<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED SEPTEMBER 30, 1999
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 July we enhanced our valuation screens to include low price to earnings,
low price to cash flow and other earnings factors, in addition to high relative
dividend yield ... The enhancement is really a nuance as opposed to a sweeping
change. It enables us to consider -- where we could not have considered
before -- stocks that don't pay dividends. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
9
Industry Sectors
10
Largest Holdings
11
Portfolio of Investments
15
Financial Statements
17
Notes to Financial Statements
21
Financial Highlights
23
Report of Independent Auditors
At A GLANCE
- --------------------------------------------------------------------------------
KEMPER U.S. GROWTH AND INCOME FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1999 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 10.87
CLASS B 9.96
CLASS C 9.88
LIPPER-LARGE-CAP VALUE FUNDS CATEGORY AVERAGE* 20.68
- -------------------------------------------------------------------------------
</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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
9/30/99 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER U.S. GROWTH AND
INCOME FUND CLASS A $9.99 $9.12
- --------------------------------------------------------------------------------
KEMPER U.S. GROWTH AND
INCOME FUND CLASS B $9.98 $9.12
- --------------------------------------------------------------------------------
KEMPER U.S. GROWTH AND
INCOME FUND CLASS C $9.97 $9.12
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER U.S. GROWTH AND INCOME FUND
RANKINGS AS OF 9/30/99*
- --------------------------------------------------------------------------------
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER LARGE-CAP VALUE FUNDS CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #227 of #230 of #231 of
250 funds 250 funds 250 funds
- --------------------------------------------------------------------------------
</TABLE>
*LIPPER ANALYTICAL SERVICES, INC. RETURNS ARE BASED UPON CHANGES IN NET ASSET
VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF SALES
CHARGES AND, IF SALES CHARGE HAD BEEN INCLUDED, RESULTS MAY HAVE BEEN LESS
FAVORABLE.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
DURING THE YEAR ENDED SEPTEMBER 30, 1999, KEMPER U.S. GROWTH AND INCOME FUND
PAID THE FOLLOWING DIVIDENDS PER SHARE.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME DIVIDEND $0.1225 $0.0485 $0.0505
- --------------------------------------------------------------------------------
</TABLE>
TERMS TO KNOW
- --------------------------------------------------------------------------------
CYCLICAL STOCK A stock of a company in an industry in which earnings tend to
rise quickly when the economy strengthens and fall quickly when the economy
weakens. Examples are companies that produce commodities such as paper, steel
and chemical companies. The performance of noncyclical industries such as food,
insurance and drugs is normally not as directly affected by economic changes.
GROWTH STOCK Growth stocks are those that are expected to experience rapid
growth resulting from strong sales, dominant market positions and talented
management teams. Because these stocks are in demand, they're generally more
expensive than value stocks.
NARROW MARKET A narrow market is a securities market in which most of the gains
are earned by only a small group of companies. In 1998 and most of 1999 a narrow
market existed in which only the largest growth-style stocks enjoyed robust
gains.
SECTOR A sector comprises stocks usually found in related industries. Financial,
economic, business and other developments may affect stocks within a market
sector similarly.
VALUE STOCK Value stocks are considered to be bargain stocks because they are
perceived as undervalued and attractively priced relative to a measure of their
true worth, such as earnings potential, book value, cash flow or dividend yield.
<PAGE> 3
ECONOMIC OVERVIEW
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER:
Markets have been aquiver about inflation risks. Growth in the United States
continues to exceed most expectations. Labor markets are visibly tight. These
are the precursors to inflation -- everybody knows it.
Everybody except us, that is. We don't buy it in principle, and reality is
proving our theory correct.
First, let's look at growth. The traditional economic view is that growth
causes inflation. Today, we're seeing exactly the opposite: Low inflation is
causing growth. Low inflation keeps interest rates down, and low interest rates
spur investment by making borrowing money cheap. Investment allows companies to
add capacity, keeping competition fierce. As a result, companies aren't raising
prices; they're competing for business by keeping goods attractive and prices
low. That's true for the old economy, in which consumers are buying t-shirts,
and the new economy, in which consumers are buying Internet services. Everywhere
they look, consumers see bargains -- in the malls, in the auto showrooms, at the
mortgage companies.
