SCUDDER
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EQUITY/GROWTH
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Scudder Classic
Growth Fund
Fund #058
Annual Report
August 31, 1999
A fund seeking long-term growth of capital with reduced share price volatility
compared to other growth mutual funds.
Scudder Classic Growth Fund is a class of shares of Classic Growth 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
17 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 Classic Growth Fund
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ticker symbol SCCGX fund number 058
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Date of Inception: o Large-cap growth stocks posted strong performance over
9/9/96 the last twelve months, providing a positive investment
backdrop for the fund.
Total Net Assets of
Scudder Shares as of o Management continued to focus on companies at the
8/31/99: forefront of the convergence of communications and
$133.3 million technology, which allowed the fund to participate in
the explosive growth of the internet.
o The Scudder shares of the fund returned 41.06% for the
period, which beat the 39.81% return of its unmanaged
benchmark, the S&P 500, and the 40.37% return for the
growth fund category, as calculated by Lipper
Analytical Services for the period ended August 31,
1999.
3
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Letter from the Fund's President
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Dear Shareholders,
Large-cap growth stocks have consistently outperformed the broader market over
the past year, with the exception of a brief period during the spring when value
stocks rallied sharply. In general, such a narrowly focused market is a sign of
concern on the part of investors. Seeking shelter from a perceived threat in the
external environment, market participants will often sell, or avoid, stocks
whose outlook is less certain. Instead, they will focus on the higher-quality,
well-known names that have delivered consistent earnings growth year in and year
out. This proved to be the case over the last twelve months, during which time
fears of recession, and later inflation, gripped the market at different points.
Classic Growth Fund, which seeks to invest in rapidly growing companies trading
at reasonable prices, was ideally positioned to prosper in such an environment.
While it is unlikely that growth stocks will continue to outperform by such a
wide margin in the coming years, we believe that management's consistent
approach is well-suited for any investment climate.
Over the period, the Scudder shares of the fund outperformed both its benchmark,
the S&P 500 Index, and the Lipper growth fund average. For more information on
management's approach to stockpicking, please turn to the Portfolio Management
Discussion that begins on page 10.
4
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Finally, it should be noted that Daniel Pierce retired in June of this year as
President of Classic Growth 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 Classic Growth Fund's team in this capacity, and
look forward to serving your interests.
Thank you for your continued investment in the Scudder shares of Classic Growth
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,
Classic Growth Fund
5
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Performance Update
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August 31, 1999
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Growth of a $10,000 Investment
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THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
CHART DATA:
Classic Growth Fund S&P 500 Index*
-- Scudder Shares
9/96** 10000 10000
2/97 11361 11601
8/97 13818 13317
2/98 15660 15664
8/98 13450 14398
2/99 17635 18755
8/99 18973 20129
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Fund Index Comparison
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Total Return
Growth of Average
Period ended 8/31/1999 $10,000 Cumulative Annual
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Classic Growth Fund -- Scudder Shares
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1 year $ 14,106 41.06% 41.06%
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Life of Class $ 19,937 99.37% 26.10%
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S&P 500 Index*
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1 year $ 13,981 39.81% 39.81%
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Life of Class $ 20,129 101.29% 27.10%
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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 industies. Index returns assume reinvestment of
dividends and, unlike Fund returns, do not reflect any fees or expenses.
** The Fund commenced operations on September 9, 1996. Index comparisons begin
September 30, 1996.
6
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Returns and Per Share Information
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THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
ILLUSTRATING THE FUND TOTAL RETURN (%) AND S&P 500
INDEX TOTAL RETURN (%)
CHART DATA:
Classic Growth Fund
-- Scudder Shares S&P 500 Index*
1997** 45.20 38.08
1998 -2.72 8.13
1999 41.06 39.81
Yearly periods ended August 31
1997** 1998 1999
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Class Total
Return (%) 45.20 -2.72 41.06
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Index Total
Return (%) 38.08 8.13 39.81
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Net Asset
Value ($) 17.38 16.61 22.55
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Income
Dividends ($) .04 .04 --
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Capital Gains
Distributions ($) -- .29 .81
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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 industies. Index returns assume reinvestment of
dividends and, unlike Fund returns, do not reflect any fees or expenses.
** The Fund commenced operations on September 9, 1996. Index comparisons begin
September 30, 1996.
Effective April 16, 1998, the Fund changed its name from Scudder Classic
Growth Fund to Classic Growth Fund and an additional three classes of shares
were offered. Existing shares of Classic Growth 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 return for
the one year and life of Class periods would have been lower.
7
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Portfolio Summary
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August 31, 1999
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Asset Allocation
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Fund management seeks to
remain fully invested in
reasonably valued growth
stocks at all times.
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
Equity Holdings 98%
Cash Equivalents 2%
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100%
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Sector Diversification
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(Excludes 2% Cash Equivalents) The fund's holdings in
the technology and media
sectors provided strong
returns over the period,
but its position in
health care stocks has
lagged in recent months.
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
Technology 19%
Health 16%
Consumer Discretionary 11%
Financial 10%
Consumer Staples 9%
Manufacturing 9%
Media 7%
Service Industries 6%
Energy 5%
Other 8%
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100%
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8
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Ten Largest Equity Holdings
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(27% of Portfolio) The top ten holdings
reflect a focus on
companies that
management believes are
positioned to
consistently deliver
upside earnings
surprises.
1. Intel Corp.
Producer of semiconductor memory circuits
2. Microsoft Corp.
Developer of computer software
3. AT&T Corp.-Liberty Media Group
Holding company of entertainment networks
4. General Electric Co.
Producer of electrical equipment
5. MCI WorldCom, Inc.
Provider of local, long distance, international, and Internet
services
6. Tyco International Ltd.
Manufacturer of medical products, packaging, electrical and
electronic components
7. Home Depot, Inc.
Building materials and home improvement stores
8. Proctor & Gamble Co.
Diversified manufacturer of consumer products
9. International Business Machines Corp.
Manufacturer of computers and servicer of information
processing units
10. Bristol-Meyers Squibb Co.
Diversified pharmaceutical and consumer products
company
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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August 31, 1999
In the following interview, William F. Gadsden and Bruce F. Beaty, portfolio
managers of Classic Growth Fund, discuss the fund's strategy and the market
environment during the twelve-month period ended August 31, 1999.
Q: In the past year, the market environment has changed quite a bit. Please
describe what has taken place, and how growth stocks have been affected.
A: The stock market has come full circle in the past year, as a worldwide
financial crisis has gradually given way to stronger growth and fears of higher
interest rates. During this time, a high level of uncertainty with respect to
the direction of the economy has allowed growth stocks to outperform virtually
all other sectors of the market. Fearing that the global economy was going to
tip into a recession earlier in the year, investors sought shelter in companies
whose growth rates were thought to be strong enough to withstand a slowdown. By
the spring, however, evidence had begun to build that the economy was not
contracting as most analysts had expected, but instead growing at a rapid pace.
As the market factored this surprising development into equity prices during
April and May, growth stocks stumbled as money flowed out to previously
depressed sectors such as small companies and value stocks once the need for a
safe haven dissipated. Soon, however, concerns over higher interest rates
spooked market participants, and large-cap growth stocks once again assumed the
mantle of market leadership on the strength of large gains in the technology
sector. Despite the high levels of volatility growth stocks experienced during
the summer, they finished the full twelve-month period with outstanding returns.
We believe that the fund, which emphasizes large-cap growth companies, was
ideally positioned to take advantage of this environment.
Q: How did the Scudder shares of the fund perform over the period?
A: The Scudder shares of the fund returned 41.06% for the period, beating the
39.81% return of its unmanaged
10
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benchmark, the S&P 500. In addition, the Scudder shares of the fund's return
placed it ahead of the 40.37% average of the Lipper growth fund category. We
believe that the fund's strong performance is a result of our disciplined stock
selection methodology, as well as the fact that the market climate was so
favorable for our investment universe. However, we feel that our use of a GARP
approach -- which stands for Growth at a Reasonable Price -- will allow us to
outperform even when the environment is less favorable for growth stocks.
Q: Please tell us about the concept behind GARP.
A: GARP is a method we use to assess the value in sectors that often defy
valuation by traditional methods. We believe that good companies that offer
superior long-term growth characteristics are worth more than less reliable
companies that are often "cheap" for a reason. Look at a company like Cisco --
for years it has been selling at a multiple well above the market's, but its
growth rate and business model have been phenomenal. Investors who were willing
to pay up to gain a piece of this company have been handsomely rewarded. On the
other hand, when a stock reaches a price that we believe to be excessive in
light of its long-term growth prospects, we will generally trim the position to
avoid what may be substantial downside risk in the event of a disappointment. In
short, GARP is a disciplined methodology that has allowed us to participate in
some of the market's biggest winners and avoid an inordinate amount of negative
surprises.
Q: In what sectors have you found opportunities in recent months?
A: Using a bottom-up approach, we have uncovered a number of quality stocks in
the technology and telecommunications sectors. In our view, one of the most
important developments of recent years has been the convergence of these two
industries. The need for communications infrastructure is increasing
exponentially as the Internet grows, and the worlds of tech and telecom
11
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are crashing together as a result. The companies at the forefront of this
convergence will experience the fastest growth, which will in turn justify their
higher multiples. Examples of stocks in these categories that have performed
well for us are Sun Microsystems (up 301% over the twelve months), EMC (169%),
Cisco Systems (148%), and MCI WorldCom (85%). We feel that a continued focus on
companies that build the infrastructure for the Internet has been, and should
continue to be, a more effective way to play the sector than to invest in the
pure Internet companies themselves. It is impossible, at this juncture, to say
which of the dozens of public companies hawking their wares online will
ultimately emerge as the leaders in their industries. On the other hand, the
companies we hold in the portfolio have already staked out their territory as
the leaders of their respective businesses, and therefore offer a better way to
capitalize on the growth of the Internet.
Outside of technology, we continue to favor the media and healthcare sectors.
While both have endured choppy performance in recent months, we felt that our
holdings in these industries are on track for continued strong earnings growth
over time, and we are taking advantage of market dips to add to our positions.
Q: What stocks, and sectors, have you been avoiding?
A: We are currently underweighted in the retail and financial sectors based on
our concern that the long-term growth potential of both industries has
deteriorated. In the retail sector, for example, the backdrop has been ideal in
recent years, with a strong economy, low interest rates (until recently), and
high levels of consumer spending all contributing to stronger earnings. The
stocks performed well as a result, giving the fund a lift in the first half of
the year. However, the rosy picture prompted us to ask: How much better can
things get? Seeing a more subdued upside ahead, we trimmed our weightings in
Home Depot and eliminated our holdings of Costco, among others, and put the cash
to work elsewhere. We also added to a handful of
12
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holdings that we feel will continue to deliver superior earnings growth, among
them Wal-Mart and Gap stores.
Similarly, we trimmed our holdings in financials on the belief that their
current growth rate will not be sustainable going forward. Rates are rising,
revenue growth appears to be slowing, and lending spreads are widening.
Consequently, we have eliminated our holdings in Allstate, Conseco, and MBIA,
while holding on to the stocks in which we have a higher level of conviction,
such as American Express, AIG, and Fannie Mae. Our view on financials -- in
comparison to our view on technology -- provides an excellent illustration of
our investment strategy: even though earnings multiples in the tech sector are
much higher on an absolute basis, we find tech stocks more attractive compared
to financials because their earnings momentum seems to be so much stronger.
Q: Please tell us about some other stocks that you find particularly attractive.
A: Two stocks that we think are interesting right now are Pepsi and McDonald's.
Like the other companies we've mentioned, Pepsi offers growth at an attractive
price. The company has been an underperformer for years, due in part to erratic
earnings and a complicated business mix. However, it has recently divested its
restaurant and bottling businesses, creating a slimmer and more focused
operation. Although in our view Pepsi has emerged as a dependable earnings
story, the market has not yet recognized its turnaround potential. Expecting
consistent growth of 12-15% over the next several years, we have taken the
opportunity to accumulate shares at a below-market multiple.
We believe McDonald's is well-positioned as the dominant quick-service
restaurant brand in the world, with a leading market share and store count. We
expect that the company should continue to outperform within its sector due to
favorable same-store volume growth, an ongoing share repurchase program, and an
improving environment in the
13
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emerging markets. Although the company's growth
rate is above that of the overall market, it is trading at a lower p/e ratio.
