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
- --------------------------------------------------------------------------------
Retirement Programs Education Accounts
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Variable Annuities
Scudder Horizon Plan**+++ +++
Scudder Horizon Advantage**+++ +++ +++
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Closed-End Funds#
- -----------------------------------------------------------------------------------------
<S> <C>
The Argentina Fund, Inc. 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.
</TABLE>
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money.
+++ Funds within categories are listed in order from expected least
risk to most risk. Certain Scudder funds or classes thereof may
not be available for purchase or exchange.
+ A portion of the income from the tax-free funds may be subject to
federal, state, and local taxes.
* A class of shares of the fund.
** Not available in all states.
*** Only the Scudder Shares of the fund are part of the Scudder Family
of Funds.
++ Only the International Shares of the fund are part of the Scudder
Family of Funds.
+++ +++ A no-load variable annuity contract provided by Charter National
Life Insurance Company and its affiliate, offered by Scudder's
insurance agencies, 1-800-225-2470.
+++ +++ +++ A no-load variable annuity contract issued by Glenbrook Life and
Annuity Company and underwritten by Allstate Financial Services,
Inc., sold by Scudder's insurance agencies, 1-800-225-2470.
# These funds, advised by Scudder Kemper Investments, Inc., are
traded on the New York Stock Exchange and, in some cases, on
various other stock exchanges.
37
<PAGE>
Scudder Solutions
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
Convenient Automatic Investment Plan
ways to invest,
quickly and A convenient investment program in which money is
reliably electronically debited from your bank account monthly to
regularly purchase fund shares and "dollar cost average" --
buy more shares when the fund's price is lower and fewer
when it's higher, which can reduce your average purchase
price over time.*
Automatic Dividend Transfer
The most timely, reliable, and convenient way to purchase
shares -- use distributions from one Scudder fund to
purchase shares in another, automatically (accounts with
identical registrations or the same social security or tax
identification number).
QuickBuy
Lets you purchase Scudder fund shares electronically,
avoiding potential mailing delays; money for each of your
transactions is electronically debited from a previously
designated bank account.
Payroll Deduction and Direct Deposit
Have all or part of your paycheck -- even government checks
-- invested in up to four Scudder funds at one time.
* Dollar cost averaging involves continuous investment in
securities regardless of price fluctuations and does not
assure a profit or protect against loss in declining
markets. Investors should consider their ability to
continue such a plan through periods of low price
levels.
Around-the- Scudder Automated Information Line: SAIL(TM) --
clock electronic 1-800-343-2890
account
service and Personalized account information, the ability to exchange
information, or redeem shares, and information on other Scudder funds
including some and services via touchtone telephone.
transactions
Scudder's Web Site -- www.scudder.com
Personal Investment Organizer: Offering account information
and transactions, interactive worksheets, prospectuses and
applications for all Scudder funds, plus your current asset
allocation, whenever your need them. Scudder's site also
provides news about Scudder funds, retirement planning
information, and more.
38
<PAGE>
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
Retirees and Automatic Withdrawal Plan
those who depend
on investment You designate the bank account, determine the schedule (as
proceeds for frequently as once a month) and amount of the redemptions,
living expenses and Scudder does the rest.
can enjoy these
convenient, Distributions Direct
timely, and
reliable Automatically deposits your fund distributions into the
automated bank account you designate within three business days after
withdrawal each distribution is paid.
programs
QuickSell
Provides speedy access to your money by electronically
crediting your redemption proceeds to the bank account you
previously designated.
For more Call a Scudder representative at
information about 1-800-SCUDDER
these services
Or visit our Web site at
www.scudder.com
Please address The Scudder Funds
all written PO Box 2291
correspondence Boston, Massachusetts
to 02107-2291
39
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc. is one of the largest and most experienced
investment management organizations worldwide, managing more than $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
<PAGE>
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED SEPTEMBER 30, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[MORNINGSTAR RATINGS LOGO]
SEEKS LONG-TERM GROWTH OF CAPITAL BY INVESTING PRIMARILY IN LARGE-CAPITALIZATION
STOCKS IN UNDERVALUED SECTORS OF THE MARKET. KEMPER VALUE FUND IS PROPERLY KNOWN
AS VALUE FUND.
KEMPER
VALUE FUND
"... Maintaining our investment style is another
way we measure our progress. Investors choose
funds to fit specific needs in their portfolios.
That's why we're committed to maintaining our
pure value strategy and why we won't shift to
other styles in search of performance. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
10
INDUSTRY SECTORS
11
INDIVIDUAL HOLDINGS
12
PORTFOLIO OF INVESTMENTS
15
FINANCIAL STATEMENTS
18
FINANCIAL HIGHLIGHTS
20
NOTES TO FINANCIAL STATEMENTS
26
REPORT OF INDEPENDENT ACCOUNTANTS
AT A GLANCE
- -------------------------------------------------------------------------------
KEMPER VALUE
FUND TOTAL RETURNS*
- -------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1999
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CLASS A 13.04%
CLASS B 12.02%
CLASS C 12.06%
LIPPER MULTI-CAP VALUE FUND CATEGORY AVERAGE* 16.38%
- -------------------------------------------------------------------------------
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
* TOTAL RETURN MEASURES NET INVESTMENT INCOME AND CAPITAL GAIN OR LOSS FROM
PORTFOLIO INVESTMENTS, ASSUMING REINVESTMENT OF ALL DIVIDENDS. DURING THE PERIOD
NOTED, SECURITIES PRICES FLUCTUATED. FOR ADDITIONAL INFORMATION SEE THE
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
NET ASSET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
AS OF AS OF
9/30/99 9/30/98
KEMPER VALUE FUND CLASS A $22.89 $21.19
- -------------------------------------------------------------------------------
KEMPER VALUE FUND CLASS B $22.72 $21.11
- -------------------------------------------------------------------------------
KEMPER VALUE FUND CLASS C $22.75 $21.13
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
VALUE FUND RANKINGS AS OF SEPTEMBER 30, 1999
- -------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER MULTI-CAP VALUE FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #293 of 471 funds #317 of 471 funds #314 of 471 funds
- -------------------------------------------------------------------------------
</TABLE>
* LIPPER ANALYTICAL SERVICES, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES
IN NET ASSET VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT
OF SALES CHARGES; IF THEY HAD BEEN INCLUDED, RESULTS MAY HAVE BEEN LESS
FAVORABLE.