As for tight labor markets, the traditional economic view is that tight labor
markets -- i.e., many "help-wanted" signs -- forces companies to pay a premium
for talent. That, in turn, forces companies to raise their prices in order to
protect their profits. And raising prices results in inflation. In contrast, we
believe that tight labor markets won't cause wages to surge. Why?
To start with, temporary agencies have proliferated, accounting for 2.2
percent of jobs, up from 0.5 percent in the early 1980s. They get just the right
amount and type of labor to the right spot at the right time to get the job
done.
Immigration also keeps a lid on wage rates, since it replenishes the work
force much faster than births. Immigration is at its highest level ever; an
amazing 10 percent of the population is foreign-born. Nearly 1 million people
enter the United States legally each year, and another 300,000 just show up.
When they get here, they look for jobs. And often, they're willing to accept
lower-paying jobs than the average citizen.
Finally, and perhaps most importantly, wage rates are kept in check by
executives' intense profit focus. Payroll is a company's biggest expense. When
payroll skyrockets, profits decline -- and that would be bad for a CEO who
promised Wall Street double-digit earnings growth from now to the end of time.
If investors are disappointed in earnings growth, they sell their stock. And
when they sell their stock, the stock options that are an essential part of many
executives' compensation are as valuable as scrap paper.
Supporting our theory are two distinct and important sets of data which were
released in late October: The Bureau of Economic Analysis (BEA) released its
third-quarter estimate of gross domestic product (GDP), the value of all goods
and services produced in the United States, and the Bureau of Labor Statistics
(BLS) released its employment cost index (ECI), which measures what employers
pay for their workers' wages, salaries and benefits.
GDP grew at a 4.8 percent rate in the third quarter, up sharply from the
revised 1.9 percent second-quarter pace and just slightly above the consensus
estimate of 4.7 percent.
At the same time, however, the ECI rose by 0.8 percent in the July-September
period, down from a 1.1 percent increase in the second quarter. The
third-quarter gain also was lower than the 0.9 percent increase forecast by
economists in a Reuters poll. (The report, by the way, is said to be one of the
favorites of Federal Reserve Chairman Alan Greenspan, who uses it as a key
indicator of inflation pressures in the world's largest economy.)
In essence, then, the U.S. economy posted its strongest growth so far this
year in the third quarter, while wage costs remained tame. The combination of
strong consumer demand and the lowest unemployment in a generation just isn't
igniting wage-driven inflation.
These figures tell us that the Fed won't have inflation as an excuse to raise
interest rates for a third time this year when it meets on Nov. 16 to decide
whether to raise key interest rates for the third time this year.
But more importantly, if these numbers prove anything, it's that conventional
wisdom that growth causes inflation should be turned on its head. The Fed, in
deciding to
3
<PAGE> 4
ECONOMIC OVERVIEW
ECONOMIC GUIDEPOSTS
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND
SHAREHOLDER DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR
DEFLATION, CREDIT EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON
MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR
INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE
10-YEAR TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES.
THE OTHER DATA REPORT YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (10/31/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
-------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate 1 6.1 5.2 4.5 6.0
Prime rate 2 8.25 7.75 8.25 8.5
Inflation rate 3* 2.6 1.8 1.4 2.2
The U.S. dollar 4 -0.9 -0.5 1.1 7.6
Capital goods orders 5* 5.25 5.5 8.6 4.6
Industrial production 5* 2.4 2.0 2.65 6.1
Employment growth 6 2.2 2.3 2.4 2.7
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
*DATA AS OF 9/30/99.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
target growth itself, wants the country to slow down to prevent an inflation
outbreak. This is a dangerous game. If it succeeds in slowing growth, inflation
could easily disappear or turn into deflation. Real rates that are already high
would turn punitive. Credit quality would deteriorate rudely. Only rapid growth
can ensure that companies and consumers can continue to pay their bills.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
Scudder Kemper Investments Economics Group
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF SCUDDER KEMPER
INVESTMENTS, INC. AS OF OCTOBER 28, 1999, AND MAY NOT ACTUALLY COME TO PASS.
THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF THIS MATERIAL IS INTENDED AS
AN INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
PERFORMANCE UPDATE
IN MID-OCTOBER (AFTER THE CLOSE OF THIS REPORTING PERIOD), KATHLEEN MILLARD
ASSUMED THE ROLE OF LEAD PORTFOLIO MANAGER. SHE JOINED SCUDDER KEMPER
INVESTMENTS, INC. IN 1991 AS A PORTFOLIO MANAGER AND BEGAN HER INVESTMENT CAREER
IN 1983. MILLARD HAS MORE THAN 15 YEARS OF INVESTMENT INDUSTRY EXPERIENCE AS A
PORTFOLIO MANAGER SPECIALIZING IN VALUE-STYLE PORTFOLIOS AND IS A CHARTERED
FINANCIAL ANALYST.
BENJAMIN THORNDIKE HAS BEEN A PORTFOLIO MANAGER FOR THE FUND SINCE ITS INCEPTION
IN 1998. HE JOINED THE ORGANIZATION IN 1983 AND HAS NEARLY 20 YEARS OF
INVESTMENT MANAGEMENT EXPERIENCE.
THE TEAM IS SUPPORTED BY INVESTMENT PROFESSIONALS INCLUDING ECONOMISTS, RESEARCH
ANALYSTS, TRADERS AND OTHER INVESTMENT SPECIALISTS THROUGHOUT THE UNITED STATES
AND ABROAD.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF LORI ENSINGER AND BENJAMIN
THORNDIKE 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.
PERFORMANCE Update
THE FOLLOWING INTERVIEW WAS CONDUCTED WITH LORI ENSINGER, LEAD PORTFOLIO MANAGER
OF KEMPER U.S. GROWTH AND INCOME FUND THROUGH THE 12-MONTH REPORTING PERIOD
ENDED SEPTEMBER 30, 1999. ON OCTOBER 19, 1999 KATHLEEN MILLARD ASSUMED THE ROLE
OF LEAD PORTFOLIO MANAGER OF THE FUND. ALL FUTURE INTERVIEWS WILL BE CONDUCTED
WITH MILLARD.
Q HOW DID THE FUND PERFORM DURING THE 12-MONTH PERIOD?
A The fund's Class A shares gained 10.87 percent unadjusted for any sales
charge. The Standard & Poor's 500 stock index gained 27.81 percent and the
Russell 1000 Value index gained 18.72 percent. The fund's relative
underperformance is due to the bifurcated market environment that favored growth
stocks over value stocks (see Terms To Know on page 2).
Q VOLATILITY ROCKED THE STOCK MARKET THIS YEAR. WHAT CAUSED THE VOLATILITY,
AND WHAT HAS ITS IMPACT BEEN ON VALUE-STYLE STOCKS AND ON KEMPER U.S. GROWTH AND
INCOME FUND IN PARTICULAR?
A Yes, the market has been volatile. It may be easier to answer this
question by talking about specific time periods throughout the year that were
characterized by different market and economic events.
OCTOBER 1998 THROUGH MARCH 1999
You may recall that a year ago, we were coming off a market decline, which
was driven by the global financial crisis -- Latin America, Russian default and
hedge fund failures. In response, the Federal Reserve Board (the Fed)
aggressively lowered short-term interest rates three times in the span of about
60 days. The Fed's actions stabilized not only the U.S. market, but global
markets as well, because it signalled that the U.S. would provide leadership and
liquidity to the marketplace.
In turn, the market rebounded in late 1998. Growth and technology stocks
made up some lost ground and continued to lead the market as they had done
earlier in 1998. This narrow leadership -- and the disparity in performance
between growth and value stocks -- caused the fund to lag the overall market as
as measured by the Standard & Poor's 500 stock index.
The fund also underperformed other value funds because our investment
process at that time precluded us from owning stocks that did not pay dividends.
Many nonyielding, undervalued stocks rallied sharply at the point, and we did
not own them.
APRIL 1999 THROUGH JUNE 1999
In late March and early April, Asia began showing signs of recovery, which
caused commodity prices -- prices of materials such as steel, chemicals, forest
products and oil -- to rally sharply. The market's underlying fear of a global
economic meltdown nearly disappeared as global and international markets beyond
Asia also showed signs of strength.
We saw a total shift in market sentiment in April that led to a period in
which value-style investments outperformed growth. Kemper U.S. Growth And Income
Fund gained 11.03 percent from April through June, compared with the S&P gain of
7.05 percent. These
5
<PAGE> 6
PERFORMANCE UPDATE
gains were due to the sizeable position of commodity cyclical stocks (see Terms
To Know on page 2) held in the fund. These stocks, which had been a drag on
performance during the first part of the period, buoyed the fund from April
through June. Rising interest rates, however, began to dampen enthusiasm for
these cyclical stocks near the end of June -- despite the companies' growing
earnings.