Believing that McDonald's is a classic example of growth at the right price, we
have been buyers.
Q: What is your outlook from here?
A: We feel that two important lessons can be drawn from the market's performance
over the past few years. The first is that it has not paid to underestimate the
resilience of the U.S. economy or the ability of the monetary authorities to
keep things on an even keel. Second, it has proven worthwhile to keep a
long-term view and to avoid the temptation to sell when market conditions
deteriorate. While we remain cautious on the outlook for the months ahead,
especially with the Federal Reserve in a tightening mode, we believe that our
disciplined investment style will continue to position the fund for
outperformance.
14
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Classic Growth Fund:
A Team Approach to Investing
Classic Growth 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.
Co-lead portfolio manager William F. Gadsden, who joined the Adviser in 1983,
focuses on overall investment strategy and has 15 years of investment industry
experience.
Co-lead portfolio manager Bruce F. Beaty focuses on securities selection and
assists with the creation and implementation of investment strategy for the
fund. Mr. Beaty joined the Adviser in 1991 and has 16 years of investment
industry experience.
15
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Glossary of Investment Terms
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Bottom-up An investment style that focuses on the use of research to
Investing assess the performance of individual companies before
Style considering the impact of economic trends. This approach,
which is the opposite of "top-down" investing, assumes that
most significant determinant of performance is individual
stock selection, rather than industry or country allocation.
Cyclical Stocks Companies whose earnings are closely tied to the business
cycle. Cyclical industries include steel, cement, paper,
machinery, and autos.
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 what
Ratio (P/E) investors are paying for a company's earning power at the
(also "earnings current stock price. A P/E ratio may be based on a company's
multiple") projected earnings for the coming 12 months. A higher
"earnings multiple" indicates higher expected earnings growth,
along with greater risk of earnings disappointment.
Weighting Refers to the allocation of assets -- usually in terms of
(over/under) sectors, industries, or countries -- within a portfolio
relative to the portfolio's benchmark index or investment
universe.
(Source: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
16
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Investment Portfolio as of August 31, 1999
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<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
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Repurchase Agreements 2.5%
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<S> <C> <C>
Repurchase Agreement with State Street Bank and Trust
Company dated 8/31/1999 at 5.41%, to be repurchased
at $5,554,835 on 9/1/1999, collateralized by a
$5,625,000 U.S. Treasury Note, 3.375%, 1/15/2007
(Cost $5,554,000) .................................... 5,554,000 5,554,000
Shares
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Common Stocks 97.5%
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Consumer Discretionary 10.4%
Department & Chain Stores 7.8%
Dayton Hudson Corp. .................................... 67,600 3,920,800
Gap Inc. ............................................... 68,000 2,660,500
Home Depot, Inc. ....................................... 85,700 5,238,413
Wal-Mart Stores Inc. ................................... 96,900 4,293,881
Walgreen Co. ........................................... 72,100 1,671,819
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17,785,413
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Recreational Products 1.3%
Electronic Arts Inc.* .................................. 25,700 1,763,663
Premier Parks, Inc.* ................................... 37,400 1,224,850
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2,988,513
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Restaurants 1.3%
McDonald's Corp. ....................................... 68,200 2,821,775
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Consumer Staples 8.7%
Alcohol & Tobacco 2.8%
Anheuser-Busch Companies, Inc. ......................... 51,200 3,942,400
Philip Morris Companies, Inc. .......................... 62,700 2,347,331
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6,289,731
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Food & Beverage 2.6%
Albertson's Inc. ....................................... 59,400 2,847,487
PepsiCo Inc. ........................................... 92,000 3,139,500
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5,986,987
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Package Goods/Cosmetics 3.3%
Gillette Co. ........................................... 51,000 2,377,875
Procter & Gamble Co. ................................... 50,100 4,972,425
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7,350,300
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</TABLE>
The accompanying notes are an integral part of the financial statements.
17
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<TABLE>
<CAPTION>
Market
Shares Value ($)
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<S> <C> <C>
Health 15.7%
Biotechnology 2.0%
Amgen Inc.* ............................................ 16,400 1,364,275
Immunex Corp.* ......................................... 29,000 1,952,063
MedImmune, Inc.* ....................................... 12,700 1,310,481
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4,626,819
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Health Industry Services 1.0%
IMS Health Inc. ........................................ 79,000 2,182,375
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Medical Supply & Specialty 2.6%
Baxter International Inc. .............................. 60,850 4,080,753
VISX Inc.* ............................................. 19,600 1,773,800
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5,854,553
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Pharmaceuticals 10.1%
Allergan, Inc. ......................................... 26,000 2,596,750
American Home Products Corp. ........................... 59,600 2,473,400
Bristol-Myers Squibb Co. ............................... 68,600 4,827,725
Johnson & Johnson ...................................... 21,600 2,208,600
Pfizer, Inc. ........................................... 75,000 2,831,250
Schering-Plough Corp. .................................. 72,000 3,784,500
Warner-Lambert Co. ..................................... 59,700 3,955,125
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22,677,350
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Communications 3.9%
Telephone/Communications
Bell Atlantic Corp. .................................... 52,150 3,194,188
MCI WorldCom, Inc.* .................................... 73,450 5,563,838
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8,758,026
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Financial 9.7%
Insurance 2.9%
AFLAC, Inc. ............................................ 48,700 2,188,456
American International Group, Inc. ..................... 46,150 4,277,528
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6,465,984
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Consumer Finance 4.7%
American Express Credit Corp. .......................... 34,400 4,730,000
Associates First Capital Corp. ......................... 57,800 1,983,263
Citigroup Inc. ......................................... 85,350 3,792,741
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10,506,004
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Other Financial Companies 2.1%
Federal National Mortgage Association .................. 76,200 4,733,925
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</TABLE>
The accompanying notes are an integral part of the financial statements.
18
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<TABLE>
<CAPTION>
Market
Shares Value ($)
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<S> <C> <C>
Media 8.2%
Advertising 1.5%
Omnicom Group, Inc. .................................. 45,000 3,391,875
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Broadcasting & Entertainment 1.7%
Infinity Broadcasting Corp.* ......................... 60,800 1,645,400
Viacom Inc. "B"* ..................................... 50,800 2,136,775
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3,782,175
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Cable Television 3.4%
AT&T Corp -- Liberty Media Group* .................... 191,000 6,112,000
Comcast Corp. "A" .................................... 42,600 1,389,825
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7,501,825
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Print Media 1.6%
Tribune Co. .......................................... 39,300 3,667,181
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Service Industries 3.9%
EDP Services 3.0%
America Online Inc.* ................................. 21,800 1,990,613
Automatic Data Processing, Inc. ...................... 65,800 2,586,763
Electronic Data Systems Corp. ........................ 37,100 2,082,238
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6,659,614
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Miscellaneous Commercial Services 0.9%
CMG Information Services, Inc.* ...................... 12,800 1,074,400
Galileo International, Inc. .......................... 19,700 955,450
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2,029,850
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Durables 4.4%
Aerospace 1.7%
United Technologies Corp. ............................ 57,000 3,769,125
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Telecommunications Equipment 2.7%
Lucent Technologies Inc. ............................. 43,000 2,754,688
Nokia AB Oy "A" (ADR) ................................ 40,600 3,385,025
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6,139,713
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Manufacturing 9.2%
Diversified Manufacturing 6.0%
General Electric Co. ................................. 52,400 5,885,175
Textron, Inc. ........................................ 26,000 2,099,500
Tyco International Ltd. (New) ........................ 53,600 5,430,350
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13,415,025
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</TABLE>
The accompanying notes are an integral part of the financial statements.
19
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<TABLE>
<CAPTION>
Market
Shares Value ($)
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<S> <C> <C>
Electrical Products 1.0%
Emerson Electric Co. ................................. 36,100 2,260,763
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Industrial Specialty 1.9%
Corning Inc. ......................................... 64,700 4,302,550
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Machinery/Components/Controls 0.3%
Parker-Hannifin Corp. ................................ 15,450 675,938
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Technology 18.6%
Computer Software 4.9%
Microsoft Corp.* ..................................... 89,200 8,256,574
Oracle Systems Corp.* ................................ 74,200 2,708,300
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10,964,874
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Diverse Electronic Products 1.5%
Applied Materials, Inc.* ............................. 47,000 3,339,938
---------------
EDP Peripherals 1.4%
EMC Corp.* ........................................... 53,700 3,222,000
---------------
Electronic Components/Distributors 2.1%
Broadcom Corp.* ...................................... 8,500 1,094,375
Cisco Systems, Inc.* ................................. 53,500 3,627,969
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4,722,344
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Electronic Data Processing 5.0%
Hewlett-Packard Co. .................................. 21,700 2,286,638
International Business Machines Corp. ................ 39,400 4,907,763
Sun Microsystems, Inc.* .............................. 50,900 4,046,550
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11,240,951
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Semiconductors 3.7%
Intel Corp. .......................................... 102,540 8,427,500
---------------
Energy 4.8%
Oil & Gas Production 1.9%
Royal Dutch Petroleum Co. (New York shares) .......... 69,700 4,312,688
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Oil Companies 1.3%
Mobil Corp. .......................................... 29,000 2,968,875
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</TABLE>
The accompanying notes are an integral part of the financial statements.
20
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<TABLE>
<CAPTION>
Market
Shares Value ($)
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<S> <C> <C>
Oilfield Services/Equipment 1.6%
Schlumberger Ltd. .................................... 53,100 3,544,425
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Total Common Stocks (Cost $186,308,546) 219,366,984
Total Investment Portfolio -- 100.0% (Cost $191,862,546) 224,920,984
</TABLE>
* Non-income producing security.
(a) The cost for federal income tax purposes was $192,278,933. At August 31,
1999, net unrealized appreciation for all securities based on tax cost was
$32,642,051. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost of
$36,933,383 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over market value of $4,291,332.
The accompanying notes are an integral part of the financial statements.
21
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Financial Statements
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Statement of Assets and Liabilities as of August 31, 1999
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<TABLE>
<CAPTION>
<S> <C>
Assets
- ------------------------------------------------------------------------------------
Investments, at market (identified cost $191,862,546) ..... $ 224,920,984
Cash ...................................................... 994
Receivable for investments sold ........................... 2,160,214
Receivable for Fund shares sold ........................... 325,925
Dividends and interest receivable ......................... 189,549
Deferred organization expenses ............................ 13,781
Other assets .............................................. 4,400
---------------
Total assets .............................................. 227,615,847
Liabilities
- ------------------------------------------------------------------------------------
Payable for investments purchased ......................... 2,852,539
Payable for Fund shares redeemed .......................... 382,130
Accrued management fee .................................... 97,311
Other payables and accrued expenses ....................... 240,428
---------------
Total liabilities ......................................... 3,572,408
Net assets, at market value $ 224,043,439
Net Assets
- ------------------------------------------------------------------------------------
Net assets consist of:
Unrealized appreciation (depreciation) on investments ..... 33,058,438
Accumulated net realized gain (loss) ...................... 9,303,306
Paid-in capital ........................................... 181,681,695
Net assets, at market value $ 224,043,439
Net Asset Value
- ------------------------------------------------------------------------------------
Scudder Shares
Net asset value, offering and redemption price per share ($133,272,949 /
5,911,188 outstanding shares of beneficial interest, $.01 par value,
unlimited number of shares authorized) ............................ $22.55
Class A Shares
Net asset value and redemption price per share ($54,691,364 / 2,416,648
outstanding shares of beneficial interest, $.01 par value,
unlimited number of shares authorized) ............................ $22.63
Maximum offering price per share (100 / 94.25 of $22.63) ............ $24.01
Class B Shares
Net asset value offering and redemption price (subject to contingent deferred
sales change) per share ($30,468,941 / 1,362,317 outstanding shares of
beneficial interest, $.01 par value, unlimited number of shares
authorized) ....................................................... $22.37
Class C Shares
Net asset value offering and redemption price (subject to contingent deferred
sales change) per share ($5,610,185 / 250,687 outstanding shares of
beneficial interest, $.01 par value, unlimited number of
shares authorized) ................................................ $22.38
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Statement of Operations for the year ended August 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Income
- ------------------------------------------------------------------------------------
<S> <C>
Income:
Dividends (net of foreign taxes withheld of $26,929) ........... $ 1,623,231
Interest ....................................................... 431,526
---------------
2,054,757
Expenses:
Management fee ................................................. 1,307,022
Services to shareholders ....................................... 1,454,320
Custodian and accounting fees .................................. 109,414
Distribution service fees ...................................... 184,290
Administrative services fees ................................... 137,913
Trustees' fees and expenses .................................... 35,708
Auditing ....................................................... 21,670
Registration fees .............................................. 128,855
Reports to shareholders ........................................ 114,028
Legal .......................................................... 13,482
Amortization of organization expense ........................... 4,073
Other .......................................................... 42,873
---------------
Total expenses before reductions ............................... 3,553,648
Expense reductions ............................................. (566,549)
---------------
Expenses, net .................................................. 2,987,099
Net investment income (loss) (932,342)
Realized and unrealized gain (loss) on investment transactions
- ------------------------------------------------------------------------------------
Net realized gain (loss) from investments ...................... 9,396,870
Net unrealized appreciation (depreciation) during the period on
investments .................................................. 44,795,107
Net gain (loss) on investment transactions 54,191,977
Net increase (decrease) in net assets resulting from operations $ 53,259,635
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended August 31,
Increase (Decrease) in Net Assets 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income (loss) .................... $ (932,342) $ 16,867
Net realized gain (loss) on investment
transactions .................................. 9,396,870 6,411,034
Net unrealized appreciation (depreciation) on
investment transactions during the period ..... 44,795,107 (18,592,485)
--------------- ---------------
Net increase (decrease) in net assets resulting
from operations ............................... 53,259,635 (12,164,584)
--------------- ---------------
Distributions to shareholders from:
Net investment income -- Scudder Shares ......... -- (134,261)
--------------- ---------------
Net realized gains -- Scudder Shares ............ (4,994,696) (1,093,271)
Net realized gains -- Class A ................... (734,391) --
Net realized gains -- Class B ................... (597,986) --
Net realized gains -- Class C ................... (91,871) --
--------------- ---------------
Fund share transactions:
Proceeds from shares sold ....................... 167,868,674 123,389,959
Net asset value of shares issued to shareholders
in reinvestment of distributions .............. 6,289,899 1,215,373
Cost of shares redeemed ......................... (114,518,626) (46,876,198)
--------------- ---------------
Net increase (decrease) in net assets from Fund
share transactions ............................ 59,639,947 77,729,134
--------------- ---------------
Increase (decrease) in net assets ............... 106,480,638 64,337,018
Net assets at beginning of period ............... 117,562,801 53,225,783
Net assets at end of period ..................... $ 224,043,439 $ 117,562,801
</TABLE>
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 (a) and other performance information derived from the financial
statements.