- -------------------------------------------------------------------------------
DIVIDEND REVIEW
- -------------------------------------------------------------------------------
DURING THE YEAR ENDED SEPTEMBER 30, 1999, VALUE FUND PAID THE FOLLOWING
DISTRIBUTIONS:
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER
VALUE FUND VALUE FUND VALUE FUND
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME DIVIDEND $0.1716 $0.0415 $0.0432
- -------------------------------------------------------------------------------
LONG-TERM CAPITAL GAIN
DISTRIBUTION $ 0.78 $ 0.78 $ 0.78
- -------------------------------------------------------------------------------
SHORT-TERM CAPITAL GAIN
DISTRIBUTION $ 0.12 $ 0.12 $ 0.12
- -------------------------------------------------------------------------------
</TABLE>
TERMS TO KNOW
YOUR FUND'S STYLE
- -------------------------------------------------------------------------------
MORNINGSTAR EQUITY STYLE BOX
- -------------------------------------------------------------------------------
[MORNINGSTAR EQUITY STYLE BOX]
SOURCE: Morningstar, Inc. Chicago, IL (312) 696-6000. The Morningstar Style Box
placement is based on two variables: a fund's market capitalization relative to
the movements of the market and a fund's valuation, which is calculated by
comparing the stocks in the fund's portfolio with the most relevant of the three
market-cap groups.
THE STYLEBOX REPRESENTS A SNAPSHOT OF THE FUND'S PORTFOLIO ON A SINGLE DAY. IT
IS NOT AN EXACT ASSESSMENT OF RISK AND DOES NOT REPRESENT FUTURE PERFORMANCE.
THE FUND'S PORTFOLIO CHANGES FROM DAY-TO-DAY. A LONGER-TERM VIEW IS REPRESENTED
BY THE FUND'S MORNINGSTAR CATEGORY, WHICH IS BASED ON ITS ACTUAL INVESTMENT
STYLE AS MEASURED BY ITS UNDERLYING PORTFOLIO HOLDINGS OVER THE PAST THREE
YEARS. CATEGORY PLACEMENTS OF NEW FUNDS ARE ESTIMATED. MORNINGSTAR HAS PLACED
KEMPER VALUE FUND IN THE LARGE VALUE CATEGORY. PLEASE CONSULT THE PROSPECTUS FOR
A DESCRIPTION OF INVESTMENT POLICIES.
GROWTH STOCK Growth stocks are those that are expected to experience rapid
growth resulting from strong sales, dominant market positions and talented
management teams. Because these stocks are in demand, they're generally more
expensive than value stocks.
NARROW MARKET A narrow market is a securities market in which most of the gains
are earned by only a small group of companies. In 1998 and most of 1999 a narrow
market existed in which only the largest growth-style stocks enjoyed robust
gains.
TROUGH FUNDAMENTALS A stock's future performance can be estimated by considering
a company's fundamentals -- its assets, earnings, sales, products and management
team. When some or all of these fundamentals are less than favorable but appear
to be on the verge of improving, they are considered to be trough fundamentals.
Like stock prices, a company's fundamental qualities typically travel through
cycles.
TROUGH VALUATION Most securities go through cycles in which their prices rise
fall and then rise again. A trough valuation is at the low point of that cycle,
after which the stock's price is expected to begin rising again.
VALUE STOCK Value stocks are considered to be bargain stocks because they are
perceived as undervalued and attractively priced relative to a measure of their
true worth, such as earnings potential, book value, cash flow or dividend yield.
<PAGE> 3
ECONOMIC OVERVIEW
Scudder Kemper Investments, the investment manager for Kemper Funds, is one of
the largest and most experienced investment management organizations in the
world, managing more than $290 billion in assets for institutional and corporate
clients, retirement and pension plans, insurance companies, mutual fund
investors and individuals. 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.
DEAR KEMPER FUNDS SHAREHOLDER:
Markets have been aquiver about inflation risks. Growth in the United States
continues to exceed most expectations. Labor markets are visibly tight. These
are the precursors to inflation -- everybody knows it.
Everybody except us, that is. We don't buy it in principle, and reality is
proving our theory correct.
First, let's look at growth. The traditional economic view is that growth
causes inflation. Today, we're seeing exactly the opposite: Low inflation is
causing growth. Low inflation keeps interest rates down, and low interest rates
spur investment by making borrowing money cheap. Investment allows companies to
add capacity, keeping competition fierce. As a result, companies aren't raising
prices; they're competing for business by keeping goods attractive and prices
low. That's true for the old economy, in which consumers are buying t-shirts,
and the new economy, in which consumers are buying Internet services. Everywhere
they look, consumers see bargains -- in the malls, in the auto showrooms, at the
mortgage companies.
As for tight labor markets, the traditional economic view is that tight labor
markets -- i.e., many "help-wanted" signs -- forces companies to pay a premium
for talent. That, in turn, forces companies to raise their prices in order to
protect their profits. And raising prices results in inflation. In contrast, we
believe that tight labor markets won't cause wages to surge. Why?
To start with, temporary agencies have proliferated, accounting for 2.2
percent of jobs, up from 0.5 percent in the early 1980s. They get just the right
amount and type of labor to the right spot at the right time to get the job
done.
Immigration also keeps a lid on wage rates, since it replenishes the work
force much faster than births. Immigration is at its highest level ever; an
amazing 10 percent of the population is foreign-born. Nearly 1 million people
enter the United States legally each year, and another 300,000 just show up.
When they get here, they look for jobs. And often, they're willing to accept
lower-paying jobs than the average citizen.
Finally, and perhaps most importantly, wage rates are kept in check by
executives' intense profit focus. Payroll is a company's biggest expense. When
payroll skyrockets, profits decline -- and that would be bad for a CEO who
promised Wall Street double-digit earnings growth from now to the end of time.
If investors are disappointed in earnings growth, they sell their stock. And
when they sell their stock, the stock options that are an essential part of many
executives' compensation are as valuable as scrap paper.
Supporting our theory are two distinct and important sets of data which were
released in late October: The Bureau of Economic Analysis (BEA) released its
third-quarter estimate of gross domestic product (GDP), the value of all goods
and services produced in the United States, and the Bureau of Labor Statistics
(BLS) released its employment cost index (ECI), which measures what employers
pay for their workers' wages, salaries and benefits.