JULY 1999 THROUGH SEPTEMBER 1999
After reaching new highs in July, the S&P posted overall declines for July,
August and September. These declines were driven by the Fed's decision to raise
interest rates twice during the period, which put a psychological lid on the
overall market. Technology stocks and many Internet issues managed to continue
their climb in valuation, while value stocks struggled. As a result, the fund
declined 11.19 percent during this period.
Q WHY HAVE TECHNOLOGY AND INTERNET STOCKS BEEN SO RESILIENT?
A In most market environments, you'd expect just the opposite. Typically,
the stocks with the highest values tumble first as rates rise and uncertainty
enters the market. This, of course, has not happened with technology stocks.
As rates began to rise this summer, investors began to doubt that the
earnings of cyclical companies would remain strong. Market sentiment reverted
back to where it was before, and investors were willing to pay a premium to own
what they considered to be the very best companies -- technology companies that
they believed would provide positive performance no matter what happened with
the economy. This was an atypical reaction by the market that led to gains by
only a narrow band of stocks that didn't have cyclical exposure.
Q HAVE YOU REDUCED THE FUND'S COMMODITY CYCLICAL EXPOSURE?
A We trimmed the portfolio somewhat, but we did so more to take profits than
to limit our exposure in this area. DuPont and Dow Chemical, which are major
cyclical companies, performed extremely well. We sold them to take profits and
reinvested in specialty cyclical companies such as Air Products & Chemicals,
Inc.
Our overall position is down slightly from where it was last year, but we
still have a major commitment to cyclical stocks, certainly in the chemical
area. Although the earnings of these companies aren't up dramatically, they are
showing improving trends. We believe there is still a great deal of upside
potential for these types of stocks, especially if their earnings continue to
improve.
Q OTHER THAN THE CYCLICAL SECTOR, IS THERE ANOTHER SECTOR THAT HAS
CONTRIBUTED TO THE FUND'S PERFORMANCE?
A We're very pleased with the performance of the fund's
communications-services holdings. As of September 30, communications services
was the largest fund sector, representing nearly 17 percent of the fund's
assets. These core holdings benefited from increased Internet usage. Companies
such as Corning, Frontier and Sprint are what we call the "toll takers" of the
Internet. They provide critical services (such as bandwidth) that make hookups
to the Internet possible.
In addition to the increasing demand for its products and services, the
industry has benefited from con-solidation. Several of the fund's holdings have
been courted by other companies, resulting in a bid-up in their value. Although
no deal was announced during the period, speculation about a merger between MCI
WorldCom and Sprint was enough to significantly drive up the valuation of
Sprint, which is held in the fund.
Q DO YOU THINK THIS TYPE OF CONSOLIDATION IN COMMUNICATIONS SERVICES CAN
CONTINUE?
A Yes, and we think it will continue on a global basis, where we might see
international companies wanting to enter the U.S. marketplace. This
consolidation, if it continues, would be positive for the fund's holdings.
Q WHAT SECTORS HAVE DISAPPOINTED YOU?
A Financial services stocks -- banks, insurance companies and specialty
finance companies -- represent more than 14 percent of the fund's assets as of
September 30. This is an industry that has struggled all year and has inhibited
the fund's performance.
The fund's bank holdings suffered most for several reasons. Since the
beginning of 1999, there has been concern about the direction of interest rates,
which has hurt bank stocks. Typically, banks make fewer loans in
higher-interest-rate environments, which can cause a slowdown in their earnings.
This summer, the fear became reality as the Fed raised short-term interest rates
twice as a preemptive move to slow the economy which seemed to be heating up.
6
<PAGE> 7
PERFORMANCE UPDATE
In addition to rising rates, consolidation in the industry has caused some
concern and caused valuations to slide. Over the last couple years, there has
been tremendous consolidation in the industry, including highly publicized
mega-transactions, such as the combination of Bank One and First Chicago/NBD,
Bank of America and NationsBank, and First Union acquiring CoreStates. Some of
these mergers have led to earnings disappointments for the combined entities.