Scudder Shares (b)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years Ended August 31, 1999 1998 1997(c)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $16.61 $17.38 $12.00
-------------------------------
Income from investment operations:
Net investment income (loss) (.10) .01 .06
Net realized and unrealized gain (loss) on investment
transactions 6.85 (.45) 5.36
-------------------------------
Total from investment operations 6.75 (.44) 5.42
Less distributions from:
Net investment income -- (.04) (.04)
Net realized gains on investment transactions (.81) (.29) --
--------------------------
Total distributions (.81) (.33) (.04)
Net asset value, end of period $22.55 $16.61 $17.38
--------------------------
Total Return (%) (d) 41.06 (2.72) 45.20**
Ratios and Supplemental Data
- -----------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 133.3 103.5 53.2
- -----------------------------------------------------------------------------------------
Ratio of operating expenses, net, to average daily net
assets (%) 1.59 1.30 1.25*
- -----------------------------------------------------------------------------------------
Ratio of operating expenses before expense reductions,
to average daily net assets (%) 1.84 1.61 2.25*
- -----------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily
net assets (%) (.48) .03 .43*
- -----------------------------------------------------------------------------------------
Portfolio turnover rate (%) 68 49 27*
- -----------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) On April 16, 1998, existing shares of the Fund were designated as Scudder
Shares and are generally not available to new investors.
(c) For the period September 9, 1996 (commencement of operations) to August 31,
1997.
(d) Total return would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
25
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
August 31, 1999
A. Significant Accounting Policies
Classic Growth Fund (the "Fund") is a diversified series of Investment Trust
(the "Trust") which is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end management investment company organized
as a Massachusetts business trust.
Effective April 16, 1998, the Fund changed its name from Scudder Classic Growth
Fund to Classic Growth Fund and an additional three classes of shares were
offered, namely Classes A, B and C. Existing shares of Classic Growth 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
26
<PAGE>
- --------------------------------------------------------------------------------
extensively. If no sale occurred, the security is then valued at the calculated
mean between the most recent bid and asked quotations. If there are no such bid
and asked quotations, the most recent bid quotation is used. Securities quoted
on the Nasdaq Stock Market ("Nasdaq"), for which there have been sales, are
valued at the most recent sale price reported. If there are no such sales, the
value is the most recent bid quotation. Securities which are not quoted on
Nasdaq but are traded in another over-the-counter market are valued at the most
recent sale price, or if no sale occurred, at the calculated mean between the
most recent bid and asked quotations on such market. If there are no such bid
and asked quotations, the most recent bid quotation shall be used.
Portfolio debt securities purchased with an original maturity greater than sixty
days are valued by pricing agents approved by the officers of the Trust, whose
quotations reflect broker/dealer-supplied valuations and electronic data
processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. Money market instruments purchased with an original maturity of
sixty days or less are valued at amortized cost.
All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Board of Trustees.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian or
sub-custodian bank, receives delivery of the underlying securities, the amount
of which at the time of purchase and each subsequent business day is required to
be maintained at such a level that the market value is equal to at least the
principal amount of the repurchase price plus accrued interest.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. Accordingly, the Fund paid no federal income taxes and no federal
income tax provision was required.
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.
27
<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.
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 August 31, 1999, purchases and sales of investment
securities (excluding short-term investments) aggregated $178,602,008 and
$121,482,661, respectively.
C. Related Parties
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.
Effective April 16, 1998, the Adviser has agreed to waive .25% of its management
fee until December 31, 2000. Certain subsidiaries of the Adviser have also
agreed to waive a portion of their fees. For the year ended August 31, 1999, the
Adviser did not impose a portion of its management fee amounting to $466,794,
and the fee imposed amounted to $840,228, of which $97,311 is unpaid at August
31, 1999.
Distribution Service Agreement. In accordance with Rule 12b-1 under the
Investment Company Act of 1940, Kemper Distributors, Inc. ("KDI"), a
28
<PAGE>
- --------------------------------------------------------------------------------
subsidiary of the Adviser, receives a fee of .75% of average daily net assets of
Classes B and C. Pursuant to the agreement, KDI enters into related selling
group agreements with various firms at various rates for sales of Class B and C
shares. For the year ended August 31, 1999, the Distribution Fee was as follows:
Total Fees Waived Unpaid at
Distribution Fee Aggregated by KDI August 31, 1999
- --------------------------------------------------------------------------------
Class B .................. $ 158,298 $ -- $ 15,903
Class C .................. 25,992 10,314 --
$ 184,290 $ 10,314 $ 15,903
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 August 31,
1999 aggregated $514,882, of which $475,896 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 August 31, 1999, the CDSC for Classes B and C aggregated $72,290 and
$2,116, 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 on assets of shareholder accounts the firms service. For the year ended
August 31, 1999, the Administrative Services Fee was as follows:
Total Fees Waived Unpaid at
Administrative Service Fee Aggregated by KDI August 31, 1999
- --------------------------------------------------------------------------------
Class A .................. $ 76,483 $ 49,784 $ 17,064
Class B .................. 52,766 30,993 --
Class C .................. 8,664 8,664 --
$ 137,913 $ 89,441 $ 17,064
29
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Services Fees. Kemper Service Company ("KSC"), an affiliate of the
Adviser, is the transfer, dividend-paying and shareholder service agent for the
Fund's Classes A, B and C Shares. For the year ended August 31, 1999, the amount
charged to Classes A, B and C by KSC aggregated $109,888, $84,916, and $30,807,
respectively, of which $9,172 is unpaid at August 31, 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 August 31, 1999 the amount charged to the Scudder Shares by SSC for
shareholder services aggregated $285,028, of which $25,878 is unpaid at August
31, 1999.
The Scudder Shares of the Fund are one of several Scudder Funds (the "Underlying
Funds") in which the Scudder Pathway Series Portfolios (the "Portfolios")
invest. In accordance with the Special Servicing Agreement entered into by the
Adviser, the Portfolios, the Underlying Funds, SSC, SFAC, STC, and Scudder
Investor Services, Inc., expenses from the operation of the Portfolios are borne
by the Underlying Funds based on each Underlying Fund's proportionate share of
assets owned by the Portfolios. No Underlying Funds will be charged expenses
that exceed the estimated savings to such Underlying Fund. These estimated
savings result from the elimination of separate shareholder accounts which
either currently are or have potential to be invested in the Underlying Funds.
For the year ended August 31, 1999, the Special Servicing Agreement expense
charged to the Scudder Shares amounted to $742,760, of which $52,612 is unpaid
at August 31, 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 February 28, 1999, the amount charged to the Scudder Shares by STC
aggregated $58,712, of which $6,244 is unpaid at August 31, 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 August 31, 1999, the amount charged to the Fund by SFAC
aggregated $99,733, of which $26,896 is unpaid at August 31, 1999.
Trustees Fees. The Trust pays each of its Trustees not affiliated with the
Adviser an annual retainer plus specified amounts for attended board and
committee meetings. For the year ended August 31, 1999, the Trustees fees and
expenses aggregated $35,708.
30
<PAGE>
- --------------------------------------------------------------------------------
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, 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.
31
<PAGE>
E. Share Transactions
The following table summarizes shares of beneficial interest and dollar activity
in the Fund:
<TABLE>
<CAPTION>
Year ended Period Ended
August 31, 1999 August 31, 1998
----------------------------------- -----------------------------------------
<S> <C> <C> <C> <C>
Shares Dollars Shares Dollars
Shares sold
- ------------------------------------------------------------------------------------------------
Scudder Shares 1,767,053 $ 36,814,454 5,261,810 $ 100,865,048
Class A ...... 4,181,810 89,719,684 686,665 13,861,440
Class B ...... 1,703,242 35,213,582 388,134 7,520,415
Class C ...... 290,638 6,120,954 59,192 1,143,056
7,942,743 167,868,674 6,395,801 123,389,959
Shares issued to shareholders in reinvestment of distributions
- ------------------------------------------------------------------------------------------------
Scudder Shares 241,446 $ 4,918,255 70,172 $ 1,215,373
Class A ...... 34,363 700,664 -- --
Class B ...... 28,770 583,153 -- --
Class C ...... 4,331 87,827 -- --
308,910 6,289,899 70,172 1,215,373
Shares redeemed
- ------------------------------------------------------------------------------------------------
Scudder Shares (2,330,780) $ (48,909,586) (2,160,627) $ (40,949,391)
Class A ...... (2,232,659) (48,175,880) (253,531) (5,236,843)
Class B ...... (727,039) (15,294,433) (30,790) (608,304)
Class C ...... (99,616) (2,138,727) (3,858) (81,660)
(5,390,094) (114,518,626) (2,448,806) (46,876,198)
Net increase (decrease)
- ------------------------------------------------------------------------------------------------
Scudder Shares (322,281) $ (7,176,877) 3,171,355 $ 61,131,030
Class A ...... 1,983,514 42,244,468 433,134 8,624,597
Class B ...... 1,004,973 20,502,302 357,344 6,912,111
Class C ...... 195,353 4,070,054 55,334 1,061,396
2,861,559 $ 59,639,947 4,017,167 $ 77,729,134
</TABLE>
32
<PAGE>
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Trustees of Investment Trust and to the Scudder Shares Shareholders of
Classic Growth 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 Classic Growth Fund
(formerly Scudder Classic Growth Fund) (the "Fund") at August 31, 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
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 August 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
October 20, 1999
33
<PAGE>
Tax Information
- --------------------------------------------------------------------------------
August 31, 1999
The Fund paid distributions of $0.68 per share from net long-term capital gains
during its year ended August 31, 1999, of which 100% represents 20% rate gains.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$10,432,000 as capital gain dividends for its year ended August 31, 1999, of
which 100% represents 20% rate gains.
