<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED SEPTEMBER 30, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEEKING LONG-TERM GROWTH OF CAPITAL,
CURRENT INCOME AND GROWTH OF INCOME.
KEMPER U.S. GROWTH AND INCOME FUND
". . . In August, we felt our strict investment discipline and value strategy
was being vindicated as we started to see leadership of the large growth stocks
deteriorate one- by-one as earnings fell short of expectations . . . As this
occurred, value stocks gained momentum. . . ."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
8
Industry Sectors
9
Largest Holdings
10
Portfolio Of Investments
13
Report Of Independent Auditors
14
Financial Statements
16
Notes To Financial Statements
20
Financial Highlights
At A GLANCE
- --------------------------------------------------------------------------------
KEMPER U.S. GROWTH AND INCOME FUND
TOTAL RETURNS AS OF 9/30/98*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIFE INCEPTION
OF CLASS DATE
- --------------------------------------------------------------------------------
<S> <C> <C>
UNADJUSTED FOR SALES CHARGE
CLASS A -3.36% 1/30/98
CLASS B -3.72% 1/30/98
CLASS C -3.71% 1/30/98
ADJUSTED FOR MAXIMUM SALES CHARGE
CLASS A -8.92% 1/30/98
CLASS B -7.56% 1/30/98
CLASS C -4.67% 1/30/98
- --------------------------------------------------------------------------------
</TABLE>
RETURNS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS
AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN ORIGINAL COST.
* TOTAL RETURN MEASURES NET INVESTMENT INCOME AND CAPITAL GAIN OR LOSS FROM
PORTFOLIO INVESTMENTS OVER THE PERIOD SPECIFIED, ASSUMING REINVESTMENT OF
DIVIDENDS AND, WHERE INDICATED, ADJUSTMENT FOR THE MAXIMUM SALES CHARGE. THE
MAXIMUM SALES CHARGE FOR CLASS A SHARES IS 5.75%. FOR CLASS B SHARES, THE
MAXIMUM CONTINGENT DEFERRED SALES CHARGE IS 4%. CLASS C SHARES HAVE NO SALES
CHARGE ADJUSTMENT, BUT REDEMPTIONS WITHIN ONE YEAR OF PURCHASE MAY BE SUBJECT
TO A CONTINGENT DEFERRED SALES CHARGE OF 1%. SHARE CLASSES INVEST IN THE SAME
UNDERLYING PORTFOLIO. DURING THE PERIOD NOTED, SECURITIES PRICES FLUCTUATED.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
9/30/98 1/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER U.S. GROWTH AND
INCOME FUND CLASS A $9.12 $9.50
- --------------------------------------------------------------------------------
KEMPER U.S. GROWTH AND
INCOME FUND CLASS B $9.12 $9.50
- --------------------------------------------------------------------------------
KEMPER U.S. GROWTH AND
INCOME FUND CLASS C $9.12 $9.50
- --------------------------------------------------------------------------------
</TABLE>
TERMS TO KNOW
PRICE/EARNINGS RATIO A company's stock price divided by its earnings for the
past four quarters. The P/E ratio, also known as the MULTIPLE, is a measure of
how much an investor is paying for a company's earning power.
SECTOR Stocks usually found in related industries. Stocks within a market sector
may be similarly affected by financial, economic, business and other
developments.
VOLATILITY Characteristic of a security, commodity or market to rise or fall
sharply in price within a short period of time.
<PAGE> 3
ECONOMIC OVERVIEW
[SILVIA PHOTO]
DR. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS.
SILVIA HOLDS A BACHELOR'S DEGREE AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND A MASTER'S DEGREE IN ECONOMICS FROM BROWN UNIVERSITY IN
PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS WITH THE HARRIS
BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT MANAGER FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $245 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES, AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS.
DEAR SHAREHOLDERS,
If you're like most investors, you may be wondering if you should allow yourself
to breathe a sigh of relief as 1998 comes to a close. After several months of
generally declining stock prices and extreme volatility, the U.S. stock market
seems to have rediscovered its resiliency. In the fourth quarter, the Standard &
Poor's 500, an unmanaged index generally representative of the U.S. stock
market, bounced back into the 1100-point range, up nearly 20 percent from its
third-quarter low of 957. The blue chip Dow Jones Industrial Average enjoyed a
comparable rise. Investor confidence suddenly overtook the investor uncertainty
that had plagued the markets at summer's end.
To what can we attribute the change? Simply this -- the cumulative effect of
some good news, not the least of which was a long-awaited reduction in interest
rates by the Federal Reserve Board. In September, the Fed reduced the federal
funds rate a modest 1/4 of a percentage point, however, the cut disappointed
some investors who were expecting a more dramatic gesture. In October, the Fed
reduced the rate an additional 1/4 of a percentage point. This was an unexpected
cut that seemed to have a positive effect on Wall Street. Investors were also
pleasantly surprised by better-than-expected corporate earnings reports early in
the fourth quarter. (Other contributors to the good vibrations included Mark
McGwire, Sammy Sosa and John Glenn. While they don't have the market clout of
Alan Greenspan, they may have played a role in elevating the national mood.)
Although there was no good news to be garnered from the sensationalized
presidential scandal, as the shock of Kenneth Starr's report wore off, the
nation seemed to refocus its attention on other matters. In this sense, another
veil of despair was lifted.