Over the last six months, integration issues have caused problems in terms
of lower-than-expected earnings and operational problems. Two of the fund's
holdings -- First Union and Bank One -- suffered as a result. First Union had
notable operational issues caused by its integration with CoreStates. Bank One
announced an earnings shortfall during September, which led to a significant
decline in price on the basis of its credit-card operations, which had, for a
long time, been a positive contributing factor to its returns. These two events
call into question the thesis of whether such large transactions can truly
achieve the synergies and cost savings initially expected.
Q WHAT COMPANIES HELPED PERFORMANCE?
A Corning was a significant contributor; on September 30, it represented
about 5.2 percent of the portfolio. The stock gained sharply during the first
nine months of 1999. GeorgiaPacific, which rallied off its lows in late 1998 and
is up year-to-date, also helped performance. The fund also benefited from its
energy holdings that accelerated as oil prices rose. Williams Company, Texaco
and nearly all of the fund's domestic oil stocks have been positive
contributors.
Q YOU MENTIONED THAT THERE WAS A CHANGE IN THE FUND'S STOCK-SCREENING
PROCESS. CAN YOU EXPLAIN THE CHANGE AND HOW IT IMPACTS THE FUND?
A In July, we enhanced our valuation screens to include low price to
earnings (P/E), low price to cash flow (P/CF) and other earnings factors, in
addition to high relative dividend yield (RDY), since our investment model
includes these as well.
Scudder Kemper's Quantitative Analysis group rigorously tested 35 factors
that go into the models we use for stock selection. They tested to see what
factors would help provide the best upside potential while limiting downside
risk. They determined that the combination of P/E, P/CF and RDY, along with
other earnings factors, provided the best results.
So, today we consider all three of those valuation factors together when
we screen stocks. Previously, we looked first at relative yield. If a stock had
a high dividend yield, we'd then look at the other value factors.
Other than adding P/E and P/CF to the initial screen, there is very little
that is different. The enhancement is really a nuance as opposed to a sweeping
change. It enables us to consider -- where we could not have considered before
-- stocks that don't pay dividends.
It's important to understand that the motivation for this change is not to
enable us to buy growth and technology companies. We're simply acknowledging the
fact that not all value companies pay high dividends. In fact, about a third of
the companies in the Russell 1000 index don't pay any dividends at all. This
figure has been increasing steadily in the last decade -- meaning our universe
of potential investments has dwindled if we use relative yield as our sole
screen. The market has evolved, so our discipline must evolve, too.
Q WHAT TYPE OF CATALYST IS NEEDED FOR THE MARKET TO BROADEN?
A We don't think this bifurcated market can last forever. However, it's hard
to predict exactly what might turn it around.
If the Fed continues to raise rates, it may reverse what was done a year
ago. That would weigh heavily on the overall market -- and could possibly
flatten out returns. However, because there has been such disparity in
valuations, a meaningful rotation to undervalued stocks may occur. A
disappointment in earnings by leading technology companies, which are trading at
all-time-high valuations, could also lead to a reversal. Or if the underlying
fundamentals within many of the more cyclical and commodity-oriented companies
- -- papers, chemicals and forest products -- show faster than anticipated
earnings recovery, a rotation may take place.
In any of these environments, we feel our portfolio would be poised to
benefit. The fund represents good value and has a much lower P/E than the S&P
500.
7
<PAGE> 8
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR THE PERIODS ENDED SEPTEMBER 30,1999 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR CLASS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER U.S. GROWTH AND INCOME FUND CLASS A 4.46% 0.59% (since 1/30/98)
.................................................................................................
KEMPER U.S. GROWTH AND INCOME FUND CLASS B 6.96 1.72 (since 1/30/98)
.................................................................................................
KEMPER U.S. GROWTH AND INCOME FUND CLASS C 9.88 3.44 (since 1/30/98)
.................................................................................................