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*
o President and Trustee
Henry P. Becton, Jr.
o Trustee; President and General
Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
o Trustee; President, Driscoll
Associates; Executive Fellow,
Center for Business Ethics,
Bentley College
Peter B. Freeman
o Trustee; Corporate Director and
Trustee
George M. Lovejoy, Jr.
o Trustee; President and Director,
Fifty Associates
Wesley W. Marple, Jr.
o Trustee; Professor of Business
Administration, Northeastern
University, College of Business
Administration
Kathryn L. Quirk*
o Trustee, Vice President and
Assistant Secretary
Jean C. Tempel
o Trustee; Venture Partner,
Internet Capital Group
Bruce F. Beaty*
o Vice President
Jennifer P. Carter*
o Vice President
Philip S. Fortuna*
o Vice President
William F. Gadsden*
o Vice President
Robert T. Hoffman*
o Vice President
Valerie F. Malter*
o Vice President
Ann M. McCreary*
o Vice President
John Millette*
o Vice President and Secretary
John R. Hebble*
o Treasurer
Caroline Pearson*
o Assistant Secretary
*Scudder Kemper Investments, Inc.
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 acount.
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 distrbution 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
PO Box 2291
Boston, MA 02107-2291
1-800-SCUDDER
www.scudder.com
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.
<PAGE>
ANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED AUGUST 31, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[MORNINGSTAR RATINGS LOGO]
SEEKS THE LONG-TERM GROWTH OF CAPITAL WITH REDUCED SHARE PRICE VOLATILITY
COMPARED TO OTHER GROWTH MUTUAL FUNDS. KEMPER CLASSIC GROWTH FUND IS PROPERLY
KNOWN AS CLASSIC GROWTH FUND.
Kemper Classic
Growth Fund
"... The annual period has certainly been an interesting -- and challenging --
time frame. We started the fiscal year at a low point, in the aftermath of one
of the worst months in market history. The climate has improved significantly
since then, and the market ended the year on a much brighter note. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
11
Industry Sectors
12
Largest Holdings
13
Report of Independent Accountants
14
Portfolio of Investments
18
Financial Statements
20
Financial Highlights
22
Notes to Financial Statements
26
Tax Information
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER CLASSIC GROWTH FUND TOTAL RETURNS
FOR THE YEAR ENDED AUGUST 31, 1999
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
KEMPER CLASSIC GROWTH FUND CLASS A 41.54
KEMPER CLASSIC GROWTH FUND CLASS B 40.30
KEMPER CLASSIC GROWTH FUND CLASS C 40.42
LIPPER GROWTH FUNDS CATEGORY AVERAGE* 40.37
</TABLE>
RETURNS 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.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
8/31/99 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER CLASSIC GROWTH FUND
CLASS A $22.63 $16.62
- --------------------------------------------------------------------------------
KEMPER CLASSIC GROWTH FUND
CLASS B $22.37 $16.57
- --------------------------------------------------------------------------------
KEMPER CLASSIC GROWTH FUND
CLASS C $22.38 $16.57
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER CLASSIC GROWTH FUND RANKINGS
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER GROWTH FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #451 OF 1078 FUNDS #508 OF 1078 FUNDS #503 OF 1078 FUNDS
- --------------------------------------------------------------------------------
</TABLE>
*LIPPER ANALYTICAL SERVICES, INC. RANKINGS ARE BASED UPON CHANGES IN NET ASSET
VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF SALES
CHARGES AND, IF THEY HAD, RESULTS MAY HAVE BEEN LESS FAVORABLE. RANKINGS ARE
HISTORICAL AND DO NOT GUARANTEE FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
DURING THE YEAR ENDED AUGUST 31, 1999, KEMPER CLASSIC GROWTH FUND PAID THE
FOLLOWING DIVIDENDS:
<TABLE>
<CAPTION>
LONG-TERM SHORT-TERM
CAPITAL GAIN CAPITAL GAIN
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER CLASSIC
GROWTH FUND CLASS A $0.68 $0.125
- --------------------------------------------------------------------------------
KEMPER CLASSIC
GROWTH FUND CLASS B $0.68 $0.125
- --------------------------------------------------------------------------------
KEMPER CLASSIC
GROWTH FUND CLASS C $0.68 $0.125
- --------------------------------------------------------------------------------
</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 CLASSIC GROWTH FUND IN THE LARGE BLEND CATEGORY. PLEASE CONSULT THE
PROSPECTUS FOR A DESCRIPTION OF INVESTMENT POLICIES.
BALANCE SHEET A condensed financial statement showing what a company owns, what
it owes and the ownership interest in the company of its stockholders, at a
certain time.
CYCLICAL STOCKS Cyclical stocks carry a higher degree of economic sensitivity.
In accelerating economies, cyclical stocks tend to rise quickly. In decelerating
economies, cyclicals tend to decline quickly. Cyclical stocks include industrial
machinery, paper and forestry, automobiles and construction.
GROWTH STOCK Growth stocks are shares in companies that are expected to
experience rapid growth resulting from strong sales, talented management and
dominant market position. Because these stocks are typically in demand, they
tend to carry relatively high price tags and can also be volatile, based on
changing perceptions of the companies' growth.
INITIAL PUBLIC OFFERING (IPO) The first launch of a company's publicly traded
stock. IPOs often involve a relatively small quantity of shares. When paired
with fluctuating demand, the small quantity of shares can contribute to
increased volatility.
<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:
Interest rates have consumed investors' attention for the past six months, but
immediate concerns of rate hikes came to a halt in October when the Federal
Reserve Board declined to raise its key interest rate, the overnight bank
lending rate, for a third time this year. To gain a better understanding of how
the Fed's recent interest rate decisions affect the economic outlook for the
remainder of 1999, let's review some of the economic events of the past few
months.
Talk of rising interest rates began last spring, and on June 30 the Fed
boosted its key interest rate -- the overnight bank lending rate -- one quarter
of a point (0.25%). With this move the Fed said it was not inclined to increase
rates again soon, although it noted that it was alert to the potential emergence
of inflationary pressures that could undermine economic growth.
Talk of a second hike began in July after Fed Chairman Alan Greenspan's
commentary to the House Banking Committee, which was part of the Fed's
twice-yearly outlook report required by the Humphrey-Hawkins Full Employment and
Balanced Growth Act of 1978. While Greenspan didn't say that the Fed definitely
would raise the overnight bank lending rate at its next meeting, the tone of his
report included more warnings than expected about the need to follow the June
rate increase with another. Speculation became reality at the Aug. 24 Fed
meeting, when the Fed once again raised the overnight bank lending rate by one
quarter of a point (0.25%).
While many investors were frustrated by the rate hikes when there were no
signs of inflation, Fed policymakers looked at the situation another way: If the
earlier increases were not enough to bring inflation risks into balance, a
"euphoric" rise in stocks could fuel increased consumer spending, which could
necessitate a more disruptive adjustment later. In its June and August rate
hikes, the Fed was acting promptly to prevent such an adjustment. In other
words, the Fed strongly believes that "a stitch in time saves nine" -- it wants
to be preemptive by raising interest rates and slowing the economy before an
inflation problem arises.
With two rate hikes behind them, investors began speculating about the
possibility of a third hike at the Fed's Oct. 5 meeting. There are some
indications that inflationary pressures still exist.
To start, the Fed forecasts that the consumer price index (CPI), the average
value of an imaginary "basket" of goods and services in the economy, could rise
as much as 2.5 percent this year, up from 1.6 percent in 1998. Because CPI is
the standard measure of inflation, the Fed has to take any acceleration
seriously.
Employment growth also has the Fed worried. Job creation has exceeded the
growth of the labor force since 1993, bringing the unemployment rate down to its
lowest level since 1970. The Fed believes that if the pool of job seekers
shrinks sufficiently, upward pressures on wage costs are likely. One of the core
beliefs of modern economics is that rising wages will produce price inflation as
companies seek to pass their rising costs along to their customers. Thus far in
this economic expansion, this hasn't happened, but the Fed does not feel it can
take a chance that such good luck will last.
Gross domestic product (GDP), the value of all goods and services produced in
the United States, has been growing faster than the Fed believes it can without
causing inflation. The Fed believes that GDP can grow slightly faster than 3.0
percent per year without generating inflation. Actual 1998 GDP growth was 3.9
percent and we expect about the same in 1999.
Rapid productivity growth is the antidote to inflation. After languishing at
an average annual increase of about 1 percent in the 1970s and 1980s,
productivity growth has recently accelerated. Over the past four quarters it has
increased 2.8 percent in the entire economy and even faster in the business
sector. However, when growth slowed to under 2 percent in the second quarter,
productivity dropped back sharply. While a one-quarter dip in productivity is no
cause for worry, the Fed will be watching developments closely. Should the gains
in technology that have fostered the productivity growth slow, inflationary red
flags would go up.
Improving economic conditions around the world mean that the U.S. economy will
no longer experience declines in basic commodity and import prices that have
helped curtail inflation in recent years. Crude oil -- one of the most important
and visible commodities, used to make everything from gasoline to plastic bags
- -- is up nearly 90 percent from its February lows.
Despite these inflationary suggestions, however, signs of actual inflation
remain few and far between, and in its Oct. 5 decisions, the Fed left rates
unchanged.
The Fed did, however, shift its policy bias from neutral toward tightening.
The accompanying press release softened that a bit by noting that "such a
directive did not signify a commitment to near-term action."
Clearly the Fed is nervous, but it is willing to wait on incoming data --
including two employment reports and
3
<PAGE> 4
ECONOMIC OVERVIEW
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 (9/30/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 5.90 5.25 4.80 6.20
Prime rate (2) 8.25 7.75 8.50 8.50
Inflation rate (3)* 2.25 1.60 1.60 2.30
The U.S. dollar (4) -3.9 -0.2 4.40 8.70
Capital goods orders (5)* 3.00 5.60 15.60 16.20
Industrial production (5)* 2.40 1.80 3.60 5.70
Employment growth (6)* 2.20 2.40 2.70 2.40
</TABLE>
<TABLE>
<S> <C>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN (4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR
A BIG PLUS FOR FINANCIAL ASSETS. IMPACT U.S. EXPORTERS AND THE VALUE OF U.S. FIRMS'
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE FOREIGN PROFITS.
THEIR BEST BORROWERS. (5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN PERFORMANCE.
THE LAST FIVE YEARS, INFLATION HAS BEEN AS HIGH (6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE *DATA AS OF 8/30/99.
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
</TABLE>
several inflation reports -- before moving again. We expect that the Fed would
prefer to hold off from further rate hikes because of the Y2K issue: It would
prefer not to add to any potential Y2K fears or appear responsible for
Y2K-related volatility in the financial markets.
The long-term possibility of interest rate hikes is likely to be affected by
political considerations. Election primaries begin in February 2000. Will
candidates be talking about tax cuts? Medicare reform? Social Security reform?
These will be the issues to consider when we look at the economy in early- to
mid-2000.
Hopefully it will be as easy for investors to obtain information about Fed
policies at that time as it is today. The Humphrey-Hawkins hearings were created
to give Congress and the public some idea of economic growth and inflation. But
this round of Humphrey-Hawkins hearings could be the last, because the
Humphrey-Hawkins law expires this year. Although Greenspan has said he thinks it
is important for the Fed to report to Congress, and House Banking Committee
Chairman Jim Leach intends to press for a new law, there has been no move to
enact a new reporting requirement. Although the Fed could still provide
hearings, without a law forcing it to do so within a certain framework, we would
likely have no consistent basis for analyzing monetary policy.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
Scudder Kemper Investments Economics Group
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 5, 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
[GADSDEN PHOTO]
CO-LEAD PORTFOLIO MANAGER WILLIAM F. GADSDEN JOINED SCUDDER KEMPER INVESTMENTS,
INC. IN 1983 AND HAS MORE THAN 15 YEARS OF INVESTMENT INDUSTRY EXPERIENCE.
[BEATY PHOTO]
CO-LEAD PORTFOLIO MANAGER BRUCE F. BEATY JOINED THE ORGANIZATION IN 1991 AND HAS
MORE THAN 16 YEARS OF INVESTMENT INDUSTRY EXPERIENCE. GADSDEN AND BEATY HAVE
MANAGED THE FUND SINCE ITS INCEPTION IN 1996.
THE TEAM IS SUPPORTED BY SCUDDER KEMPER INVESTMENT'S LARGE STAFF OF ANALYSTS,
RESEARCHERS, TRADERS, ECONOMISTS AND OTHER INVESTMENT PROFESSIONALS.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE REPORTING PERIOD INDICATED ON THE COVER. THE MANAGERS'
VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER CONDITIONS.
