<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED SEPTEMBER 30, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
KEMPER SMALL CAP
RELATIVE VALUE FUND
". . . The market's volatility, and the downturn that was accentuated in late
August caused all equity investments to struggle -- particularly small cap
stocks. Although we never like to endure losses, we were gratified that the fund
held up better than other small stock funds -- both growth style and value
style. . . ."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
8
INDUSTRY SECTORS
9
LARGEST HOLDINGS
10
PORTFOLIO OF
INVESTMENTS
16
REPORT OF INDEPENDENT AUDITORS
17
FINANCIAL STATEMENTS
19
NOTES TO
FINANCIAL STATEMENTS
22
FINANCIAL HIGHLIGHTS
At A GLANCE
- --------------------------------------------------------------------------------
KEMPER SMALL CAP RELATIVE VALUE
FUND TOTAL RETURNS AS OF 9/30/98*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIFE OF INCEPTION
CLASS DATE
- --------------------------------------------------------------------------------
<S> <C> <C>
UNADJUSTED FOR ANY SALES CHARGE
- --------------------------------------------------------------------------------
CLASS A -20.32% 5/6/98
- --------------------------------------------------------------------------------
CLASS B -20.63% 5/6/98
- --------------------------------------------------------------------------------
CLASS C -20.53% 5/6/98
- --------------------------------------------------------------------------------
ADJUSTED FOR THE MAXIMUM SALES CHARGE*
- --------------------------------------------------------------------------------
CLASS A -24.90% 5/6/98
- --------------------------------------------------------------------------------
CLASS B -23.81% 5/6/98
- --------------------------------------------------------------------------------
CLASS C -21.32% 5/6/98
- --------------------------------------------------------------------------------
</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.
* TOTAL RETURN MEASURES 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 AND FOR CLASS B
SHARES ADJUSTMENT FOR THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) OF 4
PERCENT. FOR CLASS C SHARES, THERE IS A 1 PERCENT CDSC ON CERTAIN REDEMPTIONS
WITHIN THE FIRST YEAR OF PURCHASE. 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.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
9/30/98 5/6/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER SMALL CAP
RELATIVE VALUE FUND CLASS A $7.57 $9.50
- --------------------------------------------------------------------------------
KEMPER SMALL CAP
RELATIVE VALUE FUND CLASS B $7.54 $9.50
- --------------------------------------------------------------------------------
KEMPER SMALL CAP
RELATIVE VALUE FUND CLASS C $7.55 $9.50
- --------------------------------------------------------------------------------
</TABLE>
INVESTMENT BY THE FUND IN SMALL COMPANIES PRESENTS GREATER RISK THAN INVESTMENT
IN LARGER, MORE ESTABLISHED COMPANIES.
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
James (Mac) Eysenbach is the lead portfolio manager for Kemper Small Cap
Relative Value Fund. Eysenbach joined Scudder Kemper Investments, Inc. in 1991.
He holds a bachelor's degree in economics from Bowdoin College and an M.B.A.
degree in finance from the Anderson School at UCLA. Eysenbach is a chartered
financial analyst.
Philip Fortuna is a portfolio manager of the fund and a managing director of
Scudder Kemper Investments, Inc. He directs the company's quantitative group.
Fortuna received a bachelor's degree from Carnegie Mellon University and an
M.B.A. from the University of Chicago.
Calvin Young is also a portfolio manager of the fund. He joined the organization
in 1990. Young earned an M.B.A. from Golden Gate University and a bachelor's
degree from the University of California at Berkeley.
IN THE FUND'S FIRST SHAREHOLDER REPORT, KEMPER SMALL CAP RELATIVE VALUE FUND'S
LEAD PORTFOLIO MANAGER JAMES (MAC) EYSENBACH EXPLAINS THE FUND'S INVESTMENT
APPROACH, HOW IT DIFFERS FROM KEMPER'S OTHER SMALL CAPITALIZATION EQUITY FUNDS,
AND HOW IT HAS PERFORMED IN ITS FIRST FIVE MONTHS -- A TIME WHEN SMALL
CAPITALIZATION STOCKS STRUGGLED.
Q MAC, SINCE THIS IS THE FUND'S FIRST REPORT TO SHAREHOLDERS, COULD YOU
BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
A Certainly. The fund seeks long-term capital appreciation, through a
diversified portfolio of undervalued, small-company stocks. We use a relative
value strategy to select investments from each major sector of the small-cap
market as part of a well-diversified, risk-managed portfolio. We seek
attractively priced stocks based on sales, earnings, book values and other
measures of firm value, measured in relationship to companies within the same
economic sector. Using this relative value approach, we choose only those stocks
that we believe represent the best values within each sector. We do not attempt
to forecast which sectors are going to perform best or the direction of the
overall market. To limit individual security risk, we diversify among a large
number of securities (typically more than 150) and limit positions to less than
2 percent of assets.