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER U.S. GROWTH & INCOME FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class A shares from 1/31/98 to
9/30/99
<TABLE>
<CAPTION>
KEMPER U.S. GROWTH & STANDARD & POOR'S 500
INCOME FUND CLASS A1 STOCK INDEX* CONSUMER PRICE INDEX**
-------------------- --------------------- ----------------------
<S> <C> <C> <C>
1/31/98 9425.00 10000.00 10000.00
10179.00 11629.00 10087.00
12/31/98 10123.00 12689.00 10142.00
11371.00 14169.00 10285.00
9/30/99 10099.00 13240.00 10365.00
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER U.S. GROWTH & INCOME FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class B shares from 1/31/98 to
9/30/99
<TABLE>
<CAPTION>
KEMPER U.S. GROWTH & STANDARD & POOR'S 500
INCOME FUND CLASS B1 STOCK INDEX* CONSUMER PRICE INDEX**
-------------------- --------------------- ----------------------
<S> <C> <C> <C>
1/31/98 10000.00 10000.00 10000.00
10769.00 11629.00 10087.00
12/31/98 10673.00 12689.00 10142.00
11947.00 14169.00 10285.00
9/30/99 10296.00 13240.00 10365.00
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER U.S. GROWTH & INCOME FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class C shares from 1/31/98 to
9/30/99
<TABLE>
<CAPTION>
KEMPER U.S. GROWTH & STANDARD & POOR'S 500
INCOME FUND CLASS C1 STOCK INDEX* CONSUMER PRICE INDEX**
-------------------- --------------------- ----------------------
<S> <C> <C> <C>
1/31/98 10000.00 10000.00 10000.00
10770.00 11629.00 10087.00
12/31/98 10664.00 12689.00 10142.00
11940.00 14169.00 10285.00
9/30/99 10580.00 13240.00 10365.00
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN ORIGINAL COSTS.
*AVERAGE ANNUAL TOTAL RETURNS AND TOTAL RETURN MEASURE NET INVESTMENT INCOME
AND CAPITAL GAIN OR LOSS FROM PORTFOLIO INVESTMENTS, ASSUMING REINVESTMENT OF
ALL DIVIDENDS AND FOR CLASS A SHARES ADJUSTMENT FOR THE MAXIMUM SALES CHARGE
OF 5.75%, FOR CLASS B SHARES ADJUSTMENT FOR THE APPLICABLE CONTINGENT
DEFERRED SALES CHARGE (CDSC) OF 3% AND FOR CLASS C SHARES NO ADJUSTMENT FOR
SALES CHARGE. THE MAXIMUM CDSC FOR CLASS B SHARES IS 4%. FOR CLASS C SHARES,
THERE IS A 1% CDSC ON CERTAIN REDEMPTIONS WITHIN THE FIRST YEAR OF PURCHASE.
AVERAGE ANNUAL TOTAL RETURN REFLECTS ANNUALIZED CHANGE WHILE TOTAL RETURN
REFLECTS AGGREGATE CHANGE. DURING PERIODS NOTED, SECURITIES PRICES
FLUCTUATED. FOR ADDITIONAL INFORMATION, SEE PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION AND THE FINANCIAL HIGHLIGHTS AT THE END OF THIS
REPORT.
(1)PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS AND ADJUSTMENT FOR THE MAXIMUM
SALES CHARGE FOR CLASS A SHARES AND THE CDSC IN EFFECT AT THE END OF THE
PERIOD FOR CLASS B SHARES. IN COMPARING KEMPER U.S. GROWTH & INCOME FUND TO
THE STANDARD & POOR'S 500 STOCK INDEX* AND THE CONSUMER PRICE INDEX**, YOU
SHOULD NOTE THAT THE FUND'S PERFORMANCE REFLECTS THE MAXIMUM SALES CHARGE,
WHILE NO SUCH CHARGES ARE REFLECTED IN THE PERFORMANCE OF THE INDICES.
*THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET. SOURCE IS CDA WIESENBERGER.
**THE CONSUMER PRICE INDEX IS A STATISTICAL MEASURE OF CHANGE, OVER TIME, IN
THE PRICES OF GOODS AND SERVICES IN MAJOR EXPENDITURE GROUPS FOR ALL URBAN
CONSUMERS. IT IS GENERALLY CONSIDERED TO BE A MEASURE OF INFLATION. SOURCE IS
CDA WIESENBERGER.