GDP grew at a 4.8 percent rate in the third quarter, up sharply from the
revised 1.9 percent second-quarter pace and just slightly above the consensus
estimate of 4.7 percent.
At the same time, however, the ECI rose by 0.8 percent in the July-September
period, down from a 1.1 percent increase in the second quarter. The
third-quarter gain also was lower than the 0.9 percent increase forecast by
economists in a Reuters poll. (The report, by the way, is said to be one of the
favorites of Federal Reserve Chairman Alan Greenspan, who uses it as a key
indicator of inflation pressures in the world's largest economy.)
In essence, then, the U.S. economy posted its strongest growth so far this
year in the third quarter, while wage costs remained tame. The combination of
strong consumer demand and the lowest unemployment in a generation just isn't
igniting wage-driven inflation.
These figures tell us that the Fed won't have inflation as an excuse to raise
interest rates for a third time this year when it meets on Nov. 16 to decide
whether to raise key interest rates for the third time this year.
But more importantly, if these numbers prove anything, it's that conventional
wisdom that growth causes inflation should be turned on its head. The Fed, in
deciding to
3
<PAGE> 4
ECONOMIC OVERVIEW
target growth itself, wants the country to slow down to prevent an inflation
outbreak. This is a dangerous game. If it succeeds in slowing growth, inflation
could easily disappear or turn into deflation. Real rates that are already high
would turn punitive. Credit quality would deteriorate rudely. Only rapid growth
can ensure that companies and consumers can continue to pay their bills.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
Scudder Kemper Investments Economics Group
ECONOMIC GUIDEPOSTS
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND SHAREHOLDER
DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR DEFLATION, CREDIT
EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR INVESTMENT
RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE 10-YEAR TREASURY
RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES. THE OTHER DATA REPORT
YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (8/31/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 5.94 5.00 5.34 6.30
Prime rate (2) 8.06 7.75 8.50 8.50
Inflation rate (3)* 2.00 1.60 1.68 2.16
The U.S. dollar (4) -6.36 -1.53 8.17 10.10
Capital goods orders (5)* 11.84 5.11 3.05 10.30
Industrial production (5)* 3.58 1.55 2.71 5.59
Employment growth (6)* 2.17 2.37 2.67 2.39
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6 percent. The low, moderate inflation of the
last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
*Data as of 9/30/99.
SOURCE: Economics Department, Scudder Kemper Investments, Inc.
The information contained in this piece has been taken from sources believed to
be reliable, but the accuracy of the information is not guaranteed. The opinions
and forecasts expressed are those of the economic advisors of Scudder Kemper
Investments, Inc. as of October 28, 1999, and may not actually come to pass.
This information is subject to change. No part of this material is intended as
an investment recommendation.
To obtain a Kemper Funds prospectus, download one from www.kemper.com, talk to
your financial representative or call Shareholder Services at (800) 621-1048.
The prospectus contains more complete information, including management fees and
expenses. Please read it carefully before you invest or send money.
4
<PAGE> 5
PERFORMANCE UPDATE
[ROMAN PHOTO]
LOIS R. ROMAN, LEAD PORTFOLIO MANAGER, JOINED SCUDDER KEMPER INVESTMENTS, INC.
IN 1994. SHE HAS MORE THAN 10 YEARS OF INVESTMENT EXPERIENCE.
[MILLARD PHOTO]
KATHLEEN MILLARD, PORTFOLIO MANAGER, JOINED SCUDDER KEMPER INVESTMENTS, INC. IN
1991 AND HAS MORE THAN 15 YEARS OF INVESTMENT EXPERIENCE. SHE IS ALSO A
CHARTERED FINANCIAL ANALYST.
[WALLACE PHOTO]
WILLIAM J. WALLACE, PORTFOLIO MANAGER, HAS BEEN A MEMBER OF THE FUND'S TEAM
SINCE 1992 AND HAS NEARLY 20 YEARS OF INVESTMENT EXPERIENCE. HE IS A CHARTERED
FINANCIAL ANALYST.
THE TEAM IS SUPPORTED BY INVESTMENT PROFESSIONALS INCLUDING ECONOMISTS, RESEARCH
ANALYSTS, TRADERS AND OTHER INVESTMENT SPECIALISTS THROUGHOUT THE UNITED STATES
AND ABROAD.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
IN JUNE 1999, LOIS ROMAN ASSUMED THE ROLE OF LEAD PORTFOLIO MANAGER OF KEMPER
VALUE FUND. BELOW SHE DISCUSSES HOW HER INVESTMENT STYLE DIFFERS FROM THAT OF
THE PREVIOUS MANAGEMENT TEAM; THE CHANGES SHE HAS MADE TO THE PORTFOLIO; AND HER
OUTLOOK FOR THE VALUE MARKET AND KEMPER VALUE FUND IN PARTICULAR.
Q YOU TOOK OVER MANAGEMENT OF KEMPER VALUE FUND IN JUNE. DOES YOUR
MANAGEMENT STYLE DIFFER FROM THE STYLE OF THE PREVIOUS MANAGEMENT TEAM?
A Yes, our approach is a bit different, but our goal has not changed. We
still search the marketplace for undervalued stocks. The difference is how we
arrive at our portfolio. We have refined the investment process into three
steps:
1. We rely heavily on a proprietary quantitative model developed at Scudder
Kemper. We define our investment universe as the 1,000 securities in the
Russell 1000 index -- a group of 1,000 large-cap stocks that is not
available for direct investment. Essentially, this is the pond where we
fish for our holdings.
Our model looks at five measures of a stock's value and ranks the stocks
in the Russell 1000 based on these criteria. Each stock is then placed in
one of 10 groups (deciles). The cheapest 40 percent of those stocks -- the
four most attractive deciles -- are issues we may consider adding to our
portfolio. The most expensive 20 percent are those we would consider
selling. Everything else can be held if it is already in the portfolio and
the positive investment thesis remains intact.
2. Every month, our quantitative model comes up with 400 buyable stocks. But
we don't invest blindly. Our internal research analysts provide us with
qualitative assessments of those stocks. We discuss each company's
management strategy with our analysts, who provide their outlook for the
internal business model of the companies. Our analysts sift through those
400 names to figure out which ones are likely to offer the strongest upside
potential and which ones we should avoid because they may simply get
cheaper over time.