Q KEMPER HAS A COUPLE OF SMALL-CAPITALIZATION EQUITY FUNDS. WHAT MAKES THIS
ONE DIFFERENT?
A Yes, Kemper currently has three small-cap equity funds -- two value-style
funds and one growth-style fund. Kemper Small Cap Relative Value Fund is similar
to other value funds such as Kemper Small Cap Value Fund in that we focus on
out-of-favor companies that are currently selling at bargain prices. The fund's
median price-per-earnings multiple, for example, is currently 13.1 times
earnings, or about 25 percent lower than that of the overall small cap
market. We differ in our use of a relative value investment strategy, whereby
we seek the most attractively priced securities within each major economic
sector, while maintaining overall sector allocations roughly in line with the
small cap market. In other types of value investment strategies, certain sectors
are often significantly underweighted or eliminated from consideration because
of their higher valuations relative to the broader stock market. While a
relative value strategy may result in slightly higher volatility than an
absolute value strategy, the fund has the potential to more fully participate in
market advances led by higher growth sectors, such as technology and health
care.
Another important distinction is our use of quantitative techniques for
security evaluation and portfolio management. We start by collecting fundamental
and pricing information for the nearly 2,000 U. S. common stocks (excluding
REITs*) in the Russell 2000 Index of small companies. Each company is then
systematically analyzed to uncover those with attractive valuations.
Specifically, we look for stocks that are:
- Undervalued in the market based on measures such as earnings, sales, cash
flow and book value
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.
5
<PAGE> 6
PERFORMANCE UPDATE
- Experiencing favorable trends in sales, earnings and prices
- Considered lower risk, based on factors such as financial strength and
earnings predictability.
Finally, we use portfolio optimization software to build a diversified,
sector-neutral portfolio of these undervalued stocks.
* REITs, or real estate investment trusts, represent pooled real estate
investments and are included in the Russell 2000 Index, but not other small
cap stock benchmarks.
Q WHAT ARE THE BENEFITS OF THE QUANTITATIVE SELECTION PROCESS YOU MENTIONED?
A The screening process allows us to research a 2,000-company universe in a
consistent and systematic way. With a universe of this size, more than 30
quarterly earnings reports may be released on any given business day. As this
new information is reported, we can quickly and efficiently incorporate it into
our valuation model along with the latest security prices. This ability to
quickly reassess relative valuations for our holdings as well as the broad
universe of potential investments is especially important in volatile markets
like we experienced this period. It allows us to take advantage of
"mis-valuations" that may result from the volatility and keep the fund
positioned in the most attractive investments based on the latest available
information.
Q HOW HAS THE FUND PERFORMED SINCE ITS INCEPTION IN MAY?
A The market's volatility, and the downturn that was accentuated in late
August caused all equity investments to struggle -- particularly small cap
stocks. The fund's Class A shares (unadjusted for any sales charge) declined
20.32 percent since their inception on May 6, 1998. By comparison, the Russell
2000 (a blend of small cap growth and value stocks) declined 24.12 percent, and
the Russell 2000 Value Index declined 21.24 percent for the same period.
Although we never like to endure losses, we were gratified that the fund
held up better than other small stock funds -- both growth-style and
value-style. Both our value orientation and emphasis on risk management were
important factors. Small value stocks held up better than small growth stocks as
measured by the Russell indices, which is what we expect to happen in down
markets, and why we believe this fund has the potential for less downside risk
than a growth-style fund. In addition, our broad security diversification helped
mitigate the impact of the market's volatility on the fund.
Q CAN YOU EXPLAIN WHAT CAUSED THE VOLATILITY IN THE MARKETS AND THE DOWNTURN
IN AUGUST?
A There is, of course, no single answer to that question. However, I believe
that the heightened volatility and the downturn in August was a result of
investor psychology about the ongoing trouble in Asia, the Russian currency
devaluation and concern about Latin American economies. Investors suffered
through some significant losses a year ago in October 1997 as deep economic
trouble surfaced in Southeast Asia. And although the U.S. markets recovered
quite quickly, there continued to be concern that trouble in Asia would
eventually spread to the U.S. The question soon became WHEN, and not IF, the
U.S. economy and stock market would be hurt by the Asia crisis.
With this fear looming, investors began to buy anything that they believed
would be "safe" and offer liquidity in the case of another downturn. The result
of this flight to quality meant that investors fled from small-cap stocks in
pursuit of the more stable earnings of large-capitalization growth stocks.