In many ways, 1998's market activity provides a study in how investor
perceptions can upstage economic realities. Certainly, the tumultuous lessons of
Russia and Southeast Asia renewed investors' awareness of risk in 1998, which
was an important wake-up call. At all times, investors must understand and
consider risk. But over the course of 1998, U.S. economic fundamentals have
essentially remained strong. In fact, inflation has remained low for the entire
year. Economic growth has been solid. Our consumer confidence has remained
fairly high, although not quite as high as last year.
Other signs of strength this year have included better-than-expected regional
retail sales, as well as robust housing starts and home sales. The nation's
budget surplus for 1998 came in at $60 billion, with another budget surplus
expected for fiscal 1999.
Growth in the nation's gross domestic product (GDP), which represents the
total value of all goods and services produced within the U.S. economy, has
remained remarkably steady. GDP is expected to have grown at an annualized rate
of between 2 and 3 percent for the second half of 1998 and is anticipated to
hover around 2 percent for the first half of 1999. The consumer price index
(CPI) remains at about 1.5 percent to 2 percent.
While employment growth has slowed a bit, the slowdown in wage gains may
provide the Fed with an incentive to reduce interest rates even further. U.S.
corporate profits have generally been flat, so we may see a decrease in capital
spending. Banks appear to be only a little less willing to lend, so the threat
of a general credit crunch is minimal.
Investors may take comfort in the fact that the U.S. markets and economy have
withstood the test of 1998's tumultuous third quarter. Similarly, while certain
countries, such as Malaysia, Indonesia, Brazil and Russia, are still suffering
from economic crises, others, including the Philippines, South Korea, Thailand
and China, appear to have survived. As long as the Fed and the Group of Seven
leading industrial nations (G7) are committed to avoiding recession on national
and global levels respectively, investors have a good chance of experiencing a
more stable economic environment.
At home, there has been somewhat of a slowdown in manufacturing, as reduced
U.S. exports reflect foreign economic turmoil. But the global impact of the
Asian crisis still has not hit the U.S. as hard as was expected. Indeed, Asian
turmoil has not affected U.S. trade as much as it has lowered import prices and
helped reduce global interest rates.
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>
OCTOBER 31, 1998 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 4.53 5.64 6.03 6.53
PRIME RATE(2) 8.12 8.50 8.50 8.25
INFLATION RATE(3)* 1.43 1.38 2.22 3.00
THE U.S. DOLLAR(4)* 0.89 3.92 7.62 4.74
CAPITAL GOODS ORDERS(5)* 10.21 10.47 15.67 4.79
INDUSTRIAL PRODUCTION(5)* 2.45 2.57 2.60 3.18
EMPLOYMENT GROWTH(6)* 2.34 2.57 2.65 2.22
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE
VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE VALUE OF U.S. FIRMS'
FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
* DATA AS OF SEPTEMBER 30, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
In Europe, the much anticipated Economic and Monetary Union (EMU) is on the
move, with a focus on more flexibility and growth potential for the region.
European equities may be the beneficiaries of increased spending, as governments
seek to foster growth and reduce unemployment.
If you're a long-term investor in today's short-term world, go ahead and
breathe that sigh of relief as 1998 comes to an end -- but get ready for 1999.
It's going to be an interesting year as the EMU emerges, the race for the next
presidency heats up and the year 2000 approaches. And, remember: Investors don't
like uncertainty, be it economic or political. A threat of impeachment, new acts
of terrorism or any other hints of crisis could help drag our markets downward
again.
I would like to take this opportunity to thank you for choosing to invest with
Kemper Funds. We appreciate the opportunity to serve your investment needs.
Sincerely,
/S/ John E. Silvia
JOHN E. SILVIA
November 9, 1998
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 DR. JOHN SILVIA AS OF NOVEMBER 9, 1998, AND
MAY NOT ACTUALLY COME TO PASS. THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF
THIS MATERIAL IS INTENDED AS AN INVESTMENT RECOMMENDATION.
4
<PAGE> 5
PERFORMANCE UPDATE
[ENSINGER PHOTO]
LORI J. ENSINGER IS A SENIOR VICE PRESIDENT OF SCUDDER KEMPER INVESTMENTS, INC.
AND THE LEAD PORTFOLIO MANAGER OF KEMPER U.S. GROWTH AND INCOME FUND. SHE HAS
MORE THAN 15 YEARS OF INVESTMENT MANAGEMENT EXPERIENCE, JOINING THE ORGANIZATION
IN 1993. SHE IS A CHARTERED FINANCIAL ANALYST AND RECEIVED A BACHELOR'S DEGREE
CUM LAUDE FROM WILLIAMS COLLEGE IN 1983.
ROBERT T. HOFFMAN IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS AND HAS
BEEN WITH THE FIRM SINCE 1990. HE HAS MORE THAN 12 YEARS OF EXPERIENCE IN THE
INVESTMENT INDUSTRY AND RECEIVED A DEGREE IN ECONOMICS FROM DARTMOUTH COLLEGE IN
1981 AND AN M.M. DEGREE FROM THE KELLOGG SCHOOL AT NORTHWESTERN UNIVERSITY IN
1985.
BEN THORNDIKE IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS. HE HAS MORE
THAN 18 YEARS OF INVESTMENT EXPERIENCE, JOINING THE ORGANIZATION IN 1983. HE IS
A CHARTERED FINANCIAL ANALYST AND A CHARTERED INVESTMENT COUNSELOR.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
LAUNCHED JANUARY 30, 1998, KEMPER U.S. GROWTH AND INCOME FUND WAS A RELATIVELY
NEW FUND AS IT HEADED INTO THE THIRD QUARTER OF 1998, WHICH WOULD PROVE TO BE
THE WORST QUARTER FOR MUTUAL FUNDS IN EIGHT YEARS. LEAD PORTFOLIO MANAGER LORI
ENSINGER EXPLAINS HOW THE CHOPPY MARKETS IMPACTED THE FUND AND WHY SHE BELIEVES
STAYING TRUE TO THE FUND'S HIGH RELATIVE DIVIDEND YIELD STRATEGY WAS IMPORTANT
FOR THE FUND.