RALLIES AND CORRECTIONS IN INTERNET STOCKS, INTEREST-RATE RISES AND FALLS, AND
SHIFTS IN MARKET DIRECTION -- THESE WERE JUST SOME OF THE UPS AND DOWNS THAT
STOCK INVESTORS FACED DURING THE PAST YEAR. DESPITE THESE CHALLENGES, CO-LEAD
PORTFOLIO MANAGERS WILLIAM GADSDEN AND BRUCE BEATY LED KEMPER CLASSIC GROWTH
FUND TO A SOLID ONE-YEAR RETURN. BELOW, GADSDEN AND BEATY DISCUSS THE MARKET
CLIMATE, THE FUND'S PERFORMANCE AND THEIR INVESTMENT PHILOSOPHY.
Q FOR THE ONE-YEAR PERIOD ENDING AUGUST 31, 1999, KEMPER CLASSIC GROWTH FUND
EARNED 41.54 PERCENT (CLASS A SHARES, UNADJUSTED FOR ANY SALES CHARGES.) PLEASE
PUT THIS GAIN INTO PERSPECTIVE FOR US.
A We're very pleased with Kemper Classic Growth Fund's performance. The fund
outpaced the Standard & Poor's 500 Index's (S&P 500) gain of 39.81 percent.
(This index comprises 500 large-cap growth and value stocks and is often cited
as a gauge of the overall market.) For the one-year period, the fund (Class A
shares) also topped the Lipper Growth Fund Category average of 40.37 percent.
If these returns sound high to you, you're right. This most recent fiscal
year covers an unusual period for the stock market. When the period began in
September 1998, many stocks had been driven down to extreme -- and unrealistic
- -- lows. During the following months, stocks rebounded and made back the ground
they had lost.
Keep in mind that over the long term, equities have historically earned
less-spectacular gains than those earned by the fund and its benchmarks during
this past fiscal year. For instance, for the past 30 calendar years, the S&P 500
earned an average of 12.65 percent.
Even in good times like these, we encourage investors to maintain a
long-term perspective and to remember that a single year's performance figure
doesn't tell the whole story.
Q BILL AND BRUCE, BEFORE YOU DISCUSS THE FUND'S PERFORMANCE IN GREATER
DETAIL, COULD YOU WALK US THROUGH THE KEY EVENTS AND THEMES THAT SHAPED THE
MARKETS DURING THE ANNUAL PERIOD?
A The annual period has certainly been an interesting -- and challenging --
time frame. We started the fiscal year at a low point, in the aftermath of one
of the worst months in market history. The climate has improved significantly
since then, and the market ended the year on a much brighter note.
A ROCKY START When the annual period began on September 1, 1998, the
markets were experiencing exceptional turbulence. As you may recall, in August
1998, Russia defaulted on its debt. The default sent the global stock and bond
markets into a tailspin. The U.S. market lost 15 percent in August alone. The
crisis climate was further exacerbated by concerns about economic weakness in
other emerging markets. And, the markets were rattled by the misadventures of a
large hedge fund. Against this backdrop, a liquidity and monetary crisis
unfolded.
THE FED TAKES ACTION The Federal Reserve responded aggressively and
promptly reduced interest
5
<PAGE> 6
PERFORMANCE UPDATE
rates. Many other countries followed the Federal Reserve's lead and cut rates as
well. These speedy and unified actions restored investor confidence and improved
the liquidity of the market. Stocks roared back, and the economy percolated on a
stronger-than-expected track. Consumer confidence was high, unemployment was
low, and corporate profits remained sound.
TECHNOLOGY STOCKS DRIVE A STILL-NARROW MARKET However, even after the
autumn rebound, the domestic market remained narrow. By narrow, we mean that
only a few stocks contributed most of the positive returns. Generally, the
successful stocks fell into two groups: mega-cap domestic-growth stocks and
technology stocks.
While a climate of high consumer confidence benefited media and retail
stocks, excitement about the Internet played the most significant role in
shaping the market in the fourth quarter. Along with more established,
large-cap, quality technology stocks, investors welcomed Internet IPOs (see
Terms To Know on page 2), with heady enthusiasm. Fuelled by market emotion, many
untested ".com" stocks traded at seemingly high valuations.
EMOTION GIVES WAY TO A MORE RATIONAL CLIMATE The market began to broaden
out in early- and mid-1999. Investors began paying more attention to
fundamentals and became more discriminating. There was less willingness to pay
ANY price for growth. The market began to react to the possibility of an
overheating economy. In April and May, cyclically-oriented (see Terms To Know on
page 2) and smaller-cap stocks began to return to favor. Less glamorous -- but
fundamentally strong manufacturing and capital-goods stocks -- began to steal
some of the limelight away from untested Internet stocks. However, many quality
technology stocks continued to perform robustly, although they too gave up some
ground.
THE FED MOVES AGAIN Now, at the completion of the fund's fiscal year, we've
come full circle. Whereas the Federal Reserve dropped rates three times in 1998
to shore up the faltering global economy, the Fed has raised rates twice this
year. These increases served as a preemptive strike to prevent the economy from
accelerating too quickly into an inflationary climate.
And while there has been some broadening, the markets continue to be fairly
narrow, given long-term historical trends. Concerns about Year 2000 and
additional interest-rate increases have left investors poised for more
volatility.
Q HOW DO YOU SELECT STOCKS?
A Kemper Classic Growth Fund pursues long-term growth of capital, with
reduced share-price volatility compared to other growth-stock funds. To do this,
we follow a growth-at-a-reasonable-price (GARP) investment strategy. Our
investment process targets high-quality, large-cap growth stocks. We seek
established companies with strong competitive positions, stable and consistent
earnings-growth prospects, excellent balance sheets (see Terms To Know on page
2) and strong management.
Outstanding fundamentals and growth potential are only a part of what we
need, however. Our analysis must indicate that the stock is "reasonably valued,"
or in other words, trading at an attractive price.
We sell stocks when we see indications of deteriorating fundamentals or
slowing earnings growth. Also, in keeping with our price-conscious philosophy,
we reduce positions when valuations become stretched.
Q PLEASE PROVIDE US WITH SOME EXAMPLES OF YOUR STOCK-SELECTION PROCESS IN
ACTION.
A Our independent research led us to Corning, traditionally thought of as a
manufacturing company. But, there's more to Corning than meets the eye. Corning
has carved out an exciting -- and profitable -- niche for itself as a premier
provider of high-capacity optic fiber. Due to the increase in high-density data
traffic, there's a significant demand for Corning's product. So, this
"manufacturing" company is actually providing a high-tech solution for Internet
and network expansion. It's a clear leader in its market segment and well
positioned in terms of patent protection. Far from it being a pricey, trendy
tech stock, Corning is very cheap given its growth rate.
Pepsi also typifies our GARP discipline in action. Historically, Pepsi was
punished for its overly complex business model, which included operations in
restaurants, beverages, snacks and bottling. The fundamental picture has begun
to improve. Pepsi's management recently spun off its restaurant and bottling
divisions. Pepsi has emerged as a slimmed-down, focused company with a
more-dependable earnings outlook. And, the price was right: We purchased the
stock at a below-market multiple.
McDonald's Corp., a relatively recent addition to the portfolio, is another
example of a stock that satisfies our GARP criteria. As emerging markets in
Latin America and Asia stabilize, McDonald's has an edge over the majority of
its
6
<PAGE> 7
PERFORMANCE UPDATE
potential rivals. Indeed, the McDonald's name is one of the most recognized
across the globe. Relative to the growth rate of the overall market, the stock
offers higher forecasted growth. Our analysis also indicates a favorable
probability of upward earnings revisions. Given the fundamentals and
earnings-growth potential, we believe that we've captured an excellent,
reasonably priced opportunity.
Q WHAT WORKED OUT PARTICULARLY WELL FOR THE FUND?
A Several of our largest technology stocks generated outstanding returns.
While we're steering clear of many of the un-tested and highly combustible
".com" stocks, we're still participating in the growth of the Internet and
electronic commerce. For instance, the fund benefited from exposure to
established, quality companies that are creating the Internet's infrastructure.
Top-performing holdings included Sun Microsystems, a dominant provider of
network servers, semiconductor and semiconductor-capital-equipment leaders Intel
and Applied Materials, and network superstar Cisco Systems.
We also reaped very good returns from companies involved in
communications-oriented technology, such as MCI WorldCom and Nokia. MCI WorldCom
continues to execute a well-thought-out global business plan, thanks to logical
acquisi-tions and innovative management. MCI WorldCom is also an Internet
beneficiary: By building out global long-distance and data services, MCI
WorldCom contributes to the Internet's required infrastructure.
While most of our holdings are based in the U.S., we've found some
compelling opportunities in foreign-based companies, such as Finnish
telecommunications giant Nokia. (Keep in mind, though, that many of our U.S.
companies are key players in the global marketplace, a trend that blurs the line
between traditional definitions of domestic and international exposure.) Nokia
has established itself as a leading, growing presence in digital cellular
networks and telecommunications systems. The applications for their products are
extensive, and the stock has delivered nice earnings for a reasonable price.
Our conviction in media stocks also contributed positively to performance.
For example, AT&T -- Liberty Media, a well-diversified media company, posted
top-notch returns during the annual period. Similar to MCI WorldCom, this
company has participated in prudent consolidation trends. By agreeing to merge
into AT&T as a wholly owned subsidiary, the company has enhanced its strategic
positioning and cash flow. AT&T -- Liberty Media again demonstrates that
exposure to the Internet's growth can come in a variety of ways: In addition to
offering media, cable and television programming, the company also offers
attractive bandwidth.
Relative to our benchmarks, an underweighting in consumer staples helped
performance. Many global consumer-staples stocks carry considerable exposure to
emerging markets. As emerging economies fal-tered, these stocks faced a less
hospitable climate. And, although there are signs that demand from emerging
markets is picking up, many of these companies haven't yet turned the corner.
In more general terms, our rededication to our growth discipline benefited
performance. We recognize that our shareholders select Kemper Classic Growth
Fund to pursue long-term capital growth. As portfolio managers, we evaluate the
portfolio on an ongoing basis to make sure that we're on track, and look for
ways to improve the execution of our strategy. During the fiscal year, we sought
ways to enhance the portfolios' growth orientation, consistent with its charter.
This fine-tuning served the fund well, and returns firmed up nicely.
Q WHAT HELD THE FUND BACK DURING THE ANNUAL PERIOD?
A Exposure to companies with poorly executed acquisition strategies clipped
the fund's returns. Growth through acquisition has been a difficult business,
and the market has little tolerance for companies that misstep. Funeral-services
operator Service Corp. International proved particularly disappointing. A leader
in its market segment with a long-running history of earnings growth, Service
Corp. International suffered as a result of overly costly acquisition plans.
HEALTHSOUTH and Waste Management also eroded their earnings-growth potential by
failing to appropriately manage expensive acquisitions. Similarly, an imprudent
acquisition strategy was a key factor in Rite-Aid's downward slide. These
mishaps signaled a lack of management control, as well as a decline in company
fundamentals and earnings-growth potential. Consequently, we have eliminated all
of these stocks from the portfolio.
Financial-services stocks also hindered performance. Stocks in this sector
had a difficult time during the annual period. First, many languished in the
aftermath of the Russian debt default. Then, in 1999's rising-rate environment,
7
<PAGE> 8
PERFORMANCE UPDATE
financial-service stocks once again found themselves behind the barrel.
In relative terms, our active omission of some of the market's leaders
slowed the fund's pace. For instance, at the start of the fiscal year, the fund
did not own Microsoft or Lucent Technologies. Initially, our analytical process
didn't correctly recognize and reward these companies' potential for upward
earnings surprises. We've rectified that, and now own both stocks. In each case,
however, we did not stray from our GARP discipline. We instead reexamined the
stocks and determined that given their high growth prospects, each was, in fact,
attractively priced.
Q TELL US HOW YOU'VE POSITIONED THE PORTFOLIO. WHAT TYPES OF STOCKS ARE YOU
FAVORING?
A To preface, keep in mind that we're bottom-up stock pickers. That means we
don't decide to invest a certain amount in a particular sector and then select
the stocks. Instead, the fund's overall sector weightings are the outcome of
many individual decisions. That said, we'd be glad to highlight some general
themes.