Well-known companies such as Microsoft, Coca Cola, Gillette and others began to
symbolize safety for investors, despite their increasingly high valuations. As
trouble surfaced in Russia and Latin America, investors became more certain that
the U.S. would not be insulated from the struggling global economy. They poured
money even faster into big-name blue-chip companies, and as a result the prices
of these huge large-cap growth stocks were driven up to levels unseen before,
while the prices of small caps started moving lower in late August.
It's important to remember that this flight from small caps had little to
do with the fundamental strength of smaller companies and everything to do with
the fears of investors. As a result, we believe this situation has created an
attractive buying opportunity for investors willing to focus on the promising
long-term prospects for small U.S. companies.
Q HAS YOUR MANAGEMENT OF THE FUND CHANGED IN LIGHT OF THE MARKET'S EXTREME
VOLATILITY?
A No. We won't change our investment style because of short-term shifts in
the market. In fact, our investment style proved advantageous in August as the
market declined. In nine out of 13 sectors the fund's investments
6
<PAGE> 7
PERFORMANCE UPDATE
performed better than the same economic sectors of the Russell 2000 Index.
We also believe that small-cap stocks are due for a turnaround. These
stocks have more limited foreign exposure and are trading at historically low
levels. Valuations relative to large cap stocks are more attractive than they
have been in more than a decade. Consequently, we are maintaining our small-cap
focus. The median market cap of the fund's holdings on September 30, 1998 was
$336 million compared to $382 million for the Russell 2000 Index.
Q WHICH FUND SECTOR PERFORMED THE BEST DURING THE PERIOD?
A The utilities sector was the fund's strongest performer during the period.
Earlier in the year, utilities had been underperforming amid concerns about
industry deregulation and the ability of these stocks to keep up in a rapidly
rising market. As a result, many investors were underweighted in utilities. True
to our sector-neutral investment style, the fund had a market weighting in this
sector. Utilities are generally considered to be "defensive" stocks, those that
people favor in times of uncertainty. As volatility began to rock the market,
utility stocks rallied and the fund was well positioned to benefit from the
rally.
Q WHAT ABOUT SECTORS THAT DISAPPOINTED YOU?
A Some of the weakest returns came from the transportation and energy
sectors. It was a difficult period to invest in these sectors. Transportation
stocks fell on concerns of a slowing U.S. economy and energy stocks were hit by
falling commodity prices resulting from weak global demand. Nevertheless, we
continue to believe there is value to be found in these sectors and are sticking
with those holdings with the most promising valuations currently.
Q WHAT'S YOUR OUTLOOK FOR THE SMALL-CAP MARKET AND KEMPER SMALL CAP RELATIVE
VALUE FUND IN PARTICULAR?
A Although the small-cap market has been difficult, we believe investors will
be rewarded for their patience. As I mentioned previously, we're seeing many
financially sound, fundamentally solid companies now trading at historically low
valuations. Despite short-term slowing, the U.S. economy remains sound and most
small cap companies have more limited foreign exposure, which should be positive
for earnings. We believe the disproportionate drop in the prices of small U.S.
companies may offer great opportunities for small-cap investors and the fund in
particular.
7
<PAGE> 8
INDUSTRY SECTORS
KEMPER SMALL CAP RELATIVE VALUE FUND SECTOR COMPOSITION
Data show the percentage of the common stocks in the portfolio that each sector
of Kemper Small Cap Relative Value Fund represented on September 30,1998.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL CAP VALUE FUND
ON 9/30/98
<S> <C>
FINANCE 13.4%
CONSUMER DISCRETIONARY 12.0%
TECHNOLOGY 11.8%
SERVICE INDUSTRIES 10.6%
MANUFACTURING 8.9%
HEALTH 8.3%
CONSTRUCTION 8.0%
CONSUMER STAPLES 6.2%
DURABLES 6.1%
UTILITIES 4.7%
METALS & MINERALS 3.5%
ENERGY 3.3%
COMMUNICATIONS 1.9%
TRANSPORTATION 1.3%
</TABLE>
8
<PAGE> 9
LARGEST HOLDINGS
THE FUND'S 10 LARGEST HOLDINGS*
Representing 11.4 percent of the fund's common stocks on September 30, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
HOLDINGS PERCENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. KAMAN Serves government and commercial markets 1.2%
through its diversified technologies and
distribution segments. It provides aircraft
manufacturing, design and manufacture of
advanced technology products and systems and
advanced technology services.
2. FOODMAKER Foodmaker owns, operates, and franchises the 1.2%
Jack In The Box restaurant concept.
3. EL PASO ELECTRIC CO. Generates, purchases, distributes, transmits, 1.2%
and sells electric power.
4. HARMON INDUSTRIES Supplies sophisticated signal and train control 1.2%
products and systems to railroads, both freight
and transit, throughout the world.