Q LORI, AFTER A NEARLY SEVEN-YEAR BOOM AND RECORD HIGHS THIS SPRING, THE
STOCK MARKET BEGAN SHOWING ITS NASTIER SIDE IN AUGUST. IN ITS SHORT LIFETIME
THIS FUND HAS SEEN SOME PRETTY WILD SWINGS. HAS IT BEEN DIFFICULT MANAGING THE
FUND IN THIS ENVIRONMENT?
A Managing in volatile markets is never easy, but it's not new to me or to
the rest of the management team. We've all been managing investments for more
than 12 years, so we've seen down markets. Controlling downside risk is always
in the back of our minds.
However, the recent market downturn has been a bit of a wakeup call for
many investors who have forgotten or never experienced market drops. What had
gone up -almost without interruption for nearly seven years -- suddenly was
coming down. And what had been an afterthought for many investors -- the concept
of downside risk control -- was once again in vogue.
Those of us on the fund's management team -- Rob Hoffman, Ben Thorndike
and myself -- would argue that managing downside risk should never go out of
fashion. It's something we strive for every day in managing Kemper U.S. Growth
And Income Fund.
Q HOW HAS THIS VOLATILITY AND THE MARKET SLIDE IN AUGUST IMPACTED THE FUND'S
PERFORMANCE?
A It was a troublesome period for value stocks. Although the fund has lost
some ground, we believe our strict relative dividend yield value style mitigated
any further losses. Class A shares (unadjusted for any sales charge) slipped
3.36 percent since the fund's inception on January 30, 1998.
Prior to the August downturn, it was a very difficult market environment
for value managers to outperform. Our relative yield style, which tends to
outperform with lower volatility, didn't do that; it did the exact opposite. In
my opinion, the reason was irrational investor psychology. As concerns that the
problems in Asia might infect the U.S. stock market, investors began a flight to
quality. They began to pile into anything they perceived to be "safe" -- and
what they considered safe were very large, blue-chip growth companies that were
perceived by the market to have highly visible and highly consistent earnings.
Value stocks and nearly anything but these mega-growth stocks were shunned, and
their prices fell.
However, there was a problem with that market assessment, and it caused
that theory of "safety" to unwind. The problem was that investors ignored the
P/E valuations of the stocks they were fleeing to. A price-to-earnings multiple
(P/E) is the price of a stock divided by its earnings per share. This
calculation gives investors an idea of how much they are paying for a company's
earning power. The higher the P/E, the more investors are paying, and therefore
the more earnings growth they are expecting. These growth
5
<PAGE> 6
PERFORMANCE UPDATE
stocks that had become so popular were trading at P/Es of as high as 50 times
earnings, while the average stock in the market was trading at about 25 times
earnings. That differential in P/E set investors in large-cap growth stocks up
for the risk of some serious earnings disappointments. And the higher the
valuation of a stock, the more it has to fall if its earnings don't meet
expectations.
In August, we felt our strict investment discipline and value strategy was
being vindicated as we started to see the leadership of the large growth stocks
deteriorate one-by-one as earnings fell short of expectations. For example,
Coca-Cola peaked in mid-July, had a dramatic plunge in August and has fallen
ever since because they announced that their case volumes were much less than
what was expected. Similar situations occurred with Gillette, Cisco Systems and
Lucent Technologies.
As the giant growth stocks began to stumble, value stocks gained momentum.
Because the earnings expectations of value companies were already depressed,
their prices didn't fall as significantly when estimates were not met. And, in
many cases, these companies were able to meet their earnings estimates, a
positive "surprise" that gave their stock prices a boost.
An example of the rebound can be found in the utility sector. Both
electric and telephone utility companies dramatically outperformed the market in
August. And cyclical stocks -- paper companies, metal stocks and chemical
companies -- have held up better in response to bad news. We believe the
leadership position of the large growth stocks will continue to narrow, and when
that happens, the fund should begin to see some better performance relative to
the S&P.
Q KEMPER U.S. GROWTH AND INCOME FUND WAS ONE OF THE FIRST PRODUCTS LAUNCHED
AFTER KEMPER FUNDS' MERGER WITH SCUDDER, STEVENS & CLARK. YOU CAME TO THE FIRM
FROM THE SCUDDER SIDE. HOW HAS THE MERGER OF THE TWO COMPANIES AFFECTED
PORTFOLIO MANAGEMENT?
A The most noticeable and meaningful change is the size of the equity
research team. We combined the analyst staffs from both companies and now have
over 50 analysts doing research. The larger staff size means each analyst can
cover fewer companies in more depth and detail and can specialize more in a
particular sector or industry. This has improved our ability to do what we've
always aimed to do: on-the-ground, original research.
That first-hand review is vital to our success in finding undervalued
companies with high dividend yields relative to the S&P 500, but with generally
more upside potential and less downside. After the analysts identify potential
opportunities, we work with them to find out which cheap stocks have a
fundamental catalyst or are misunderstood and whose valuation may be only
temporary.
Q DID THE MARKET DROP PROVIDE YOU WITH ANY BUYING OPPORTUNITIES?