Technology stocks make up the largest single weighting within the
portfolio. Here, we place an especially high premium on "winner-takes-all"
companies. We remain particularly interested in stocks that are participating in
Internet infrastructure and the convergence of technology and
telecommunications. Stocks that satisfy our exacting criteria include Oracle and
EMC. Meanwhile, we've eliminated Parametric Technologies, Compaq Computers and
Sterling Commerce. They don't offer the exemplary characteristics we seek.
We're optimistic about the long-term return prospects offered by selected
media and health-care stocks. In addition to AT&T -- Liberty Media, our media
holdings include Viacom and Comcast. On the health-care side, the fund holds
positions in pharmaceutical companies like Bristol-Myers Squibb. More recently,
we've initiated stakes in biotech companies MedImmune and Immunex.
Compared to our benchmark, the fund holds a greater portion of its assets
in capital-goods stocks, most notably manufacturing stocks such as Tyco
International and Corning. These stocks provide a degree of cyclical exposure,
as well as strong growth potential. Corning, as you'll recall, provides
high-tech optic fiber. Tyco has displayed an entrepreneurial approach to making
and synthesizing acquisitions, a key to long-term earnings growth.
Q ARE THERE AREAS WHERE YOU'RE FINDING FEWER OPPORTUNITIES?
A Consistent with our goal of pursuing superior, sustainable, long-term
growth, we've significantly reduced our exposure to financial-services stocks.
Particularly in rising-rate climates, financials -- especially banks -- have a
more difficult time keeping up. The portfolio does include a contingent of
financial-service stocks with strong growth prospects, however. Despite the
challenges of a rising-rate environment, we believe that American Express
(diversified financial and travel services), American International Group
(insurance) and Fannie Mae (mortgage lender) offer attractively valued growth
prospects.
We feel that the consumer discretionary area -- which includes retail and
leisure stocks -- warrants additional scrutiny. Even in a climate of high
consumer confidence, retail stocks are susceptible to rising rates. What's more,
retailers face stiff competition and the possibility that Internet distribution
channels could disrupt future growth. Based on these types of concerns, we
eliminated Office Depot and Costco. In the leisure area, we've also sold the
fund's positions in Carnival Corp. and Mirage.
As oil prices rebounded, we gradually pared back our exposure to energy
stocks. The rebound in oil prices served as a good opportunity for us to sell
into strength and capture profits. We continue to hold Royal Dutch Petroleum,
Schlumberger and Mobil.
Q AS 1999 APPROACHES ITS CLOSE, DO YOU HAVE ANY THOUGHTS FOR THE
SHAREHOLDERS?
A We encourage shareholders not to underestimate the remarkable resiliency
and depth of the U.S. economy. In the 1980s and early 1990s, the domestic
economy faced difficult times. Corporate America struggled to put its house in
order. There were painful corporate restructurings, layoffs and consolidations.
Now, rebuilt on a stron-ger foundation, the domestic economy holds bright
prospects. The events of the past year testify to the Federal Reserve's ability
to keep the markets on an even keel. Domestic corporations continue to generate
steady profits, unemployment is low and consumer confidence is high.
We recognize that investors are concerned about the potential impacts of
Year 2000. Here, too, we recommend a long-term focus. We believe that Y2K issues
may cause some temporary distortions in the market and the economy. These
distortions could relate to inventory building, capital-spending deferrals
8
<PAGE> 9
PERFORMANCE UPDATE
and reduced market liquidity. We can't know for sure. Yet in the face of
short-term distortions, we remain steadfast in a long-term perspective. As
long-term, quality-focused investors, we seek companies that can navigate
unfamiliar terrain, address challenges and emerge stronger.
Q WHAT LESSONS CAN SHAREHOLDERS TAKE FROM THE PAST FISCAL YEAR?
A The past year serves as an excellent reminder that stock investing is a
long-term proposition. When the markets corrected in August 1998, we understand
that some investors would have been tempted to get out of stocks. But the
markets did come back, and the investment climate is much improved.
But accepting the inherent volatility of the market doesn't mean courting
risk. We remain committed to a risk-conscious approach to long-term growth. Rain
or shine, we look forward to the next year and to putting our investment
discipline to work on behalf of the fund's shareholders.
9
<PAGE> 10
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED AUGUST 31, 1999 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR CLASS(1)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER CLASSIC GROWTH FUND CLASS A 33.43% 23.78% (since 9/9/96)
- -----------------------------------------------------------------------------------------------------
KEMPER CLASSIC GROWTH FUND CLASS B 37.30 8.24 (since 4/16/98)
- -----------------------------------------------------------------------------------------------------
KEMPER CLASSIC GROWTH FUND CLASS C 40.42 10.42 (since 4/16/98)
- -----------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER CLASSIC GROWTH FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000
investment in Class A shares from
9/30/96 to 8/31/99
<TABLE>
<CAPTION>
KEMPER CLASSIC GROWTH STANDARD & POOR'S 500
FUND CLASS A1 STOCK INDEX+ CONSUMER PRICE INDEX++
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
9/30/96 10000 10000 10000
12/31/97 13531 14447 10222
8/31/99 17952 19914 10596
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER CLASSIC GROWTH FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000
investment in Class B shares from
4/30/98 to 8/31/99
<TABLE>
<CAPTION>
KEMPER CLASSIC GROWTH STANDARD & POOR'S 500
FUND CLASS B1 STOCK INDEX+ CONSUMER PRICE INDEX++
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
4/30/98 10000 10000 10000
12/31/98 10627 11153 10085
8/31/99 11150 11979 10289
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER CLASSIC GROWTH FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000
investment in Class C shares from
4/30/98 to 8/31/99
<TABLE>
<CAPTION>
KEMPER CLASSIC GROWTH STANDARD & POOR'S 500
FUND CLASS C1 STOCK INDEX+ CONSUMER PRICE INDEX++
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
4/30/98 10000 10000 10000
12/31/98 10632 11153 10086
8/31/99 11451 11979 10289
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN ORIGINAL COSTS.
*AVERAGE ANNUAL TOTAL RETURN 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 PERCENT, FOR CLASS B SHARES ADJUSTMENT FOR THE APPLICABLE
CONTINGENT DEFERRED SALES CHARGE (CDSC) OF 3 PERCENT 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 PERCENT 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 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. THE EXPENSES
APPLICABLE TO CLASS S SHARES HAVE BEEN REFLECTED IN THE PERFORMANCE
PRESENTED FOR CLASS A. 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 CLASSIC GROWTH FUND TO THE S&P 500 STOCK INDEX, YOU
SHOULD NOTE THAT THE FUND'S PERFORMANCE REFLECTS THE MAXIMUM SALES CHARGE,
WHILE NO SUCH CHARGES ARE REFLECTED IN THE PERFORMANCE OF THE INDEX. DURING
THE PERIODS NOTED, SECURITIES PRICES FLUCTUATED. FOR ADDITIONAL INFORMATION,
SEE THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION AND THE FINANCIAL
HIGHLIGHTS AT THE END OF THIS REPORT.
+THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET. SOURCE IS CDA WIESENBERGER.
++THE CONSUMER PRICE INDEX IS A STATISTICAL MEASURE OF CHANGE, OVER TIME, IN
THE PRICES OF GOOD AND SERVICES IN MAJOR EXPENDITURE GROUPS FOR ALL URBAN
CONSUMERS. IT IS GENERALLY CONSIDERED TO BE A MEASURE OF INFLATION. SOURCE
IS CDA WIESENBERGER.
10
<PAGE> 11
INDUSTRY SECTORS
SECTOR COMPOSITION OF KEMPER CLASSIC GROWTH FUND*
Data shows the percentage of the common stocks in the portfolio that each sector
of Kemper Classic Growth Fund represented on August 31, 1999, and August 31,
1998.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER CLASSIC GROWTH FUND ON KEMPER CLASSIC GROWTH FUND ON
8/31/99 8/31/98
<S> <C> <C>
Technology 19.1 15.6
Health care 16.1 11.9
Consumer non-durables 14.7 16.8
Capital goods 13.9 12.8
Communication services 12.4 8.5
Financial 9.9 18.2
Consumer staples 8.9 5.8
Energy 5 9.3
Transportation 0 1.1
</TABLE>
* PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE
A COMPARISON WITH THE STANDARD & POOR'S 500 STOCK INDEX*
Data shows the percentage of the common stocks in the portfolio that each sector
of Kemper Classic Growth Fund represented on August 31, 1999, compared to the
industry sectors that make up the fund's benchmark, the Standard & Poor's 500
Stock Index.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER CLASSIC GROWTH FUND ON STANDARD & POOR'S 500 STOCK
8/31/99 INDEX ON 8/31/99
<S> <C> <C>
Technology 19.10 22.30
Health care 16.10 10.40
Consumer non-durables 14.70 8.80
Capital goods 13.90 8.50
Communication services 12.40 8.50
Financial 9.90 15.20
Consumer staples 8.90 12.90
Energy 5.00 6.10
Basic materials 0.00 3.40
Utilities 0.00 2.90
Transportation 0.00 1.00
</TABLE>
* STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED CAPITALIZATION-WEIGHTED
PRICE-ONLY INDEX COMPRISED OF THE LARGEST CAPITALIZED U.S. COMPANIES WHOSE
COMMON STOCKS ARE TRADED IN THE UNITED STATES. THIS LARGE CAPITALIZATION
MARKET ORIENTED INDEX IS HIGHLY CORRELATED WITH THE S&P 500 STOCK INDEX.
11
<PAGE> 12
LARGEST HOLDINGS
KEMPER CLASSIC GROWTH FUND'S 10 LARGEST HOLDINGS*
Representing 27.2 percent of the fund's portfolio on August 31, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
HOLDINGS PERCENT
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. INTEL Engaged in the design, 3.8%
development, manufacture and sale
of advanced semiconductor
components.
- ---------------------------------------------------------------------------------------
2. MICROSOFT Develops, markets and supports a 3.8%
variety of software, operating
systems, language and application
programs.
- ---------------------------------------------------------------------------------------
3. AT&T -- LIBERTY MEDIA Holds positions in a variety of 2.8%
cable channels, such as the
Discovery Channel, as well as
exposure to the Internet and
other media.
- ---------------------------------------------------------------------------------------
4. GENERAL ELECTRIC A broadly diversified company 2.7%
with major businesses in power
generators, appliances, lighting,
plastics, medical systems,
aircraft engines, financial
services and broadcasting.
- ---------------------------------------------------------------------------------------
5. MCI WORLDCOM Provides intrastate, interstate 2.5%
and international long-distance
voice and data services.
- ---------------------------------------------------------------------------------------
6. TYCO INTERNATIONAL A broadly diversified company 2.5%
with operations in fire-
protection systems, electronic
and electrical components and
health care.
- ---------------------------------------------------------------------------------------
7. HOME DEPOT Operates retail stores carrying 2.4%
building supplies and
home-improvement products.
- ---------------------------------------------------------------------------------------
8. PROCTER & GAMBLE Manufactures and distributes 2.3%
household products, including
food, diapers, and personal-care,
laundry and cleaning products.
- ---------------------------------------------------------------------------------------
9. IBM Leading manufacturer of data 2.2%
processing equipment and systems.
- ---------------------------------------------------------------------------------------
10. BRISTOL-MYERS SQUIBB Produces and distributes 2.2%
pharmaceutical products, medical
devices, and health, beauty and
household products.