5. TNP ENTERPRISES Engaged in the business of generating, 1.1%
purchasing, transmitting, distributing and
selling electric energy within the states of
Texas and New Mexico.
6. RLI Underwrites selected property and casualty 1.1%
insurance products through its subsidiaries RLI
Insurance Company and Mt. Howley Insurance
Company.
7. BOWNE & CO. Prepares and distributes documentation related 1.1%
to corporate and public financing, information
management and compliance documentation services
through its financial, corporate, commercial
and legal printing subsidiaries.
8. SPS TECHNOLOGIES Manufactures high-strength aerospace and indus- 1.1%
trial fasteners and precision components;
computer-controlled fastening systems; super
alloys; and magnetic materials.
9. LONE STAR INDUSTRIES Produces and distributes cement, aggregates and 1.1%
ready mixed concrete.
10. CTS Designs, manufactures, and markets electronic 1.1%
components such as resistor networks, variable
resistors, frequency control devices,
microcircuits, electronic connectors, switches,
automotive control sensors and loudspeakers.
</TABLE>
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER SMALL CAP RELATIVE VALUE FUND
Portfolio of Investments at September 30, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT($)/ MARKET
SHORT TERM INVESTMENTS--5.8% SHARES VALUE ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Home Loan Mortgage Corp.,
Discount Note, due 10/1/98
(Cost: $104,000) 104,000 104,000
------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
COMMON STOCKS--94.2%
- -----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--1.8% (a)Cellular Communications of Puerto
CELLULAR TELEPHONE--.7% Rico, Inc. 800shs. 9,300
(a)CoreComm Ltd. 300 3,263
------------------------------------------------------------------------
12,563
TELEPHONE/COMMUNICATIONS--.4% CFW Communications Co. 300 6,787
------------------------------------------------------------------------
MISCELLANEOUS--.7% North Pittsburgh Systems, Inc. 700 8,575
(a)Plantronics, Inc. 100 4,819
------------------------------------------------------------------------
13,394
- -----------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--7.5% Florida Rock Industries, Inc. 600 14,850
BUILDING MATERIALS--1.8% Lone Star Industries, Inc. 300 17,925
------------------------------------------------------------------------
32,775
BUILDING PRODUCTS--2.4% (a)Holophane Corp. 700 17,150
NCI Building Systems, Inc. 600 11,888
(a)Nortek, Inc. 500 13,625
------------------------------------------------------------------------
42,663
HOMEBUILDING--2.8% Del Webb Corp. 300 6,319
(a)NVR Inc. 300 9,900
Ryland Group, Inc. 500 12,188
Skyline Corp. 200 5,800
Standard Pacific Corp. 700 9,888
(a)U.S. Home Corp. 200 5,875
------------------------------------------------------------------------
49,970
MISCELLANEOUS--.5% Granite Construction, Inc. 300 8,831
------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY--11.3% (a)Ames Department Stores, Inc. 900 11,419
DEPARTMENT & CHAIN STORES--2.2% (a)Dress Barn Inc. 400 4,850
(a)Shopko Stores, Inc. 400 13,000
(a)Syms Corp. 1,000 10,375
------------------------------------------------------------------------
39,644
HOME FURNISHINGS--1.1% Oneida Ltd. 300 5,100
Thomas Industries, Inc. 700 15,006
------------------------------------------------------------------------
20,106
HOTELS & CASINOS--.7% Marcus Corp. 300 4,650
(a)Rio Hotel and Casino, Inc. 500 6,906
------------------------------------------------------------------------
11,556
RECREATIONAL PRODUCTS--.4% CPI Corp. 300 7,106
------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
MARKET
SHARES VALUE ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RESTAURANTS--3.5% (a)CEC Entertainment Inc. 700 14,175
(a)Foodmaker, Inc. 1,300 20,394
Ruby Tuesday, Inc. 900 13,613
Sonic Corp. 850 14,875
------------------------------------------------------------------------
63,057
SPECIALTY RETAIL--3.4% Aaron Rents, Inc. 600 9,000
(a)Friedman's, Inc. 300 1,950
(a)Inacom Corp. 600 11,325
(a)Just For Feet, Inc. 800 10,200
(a)Rent-Way, Inc. 600 14,775
Russ Berrie and Company 700 13,344
------------------------------------------------------------------------
60,594
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--5.8% Dexter Corp. 700 17,150
CONSUMER SPECIALTIES--1.3% Imperial Holly Corp. 900 6,075
------------------------------------------------------------------------
23,225
FOOD & BEVERAGE--1.3% Michael Foods, Inc. 450 10,688
Pilgrim's Pride Corp. 600 12,488
------------------------------------------------------------------------
23,176
PACKAGE GOODS/COSMETICS--1.1% (a)American Safety Razor Co. 200 1,950
(a)Chattem, Inc. 500 13,656
(a)French Fragrances, Inc. 700 5,075
------------------------------------------------------------------------
20,681
TEXTILES--1.0% Guilford Mills, Inc. 300 4,462
(a)Hartmarx Corp. 2,000 13,125
------------------------------------------------------------------------
17,587