A At the depth of the market we began to take advantage of some "bargain
basement" prices in a number of issues. We added to our Real Estate Investment
Trusts (REITs), when we saw good names that had fallen 15 to 20 percent. We also
saw value in some of the metal and chemical companies that had been beaten up
but were still fundamentally solid companies with great upside potential.
Q WHAT ABOUT INVESTMENTS YOU SOLD?
A We trimmed our exposure to banks as the trouble abroad and the credit
crunch at home began to hurt the sector. Although we took some profits, we
continued to sell as the banks were weakening because we felt that there was
still a very uncertain environment ahead. And we didn't believe the bank stocks
were likely to outperform. Much of our exposure is to regional banks, those with
relatively no exposure to foreign loans. Among financial services stocks, those
regionals held up best in the downturn.
Q IN HINDSIGHT, WHAT ARE SOME THINGS YOU WOULD HAVE DONE DIFFERENTLY?
A We positioned the portfolio very defensively early in the year, feeling
that the market was overvalued. Although we were right, we were early in that
strategy. It did finally pay off once the August downturn began.
Much of our underperformance this year is simply due to the fact that the
fund's value-oriented style has been out of favor. Nevertheless, we don't
believe a fund should change its management style for short-term shifts in the
market. For example, what hurt us most during the period was not having exposure
to the technology sector, which through September was the best-performing sector
of the market. But because we follow a high relative yield-based discipline, we
are typically precluded from owning big tech companies because they generally
don't pay dividends. Although our lack of technology stocks hurt us recently,
over longer periods of time, not owning these companies
6
<PAGE> 7
PERFORMANCE UPDATE
really has made no difference to the portfolios we manage.
Q WHAT'S YOUR OUTLOOK FOR THE MARKET AND THE FUND?
A Generally speaking, I think the market will continue to be quite volatile.
The market is very focused on earnings, and to the extent that we still have
some expensively priced stocks out there that are vulnerable to earnings
surprises, there is added risk to the market. On the other hand, our valuation
models are telling us that cyclical stocks are as cheap as they've ever been.
For example, Oregon Steel Mills and Lyondell Petrochemical are trading at
five to six times normalized earnings, and have historically high relative
yields. We have owned both stocks for several years on the premise that
normalized earnings power and cash flow would be secularly rising as a result of
specific financial and operating strategy shifts. However, both companies are
operationally and financially leveraged, and are subject to the deleterious
effect that the Asian currency devaluations have on their competitive positions.
If we ascribe to the notion that we are soon to embark on a global
deflationary spiral, these are precisely the characteristics we would want to
avoid in any of our companies. It is however, because we do not believe the
deflation threat is likely, that we still hold these companies. However, should
evidence to the contrary begin to materialize, we acknowledge that valuations
will not matter, that our thesis was broken, and that we must move on.
In this challenging environment, we cannot overemphasize the advantage of
having such a strong team of equity analysts behind us. It is only the process
of rigorous fundamental research that will enable us to determine whether an
economic paradigm shift is truly underway. We must be especially vigilant in
distinguishing between those stocks that are value traps and those that are
value opportunities. If the warning signals of deflation begin to flash more
brilliantly, we will not hesitate to acknowledge that the playing field has
changed, and reposition the portfolio accordingly.
7
<PAGE> 8
INDUSTRY SECTORS
A COMPARISON WITH THE STANDARD & POOR'S 500 STOCK INDEX*
DATA SHOW THE PERCENTAGE OF THE COMMON STOCKS IN THE PORTFOLIO THAT EACH SECTOR
OF THE KEMPER U.S. GROWTH AND INCOME FUND REPRESENTED ON SEPTEMBER 30, 1998,
COMPARED TO THE INDUSTRY SECTORS THAT MAKE UP THE FUND'S BENCHMARK, THE STANDARD
& POOR'S 500 STOCK INDEX.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER U.S. GROWTH
AND INCOME FUND S&P 500 INDEX
AS OF 9/30/98 AS OF 9/30/98
<S> <C> <C>
FINANCE 22.6% 15.1%
UTILITIES 22.3% 10.3%
BASIC INDUSTRY 15.5% 4.0%
ENERGY 10.9% 8.4%
CONSUMER NONDURABLES 8.5% 20.7%
HEALTH CARE 7.0% 13.3%
CONSUMER DURABLES 6.2% 2.3%
TRANSPORTATION 3.3% 1.0%
TECHNOLOGY 2.0% 16.8%
CAPITAL GOODS 1.7% 8.1%
</TABLE>
* The Standard & Poor's 500 Stock Index is an unmanaged index generally
representative of the U.S. stock market. Source is TowersData.
<PAGE> 9
LARGEST HOLDINGS
THE FUND'S 10 LARGEST HOLDINGS*
REPRESENTING 26.6 PERCENT OF THE FUND'S COMMON STOCK HOLDINGS ON SEPTEMBER 30,
1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
HOLDINGS PERCENT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Bristol-Myers Squibb Co. A diversified worldwide health and personal care 3.4%
company whose principal businesses are pharmaceuticals,
consumer products, nutritionals, and medical devices.
- --------------------------------------------------------------------------------------------------------
2. American Home Products Corp. Manufactures and markets heath care products, including 3.3%
pharmaceuticals, consumer health care products, and
medical supplies.
- --------------------------------------------------------------------------------------------------------
3. H.J. Heinz Co. Manufactures and markets processed food products 3.1%
including tuna, ketchup, frozen potato products and pet
food, among others.
- --------------------------------------------------------------------------------------------------------
4. Mobil Corp. Produces, transports, refines and markets petroleum and 2.6%
natural gas and related products.
