certain of its capital accounts without impacting the net asset value of the
Fund.
Organization Costs. Costs incurred by the Fund in connection with its
organization have been deferred and are being amortized on a straight-line basis
over a five-year period.
Investment Transactions and Investment Income. Investment transactions are
accounted for on the trade date. Interest income is recorded on the accrual
basis. Dividend income is recorded on the ex-dividend date. Realized gains and
losses from investment transactions are recorded on an identified cost basis.
All discounts are accreted for both tax and financial reporting purposes.
B. Purchases and Sales of Securities
During the year ended September 30, 1999, purchases and sales of investment
securities (excluding short-term investments) aggregated $475,014,495 and
$511,158,471, respectively.
The aggregate face value of futures contracts opened and closed during the year
ended September 30, 1999 was $96,309,392 and $120,900,956, respectively.
C. Related Parties
Management Agreement. Under the Management Agreement (the "Agreement") with
Scudder Kemper Investments, Inc. ("Scudder Kemper" or the "Adviser"), 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. The management fee payable under the Agreement is equal to an annual
rate of 0.70% of the Fund's average daily net assets, computed and accrued daily
and payable monthly.
29
<PAGE>
For the year ended September 30, 1999, the fee pursuant to the Agreement
amounted to $3,893,119, of which $292,302 is unpaid at September 30, 1999.
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 0.75% 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 year ended September 30, 1999, the Distribution Fee was as
follows:
Unpaid at
Total September 30,
Distribution Fee Aggregated 1999
- -------------------------------------- --------------- ---------------
Class B ......................... $ 221,395 $ --
Class C ......................... 41,426 --
--------------- ---------------
$ 262,821 $ --
--------------- ---------------
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 year ended September
30, 1999 aggregated $419,039, of which $392,065 was paid to other firms.
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 year
ended September 30, 1999, the CDSC for Classes B and C aggregated $125,539 and
$3,273, respectively.
Administrative Service Fees. KDI provides information and administrative
services to Classes A, B and C shareholders at an annual rate of up to 0.25% 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 year
ended September 30, 1999, the Administrative Service Fee was as follows:
30
<PAGE>
Unpaid at
Total Fees waived September 30,
Administrative Service Fees Aggregated by KDI 1999
- ------------------------------ -------------- -------------- --------------
Class A ..................... $ 93,765 $ 59,567 $ 31,654
Class B ..................... 73,798 14,871 5,880
Class C ..................... 13,808 4,128 2,441
-------------- -------------- --------------
$ 181,371 $ 78,566 $ 39,975
-------------- --------------- -------------
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 year ended September 30, 1999, the
amount charged to Classes A, B and C by KSC aggregated $126,686, $98,729 and
$19,281, respectively, none of which is unpaid at September 30, 1999. 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, 1999, the amount charged to the Scudder Shares by SSC
for shareholder services aggregated $886,717, of which $83,154 is unpaid at
September 30, 1999.
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, 1999, the amount charged to the Scudder Shares by STC
aggregated $1,294,096, of which $209,087 is unpaid at September 30, 1999.
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, 1999, the amount charged to the Fund by SFAC
aggregated $150,965, of which $11,782 is unpaid at September 30, 1999.
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, 1999, the Trustees fees and
expenses aggregated $47,094.
D. Line of Credit
The Fund and several Scudder Funds (the "Participants") share in a $850 million
revolving credit facility for temporary or emergency purposes,
31
<PAGE>
including the meeting of redemption requests that otherwise might require the
untimely disposition of securities. The Participants are charged an annual
commitment fee which is allocated among each of the Participants. Interest is
calculated based on the market rates at the time of the borrowing. The Fund may
borrow up to a maximum of 33 percent of its net assets under the agreement.
E. Share Transactions
The following table summarizes shares of beneficial interest and dollar activity
in the Fund:
<TABLE>
<CAPTION>
Year Ended September 30, Year Ended September 30,
1999 1998
----------------------------------- -----------------------------
Shares Dollars Shares Dollars
Shares sold
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Scudder Shares 5,568,655 $ 131,356,073 15,127,170 $ 358,943,904
Class A ........... 4,906,004 115,981,063 2,277,297 53,828,754
Class B ........... 901,601 21,274,145 924,056 21,926,576
Class C ........... 2,262,454 52,988,891 142,532 3,367,784
---------- -------------- ---------- --------------
13,638,714 321,600,172 18,471,055 438,067,018
---------- -------------- ---------- --------------
Shares issued to shareholders in reinvestment of distributions
- ------------------------------------------------------------------------------------
Scudder Shares 1,010,122 $ 23,313,600 1,219,065 $ 26,526,859
Class A ........... 59,448 1,372,649 -- --
Class B ........... 43,529 1,004,640 -- --
Class C ........... 9,689 223,904 -- --
---------- -------------- ---------- --------------
1,122,788 25,914,793 1,219,065 26,526,859
---------- -------------- ---------- --------------
Shares redeemed
- ------------------------------------------------------------------------------------
Scudder Shares (10,886,073) $(258,426,354) (6,911,251) $(162,049,236)
Class A .......... (4,451,976) (104,695,242) (945,447) (22,781,139)
Class B .......... (518,518) (12,396,396) (63,842) (1,468,241)
Class C .......... (2,181,822) (51,292,326) (3,624) (83,547)
---------- -------------- ---------- --------------
(18,038,389) (426,810,318) (7,924,164) (186,382,163)
---------- -------------- ---------- --------------
Net increase (decrease)
- ------------------------------------------------------------------------------------
Scudder Shares (4,307,296) $(103,756,681) 9,434,984 $ 223,421,527
Class A ......... 513,476 12,658,470 1,331,850 31,047,615
Class B ......... 426,612 9,882,389 860,214 20,458,335
Class C ......... 90,321 1,920,469 138,908 3,284,237
---------- -------------- ---------- --------------
(3,276,887) $ (79,295,353) 11,765,956 $ 278,211,714
---------- -------------- ---------- --------------
</TABLE>
32
<PAGE>
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Trustees of Value Equity Trust and the Scudder Shares 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 Scudder Shares financial highlights present
fairly, in all material respects, the financial position of Value Fund (the
"Fund") at September 30, 1999, the results of its operations, the changes in its
net assets, and the Scudder Shares financial highlights for the periods
indicated therein, in conformity with generally accepted accounting principles.