MISCELLANEOUS--1.1% HEICO Corp. 400 6,675
(a)VWR Scientific Products Corp. 500 12,531
------------------------------------------------------------------------
19,206
- -----------------------------------------------------------------------------------------------------------------------
DURABLES--5.7% AAR Corp. 700 13,737
AEROSPACE--3.3% (a)Banner Aerospace, Inc. 1,200 9,600
Curtiss-Wright Corp. 100 3,969
Ducommun, Inc. 550 11,000
Kaman Corp. 1,200 20,550
------------------------------------------------------------------------
58,856
AUTOMOBILES--1.0% Intermet Corp. 1,000 12,687
Wynn's International, Inc. 300 5,606
------------------------------------------------------------------------
18,293
LEASING COMPANIES--1.4% (a)Budget Group, Inc. 400 9,125
(a)Leasing Solutions, Inc. 600 16,425
------------------------------------------------------------------------
25,550
- -----------------------------------------------------------------------------------------------------------------------
ENERGY--3.1% (a)Tesoro Petroleum Corp. 900 11,756
OIL & GAS PRODUCTION--.7% ------------------------------------------------------------------------
OILFIELD SERVICES/EQUIPMENT--2.4% (a)Oceaneering International, Inc. 800 11,400
(a)Pool Energy Services Co. 1,200 10,950
RPC, Inc. 500 4,438
(a)Seacor Smit Inc. 400 16,600
------------------------------------------------------------------------
43,388
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
MARKET
SHARES VALUE ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL--12.6% ALBANK Financial Corp. 100 5,575
BANKS--5.1% Columbia Banking System, Inc. 600 11,400
Corus Bankshares, Inc. 100 3,400
Downey Financial Corp. 600 14,287
F & M Bankcorp 110 3,575
First Federal Financial Corp. 750 12,797
(a)First Republicbank Corp. 300 9,150
Silicon Valley Bancshares 1,100 17,600
The Trust Company of N.J. 600 14,325
---------------------------------------------------------------------------
92,109
BUSINESS FINANCE--.8% Advest Group, Inc. 700 14,262
---------------------------------------------------------------------------
CONSUMER FINANCE--.1% (a)Bank Plus Corp. 300 1,341
---------------------------------------------------------------------------
INSURANCE--5.6% (a)Acceptance Insurance Cos., Inc. 400 8,325
American Heritage Life Investment
Corp. 300 6,844
Arthur J. Gallagher & Co. 300 12,375
Foremost Corporation of America 800 14,650
Guarantee Life Companies, Inc. 400 7,250
Hilb, Rogal & Hamilton Co. 400 7,550
Medical Assurance, Inc. 300 7,950
Presidential Life Corp. 1,100 16,500
RLI Corp. 500 19,000
---------------------------------------------------------------------------
100,444
REAL ESTATE--.2% (a)IMC Mortgage Company 1,800 3,544
---------------------------------------------------------------------------
MISCELLANEOUS--.8% Resource Bancshares Mortgage
Group, Inc. 800 14,200
---------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
HEALTH--7.9% (a)Bio-Rad Laboratories, Inc. 500 12,187
BIOTECHNOLOGY--.7% ---------------------------------------------------------------------------
HEALTH INDUSTRY (a)DVI, Inc. 600 8,812
SERVICES--3.2% (a)Genesis Health Ventures, Inc. 800 9,800
(a)Hanger Orthopedic Group, Inc. 600 11,175
(a)PharMerica, Inc. 2,300 12,506
(a)Prime Medical Services, Inc. 500 4,063
Res-Care, Inc. 600 11,250
---------------------------------------------------------------------------
57,606
HOSPITAL MANAGEMENT--.4% (a)Curative Health Services, Inc. 200 6,125
---------------------------------------------------------------------------
MEDICAL SUPPLY & Ballard Medical Products 200 4,012
SPECIALTY--3.6% Bindley Western Industries, Inc. 466 15,378
(a)Biomatrix, Inc. 100 3,900
(a)Cooper Cos. 700 12,337
(a)Datascope Corp. 400 8,850
(a)OEC Medical Systems, Inc. 500 10,813
(a)Respironics, Inc. 300 3,375
West Co., Inc. 200 5,750
---------------------------------------------------------------------------
64,415
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
MARKET
SHARES VALUE ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANUFACTURING--8.4% (a)Kronos, Inc. 300 11,100
CHEMICALS--.9% Stepan Co. 200 5,413
------------------------------------------------------------------------
16,513
CONTAINERS & PAPER--.5% P.H. Glatfelter Company 700 9,144
------------------------------------------------------------------------
DIVERSIFIED MANUFACTURING--1.1% (a)SPS Technologies, Inc. 400 18,625
------------------------------------------------------------------------
ELECTRICAL PRODUCTS--.5% (a)Benchmark Electronics, Inc. 300 6,844
(a)DII Group, Inc. 200 2,425
------------------------------------------------------------------------
9,269
HAND TOOLS--.2% L.S. Starrett Corp. 100 3,450
------------------------------------------------------------------------
INDUSTRIAL SPECIALTY--2.2% Chart Industries, Inc. 600 3,637
Gardner Denver Inc. 800 11,300
(a)Hologic, Inc. 600 7,800
Huffy Corporation 300 4,237
National R.V. Holdings, Inc. 600 12,600