- ---------------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
12
<PAGE> 13
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF INVESTMENT TRUST AND TO THE
CLASS A, CLASS B AND CLASS C SHAREHOLDERS OF
CLASSIC GROWTH 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 Classic Growth Fund (formerly Scudder Classic Growth Fund) (the
"Fund") at August 31, 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
(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 August 31, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
October 20, 1999
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
KEMPER CLASSIC GROWTH FUND
Portfolio of Investments as of August 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
REPURCHASE AGREEMENTS 2.5% AMOUNT ($) VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Repurchase Agreement with State Street Bank
and Trust Company dated 8/31/1999 at 5.41%,
to be repurchased at $5,554,835 on
9/1/1999, collateralized by a $5,625,000
U.S. Treasury Note, 3.375%, 1/15/2007 (Cost
$5,554,000) 5,554,000 5,554,000
---------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 97.5% SHARES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--10.4%
DEPARTMENT & CHAIN STORES--7.8%
Dayton Hudson Corp. 67,600 3,920,800
Gap Inc. 68,000 2,660,500
Home Depot, Inc. 85,700 5,238,413
Wal-Mart Stores Inc. 96,900 4,293,881
Walgreen Co. 72,100 1,671,819
---------------------------------------------------------------------------
17,785,413
RECREATIONAL PRODUCTS--1.3%
Electronic Arts Inc.* 25,700 1,763,663
Premier Parks, Inc.* 37,400 1,224,850
---------------------------------------------------------------------------
2,988,513
RESTAURANTS--1.3%
McDonald's Corp. 68,200 2,821,775
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--8.7%
ALCOHOL & TOBACCO--2.8%
Anheuser-Busch Companies, Inc. 51,200 3,942,400
Philip Morris Companies, Inc. 62,700 2,347,331
---------------------------------------------------------------------------
6,289,731
FOOD & BEVERAGE--2.6%
Albertson's Inc. 59,400 2,847,487
PepsiCo Inc. 92,000 3,139,500
---------------------------------------------------------------------------
5,986,987
PACKAGE GOODS/COSMETICS--3.3%
Gillette Co. 51,000 2,377,875
Procter & Gamble Co. 50,100 4,972,425
---------------------------------------------------------------------------
7,350,300
- ------------------------------------------------------------------------------------------------------------------------
HEALTH--15.7%
BIOTECHNOLOGY--2.0%
Amgen Inc.* 16,400 1,364,275
Immunex Corp.* 29,000 1,952,063
MedImmune, Inc.* 12,700 1,310,481
---------------------------------------------------------------------------
4,626,819
HEALTH INDUSTRY SERVICES--1.0%
IMS Health Inc. 79,000 2,182,375
---------------------------------------------------------------------------
MEDICAL SUPPLY
& SPECIALTY--2.6%
Baxter International Inc. 60,850 4,080,753
VISX Inc.* 19,600 1,773,800
---------------------------------------------------------------------------
5,854,553
PHARMACEUTICALS--10.1%
Allergan, Inc. 26,000 2,596,750
American Home Products Corp. 59,600 2,473,400
Bristol-Myers Squibb Co. 68,600 4,827,725
Johnson & Johnson 21,600 2,208,600
Pfizer, Inc. 75,000 2,831,250
Schering-Plough Corp. 72,000 3,784,500
Warner-Lambert Co. 59,700 3,955,125
---------------------------------------------------------------------------
22,677,350
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
MARKET
SHARES VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS--3.9%
TELEPHONE/COMMUNICATIONS
Bell Atlantic Corp. 52,150 3,194,188
MCI WorldCom, Inc.* 73,450 5,563,838
---------------------------------------------------------------------------
8,758,026
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL--9.7%
INSURANCE--2.9%
AFLAC, Inc. 48,700 2,188,456
American International Group, Inc. 46,150 4,277,528
---------------------------------------------------------------------------
6,465,984
CONSUMER FINANCE--4.7%
American Express Credit Corp. 34,400 4,730,000
Associates First Capital Corp. 57,800 1,983,263
Citigroup Inc. 85,350 3,792,741
---------------------------------------------------------------------------
10,506,004
OTHER FINANCIAL
COMPANIES--2.1%
Federal National Mortgage Association 76,200 4,733,925
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
MEDIA--8.2%
ADVERTISING--1.5%
Omnicom Group, Inc. 45,000 3,391,875
---------------------------------------------------------------------------
BROADCASTING &
ENTERTAINMENT--1.7%
Infinity Broadcasting Corp.* 60,800 1,645,400
Viacom Inc. "B"* 50,800 2,136,775
---------------------------------------------------------------------------
3,782,175
CABLE TELEVISION--3.4%
AT&T Corp -- Liberty Media Group* 191,000 6,112,000
Comcast Corp. "A" 42,600 1,389,825
---------------------------------------------------------------------------
7,501,825
PRINT MEDIA--1.6%
Tribune Co. 39,300 3,667,181
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--3.9%
EDP SERVICES--3.0%
America Online Inc.* 21,800 1,990,613
Automatic Data Processing, Inc. 65,800 2,586,763
Electronic Data Systems Corp. 37,100 2,082,238
---------------------------------------------------------------------------
6,659,614
MISCELLANEOUS COMMERCIAL
SERVICES--0.9%
CMG Information Services, Inc.* 12,800 1,074,400
Galileo International, Inc. 19,700 955,450
---------------------------------------------------------------------------
2,029,850
- ------------------------------------------------------------------------------------------------------------------------
DURABLES--4.4%
AEROSPACE--1.7%
United Technologies Corp. 57,000 3,769,125
---------------------------------------------------------------------------
TELECOMMUNICATIONS
EQUIPMENT--2.7%
Lucent Technologies Inc. 43,000 2,754,688
Nokia AB Oy "A" (ADR) 40,600 3,385,025
---------------------------------------------------------------------------
6,139,713
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
MARKET
SHARES VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANUFACTURING--9.2%
DIVERSIFIED MANUFACTURING--6.0%
General Electric Co. 52,400 5,885,175
Textron, Inc. 26,000 2,099,500
Tyco International Ltd. (New) 53,600 5,430,350
---------------------------------------------------------------------------
13,415,025
ELECTRICAL PRODUCTS--1.0%
Emerson Electric Co. 36,100 2,260,763
---------------------------------------------------------------------------
INDUSTRIAL SPECIALTY--1.9%
Corning Inc. 64,700 4,302,550
---------------------------------------------------------------------------
MACHINERY/COMPONENTS/
CONTROLS--0.3%
Parker-Hannifin Corp. 15,450 675,938
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--18.6%
COMPUTER SOFTWARE--4.9%
Microsoft Corp.* 89,200 8,256,574
Oracle Systems Corp.* 74,200 2,708,300
---------------------------------------------------------------------------
10,964,874
DIVERSE ELECTRONIC
PRODUCTS--1.5%
Applied Materials, Inc.* 47,000 3,339,938
---------------------------------------------------------------------------
EDP PERIPHERALS--1.4%
EMC Corp.* 53,700 3,222,000
---------------------------------------------------------------------------
ELECTRONIC COMPONENTS/
DISTRIBUTORS--2.1%
Broadcom Corp.* 8,500 1,094,375
Cisco Systems, Inc.* 53,500 3,627,969
---------------------------------------------------------------------------
4,722,344
ELECTRONIC
DATA PROCESSING--5.0%
Hewlett-Packard Co. 21,700 2,286,638
International Business Machines Corp. 39,400 4,907,763
Sun Microsystems, Inc.* 50,900 4,046,550
---------------------------------------------------------------------------
11,240,951
SEMICONDUCTORS--3.7%
Intel Corp. 102,540 8,427,500
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
ENERGY--4.8%
OIL & GAS PRODUCTION--1.9%
Royal Dutch Petroleum Co. (New York shares) 69,700 4,312,688
---------------------------------------------------------------------------
OIL COMPANIES--1.3%
Mobil Corp. 29,000 2,968,875
---------------------------------------------------------------------------
OILFIELD SERVICES/EQUIPMENT--1.6%
Schlumberger Ltd. 53,100 3,544,425
---------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $186,308,546) 219,366,984
---------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost $191,862,546)(a) 224,920,984
---------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
* Non-income producing security.
(a) The cost for federal income tax purposes was $192,278,933. At August 31,
1999, net unrealized appreciation for all securities based on tax cost was
$32,642,051. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost of
$36,933,383 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over market value of $4,291,332.
The accompanying notes are an integral part of the financial statements.
16
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
as of August 31, 1999
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------
Investments, at market (identified cost $191,862,546) $224,920,984
- ----------------------------------------------------------------------------
Cash 994
- ----------------------------------------------------------------------------
Receivable for investments sold 2,160,214
- ----------------------------------------------------------------------------
Receivable for Fund shares sold 325,925
- ----------------------------------------------------------------------------
Dividends and interest receivable 189,549
- ----------------------------------------------------------------------------
Deferred organization expenses 13,781
- ----------------------------------------------------------------------------
Other assets 4,400
- ----------------------------------------------------------------------------
TOTAL ASSETS 227,615,847
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
LIABILITIES
- ----------------------------------------------------------------------------
Payable for investments purchased 2,852,539
- ----------------------------------------------------------------------------
Payable for Fund shares redeemed 382,130
- ----------------------------------------------------------------------------
Accrued management fee 97,311
- ----------------------------------------------------------------------------
Other payables and accrued expenses 240,428
- ----------------------------------------------------------------------------
Total liabilities 3,572,408
- ----------------------------------------------------------------------------
NET ASSETS, AT MARKET VALUE $224,043,439
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------
Unrealized appreciation (depreciation) on investments 33,058,438
- ----------------------------------------------------------------------------
Accumulated net realized gain (loss) 9,303,306
- ----------------------------------------------------------------------------
Paid-in capital 181,681,695
- ----------------------------------------------------------------------------
NET ASSETS, AT MARKET VALUE $224,043,439
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
NET ASSET VALUE
- ----------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($54,691,364/2,416,648 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $22.63
- ----------------------------------------------------------------------------
Maximum offering price per share (100/94.25 of $22.63) $24.01
- ----------------------------------------------------------------------------
CLASS B SHARES
Net asset value offering and redemption price (subject to
contingent deferred sales change) per share
($30,468,941/1,362,317 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $22.37
- ----------------------------------------------------------------------------
CLASS C SHARES
Net asset value offering and redemption price (subject to
contingent deferred sales change) per share
($5,610,185/250,687 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $22.38
- ----------------------------------------------------------------------------
CLASS S SHARES
Net asset value, offering and redemption price per share
($133,272,949/5,911,188 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $22.55
- ----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE> 18
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
for the year ended August 31, 1999
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------
INVESTMENT INCOME
- ---------------------------------------------------------------------------
Income:
Dividends (net of foreign taxes withheld of $26,929) $ 1,623,231
Interest 431,526
- ---------------------------------------------------------------------------
2,054,757
- ---------------------------------------------------------------------------
Expenses:
Management fee 1,307,022
- ---------------------------------------------------------------------------
Services to shareholders 1,454,320
- ---------------------------------------------------------------------------
Custodian and accounting fees 109,414
- ---------------------------------------------------------------------------
Distribution service fees 184,290
- ---------------------------------------------------------------------------
Administrative services fees 137,913
- ---------------------------------------------------------------------------
Trustees' fees and expenses 35,708
- ---------------------------------------------------------------------------
Auditing 21,670
- ---------------------------------------------------------------------------
Registration fees 128,855
- ---------------------------------------------------------------------------
Reports to shareholders 114,028
- ---------------------------------------------------------------------------
Legal 13,482
- ---------------------------------------------------------------------------
Amortization of organization expense 4,073
- ---------------------------------------------------------------------------
Other 42,873
- ---------------------------------------------------------------------------
Total expenses before reductions 3,553,648
- ---------------------------------------------------------------------------
Expense reductions (566,549)
- ---------------------------------------------------------------------------
Expenses, net 2,987,099
- ---------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (932,342)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
- ---------------------------------------------------------------------------
Net realized gain (loss) from investments 9,396,870
- ---------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on investments 44,795,107
- ---------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENT TRANSACTIONS 54,191,977
- ---------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $53,259,635
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE> 19
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
1999 1998
- ----------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
- ----------------------------------------------------------------------------------------------
Net investment income (loss) $ (932,342) $ 16,867
- ----------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions 9,396,870 6,411,034
- ----------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period 44,795,107 (18,592,485)
- ----------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 53,259,635 (12,164,584)
- ----------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income -- Class S -- (134,261)
- ----------------------------------------------------------------------------------------------
Net realized gains -- Class S (4,994,696) (1,093,271)
- ----------------------------------------------------------------------------------------------
Net realized gains -- Class A (734,391) --
- ----------------------------------------------------------------------------------------------
Net realized gains -- Class B (597,986) --
- ----------------------------------------------------------------------------------------------
Net realized gains -- Class C (91,871) --
- ----------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 167,868,674 123,389,959
- ----------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in
reinvestment of distributions 6,289,899 1,215,373
- ----------------------------------------------------------------------------------------------
Cost of shares redeemed (114,518,626) (46,876,198)
- ----------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE
TRANSACTIONS 59,639,947 77,729,134
- ----------------------------------------------------------------------------------------------
Increase (decrease) in net assets 106,480,638 64,337,018
- ----------------------------------------------------------------------------------------------
Net assets at beginning of period 117,562,801 53,225,783
- ----------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 224,043,439 $ 117,562,801
- ----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE> 20
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
the period (a) and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
---------------------------------------------
CLASS A
---------------------------------------------
FOR THE PERIOD
APRIL 16, 1998
YEAR ENDED (COMMENCEMENT OF SALE OF
AUGUST 31, CLASS A SHARES) TO
1999 AUGUST 31, 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $16.62 $20.30
- ----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.04) .01
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions 6.86 (3.69)
- ----------------------------------------------------------------------------------------------------------
Total from investment operations 6.82 (3.68)
- ----------------------------------------------------------------------------------------------------------
Less distributions from net realized gains on investment
transactions (.81) --
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $22.63 $16.62
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN (%)(B)(C) 41.54 (18.13)**
- ----------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 54.7 7.2
- ----------------------------------------------------------------------------------------------------------
Ratio of operating expenses, net, to average daily net
assets (%) 1.24 1.24*
- ----------------------------------------------------------------------------------------------------------
Ratio of operating expenses before expense reductions, to
average daily net assets (%) 1.65 1.74*
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net
assets (%) (.17) .10*
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 68 49
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------
CLASS B
---------------------------------------------
FOR THE PERIOD
APRIL 16, 1998
YEAR ENDED (COMMENCEMENT OF SALE OF
AUGUST 31, CLASS B SHARES) TO
1999 AUGUST 31, 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $16.57 $20.30
- ----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.22) (.05)
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions 6.83 (3.68)
- ----------------------------------------------------------------------------------------------------------
Total from investment operations 6.61 (3.73)
- ----------------------------------------------------------------------------------------------------------
Less distributions from net realized gains on investment
transactions (.81) --
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $22.37 $16.57
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN (%)(B)(C) 40.30 (18.37)**
- ----------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 30.5 5.9
- ----------------------------------------------------------------------------------------------------------
Ratio of operating expenses, net, to average daily net
assets (%) 2.12 2.12*
- ----------------------------------------------------------------------------------------------------------
Ratio of operating expenses before expense reductions, to
average daily net assets (%) 2.51 2.52*
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net
assets (%) (1.04) (.79)*
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 68 49
- ----------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------------
CLASS C
---------------------------------------------
FOR THE PERIOD
APRIL 16, 1998
YEAR ENDED (COMMENCEMENT OF SALE OF
AUGUST 31, CLASS C SHARES) TO
1999 AUGUST 31, 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $16.57 $20.30
- ----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.22) (.05)
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions 6.84 (3.68)
- ----------------------------------------------------------------------------------------------------------
Total from investment operations 6.62 (3.73)
- ----------------------------------------------------------------------------------------------------------
Less distributions from net realized gains on investment
transactions (.81) --
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $22.38 $16.57
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN (%)(B)(C) 40.42 (18.37)**
- ----------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 5.6 .9
- ----------------------------------------------------------------------------------------------------------
Ratio of operating expenses, net, to average daily net
assets (%) 2.09 2.09*
- ----------------------------------------------------------------------------------------------------------
Ratio of operating expenses before expense reductions, to
average daily net assets (%) 2.88 3.00*
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net
assets (%) (1.02) (.73)*
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 68 49
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES Classic Growth Fund (the "Fund") is a diversified
series of Investment Trust (the "Trust") which is
registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end
management investment company organized as a
Massachusetts business trust.