8
<PAGE> 9
INDUSTRY SECTORS
A YEAR-TO-YEAR COMPARISON
Data shows the percentage of the common stocks in the portfolio that each sector
represented on September 30, 1999, and September 30, 1998.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER U.S. GROWTH AND KEMPER U.S. GROWTH AND
INCOME FUND ON 9/30/99 INCOME FUND ON 9/30/98
<S> <C> <C>
Capital goods 17.90 7.90
Communications services 17.80 0.00
Finance 14.10 22.60
Consumer non-durables 12.90 8.50
Energy 10.90 10.90
Transportation 5.50 3.30
Health care 4.90 7.00
Technology 4.90 2.00
Basic materials 4.10 15.50
Utilities 3.70 22.30
Other 3.30 0.00
</TABLE>
A COMPARISON WITH THE STANDARD & POOR'S 500 STOCK INDEX*
Data shows the percentage of the common stocks in the portfolio that each sector
of the Kemper U.S. Growth and Income Fund represented on September 30, 1999,
compared to the industry sectors that make up the fund's benchmark, the Standard
& Poor's 500 Stock Index.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER U.S. GROWTH AND STANDARD & POOR'S 500 STOCK
INCOME FUND ON 9/30/99 INDEX ON 9/30/99
<S> <C> <C>
Capital goods 17.90 8.50
Communications services 17.80 7.70
Finance 14.10 14.60
Consumer non-durables 12.90 21.20
Energy 10.90 6.40
Transportation 5.50 0.80
Health care 4.90 10.80
Technology 4.90 23.90
Basic materials 4.10 3.20
Utilities 3.70 2.90
Other 3.30 0.00
</TABLE>
* THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
9
<PAGE> 10
LARGEST HOLDINGS
THE FUND'S 10 LARGEST HOLDINGS*
Representing 30.3 percent of the fund's common stock holdings on September 30,
1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
HOLDINGS PERCENT
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. CORNING Corning is a global, 5.3%
technology-based corporation that
operates in three broadly based
business segments:
telecommunications, advanced
materials and information
display.
- ---------------------------------------------------------------------------------------
2. BELL ATLANTIC Bell Atlantic is an international 4.0%
telecommunications company that
operates in four segments:
domestic telecom, global wireless,
directory and other businesses.
- ---------------------------------------------------------------------------------------
3. MOBIL Mobil is the second-largest oil 3.4%
company in the U.S., and is being
bought by Exxon. The two combined
will create Exxon Mobil, far and
away the world's biggest oil
company.
- ---------------------------------------------------------------------------------------
4. CSX CSX operates the third-largest 3.3%
U.S. rail system.
- ---------------------------------------------------------------------------------------
5. DAYTON HUDSON Dayton Hudson operates nearly 2.7%
1,200 stores in three formats,
including Target, the #3 U.S.
discount chain; Mervyn's
California midrange department
stores, found primarily in the
West and Southwest; and Dayton,
Hudson's, and Marshall Field's
upscale department stores in the
Midwest.
- ---------------------------------------------------------------------------------------
6. GTE GTE serves local phone customers 2.6%
in 28 U.S. states and offers
long-distance service in 50. It
provides cellular and PCS phone
service through its subsidiary GTE
Wireless, consumer Internet access
through GTE.net, and also operates
cable franchises. GTE has agreed
to be acquired by Bell Atlantic.
- ---------------------------------------------------------------------------------------
7. BRISTOL-MYERS SQUIBB Bristol-Myers Squibb is a 2.5%
manufacturer of personal-care
products under brands such as
Clairol and Excedrin. Most of its
sales come from pharmaceuticals.
The company focuses its efforts on
cardiovascular treatments and
related products, such as
cholesterol-reduction drugs and
anticancer and anti-infective
drugs. The company also makes baby
formula as well as wound-treatment
and orthopedic products.
- ---------------------------------------------------------------------------------------
8. BELLSOUTH BellSouth is a local phone 2.3%
service, domestic cellular and PCS
provider. BellSouth.net provides
dial-up Internet access and is
rolling out high-speed ADSL
(asymmetric digital subscriber
line) access. BellSouth also has
expanding wireless operations and
telecommunications offerings in
Latin America.
- ---------------------------------------------------------------------------------------
9. SPRINT Sprint is a long-distance and 2.1%
local telephone service provider.
Sprint is expected to be acquired
by MCI WorldCom.
- ---------------------------------------------------------------------------------------
10. TEXACO Texaco is engaged in the 2.1%
exploration, production,
manufacture, transportation and
sale of crude oil, natural gas and
petroleum products.
- ---------------------------------------------------------------------------------------
</TABLE>
*THE FUND'S HOLDINGS ARE SUBJECT TO CHANGE.