------------------------------------------------------------------------
39,574
MACHINERY/COMPONENTS/ (a)Asyst Technologies, Inc. 300 2,100
CONTROLS--2.4% Gleason Corp. 900 14,456
Reliance Steel & Aluminum Co. 400 13,125
(a)Shaw Group, Inc. 300 2,588
Varlen Corp. 400 11,200
------------------------------------------------------------------------
43,469
OFFICE EQUIPMENT/SUPPLIES--.6% General Binding Corp. 300 9,844
------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--3.3% (a)Armco, Inc. 2,900 14,500
STEEL & METALS Lone Star Technologies 500 6,375
Quanex Corp. 400 7,925
(a)RMI Titanium Co. 500 10,063
Roanoke Electric Steel Corp. 800 10,400
(a)Shiloh Industries, Inc. 400 7,250
(a)Wolverine Tube, Inc. 100 2,106
------------------------------------------------------------------------
58,619
- -----------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--10.0% Analysts International Corp. 100 3,000
EDP SERVICES--1.8% Electro Rent Corp. 1,100 15,331
Pomeroy Computer Resources, Inc. 800 13,300
------------------------------------------------------------------------
31,631
ENVIRONMENTAL SERVICES--.3% Dames & Moore, Inc. 500 5,250
------------------------------------------------------------------------
INVESTMENT--.8% Southwest Securities Group, Inc. 800 14,800
------------------------------------------------------------------------
COMMERCIAL ABM Industries, Inc. 200 5,850
COMMUNICATIONS--4.7% (a)Borg-Warner Security Corp. 700 9,800
(a)Dycom Industries, Inc. 300 9,337
Personnel Group of America, Inc. 900 11,081
(a)Pinkerton's, Inc. 500 6,906
Unifirst Corporation 600 16,163
(a)Veritas DGC Inc. 700 11,681
(a)Volt Information Sciences, Inc. 700 13,956
------------------------------------------------------------------------
84,774
CONSUMER (a)ADVO, Inc. 400 9,775
SERVICES--.6% ------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
MARKET
SHARES VALUE ($)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRINTING/PUBLISHING--1.5% Bowne & Co., Inc. 1,100 18,631
Merrill Corp. 500 7,844
---------------------------------------------------------------------
26,475
MISCELLANEOUS--.3% (a)Franklin Covey Co. 300 5,869
---------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--11.1%
COMPUTER SOFTWARE--2.5% (a)Activision, Inc. 400 4,500
(a)MAPICS, Inc. 600 13,237
MTS Systems Corp. 800 11,800
(a)Mentor Graphics Corp. 600 4,163
(a)Structural Dynamics Research
Corp. 900 10,125
---------------------------------------------------------------------
43,825
DIVERSE ELECTRONIC PRODUCTS--1.2% Cubic Corp. 200 4,175
Esterline Technologies Corp. 700 13,737
(a)Evans & Sutherland Computer Corp. 200 2,625
---------------------------------------------------------------------
20,537
EDP PERIPHERALS--.6% (a)Black Box Corp. 200 4,850
Gerber Scientific, Inc. 200 5,400
---------------------------------------------------------------------
10,250
ELECTRONIC COMPONENTS/ (a)CHS Electronics, Inc. 800 8,700
DISTRIBUTORS--3.1% CTS Corp. 600 17,700
Harmon Industries, Inc. 900 19,800
Technitrol, Inc. 500 10,000
---------------------------------------------------------------------
56,200
ELECTRONIC DATA PROCESSING--.9% (a)Data General Corp. 1,500 16,312
---------------------------------------------------------------------
PRECISION INSTRUMENTS--1.8% Coherent, Inc. 1,100 10,278
Innovex, Inc. 600 7,275
(a)Moog Inc. 500 14,469
---------------------------------------------------------------------
32,022
SEMICONDUCTORS--.2% (a)Siliconix, Inc. 300 4,163
---------------------------------------------------------------------
MISCELLANEOUS--.8% (a)CACI International, Inc. 200 3,100
National Computer Corp. 400 11,800
---------------------------------------------------------------------
14,900
- --------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.3% Mesaba Holdings, Inc. 400 5,800
AIRLINES--.3%
---------------------------------------------------------------------
MARINE TRANSPORTATION--.7% (a)Avondale Industries, Inc. 500 12,375
---------------------------------------------------------------------
TRUCKING--.3% Roadway Express, Inc. 400 4,400
---------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
UTILITIES--4.4% Black Hills Corp. 200 5,375
ELECTRIC UTILITIES--3.5% Central Hudson Gas & Electric Co. 100 4,187
(a)El Paso Electric Co. 2,100 20,344
Northwestern Corp. 500 13,000
TNP Enterprises, Inc. 550 19,216
---------------------------------------------------------------------
62,122
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
MARKET
SHARES VALUE ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NATURAL GAS DISTRIBUTION--.9%
NUI Corp. 400 9,200
New Jersey Resources Corp. 200 7,125
-----------------------------------------------------------------------
16,325
-----------------------------------------------------------------------
TOTAL COMMON STOCKS--94.2%
(Cost: $1,931,801) 1,683,309
-----------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $2,035,801) 1,787,309
-----------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security.