- --------------------------------------------------------------------------------------------------------
5. Xerox Corp. Develops, manufactures, markets, services and finances 2.6%
a complete range of document processing products and
services.
- --------------------------------------------------------------------------------------------------------
6. Texaco Inc. Is engaged in the worldwide exploration for and 2.5%
production, transportation, refining and marketing of
crude oil, natural gas, and petroleum products.
- --------------------------------------------------------------------------------------------------------
7. KeyCorp Provides commercial banking operations and related 2.5%
financial activities.
- --------------------------------------------------------------------------------------------------------
8. Chevron Corp. Is engaged in worldwide-integrated petroleum 2.4%
operations, including exploration for, development,
transportation, refining and marketing of crude oil and
natural gas.
- --------------------------------------------------------------------------------------------------------
9. Bell Atlantic Corp. It is in the communications and entertainment 2.1%
information industry. It is the premier provider of
local telecommunications and advanced services in the
mid-Atlantic U.S. and globally, it is one of the
largest investors in the high-growth wireless
communication marketplace.
- --------------------------------------------------------------------------------------------------------
10. Sprint Corp. A diversified international telecommunications company 2.1%
with divisions that provide global long distance voice,
data, and video products and services and local
telephone services.
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Portfolio holdings and composition are subject to change.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER U.S. GROWTH AND INCOME FUND
PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT ($)/ MARKET
SHORT TERM INVESTMENTS--4.7% SHARES VALUE ($)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Home Loan Mortgage Corp.,
Discount Note, due 10/1/98
(Cost: $870,000) 870,000 870,000
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF
COMMON STOCKS--95.3% SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--10.8% Alltel Corp. 6,950shs. 329,000
TELEPHONE/ Bell Atlantic Corp. 8,050 390,000
COMMUNICATIONS BellSouth Corp. 4,700 354,000
Frontier Corp. 8,525 233,000
GTE Corp. 5,300 292,000
Sprint Corp. 5,300 382,000
------------------------------------------------------------------------
1,980,000
- --------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--3.1% Georgia Pacific Group 5,400 246,000
BUILDING PRODUCTS--1.4% ------------------------------------------------------------------------
FOREST PRODUCTS--1.7% Georgia Pacific Timber Group 3,400 66,000
Weyerhaeuser Co. 5,950 251,000
------------------------------------------------------------------------
317,000
- --------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY--3.3% J.C. Penney Co., Inc. 4,675 210,000
DEPARTMENT & CHAIN STORES May Department Stores 4,050 209,000
Sears, Roebuck & Co. 4,150 183,000
------------------------------------------------------------------------
602,000
- --------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--4.8% Philip Morris Companies, Inc. 6,750 311,000
ALCOHOL & TOBACCO--1.7% ------------------------------------------------------------------------
FOOD & BEVERAGE--3.1% H.J. Heinz Co. 11,100 567,000
------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
DURABLES--5.9% Lockheed Martin Corp. 3,200 323,000
AEROSPACE--1.8% ------------------------------------------------------------------------
AUTOMOBILES--2.8% Dana Corp. 4,700 1 75,000
Ford Motor Co. 6,925 325,000
Meritor Automotive, Inc. 1,050 16,000
------------------------------------------------------------------------
516,000
CONSTRUCTION/AGRICULTURAL PACCAR, Inc. 500 21,000
EQUIPMENT--.1% ------------------------------------------------------------------------
TIRES--1.2% Goodyear Tire & Rubber Co. 4,400 226,000
------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
ENERGY--9.4% Amoco Corp. 1,100 59,000
OIL COMPANIES--7.8% Chevron Corp. 5,175 435,000
Mobil Corp. 6,300 478,000
Texaco Inc. 7,425 465,000
------------------------------------------------------------------------
1,437,000
------------------------------------------------------------------------
OIL/GAS TRANSMISSION--1.6% Williams Cos., Inc. 10,100 290,000
------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
MARKET
SHARES VALUE ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL--18.1% Banc One Corp. 4,325 184,000
BANKS--8.7% BankAmerica Corp. 125 8,000
Bankers Trust New York Corp. 1,200 71,000
Chase Manhattan Corp. 3,050 132,000
First Union Corp. 3,315 170,000
Fleet Financial Group Inc. 1,850 136,000
KeyCorp 15,900 459,000
NationsBank Corp. 5,925 317,000
US Bancorp 3,325 118,000
-----------------------------------------------------------------------
1,595,000
INSURANCE--2.8% American General Corp. 4,800 307,000
Lincoln National Corp. 1,500 123,000
Safeco Corp. 1,775 74,000
-----------------------------------------------------------------------
504,000
CONSUMER FINANCE--.1% SLM Holding Corp. 700 23,000
-----------------------------------------------------------------------
OTHER FINANCIAL Federal National Mortgage
COMPANIES--1.9% Association 5,375 345,000
-----------------------------------------------------------------------
REAL ESTATE--4.6% Arden Realty Group, Inc. 4,450 99,000
Boston Properties, Inc. 5,700 162,000
Equity Office Properties Trust 3,050 75,000
Equity Residential Properties Trust 3,000 127,000
Health Care Property Investment Inc. 3,350 111,000
Nationwide Health Properties Inc. 4,825 109,000
Prentiss Properties Trust 1,325 32,000
ProLogis Trust 6,075 137,000
-----------------------------------------------------------------------
852,000
- -------------------------------------------------------------------------------------------------------------------
HEALTH--6.7% American Home Products Corp. 11,500 602,000
PHARMACEUTICALS Bristol-Myers Squibb Co. 6,075 631,000
-----------------------------------------------------------------------
1,233,000
- -------------------------------------------------------------------------------------------------------------------
MANUFACTURING--11.0% E.I. du Pont de Nemours & Co. 6,700 376,000
CHEMICALS--4.3% Eastman Chemical Co. 3,500 177,000
Lyondell Petrochemical Co. 10,325 230,000
-----------------------------------------------------------------------
783,000
CONTAINERS & PAPER--1.1% Boise Cascade Corp. 2,750 70,000
Temple-Inland, Inc. 2,825 135,000
-----------------------------------------------------------------------
205,000
DIVERSIFIED
MANUFACTURING--1.1% Olin Corp. 7,100 204,000
-----------------------------------------------------------------------
ELECTRICAL PRODUCTS--.1% Thomas & Betts Corp. 625 24,000
-----------------------------------------------------------------------
INDUSTRIAL SPECIALTY--1.8% Corning Inc. 11,075 326,000
-----------------------------------------------------------------------