3. Last, we try to assess the risk factors associated with the companies we
consider to be candidates for purchase. First, we look at the companies on
a macroeconomic level. Will the direction of interest rates affect their
performance? How may these stocks perform if there is a downturn or uptick
in the economy? Additionally, do they complement the other holdings in the
portfolio? Would their addition tilt the portfolio in an area that might
increase overall portfolio risk?
To assess the risk factors, we split the portfolio into four broad
pillars or sectors -- cyclical stocks, interest-rate-sensitive stocks,
energy stocks and noncyclical stocks. Once every stock has been assigned to
one of those four broad categories, we can easily see where the portfolio
is tilted versus our
5
<PAGE> 6
PERFORMANCE UPDATE
benchmark -- and where the risks are concentrated.
This is an important exercise, since we build the portfolio from the
bottom up. We look first for good stocks, then we consider the sector
allocations. This risk model enables us to quickly identify an overexposure
or underexposure in one of those four sectors and make adjustments if
necessary. We can then take advantage of the intersection between what our
quantitative model is telling us is cheap and what our analysts are telling
us is good -- while diversifying the portfolio to help manage risk.
Q HOW DO YOU MONITOR THE FUND'S PROGRESS?
A After we employ our three-step process, we end up with a portfolio of
about 60 to 90 stocks. (On September 30, there were 63 stocks in the fund.) We
compare the performance of each individual stock and the fund's overall
performance with that of the Russell 1000 Value Index -- a group of 1,000
large-cap value stocks. Our goal is to outperform that benchmark over a market
cycle of three to five years. We also aim to land in the top performance
quartile on an ongoing basis in the Morningstar Large Value Category -- a group
of 592 large-cap value funds with investment objectives similar to those of
Kemper Value Fund.
Maintaining our investment style is another way we measure our progress.
Investors choose funds to fit specific needs in their portfolios. That's why
we're committed to maintaining our pure value strategy and why we won't shift to
other styles in search of performance. Our goal is to keep the fund's portfolio
in the deep-value, large-cap area of the market. The style target below
illustrates the area in which we aim to keep the fund invested.
[STYLE BOX]
KEEP IN MIND THAT THE TARGET PLACEMENT MAY NOT ALWAYS MATCH THE MORNINGSTAR
STYLE-BOX DESIGNATION SHOWN EARLIER IN THIS REPORT, AS THE MORNINGSTAR STYLE BOX
REPRESENTS A SNAPSHOT OF A FUND'S PORTFOLIO ON A SINGLE DAY.
INVESTMENT STYLE The investment-style placement shows where a fund is positioned
on the value/growth spectrum.
MARKET CAPITALIZATION The market-capitalization placement identifies the size of
the companies in which the fund invests. For instance, large-cap stocks are
shares in larger, established corporations. The biggest advantage of large-cap
stocks is that they generally offer relative stability compared with newer,
smaller companies.
Q HOW DID KEMPER VALUE FUND PERFORM FOR THE 12 MONTHS ENDED SEPTEMBER 30,
1999?
A For the 12-month period, the fund's Class A shares gained 13.04 percent
(unadjusted for any sales charge). By comparison, the 12-month return in the
Morningstar Large Value Category returned 15.91 percent and the Russell 1000
Value index returned 18.72 percent for the same period. There were several
specific stocks in our portfolio that struggled with significant declines during
the period, which in part, led to this underperformance. Additionally, as
mentioned previously, the portfolio has been completely restructured since June.
We hope that the new stock selection process will enable the fund's relative
performance to improve.
Q DID YOU RESTRUCTURE THE PORTFOLIO WHEN YOU TOOK OVER?
A Yes, primarily we made three major changes:
1. DECREASED THE NUMBER OF HOLDINGS IN THE FUND.
We wanted each stock to have a more meaningful impact on the fund's
performance, so we trimmed the number of issues in the portfolio from 98 on
May 31 to 63 on September 30.
2. INCREASED THE OVERALL MARKET CAPITALIZATION OF THE FUND.
We wanted the fund to be a pure large-capitalization fund, so we replaced
several mid-cap names with stocks of larger companies.
3. DECREASED THE FUND'S INTERNATIONAL EXPOSURE.
We wanted the fund to invest purely in U.S. companies, so we sold many of
the foreign names that were in the portfolio.
The majority of these changes were completed by the end of June 1999.
Q WHAT DOES THE PORTFOLIO'S RESTRUCTURING MEAN IN TERMS OF CAPITAL-GAINS
EXPOSURE?
A Although we can't quote an exact number to you at this time, we were very
cognizant of capital-gains implications as we restructured the portfolio. Our
goal was to minimize capital gains wherever possible and to keep the fund's
turnover rate at a reasonable level.
6
<PAGE> 7
PERFORMANCE UPDATE
Q IT SEEMS AS IF THE NARROWNESS (SEE TERMS TO KNOW ON PAGE 2) OF 1998'S
MARKET HAS CONTINUED INTO 1999. WHAT HAS THIS MEANT FOR VALUE STOCKS?
A You're right, a small group of technology-oriented large growth stocks has
continued to dominate the market, while the rest of the investment universe has
languished. This has been frustrating for us as value investors, because our
investment style precludes us from owning those highly priced stocks.
In the second calendar quarter of 1999, value-style stocks began to rally.
Commodity-cyclical stocks -- basic-industry firms whose performance tends to
rise and fall with the economy -- led the rally. This resulted as fears of a
global financial crisis -- and its potential impact on the revenues of
commodity-cyclical companies -- abated.
The rebound caused excitement in the market, and almost anything that even
remotely resembled value rallied. However, the fundamentals of some rallying
value stocks did not warrant their rise. As these weaker value stocks began to
tumble, all value stocks suffered. As a result, the value rally was
unsustainable, and growth stocks regained their dominant position in the third
calendar quarter of 1999.
The table below shows the extent of the disparity between growth and value.