These financial statements and Scudder Shares 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, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
Boston, Massachusetts PricewaterhouseCoopers LLP
November 12, 1999
33
<PAGE>
Tax Information
- --------------------------------------------------------------------------------
September 30, 1999
The Fund paid distributions of $0.78 per share from net long-term capital gains
during its year ended September 30, 1999, of which 100% represents 20% rate
gains.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$7,465,000 as capital gains dividend for its year ended September 30, 1999, of
which 100% represents 20% rate gains.
For corporate shareholders, 100% of the income dividends paid during the Fund's
fiscal year ended September 30, 1999 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.
34
<PAGE>
Officers and Trustees
- --------------------------------------------------------------------------------
Lynn S. Birdsong* Donald E. Hall*
o President and Trustee o Vice President
Paul Bancroft III Ann M. McCreary*
o Trustee; Venture Capitalist and o Vice President
Consultant
Kathleen T. Millard*
Sheryle J. Bolton o Vice President
o Trustee; Chief Executive Officer,
Scientific Learning Corporation Robert D. Tymoczko*
o Vice President
William T. Burgin
o Trustee; General Partner, Bessemer John Millette*
Venture Partners o Vice President and Secretary
Keith R. Fox John R. Hebble*
o Trustee; Private Equity Investor o Treasurer
William H. Luers Caroline Pearson*
o Trustee; Chairman and President of o Assistant Secretary
the U.N. Association of America
*Scudder Kemper Investments, Inc.
Kathryn L. Quirk*
o Trustee, Vice President and
Assistant Secretary
Joan E. Spero
o Trustee; President, Doris Duke
Charitable Foundation
Thomas J. Devine
o Honorary Trustee; Consultant
Wilson Nolen
o Honorary Trustee; Consultant
Robert G. Stone, Jr.
o Honorary Trustee; Chairman
Emeritus and Director, Kirby
Corporation
35
<PAGE>
Investment Products and Services
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
<S> <C>
Money Market U.S. Growth and Income
Scudder U.S. Treasury Money Fund Scudder Balanced Fund
Scudder Cash Investment Trust Scudder Dividend & Growth Fund
Scudder Money Market Series -- Scudder Growth and Income Fund
Prime Reserve Shares* Scudder Select 500 Fund
Premium Shares* Scudder S&P 500 Index Fund
Managed Shares* Scudder Real Estate Investment Fund
Scudder Government Money Market
Series -- Managed Shares* U.S. Growth
Value
Tax Free Money Market+ Scudder Large Company Value Fund
Scudder Tax Free Money Fund Scudder Value Fund***
Scudder Tax Free Money Market Scudder Small Company Value Fund
Series -- Managed Shares* Scudder Micro Cap Fund
Scudder California Tax Free Money Fund** Growth
Scudder New York Tax Free Money Fund** Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Tax Free+ Scudder Select 1000 Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Medium Term Tax Free Fund Scudder 21st Century Growth Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund Global Equity
Scudder California Tax Free Fund** Worldwide
Scudder Massachusetts Limited Term Scudder Global Fund
Tax Free Fund** Scudder International Value Fund
Scudder Massachusetts Tax Free Fund** Scudder International Growth and
Scudder New York Tax Free Fund** Income Fund
Scudder Ohio Tax Free Fund** Scudder International Fund++
Scudder International Growth Fund
U.S. Income Scudder Global Discovery Fund***
Scudder Short Term Bond Fund Scudder Emerging Markets Growth Fund
Scudder GNMA Fund Scudder Gold Fund
Scudder Income Fund Regional
Scudder Corporate Bond Fund Scudder Greater Europe Growth Fund
Scudder High Yield Bond Fund Scudder Pacific Opportunities Fund
Scudder Latin America Fund
Global Income The Japan Fund, Inc.