OFFICE EQUIPMENT/ Xerox Corp. 5,575 472,000
SUPPLIES--2.6% -----------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
MARKET
SHARES VALUE ($)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
METALS & MINERALS--1.7% Allegheny Teledyne Inc. 10,425 186,000
STEEL & METALS Oregon Steel Mills, Inc. 11,000 129,000
------------------------------------------------------------------------
315,000
- --------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--1.6% Browning-Ferris Industries 9,750 295,000
ENVIRONMENTAL SERVICES ------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--1.9% General Dynamics Corp. 6,900 346,000
MILITARY ELECTRONIC ------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--3.1% CSX Corp. 6,400 269,000
RAILROADS Norfolk Southern Corp. 10,400 302,000
------------------------------------------------------------------------
571,000
- --------------------------------------------------------------------------------------------------------------------
UTILITIES--10.5% Allegheny Energy, Inc. 9,300 294,000
ELECTRIC UTILITIES CINergy Corp. 8,250 316,000
Duke Energy Corp. 4,550 301,000
PacifiCorp 9,400 180,000
Southern Company 9,275 272,000
TNP Enterprises, Inc. 7,800 273,000
Unicom Corp. 7,225 270,000
Wisconsin Energy Corp. 800 25,000
------------------------------------------------------------------------
1,931,000
- --------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS--3.4% Standard & Poor's 500 Depository
Receipt Trust Series I 6,200 630,000
------------------------------------------------------------------------
------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost: $19,014,000) 17,490,000
------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $19,884,000) 18,360,000
------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $19,914,000 for federal income tax purposes
at September 30, 1998, the gross unrealized appreciation was $418,000, the gross
unrealized depreciation was $1,942,000 and the net unrealized depreciation on
investments was $1,524,000.
See accompanying Notes to Financial Statements.
12
<PAGE> 13
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER U.S. GROWTH AND INCOME FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper U.S. Growth And Income Fund as
of September 30, 1998, and the related statements of operations and changes in
net assets and the financial highlights for the period from January 30, 1998
(commencement of operations) to September 30, 1998. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
September 30, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
U.S. Growth And Income Fund at September 30, 1998, the results of its
operations, the changes in net assets and the financial highlights for the
period referred to above, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
November 17, 1998
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------
ASSETS
- ---------------------------------------------------------------------------
Investments, at value
(Cost: $19,884,000) $18,360,000
- ---------------------------------------------------------------------------
Cash 1,000
- ---------------------------------------------------------------------------
Deferred organization expense 10,000
- ---------------------------------------------------------------------------
Receivable for:
Investments sold 76,000
- ---------------------------------------------------------------------------
Fund shares sold 297,000
- ---------------------------------------------------------------------------
Dividends 32,000
- ---------------------------------------------------------------------------
TOTAL ASSETS 18,776,000
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ---------------------------------------------------------------------------
Payable for:
Investments purchased 151,000
- ---------------------------------------------------------------------------
Fund shares redeemed 18,000
- ---------------------------------------------------------------------------
Distribution fee 17,000
- ---------------------------------------------------------------------------
Other payables and accrued expenses 27,000
- ---------------------------------------------------------------------------
Total liabilities 213,000
- ---------------------------------------------------------------------------
NET ASSETS $18,563,000
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ---------------------------------------------------------------------------
Paid-in capital $20,518,000
- ---------------------------------------------------------------------------
Accumulated net realized loss on investments (437,000)
- ---------------------------------------------------------------------------
Net unrealized depreciation on investments (1,524,000)
- ---------------------------------------------------------------------------
Undistributed net investment income 6,000
- ---------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $18,563,000
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
THE PRICING OF SHARES
- ---------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($8,776,081 / 962,731 shares outstanding) $9.12
- ---------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering price) $9.68
- ---------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($6,661,231 / 730,477 shares outstanding) $9.12
- ---------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($3,125,365 / 342,855 shares outstanding) $9.12
- ---------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 15
FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 30, 1998 (COMMENCEMENT OF OPERATIONS) TO
SEPTEMBER 30, 1998
STATEMENT OF OPERATIONS
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------
NET INVESTMENT INCOME
- ---------------------------------------------------------------------------
Dividends $ 174,000
- ---------------------------------------------------------------------------
Interest 16,000
- ---------------------------------------------------------------------------
Total investment income 190,000
- ---------------------------------------------------------------------------
Expenses:
Management fee 39,000
- ---------------------------------------------------------------------------
Distribution services fee 24,000
- ---------------------------------------------------------------------------
Administrative services fee 16,000
- ---------------------------------------------------------------------------
Custodian, accounting and transfer agent fees and related
expenses 52,000
- ---------------------------------------------------------------------------
Professional fees 52,000
- ---------------------------------------------------------------------------
Registrations fee 6,000
- ---------------------------------------------------------------------------
Amortization of organization expenses 1,000
- ---------------------------------------------------------------------------
Trustees' fees and other 4,000
- ---------------------------------------------------------------------------
Total expenses before expense waiver 194,000
- ---------------------------------------------------------------------------