- -------------------------------------------------------------------------------
DISPARITY BETWEEN GROWTH AND VALUE EXISTED THROUGHOUT THE PERIOD DATA FOR
PERIODS ENDING 9/30/99
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDEX 1 YEAR 9 MONTHS 3 MONTHS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RUSSELL 1000
GROWTH INDEX 34.85% 6.40% -3.66%
- -------------------------------------------------------------------------------
RUSSELL 1000
VALUE INDEX 18.72 1.81 -9.80
- -------------------------------------------------------------------------------
</TABLE>
In preparation for the next value-dominated cycle, we have tilted our
portfolio cyclically relative to our benchmark. That is, our exposure in
manufacturing, durables and technology is greater than the Russell Value 1000
benchmark. If value stocks come back into favor, some of these areas may perform
very well.
Q WHAT HAS THIS PROLONGED DOWNTURN IN VALUE MEANT FOR KEMPER VALUE FUND?
A The downturn in value has given us the opportunity to find many quality
companies at low prices, which we believe are only temporarily depressed. Our
quantitative model helps us find those stocks at trough valuations, while our
qualitative inputs from the analysts help us find the trough fundamentals (see
Terms To Know on page 2).
Typically, the performance of stocks runs in cycles -- in terms of both
market price and company fundamentals. These cycles don't often run in tandem,
but when they do, it presents a huge opportunity for value investors. Earlier
this year, we saw the opposite -- many value stocks rallied in market price but
didn't have the strong company fundamentals to sustain their gains.
Of course, we don't know when value will come back into favor, but we are
hunting for those stocks that have fallen back to trough valuations to see if
there are any that are now also at trough fundamentals. We believe our
three-step investment process allows us to identify those companies earlier
rather than later. In the meantime, we're sticking with our winners a little
longer than we normally would and are being very selective when adding new names
to the portfolio.
Q ARE YOU STILL COMMITTED TO THE FINANCIAL SERVICES SECTOR? WHAT TYPE OF
CATALYST IS NEEDED TO TURN THE SECTOR'S PERFORMANCE AROUND?
A Financial stocks, we believe, offer a tremendous amount of value over the
long term. There are many solid companies with strong fundamentals and smart
management teams that have been increasing the business returns of the
companies. However, many financial stocks reflected much of the good news
earlier in the year and were trading at historically high valuations. Because of
this, we decreased our exposure to this sector relative to our benchmark, the
Russell 1000 Value index. As of September 30, 1999 financial services
represented 19 percent of the fund versus 29.6 percent for the Russell 1000
Value index. This underweighting has helped performance during the year.
The financial stocks in the fund suffered with the sector as interest rates
climbed. We favored insurance companies over banks, and that helped mitigate
some of the negative impact of individual stocks on performance. Over the longer
term, we expect some turn in pricing and more consolidation within the industry
to get the insurance stocks moving positively again.
Higher rates are not a good environment for financial stocks. However, we
believe that at some point, the valuations of financial stocks should adequately
reflect the current rising-rate environment, and we would look to increase our
exposure again. If rates stabilize or fall, the sector should improve
dramatically.
7
<PAGE> 8
PERFORMANCE UPDATE
Q YOU ALSO HAVE A SUBSTANTIAL POSITION IN TECHNOLOGY. ARE THERE TRULY
TECHNOLOGY STOCKS TRADING AT VALUE PRICES?
A During the year, we were finding a lot of value in some of the hardware
companies such as IBM, Hewlett-Packard and Motorola. In recent months, the
prices of those stocks have risen, and they are now looking fairly priced.
However, the long-term thesis for each of these stocks remains intact, so we
continue to hold them.
For example, IBM still has a top-line growth story to it. IBM was added to
the portfolio years ago when the market was misunderstanding the potential
impact of the services business on the overall operations of the company. At
that time, investors were more concerned with the hardware area and the
potential for a financial turnaround. IBM has been successful at cleaning up its
cost structure and business portfolio, which has increased normalized earnings
significantly. Going forward, IBM should be able to focus on top-line growth as
a new avenue for value creation.
Earlier this year, Hewlett-Packard announced plans to split into two
publicly traded companies: one that focuses on its test and measurement
businesses and one that concentrates on its computing and imaging businesses.
When this happens, it should be very positive for the stock. The company also
has a new CEO, who is expected to increase Hewlett's market competitiveness and
bring new financial milestones and discipline to the company.
In the case of Motorola, improvement in the semiconductor industry,
combined with better products in the cellular phone area and the company's new
alliance with General Instruments, could bring exciting growth opportunities in
the future.
Q WHERE ELSE ARE YOU FINDING VALUE?
A I mentioned the insurance industry earlier. We believe that property and
casualty insurance companies are extremely attractive at their current
fundamentals and valuations. We are also building a position in the
aerospace/defense industry. There has been a huge trough in the spending cycle
for that industry, which we believe may be poised to turn around. There are also
a lot of peripheral companies at attractive valuations that will likely benefit
if defense spending picks up.
We have also invested more heavily in railroad stocks this year. The
railroad industry, we believe, should be emerging from its recent trough. By
improving their cost structures, rails can more effectively compete with the
trucking industry. Additionally, the consolidation among the rails has made them
much more efficient and competitive operators.
Q HOW ARE YOU POSITIONING THE FUND GOING FORWARD?
A We are going to stick to our knitting, which is creating a fund of
undervalued securities with trough fundamentals through the use of our
quantitative model and the qualitative inputs of our analysts, who talk to the
management of the companies on an almost daily basis. When value turns around,
we believe our process will enable us to benefit by holding strong companies
with good fundamentals. In the short run, we believe our value portfolio will
hold up better than other more growth-oriented portfolios if there is a market
downturn.