Scudder Global Bond Fund
Scudder International Bond Fund Industry Sector Funds
Scudder Emerging Markets Income Fund Choice Series
Scudder Financial Services Fund
Asset Allocation Scudder Heath Care Fund
Scudder Pathway Conservative Portfolio Scudder Technology Fund
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio Preferred Series
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
</TABLE>
36
<PAGE>
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
- --------------------------------------------------------------------------------
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
Variable Annuities
Scudder Horizon Plan**+++ +++
Scudder Horizon Advantage**+++ +++ +++
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Closed-End Funds#
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<S> <C>
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.
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For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money.
+++ Funds within categories are listed in order from expected least
risk to most risk. Certain Scudder funds or classes thereof may
not be available for purchase or exchange.
+ A portion of the income from the tax-free funds may be subject to
federal, state, and local taxes.
* A class of shares of the fund.
** Not available in all states.
*** Only the Scudder Shares of the fund are part of the Scudder Family
of Funds.
++ Only the International Shares of the fund are part of the Scudder
Family of Funds.
+++ +++ A no-load variable annuity contract provided by Charter National
Life Insurance Company and its affiliate, offered by Scudder's
insurance agencies, 1-800-225-2470.
+++ +++ +++ A no-load variable annuity contract issued by Glenbrook Life and
Annuity Company and underwritten by Allstate Financial Services,
Inc., sold by Scudder's insurance agencies, 1-800-225-2470.
# These funds, advised by Scudder Kemper Investments, Inc., are
traded on the New York Stock Exchange and, in some cases, on
various other stock exchanges.
37
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Scudder Solutions
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1-800-SCUDDER www.scudder.com
Convenient Automatic Investment Plan
ways to invest,
quickly and A convenient investment program in which money is
reliably electronically debited from your bank account monthly to
regularly purchase fund shares and "dollar cost average" --
buy more shares when the fund's price is lower and fewer
when it's higher, which can reduce your average purchase
price over time.*
Automatic Dividend Transfer
The most timely, reliable, and convenient way to purchase
shares -- use distributions from one Scudder fund to
purchase shares in another, automatically (accounts with
identical registrations or the same social security or tax
identification number).
QuickBuy
Lets you purchase Scudder fund shares electronically,
avoiding potential mailing delays; money for each of your
transactions is electronically debited from a previously
designated bank account.
Payroll Deduction and Direct Deposit
Have all or part of your paycheck -- even government checks
-- invested in up to four Scudder funds at one time.
* Dollar cost averaging involves continuous investment in
securities regardless of price fluctuations and does not
assure a profit or protect against loss in declining
markets. Investors should consider their ability to
continue such a plan through periods of low price
levels.
Around-the- Scudder Automated Information Line: SAIL(TM) --
clock electronic 1-800-343-2890
account
service and Personalized account information, the ability to exchange
information, or redeem shares, and information on other Scudder funds
including some and services via touchtone telephone.
transactions
Scudder's Web Site -- www.scudder.com
Personal Investment Organizer: Offering account information
and transactions, interactive worksheets, prospectuses and
applications for all Scudder funds, plus your current asset
allocation, whenever your need them. Scudder's site also
provides news about Scudder funds, retirement planning
information, and more.
38
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1-800-SCUDDER www.scudder.com
Retirees and Automatic Withdrawal Plan
those who depend
on investment You designate the bank account, determine the schedule (as
proceeds for frequently as once a month) and amount of the redemptions,
living expenses and Scudder does the rest.
can enjoy these
convenient, Distributions Direct
timely, and
reliable Automatically deposits your fund distributions into the
automated bank account you designate within three business days after
withdrawal each distribution is paid.
programs
QuickSell
Provides speedy access to your money by electronically
crediting your redemption proceeds to the bank account you
previously designated.
For more Call a Scudder representative at
information about 1-800-SCUDDER
these services
Or visit our Web site at
www.scudder.com
Please address The Scudder Funds
all written PO Box 2291
correspondence Boston, Massachusetts
to 02107-2291
39
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About the Fund's Adviser
Scudder Kemper Investments, Inc. is one of the largest and most experienced
investment management organizations worldwide, managing more than $280 billion
in assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 80
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Financial Services Group. As a result, Zurich's subsidiary, Zurich
Kemper Investments, Inc., with 50 years of mutual fund and investment management
experience, was combined with Scudder. Headquartered in New York, Scudder Kemper
Investments offers a full range of investment counsel and asset management
capabilities, based on a combination of proprietary research and disciplined,
long-term investment strategies. With its global investment resources and
perspective, the firm seeks opportunities in markets throughout the world to
meet the needs of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Financial Services Group. The Zurich Financial Services Group is
an internationally recognized leader in financial services, including
property/casualty and life insurance, reinsurance, and asset management.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
SCUDDER
INVESTMENTS(SM)
[LOGO]
PO Box 2291
Boston, MA 02107-2291
1-800-SCUDDER
www.scudder.com
A member of the [LOGO] Zurich Financial Services Group