Based on the cost of investments of $2,035,801 for federal income tax purposes
at September 30, 1998, the gross unrealized appreciation was $34,735, the gross
unrealized depreciation was $283,227 and the net unrealized depreciation on
investments was $248,492.
See accompanying Notes to Financial Statements.
15
<PAGE> 16
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER SMALL CAP RELATIVE VALUE FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Small Cap Relative Value Fund
as of September 30, 1998, and the related statements of operations and changes
in net assets and financial highlights for the period from May 6, 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. 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
Small Cap Relative Value 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
Chicago, Illinois
November 17, 1998
16
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investments, at value
(Cost: $2,035,801) $1,787,309
- --------------------------------------------------------------------------
Cash 1,792
- --------------------------------------------------------------------------
Receivable for:
Fund shares sold 16,100
- --------------------------------------------------------------------------
Investments sold 5,050
- --------------------------------------------------------------------------
Dividends 822
- --------------------------------------------------------------------------
Reimbursement from Adviser 16,432
- --------------------------------------------------------------------------
Deferred organization expense 10,087
- --------------------------------------------------------------------------
TOTAL ASSETS $1,837,592
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Payable for:
Investments purchased 49,945
- --------------------------------------------------------------------------
Other payables and accrued expenses 30,262
- --------------------------------------------------------------------------
Total liabilities 80,207
- --------------------------------------------------------------------------
NET ASSETS $1,757,385
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------
Paid-in capital $2,005,877
- --------------------------------------------------------------------------
Net unrealized depreciation on investments (248,492)
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $1,757,385
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($1,064,375 / 140,687 shares outstanding) $7.57
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering price) $8.03
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($597,687 / 79,239 shares outstanding) $7.54
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($95,323 / 12,628 shares outstanding) $7.55
- --------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
17
<PAGE> 18
FINANCIAL STATEMENTS
For the period from May 6, 1998 (commencement of operations) to September
30, 1998
STATEMENT OF OPERATIONS
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
INVESTMENT INCOME
- --------------------------------------------------------------------------
Dividends $ 3,541
- --------------------------------------------------------------------------
Interest 2,048
- --------------------------------------------------------------------------
Total investment income 5,589
- --------------------------------------------------------------------------
Expenses:
Management fee 3,095
- --------------------------------------------------------------------------
Distribution services fee 1,112
- --------------------------------------------------------------------------
Administrative services fee 1,031
- --------------------------------------------------------------------------
Custodian, accounting and transfer agent fees and related
expenses 30,537
- --------------------------------------------------------------------------
Professional fees 11,000
- --------------------------------------------------------------------------
Reports to shareholders 2,000
- --------------------------------------------------------------------------
Trustees' fees and other 5,495
- --------------------------------------------------------------------------
Amortization of organization expenses 913
- --------------------------------------------------------------------------
Total expenses before expense waiver 55,183
- --------------------------------------------------------------------------
Less expenses waived and absorbed by investment manager 47,671
- --------------------------------------------------------------------------
Total expenses after expense waiver 7,512
- --------------------------------------------------------------------------
NET INVESTMENT LOSS (1,923)
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- --------------------------------------------------------------------------
Net realized gain on sales of investments 885
- --------------------------------------------------------------------------
Change in net unrealized depreciation on investments (248,492)
- --------------------------------------------------------------------------
Net loss on investments (247,607)
- --------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (249,530)
- --------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
OPERATIONS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------
Net investment loss $ (1,923)
- --------------------------------------------------------------------------
Net realized gain 885
- --------------------------------------------------------------------------
Change in net unrealized depreciation (248,492)
- --------------------------------------------------------------------------
Net decrease in net assets resulting from operations (249,530)
- --------------------------------------------------------------------------
Net increase from capital share transactions 2,005,715
- --------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 1,756,185
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------
Beginning of period 1,200
- --------------------------------------------------------------------------
END OF PERIOD $1,757,385
- --------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Small Cap Relative Value 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 May 6, 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 a
U.S. stock exchange 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
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.