8
<PAGE> 9
PERFORMANCE UPDATE
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- -------------------------------------------------------------------------------
FOR PERIODS ENDED SEPTEMBER 30, 1999 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 3-YEAR 5-YEAR LIFE OF CLASS(1)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER VALUE FUND CLASS A 6.55% 15.00% 17.11% 14.56% (since 12/31/92)
- ---------------------------------------------------------------------------------------------------
KEMPER VALUE FUND CLASS B 9.02 N/A N/A -6.72 (since 4/16/98)
- ---------------------------------------------------------------------------------------------------
KEMPER VALUE FUND CLASS C 12.06 N/A N/A -4.75 (since 4/16/98)
- ---------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- -------------------------------------------------------------------------------
KEMPER VALUE FUND CLASS A
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER VALUE FUND CLASS STANDARD & POOR'S 500 RUSSELL 1000 VALUE
A(1) STOCK INDEX(+) INDEX(++)
----------------------- --------------------- ------------------
<S> <C> <C> <C>
12/31/92 $ 9427.00 $ 10000.00 $ 10000.00
12/31/94 10693.00 11148.00 11577.00
12/31/96 17119.00 18857.00 19483.00
9/30/99 25023.00 33678.00 31011.00
</TABLE>
[LINE GRAPH]
- -------------------------------------------------------------------------------
KEMPER VALUE FUND CLASS B
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER VALUE FUND CLASS STANDARD & POOR'S 500 RUSSELL 1000 VALUE
B(1) STOCK INDEX(+) INDEX(++)
----------------------- --------------------- ------------------
<S> <C> <C> <C>
4/30/98 $ 9427.00 $ 10000.00 $ 10000.00
12/31/98 9863.00 11153.00 10287.00
9/30/99 9190.00 11637.00 10474.00
</TABLE>
[LINE GRAPH]
- -------------------------------------------------------------------------------
KEMPER VALUE FUND CLASS C
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER VALUE FUND CLASS STANDARD & POOR'S 500 RUSSELL 1000 VALUE
C(1) STOCK INDEX(+) INDEX(++)
----------------------- --------------------- ------------------
<S> <C> <C> <C>
4/30/98 $ 9427.00 $ 10000.00 $ 10000.00
12/31/98 9872.00 11153.00 10287.00
9/30/99 9464.00 11637.00 10474.00
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN ORIGINAL COST.
*AVERAGE ANNUAL TOTAL RETURN AND TOTAL RETURN MEASURE NET INVESTMENT INCOME
AND CAPITAL GAIN OR LOSS FROM PORTFOLIO INVESTMENTS, ASSUMING REINVESTMENT
OF ALL DIVIDENDS AND FOR CLASS A SHARES ADJUSTMENT FOR THE MAXIMUM SALES
CHARGE OF 5.75%, FROM CLASS B SHARES ADJUSTMENT FOR THE APPLICABLE
CONTINGENT DEFERRED SALES CHARGE (CDSC) OF 3% AND FOR CLASS C SHARES NO
ADJUSTMENT FOR SALES CHARGE. THE MAXIMUM CDSC FOR CLASS B SHARES IS 4
PERCENT. FOR CLASS C SHARES, THERE IS A 1% CDSC ON CERTAIN REDEMPTIONS
WITHIN THE FIRST YEAR OF PURCHASE.
(1)CLASS A SHARES PERFORMANCE PRIOR TO APRIL 16, 1998 IS DERIVED FROM THE
SCUDDER "S" SHARE PERFORMANCE FROM INCEPTION DATE AND HAS BEEN ADJUSTED TO
REFLECT THE CURRENT MAXIMUM INITIAL SALES CHARGE OF 5.75%. CLASS S SHARES
ARE SUBJECT TO CERTAIN OTHER, OR DIFFERENT LEVELS OF, EXPENSES THAN CLASS A
SHARES. THE EXPENSES APPLICABLE TO CLASS S SHARES HAVE BEEN REFLECTED IN
THE PERFORMANCE PRESENTED FOR CLASS A SHARES. THE DIFFERENCE IN EXPENSES
WILL AFFECT PERFORMANCE. THE FUND'S SHARES WERE OFFERED WITHOUT A SALES
CHARGE UNTIL APRIL 15, 1998. KEMPER CLASS A, B AND C SHARES WERE INITIALLY
OFFERED ON APRIL 16, 1998. CLASS B SHARES IS ADJUSTED FOR THE CDSC IN
EFFECT AT THE END OF THE PERIOD. WHEN COMPARING KEMPER VALUE FUND TO THE
INDICES, YOU SHOULD NOTE THAT THE FUND'S PERFORMANCE REFLECT THE MAXIMUM
SALES CHARGE, WHILE NO SUCH CHARGES ARE REFLECTED IN THE PERFORMANCE OF THE
INDICES. BEGINNING WITH THE NEXT ANNUAL REPORT THE RUSSELL 1000 VALUE
INDEX, A MORE REPRESENTATIVE INDEX WILL BE SHOWN AS THE PRIMARY BENCHMARK
INSTEAD OF THE S & P 500 STOCK INDEX. FOR ADDITIONAL INFORMATION, SEE THE
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION AND THE FINANCIAL
HIGHLIGHTS AT THE END OF THIS REPORT.
+THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET. SOURCE IS CDA WIESENBERGER.
++THE RUSSELL 1000 VALUE INDEX MEASURES THE PERFORMANCE OF THOSE RUSSELL
1000 COMPANIES WITH LOWER PRICE-TO-BOOK RATIOS AND LOWER FORECASTED GROWTH
VALUES. THESE STOCKS ARE SELECTED FROM THE 1000 LARGEST COMPANIES IN THE
RUSSELL 3000 INDEX, WHICH REPRESENTS APPROXIMATELY 90% OF THE TOTAL MARKET
CAPITALIZATION OF THE RUSSELL 3000 INDEX. THE STOCKS REPRESENTED BY THIS
INDEX INVOLVE INVESTMENT RISKS, WHICH MAY INCLUDE THE LOSS OF PRINCIPAL
INVESTED. SOURCE IS CDA WIESENBERGER.