Less expenses waived and absorbed by adviser 86,000
- ---------------------------------------------------------------------------
Total expenses after expense waiver 108,000
- ---------------------------------------------------------------------------
NET INVESTMENT INCOME 82,000
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
- ---------------------------------------------------------------------------
Net realized loss on sales of investments (437,000)
- ---------------------------------------------------------------------------
Change in net unrealized depreciation on investments (1,524,000)
- ---------------------------------------------------------------------------
Net loss on investments (1,961,000)
- ---------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(1,879,000)
- ---------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
- ---------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------
<S> <C>
Net investment income $ 82,000
- ---------------------------------------------------------------------------
Net realized loss (437,000)
- ---------------------------------------------------------------------------
Change in net unrealized depreciation (1,524,000)
- ---------------------------------------------------------------------------
Net decrease in net assets resulting from operations (1,879,000)
- ---------------------------------------------------------------------------
Distribution from net investment income (76,000)
- ---------------------------------------------------------------------------
Net increase from capital share transactions 20,418,000
- ---------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 18,463,000
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------
Beginning of period 100,000
- ---------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment income
of $6,000) $18,563,000
- ---------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper U.S. Growth And Income Fund (the Fund) is a
diversified series of Kemper Securities Trust (the
Trust), an open-end management investment company
organized as a business trust under the laws of
Massachusetts. The Fund commenced operations on
January 30, 1998. The Fund currently offers three
classes of shares. Class A shares are sold to
investors subject to an initial sales charge. Class
B shares are sold without an initial sales charge
but are subject to higher ongoing expenses than
Class A shares and a contingent deferred sales
charge payable upon certain redemptions. Class B
shares automatically convert to Class A shares six
years after issuance. Class C shares are sold
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions within one year of purchase.
Class C shares do not convert into another class.
Differences in class expenses will result in the
payment of different per share income dividends by
class. All shares of the Fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES SECURITY VALUATION. Investments are stated at
value. Portfolio securities which are traded on
U.S. 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 on
the Nasdaq. If there are no such sales, the value
is the most recent bid quotation. Securities which
are not quoted on the Nasdaq but are traded in
another over-the-counter market are valued at the
most recent sale price on such market. If no sale
occurred, the security is then valued at the
calculated mean between the most recent bid and
asked quotations. If there are no such bid and
asked quotations, the most recent bid quotation
shall be used.
Portfolio debt securities other than money market
securities with an original maturity over sixty
days are valued by pricing agents approved by the
officers of the Fund, which quotations reflect
broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents
are unable to provide such quotations, the most
recent bid quotation supplied by a bona fide market
maker shall be used. Money market instruments
purchased with an original maturity of sixty days
or less are valued at amortized cost. All other
securities are valued at their fair market value as
determined in good faith by the Valuation Committee
of the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date. Dividend income is recorded on the ex-
dividend date, and interest income is recorded on
the accrual basis. Realized gains and losses from
investment transactions are reported on an
identified cost basis.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the close of the Exchange. The net
asset value per share is
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
determined separately for each class by dividing
the Fund's net assets attributable to that class by
the number of shares of the class outstanding.
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.
At September 30, 1998, the Fund had a tax basis net
loss carryforward of approximately $407,000 which
may be applied against any realized net taxable
gains of each succeeding year until fully utilized
or it will expire in the period ended 2006.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income quarterly
and any net realized capital gains annually, which
are recorded on the ex-dividend date. Dividends are
determined in accordance with income tax principles
which may treat certain transactions differently
from generally accepted accounting principles.
ORGANIZATIONAL COSTS. Costs incurred by the Fund in
connection with its organization and initial
registration of shares have been deferred and are
being amortized on a straight-line basis over a
five-year period.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a monthly management fee
of 1/12 of the annual rate of .60% of the first
$250 million of average daily net assets declining
to .53% of average daily net assets in excess of
$2.5 billion. However, the Fund incurred no
management fee for the period ended September 30,
1998, after an expense waiver by Scudder Kemper.
In addition, Scudder Kemper temporarily agreed to
absorb certain operating expenses of the Fund.
Under these arrangements, Scudder Kemper waived and
absorbed expenses of $86,000 for the period ended
September 30, 1998.
ZURICH/B.A.T MERGER. On September 7, 1998, Zurich
Insurance Company (Zurich), majority owner of
Scudder Kemper, entered into an agreement with
B.A.T Industries p.l.c. (B.A.T) pursuant to which
the financial services businesses of B.A.T were
combined with Zurich's businesses to form a new
global insurance and financial services company
known as Zurich Financial Services. Upon
consummation of the transaction, the Fund's
investment management agreement with Scudder Kemper
was deemed to have been assigned and, therefore,
terminated. The Board of Trustees of the Fund has
approved a new investment management agreement with
Scudder Kemper, which is substantially identical to
the former investment management agreement, except
for the dates of execution and termination. The
Board of Trustees of the Fund will seek shareholder
approval of the new investment management agreement
through a proxy solicitation that is currently
scheduled to conclude in mid-December.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI).