Effective April 16, 1998, the Fund changed its name
from Scudder Classic Growth Fund to Classic Growth
Fund and an additional three classes of shares were
offered, namely Classes A, B and C. Existing shares
of Classic Growth 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
Scudder 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
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
quotations reflect broker/dealer-supplied
valuations and electronic data processing
techniques. If the pricing agents are unable to
provide such quotations, the most recent bid
quotation supplied by a bona fide market maker
shall be used. Money market instruments purchased
with an original maturity of sixty days or less are
valued at amortized cost.
All other securities are valued at their fair value
as determined in good faith by the Valuation
Committee of the Board of Trustees.
REPURCHASE AGREEMENTS. The Fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
FEDERAL INCOME TAXES. The Fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies and to distribute
all of its taxable income to its shareholders.
Accordingly, the Fund paid no federal income taxes
and no federal income tax provision was required.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made annually.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the Fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles.
As a result, net investment income (loss) and net
realized gain (loss) on investment transactions for
a reporting period may differ significantly from
distributions during such period. Accordingly, the
Fund may periodically make reclassifications among
certain of its capital accounts without impacting
the net asset value of the Fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Dividend income is recorded on
the ex-dividend date. Realized gains 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 August 31, 1999, purchases
and sales of investment securities (excluding
short-term investments) aggregated $178,602,008 and
$121,482,661, respectively.
- --------------------------------------------------------------------------------
3 RELATED PARTIES 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
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
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. Effective April 16, 1998, the Adviser has
agreed to waive .25% of its management fee until
December 31, 2000. Certain subsidiaries of the
Adviser have also agreed to waive a portion of
their fees. For the year ended August 31, 1999, the
Adviser did not impose a portion of its management
fee amounting to $466,794, and the fee imposed
amounted to $840,228, of which $97,311 is unpaid at
August 31, 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 .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 August 31, 1999, the
Distribution Fee was as follows:
<TABLE>
<CAPTION>
TOTAL FEES WAIVED UNPAID AT
DISTRIBUTION FEE AGGREGATED BY KDI AUGUST 31, 1999
---------------- ---------- ----------- ---------------
<S> <C> <C> <C>
Class B $ 158,298 $ -- $ 15,903
Class C 25,992 10,314 --
-------- -------- --------
$ 184,290 $ 10,314 $ 15,903
========= ======== ========
</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 August 31, 1999
aggregated $514,882, of which $475,896 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 August 31, 1999, the
CDSC for Classes B and C aggregated $72,290 and
$2,116, 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 on assets of
shareholder accounts the firms service. For the
year ended August 31, 1999, the Administrative
Services Fee was as follows:
<TABLE>
<CAPTION>
TOTAL FEES WAIVED UNPAID AT
ADMINISTRATIVE SERVICES FEE AGGREGATED BY KDI AUGUST 31, 1999
--------------------------- ---------- ----------- ---------------
<S> <C> <C> <C>
Class A $ 76,483 $ 49,784 $ 17,064
Class B 52,766 30,993 --
Class C 8,664 8,664 --
--------- -------- --------
$ 137,913 $ 89,441 $ 17,064
========= ======== ========
</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 August 31, 1999, the amount charged
to Classes A, B and C by KSC aggregated $109,888,
$84,916, and $30,807, respectively, of which $9,172
is unpaid at August 31, 1999. Scudder Service
Corporation ("SSC"), a subsidiary of the Adviser,
is the transfer, dividend-paying and shareholder
service agent for the Scudder Shares. For
24
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
the year ended August 31, 1999 the amount charged
to the Scudder Shares by SSC for shareholder
services aggregated $285,028, of which $25,878 is
unpaid at August 31, 1999.
The Scudder Shares of the Fund are one of several
Scudder Funds (the "Underlying Funds") in which the
Scudder Pathway Series Portfolios (the
"Portfolios") invest. In accordance with the
Special Servicing Agreement entered into by the
Adviser, the Portfolios, the Underlying Funds, SSC,
SFAC, STC, and Scudder Investor Services, Inc.,
expenses from the operation of the Portfolios are
borne by the Underlying Funds based on each
Underlying Fund's proportionate share of assets
owned by the Portfolios. No Underlying Funds will
be charged expenses that exceed the estimated
savings to such Underlying Fund. These estimated
savings result from the elimination of separate
shareholder accounts which either currently are or
have potential to be invested in the Underlying
Funds. For the year ended August 31, 1999, the
Special Servicing Agreement expense charged to the
Scudder Shares amounted to $742,760, of which
$52,612 is unpaid at August 31, 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 February 28, 1999, the
amount charged to the Scudder Shares by STC
aggregated $58,712, of which $6,244 is unpaid at
August 31, 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 August 31, 1999, the amount charged to
the Fund by SFAC aggregated $99,733, of which
$26,896 is unpaid at August 31, 1999.
TRUSTEES FEES. The Trust pays each of its Trustees
not affiliated with the Adviser an annual retainer
plus specified amounts for attended board and
committee meetings. For the year ended August 31,
1999, the Trustees fees and expenses aggregated
$35,708.
- --------------------------------------------------------------------------------
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.
25
<PAGE> 26
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 PERIOD ENDED
AUGUST 31, 1999 AUGUST 31, 1998
--------------------------- --------------------------
SHARES DOLLARS SHARES DOLLARS
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 4,181,810 $ 89,719,684 686,665 $ 13,861,440
-------------------------------------------------------------------------------
Class B 1,703,242 35,213,582 388,134 7,520,415
-------------------------------------------------------------------------------
Class C 290,638 6,120,954 59,192 1,143,056
-------------------------------------------------------------------------------
Class S 1,767,053 36,814,454 5,261,810 100,865,048
-------------------------------------------------------------------------------
7,942,743 167,868,674 6,395,801 123,389,959
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES ISSUED TO SHAREHOLDERS IN REINVESTMENT OF DISTRIBUTIONS
Class A 34,363 $ 700,664 -- $ --
-------------------------------------------------------------------------------
Class B 28,770 583,153 -- --
-------------------------------------------------------------------------------
Class C 4,331 87,827 -- --
-------------------------------------------------------------------------------
Class S 241,446 4,918,255 70,172 1,215,373
-------------------------------------------------------------------------------
308,910 6,289,899 70,172 1,215,373
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES REDEEMED
Class A (2,232,659) $ (48,175,880) (253,531) $ (5,236,843)
-------------------------------------------------------------------------------
Class B (727,039) (15,294,433) (30,790) (608,304)
-------------------------------------------------------------------------------
Class C (99,616) (2,138,727) (3,858) (81,660)
-------------------------------------------------------------------------------
Class S (2,330,780) (48,909,586) (2,160,627) (40,949,391)
-------------------------------------------------------------------------------
(5,390,094) (114,518,626) (2,448,806) (46,876,198)
-------------------------------------------------------------------------------
NET INCREASE (DECREASE)
Class A 1,983,514 $ 42,244,468 433,134 $ 8,624,597
-------------------------------------------------------------------------------
Class B 1,004,973 20,502,302 357,344 6,912,111
-------------------------------------------------------------------------------
Class C 195,353 4,070,054 55,334 1,061,396
-------------------------------------------------------------------------------
Class S (322,281) (7,176,877) 3,171,355 61,131,030
-------------------------------------------------------------------------------
2,861,559 $ 59,639,947 4,017,167 $ 77,729,134
-------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
The Fund paid distributions of $0.68 per share from net long-term capital gains
during its year ended August 31, 1999, of which 100% represents 20% rate gains.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$10,432,000 as capital gain dividends for its year ended August 31, 1999, of
which 100% represents 20% rate gains.
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.
26
<PAGE> 27
NOTES
27
<PAGE> 28
TRUSTEES&OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
LYNN S. BIRDSONG BRUCE F. BEATY JOHN R. HEBBLE
President and Trustee Vice President Treasurer
HENRY P. BECTON, JR. JENNIFER P. CARTER CAROLINE PEARSON
Trustee Vice President Assistant Secretary
DAWN-MARIE DRISCOLL PHILIP S. FORTUNA
Trustee Vice President
PETER B. FREEMAN WILLIAM F. GADSDEN
Trustee Vice President
GEORGE M. LOVEJOY, JR. ROBERT T. HOFFMAN
Trustee Vice President
WESLEY W. MARPLE, JR. VALERIE F. MALTER
Trustee Vice President
JEAN C. TEMPEL JOHN MILLETTE
Trustee Vice President and
Secretary
KATHRYN L. QUIRK
Trustee, Vice President ANN M. MCCREARY
and Assistant Secretary Vice President
</TABLE>
<TABLE>
<S> <C>
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LEGAL COUNSEL DECHERT PRICE & RHOADS
Ten Post Office Square South
Boston, MA 02109
- ----------------------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- ----------------------------------------------------------------------------------------------
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02109
- ----------------------------------------------------------------------------------------------
TRANSFER AGENT INVESTOR FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
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INDEPENDENT ACCOUNTANTS PRICEWATERHOUSECOOPERS LLP
160 Federal Street
Boston, MA 02110
- ----------------------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com
</TABLE>
[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 Equity Funds/Growth Style Fund prospectus.
KCGF-2 (10/27/99) 1090130
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