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 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.
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income and 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 investment
management fee of 1/12 of the annual rate of .75%
of the first $250 million of average daily net
assets declining to .62% of average daily net
assets in excess of $12.5 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
$47,671 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). 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 $796 2,927
</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
from redemptions of Class B and Class C shares. The
Fund incurred no distribution fees for the period
ended September 30, 1998, after an expense waiver
by Scudder Kemper. During the period ended
September 30, 1998, KDI paid commissions and
distribution fees of $23,146 to firms.
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
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 $1,972
to various firms.
SHAREHOLDER SERVICES AGREEMENT. Kemper Service
Company, a subsidiary of Scudder Kemper, is the
transfer, dividend paying and shareholder service
agent for the Fund. The Fund incurred shareholder
services fees of $1,884 for the period ended
September 30, 1998, all of which is unpaid.
FUND ACCOUNTING AGENT. Scudder Fund Accounting
Corporation, a subsidiary of Scudder Kemper, 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 $26,000
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 $1,366 to independent
trustees, all of which is unpaid.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the period ended September 30, 1998, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $1,955,379
Proceeds from sales 24,463
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
V<CAPTION>
PERIOD ENDED
-----------------------------
SEPTEMBER-30, 1998
SHARES AMOUNT
<S> <C> <C>
SHARES SOLD
-------------------------------------------------------------------------
Class A 141,649 $1,224,836
--------------------------------------------------------------------------
Class B 84,568 714,490
--------------------------------------------------------------------------
Class C 26,291 233,118
--------------------------------------------------------------------------
SHARES REDEEMED
-------------------------------------------------------------------------
Class A (1,004) (8,872)
--------------------------------------------------------------------------
Class B (5,371) (49,282)
--------------------------------------------------------------------------
Class C (13,705) (108,575)
--------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL
SHARE TRANSACTIONS $2,005,715
--------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
FINANCIAL HIGHLIGHTS
For the period from May 6, 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 loss -- (.03) (.03)
- ----------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss (1.93) (1.93) (1.92)
- ----------------------------------------------------------------------------------------------------------------
Total from investment operations (1.93) (1.96) (1.95)
- ----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.57 7.54 7.55
- ----------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) (20.32)% (20.63) (20.53)
- ----------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.52% 2.40 2.37
- ----------------------------------------------------------------------------------------------------------------
Net investment loss (.15)% (1.03) (1.00)
- ----------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------------------
Expenses 12.36% 16.91 12.43
- ----------------------------------------------------------------------------------------------------------------
Net investment loss (10.99)% (15.54) (11.06)
- ----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------------------------
Net assets at end of period $1,757,385
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 7%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive its management fee and
absorb certain operating expenses of the Fund. The Other Ratios to Average Net
Assets are computed without this expense waiver or absorption. Per share data
were determined based on average shares outstanding.
- --------------------------------------------------------------------------------
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.
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY ANN M. MCCREARY
Chairman and Trustee President Vice President
JAMES E. AKINS PHILIP J. COLLORA KATHRYN L. QUIRK
Trustee Vice President and Vice President
Secretary
ARTHUR R. GOTTSCHALK LINDA J. WONDRACK
Trustee JOHN R. HEBBLE Vice President
Treasurer
FREDERICK T. KELSEY MAUREEN E. KANE
Trustee LORI J. ENSINGER Assistant Secretary
Vice President
FRED B. RENWICK CAROLINE PEARSON
Trustee PHILLIP S. FORTUNA Assistant Secretary
Vice President
JOHN B. TINGLEFF ELIZABETH C. WERTH
Trustee JERARD K. HARTMAN Assistant Secretary
Vice President
KATHRYN QUIRK BRENDA LYONS
Trustee THOMAS W. LITTAUER Assistant Treasurer
Vice President
JOHN G. WEITHERS
Trustee
- -------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- -------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- -------------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania
Kansas City, MO 64105
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG
233 South Wacker Drive
Chicago, IL 60606
- -------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER FUNDS LOGO]
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Equity Style/Value Style prospectus.
KSRVF-2 (11/98) 1059760
LONG TERM INVESTING IN A SHORT-TERM WORLD(SM)