9
<PAGE> 10
INDUSTRY SECTORS
A YEAR-TO-YEAR COMPARISON
DATA SHOWS THE PERCENTAGE OF THE COMMON STOCKS IN THE PORTFOLIO THAT EACH SECTOR
OF KEMPER VALUE FUND REPRESENTED ON SEPTEMBER 30, 1999, AND SEPTEMBER 30, 1998.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER VALUE FUND AS OF KEMPER VALUE FUND AS OF
9/30/99 9/30/98
----------------------- -----------------------
<S> <C> <C>
Capital goods 19.40% 11.00%
Finance 19.10% 19.00%
Communication services 15.80% 14.00%
Energy 12.60% 12.00%
Technology 11.70% 11.00%
Consumer non-durables 9.00% 7.00%
Health 4.30% 7.00%
Utilities 4.10% 0.00%
Transportation 4.00% 6.00%
Basic materials 0.00% 0.00%
Other 0.00% 13.00%
</TABLE>
A COMPARISON WITH THE RUSSELL 1000 VALUE INDEX*
DATA SHOWS THE PERCENTAGE OF THE COMMON STOCKS IN THE PORTFOLIO THAT EACH SECTOR
OF KEMPER VALUE FUND REPRESENTED ON SEPTEMBER 30, 1999, COMPARED TO THE INDUSTRY
SECTORS THAT MAKE UP THE FUND'S BENCHMARK, THE RUSSELL 1000 VALUE INDEX.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER VALUE FUND AS OF RUSSELL 1000 VALUE INDEX AS OF
9/30/99 9/30/99
----------------------- ------------------------------
<S> <C> <C>
Capital goods 19.40% 6.60%
Finance 19.10% 29.60%
Communication services 15.80% 12.70%
Energy 12.60% 10.50%
Technology 11.70% 5.60%
Consumer non-durables 9.00% 16.80%
Health 4.30% 3.80%
Utilities 4.10% 7.00%
Transportation 4.00% 1.80%
Basic materials 0.00% 5.60%
</TABLE>
*The Russell 1000 Value Index measures the performance of those Russell 1000
companies with lower price-to-book ratios and lower forecasted growth values.
These stocks are selected from the 1000 largest companies in the Russell 3000
Index, which represents approximately 90% of the total market capitalization of
the Russell 3000 index. The stocks represented by this index involve investment
risks, which may include the loss of principal invested.
10
<PAGE> 11
INDIVIDUAL HOLDINGS
KEMPER VALUE FUND'S 10 LARGEST HOLDINGS*
REPRESENTING 32.0 PERCENT OF THE FUND'S PORTFOLIO ON SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
HOLDINGS PERCENT
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
1. BELL ATLANTIC International telecommunications 4.7%
company which operates in four
segments: Domestic Telecom, Global
Wireless, Directory and Other
Businesses.
- -------------------------------------------------------------------------------------
2. DOW CHEMICAL A leader in the production of 3.6%
plastics, chemicals, hydrocarbons,
and herbicides and pesticides
among other materials used to
process chemicals, treat water and
refine petroleum.
- -------------------------------------------------------------------------------------
3. CHASE MANHATTAN Bank holding company whose 3.6%
subsidiaries provide banking and
financial services worldwide.
- -------------------------------------------------------------------------------------
4. CITIGROUP Diversified holding company whose 3.5%
businesses provide a range of
financial services, including
banking, insurance and investment
services, to consumer and
corporate customers around the
world.
- -------------------------------------------------------------------------------------
5. EXXON Engaged in the exploration, 3.0%
production, manufacture,
transportation and sale of crude
oil, natural gas, and petroleum
products.
- -------------------------------------------------------------------------------------
6. AT&T Provides voice, data and video 2.9%
telecommunications services,
including cellular telephone and
Internet services, to businesses,
consumers and government agencies.
AT&T Corporation also provides
cable TV services to customers
throughout the U.S.
- -------------------------------------------------------------------------------------
7. MOTOROLA Manufactures and sells a diverse 2.8%
line of electronic equipment and
components. Products include
communications systems,
semiconductors, electronic engine
controls and computer systems.
- -------------------------------------------------------------------------------------
8. IBM Provides customer solutions 2.8%
through the use of advanced
information technology. These
solutions include technologies,
systems, products, services,
software and financing.
- -------------------------------------------------------------------------------------
9. CORNING Global, technology-based 2.6%
corporation which operates in
three broadly based business
segments: Telecommunications,
Advanced Materials and Information
Display.
- -------------------------------------------------------------------------------------
10. BOEING Develops and produces jet 2.5%
transports, military aircraft, and
space and missile systems through
two industry segments: Commercial
Aircraft and Defense and Space.
- -------------------------------------------------------------------------------------
</TABLE>
*THE FUND'S HOLDINGS ARE SUBJECT TO CHANGE.
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
KEMPER VALUE FUND
PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
REPURCHASE AGREEMENTS--2.2% AMOUNT ($) VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
--------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS--97.8% SHARES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
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
--------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------
6,704,307
FOOD & BEVERAGE--0.4%
H.J. Heinz Co. 48,100 2,068,300
--------------------------------------------------------------------------
PACKAGE GOODS/ COSMETICS--0.2%
Colgate-Palmolive Co. 27,000 1,235,250
--------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
HEALTH--4.2%
MEDICAL SUPPLY & SPECIALTY--1.3%
Bausch & Lomb, Inc. 95,900 6,323,406
--------------------------------------------------------------------------
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 Communications, Inc. 163,300 8,338,506
--------------------------------------------------------------------------
50,139,994
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
MARKET
SHARES VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
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
CONSUMER FINANCE--4.1%
American Express Credit Corp. 20,200 2,719,425
Citigroup Inc. 386,400 17,001,600
--------------------------------------------------------------------------
19,721,025
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
--------------------------------------------------------------------------
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
--------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--10.2%
COMPUTER SOFTWARE--1.8%
Oracle Corp.* 193,950 8,824,725
--------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
MARKET
SHARES VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
--------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $427,659,025) 474,064,604
--------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100.0%
(Cost $438,199,025)(a) 484,604,604
--------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
* 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.