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
Underwriting commissions paid in connection with
the distribution of Class A shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS
COMMISSIONS ALLOWED BY KDI
RETAINED BY KDI TO FIRMS
--------------- --------------
<S> <C> <C>
Period ended September 30, 1998 $5,000 292,000
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares pursuant to separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees, CDSC and commissions
related to Class B and Class C shares are as
follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES
(AFTER EXPENSE WAIVER) COMMISSIONS AND
AND CDSC RECEIVED DISTRIBUTION FEES PAID
BY KDI BY KDI TO FIRMS
---------------------- ----------------------
<S> <C> <C>
Period ended September 30, 1998 $20,000 264,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, the Fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. KDI in turn has various
agreements with financial services firms that
provide these services and pays these firms based
on assets of Fund accounts the firms service. The
Fund incurred no administrative services fees for
the period ended September 30, 1998, after an
expense waiver by Scudder Kemper. During the period
ended September 30, 1998, KDI paid fees of $21,000
to various firms.
SHAREHOLDER SERVICES AGREEMENT. Kemper Service
Company (KSvC) is the transfer, dividend paying and
shareholder service agent for the Fund. The Fund
incurred shareholder services fees of $20,000 for
the period ended September 30, 1998.
FUND ACCOUNTING AGENT. Scudder Fund Accounting
Corporation is responsible for determining the
daily net asset value per share and maintaining the
portfolio and general accounting records of the
Fund. The Fund incurred no accounting fees for the
period ended September 30, 1998, after a fee waiver
of $25,000 by Scudder Kemper.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the period ended September 30,
1998, the Fund made no payments to its officers and
incurred trustees' fees of $1,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the period ended September 30, 1998, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $25,195,000
Proceeds from sales 5,744,000
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30, 1998
--------------------------------
SHARES AMOUNT
--------------------------------------------------------------------------
<S> <C> <C>
--------------------------------------------------------------------------
SHARES SOLD
--------------------------------------------------------------------------
Class A 1,058,000 $10,643,000
--------------------------------------------------------------------------
Class B 753,000 7,603,000
--------------------------------------------------------------------------
Class C 376,000 3,777,000
--------------------------------------------------------------------------
--------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
--------------------------------------------------------------------------
Class A 5,000 48,000
--------------------------------------------------------------------------
Class B 2,000 16,000
--------------------------------------------------------------------------
Class C 1,000 7,000
--------------------------------------------------------------------------
--------------------------------------------------------------------------
SHARES REDEEMED
--------------------------------------------------------------------------
Class A (104,000) (1,024,000)
--------------------------------------------------------------------------
Class B (29,000) (300,000)
--------------------------------------------------------------------------
Class C (38,000) (352,000)
--------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS $20,418,000
--------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
FINANCIAL HIGHLIGHTS
For the period from January 30, 1998 (commencement of operations) to September
30, 1998
<TABLE>
<CAPTION>
--------------------------------------------------
CLASS A CLASS B CLASS C
--------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.50 9.50 9.50
- ------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .07 .03 .03
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss (.38) (.38) (.38)
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations (.31) (.35) (.35)
- ------------------------------------------------------------------------------------------------------------------
Less distributions from net investment income .07 .03 .03
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.12 9.12 9.12
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) (3.36)% (3.72) (3.71)
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.36% 2.01 1.99
- ------------------------------------------------------------------------------------------------------------------
Net investment income 1.56% .91 .93
- ------------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------
Expenses 2.59% 3.49 3.25
- ------------------------------------------------------------------------------------------------------------------
Net investment income (loss) .33% (.57) (.33)
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ------------------------------------------------------------------------------------------------------------------
Net assets at end of period $18,563,000
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 93%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive its management fee and
absorb certain operating expenses of the Fund. The Other Ratios to Average Net
Assets are computed without this expense waiver or absorption.
TAX INFORMATION
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 Kemper Fund account, please call 1-800-621-1048.
20
<PAGE> 21
NOTES
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES&OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY THOMAS W. LITTAUER
Chairman and Trustee President Vice President
JAMES E. AKINS PHILIP J. COLLORA ANN M. MCCREARY
Trustee Vice President and Vice President
Secretary
ARTHUR R. GOTTSCHALK JOHN R. HEBBLE KATHRYN L. QUIRK
Trustee Treasurer Vice President
FREDERICK T. KELSEY LORI J. ENSINGER LINDA J. WONDRACK
Trustee Vice President Vice President
FRED B. RENWICK PHILIP S. FORTUNA MAUREEN E. KANE
Trustee Vice President Assistant Secretary
JOHN B. TINGLEFF JERARD K. HARTMAN CAROLINE PEARSON
Trustee Vice President Assistant Secretary
EDMOND D. VILLANI ELIZABETH C. WERTH
Trustee Assistant Secretary
JOHN G. WEITHERS BRENDA LYONS
Trustee Assistant Treasurer
- --------------------------------------------------------------------------------
LEGAL COUNSEL DECHERT PRICE & RHOADS
Ten Post Office Square South
Boston, MA 02109
- --------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND STATE STREET BANK AND TRUST COMPANY
TRANSFER AGENT 225 Franklin Street
Boston, MA 02110
- --------------------------------------------------------------------------------
INDEPENDENT ERNST & YOUNG LLP
AUDITORS 200 Clarendon Street
Boston, MA 02116
- --------------------------------------------------------------------------------
PRINCIPAL KEMPER DISTRIBUTORS, INC.
UNDERWRITER 222 South Riverside Plaza Chicago, IL 60602-5808
www.kemper.com
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/Value Style prospectus.
KUSGIF - 2 (11/98) 1059746
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world(SM)