14
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
as of September 30, 1999
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------
TOTAL ASSETS 486,886,025
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
LIABILITIES
- ----------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------
CLASS S 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
- ----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
for the year ended September 30, 1999
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
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 -- Class S 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 -- Class S 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
- ------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding (a)
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
-----------------------------------------------------
CLASS A
-----------------------------------------------------
FOR THE PERIOD
APRIL 16, 1998
YEAR ENDED (COMMENCEMENT OF
SEPTEMBER 30, SALE OF CLASS A SHARES)
1999 TO SEPTEMBER 30, 1998
<S> <C> <C>
Net asset value, beginning of period $21.19 $25.42
- -----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .15 .07
- -----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 2.62 (4.30)
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.77 (4.23)
- -----------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.17) --
- -----------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.90) --
- -----------------------------------------------------------------------------------------------------------------------
Total distributions (1.07) --
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $22.89 $21.19
- -----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (b) 13.04(c) (16.64)**
- -----------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 42 28
- -----------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses, net to average daily net
assets (%) 1.41 1.34*
- -----------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses before expense reductions, to
average daily net assets 1.57 1.34
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average daily net assets
(%) .61 .86*
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 91 47
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------
CLASS B
------------------------------------------------------
FOR THE PERIOD
APRIL 16, 1998
YEAR ENDED (COMMENCEMENT OF
SEPTEMBER 30, SALE OF CLASS B SHARES)
1999 TO SEPTEMBER 30, 1998
<S> <C> <C>
Net asset value, beginning of period $21.11 $25.42
- -----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (.07) --
- -----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 2.62 (4.31)
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.55 (4.31)
- -----------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.04) --
- -----------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.90) --
- -----------------------------------------------------------------------------------------------------------------------
Total distributions (.94) --
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $22.72 $21.11
- -----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (b) 12.02(c) (16.96)**
- -----------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 29 18
- -----------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses, net to average daily net
assets (%) 2.29 2.12*
- -----------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses before expense reductions, to
average daily net assets 2.34 2.12
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average daily net assets
(%) (.27) .03*
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 91 47
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding (a)
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
----------------------------------------------------------
CLASS C
----------------------------------------------------------
FOR THE PERIOD
APRIL 16, 1998
YEAR ENDED (COMMENCEMENT OF
SEPTEMBER 30, SALE OF CLASS C SHARES)
1999 TO SEPTEMBER 30, 1998
<S> <C> <C>
Net asset value, beginning of period $21.13 $25.42
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (.05) .01
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments 2.61 (4.30)
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.56 (4.29)
- ------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.04) --
- ------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.90) --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions (.94) --
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $22.75 $21.13
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (b) 12.06(c) (16.88)**
- ------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 5 3
- ------------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses, net to average daily net
assets (%) 2.26 2.11*
- ------------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses before expense reductions,
to average daily net assets 2.34 2.11
- ------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average daily net
assets (%) (.22) .08*
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 91 47
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of any sales charges.
(c) Total return would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 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
Class S 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.
Class S shares, generally not available to new
investors, are not subject to initial or contingent
deferred sales charges. Certain detailed financial
information for the Class S 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 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
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
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 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
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
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.
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.
- --------------------------------------------------------------------------------
2 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.
- --------------------------------------------------------------------------------
3 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.
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.
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
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:
<TABLE>
<CAPTION>
UNPAID AT
TOTAL SEPTEMBER 30,
DISTRIBUTION FEE AGGREGATED 1999
---------------- ---------- -------------
<S> <C> <C>
Class B $221,395 $--
Class C 41,426 --
-------- --
$262,821 $--
======== ==
</TABLE>
UNDERWRITING AGREEMENT AND CONTINGENT DEFERRED
SALES CHARGE. KDI is the principal underwriter for
Classes A, B and C. Underwriting commissions paid
in connection with the distribution of Class A
shares for the 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:
<TABLE>
<CAPTION>
UNPAID AT
SEPTEMBER
TOTAL FEES WAIVED 30,
ADMINISTRATIVE SERVICE FEES AGGREGATED BY KDI 1999
--------------------------- ---------- ----------- -------------
<S> <C> <C> <C>
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
======== ======= =======
</TABLE>
SHAREHOLDER SERVICES FEES. Kemper Service Company
("KSC"), an affiliate of the Adviser, is the
transfer, dividend-paying and shareholder service
agent for the Fund's Classes A, B and C Shares. For
the 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 Class S shares.
For the year ended September 30, 1999, the amount
charged to the Class S shares by SSC for
shareholder services aggregated $886,717, of which
$83,154 is unpaid at September 30, 1999.
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
Scudder Trust Company ("STC"), a subsidiary of the
Adviser, provides recordkeeping and other services
in connection with certain retirement and employee
benefit plans invested in the Class S shares of the
Fund. For the year ended September 30, 1999, the
amount charged to the Class S 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.
- --------------------------------------------------------------------------------
4 LINE OF CREDIT The Fund and several Scudder Funds (the
"Participants") share in a $850 million revolving
credit facility for temporary or emergency
purposes, including the meeting of redemption
requests that otherwise might require the untimely
disposition of securities. The Participants are
charged an annual commitment fee which is allocated
among each of the Participants. Interest is
calculated based on the market rates at the time of
the borrowing. The Fund may borrow up to a maximum
of 33 percent of its net assets under the
agreement.
24
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 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
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------
SHARES SOLD
----------------------------------------------------------------------------------
Class S 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
----------------------------------------------------------------------------------
Class S 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
----------------------------------------------------------------------------------
Class S (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)
----------------------------------------------------------------------------------
Class S (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>
TAX INFORMATION (UNAUDITED)
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.
25
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF VALUE EQUITY TRUST AND THE CLASS A,
CLASS B AND CLASS C 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 for the Class A, Class B
and Class C shares 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 financial highlights for the
Class A, Class B and Class C shares for the periods indicated therein, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights for the Class A, Class B and Class C shares
(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 express above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
November 12, 1999
26
<PAGE> 27
NOTES
27
<PAGE> 28
TRUSTEES&OFFICERS
TRUSTEES OFFICERS
SHERYLE J. BOLTON DONALD E. HALL
Trustee Vice President
WILLIAM T. BURGIN THOMAS W. JOSEPH
Trustee Vice President
THOMAS J. DEVINE ANN M. MCCREARY
Honorary Trustee Vice President
KEITH R. FOX KATHLEEN T. MILLARD
Trustee Vice President
WILLIAM H. LUERS JOHN MILLETTE
Trustee Vice President
and Secretary
WILSON NOLEN
Honorary Trustee JOHN R. HEBBLE
Treasurer
KATHRYN L. QUIRK
Trustee, Vice President CAROLINE PEARSON
and Secretary Assistant Secretary
JOAN E. SPERO ROBERT TYMOCZKO
Trustee Vice President
ROBERT G. STONE JR.
Honorary Trustee
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LEGAL COUNSEL DECHERT PRICE & RHOADS
Ten Post Office Square South
Boston, MA 02109
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SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 219557
Kansas City, MO 64121
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CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02109
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TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
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INDEPENDENT ACCOUNTANTS PRICEWATERHOUSECOOPERS LLP
160 Federal Street
Boston, MA 02110
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PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza
Chicago, IL 60606-5808
www.kemper.com
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed unless preceded or accompanied by a Kemper
Value Fund prospectus.
KVF-2 (11/25/99) 1094230