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
KEMPER U.S. GROWTH & INCOME FUND
PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF
COMMON STOCKS--95.7% SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS--16.4%
TELEPHONE/COMMUNICATIONS
Alltel Corp. 7,650 $ 538
Ameritech Corp. 5,100 343
Bell Atlantic Corp. 20,350 1,370
BellSouth Corp. 17,700 796
(a) Global Crossing Ltd. 13,171 349
GTE Corp. 11,600 892
SBC Communications, Inc. 12,900 659
Sprint Corp. 13,200 716
------------------------------------------------------------------------
5,663
- ----------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--2.5%
BUILDING PRODUCTS--.9%
Georgia Pacific Group 7,900 320
------------------------------------------------------------------------
FOREST PRODUCTS--1.6%
Weyerhaeuser Co. 9,350 539
------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER
DISCRETIONARY--2.7%
DEPARTMENT &
CHAIN STORES
Dayton Hudson Corp. 15,300 919
------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--7.6%
ALCOHOL &
TOBACCO--1.2%
Philip Morris Companies 12,150 415
------------------------------------------------------------------------
FOOD & BEVERAGE--3.4%
Albertson's Inc. 7,463 295
H.J. Heinz Co. 8,000 344
PepsiCo Inc. 18,000 545
------------------------------------------------------------------------
1,184
- ----------------------------------------------------------------------------------------------------------------------
PACKAGED GOODS
COSMETICS--3.0%
Avon Products, Inc. 20,200 501
Colgate-Palmolive Co. 6,700 307
Gillette Co. 6,500 221
------------------------------------------------------------------------
1,029
- ----------------------------------------------------------------------------------------------------------------------
DURABLES--6.6%
AUTOMOBILES--2.3%
Ford Motor Co. 10,125 508
Meritor Automotive, Inc. 14,200 296
----------------------------------------------------------------------------
804
AEROSPACE--4.3%
Lockheed Martin Corp. 18,700 611
Northrop Grumman Corp. 5,200 331
Rockwell International Corp. 9,900 520
----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
ENERGY--10.7%
OIL & GAS PRODUCTION--2.9%
Burlington Resources, Inc. 9,500 349
Conoco, Inc. "A" 12,400 344
Conoco, Inc. "B" 11,056 303
----------------------------------------------------------------------------
996
OIL COMPANIES--6.7%
Chevron Corp 5,175 459
Mobil Corp. 11,400 1,149
Texaco Inc. 11,225 709
----------------------------------------------------------------------------
2,317
OIL/GAS TRANSMISSION--1.1%
Williams Cos., Inc. 10,100 378
----------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL--13.8%
BANKS--6.8%
Bank One Corp. 7,025 $ 245
Bank of America Corp. 8,266 460
Chase Manhattan Corp. 7,150 539
First Union Corp. 7,715 274
Fleet Financial Group Inc. 9,400 344
J.P. Morgan & Co., Inc. 1,200 137
US Bancorp 11,425 345
-----------------------------------------------------------------------
2,344
INSURANCE--2.2%
Allstate Corp. 6,400 160
Marsh & McLennan Companies, Inc. 3,700 254
St. Paul Companies, Inc. 13,100 360
-----------------------------------------------------------------------
774
CONSUMER FINANCE--.5%
SLM Holding Corp. 3,900 168
-----------------------------
----------------------------------------------------------------------
OTHER FINANCIAL
COMPANIES--1.7%
Federal National Mortgage Association 9,075 569
----------------------------------------------------------------------
REAL ESTATE--2.6%
Boston Properties, Inc. (REIT) 10,000 307
General Growth Properties, Inc. (REIT) 11,400 359
Speiker Properties, Inc. (REIT) 6,900 239
----------------------------------------------------------------------
905
- -------------------------------------------------------------------------------------------------------------------------
HEALTH--4.5%
PHARMACEUTICALS
American Home Products Corp. 16,600 689
Bristol-Myers Squibb Co. 12,550 847
----------------------------------------------------------------------
1,536
- -------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--11.1%
CHEMICALS--.9%
Lyondell Petrochemical Co. 22,525 301
----------------------------------------------------------------------
CONTAINERS & PAPER--.6%
Temple-Inland Inc. 3,525 213
----------------------------------------------------------------------
ELECTRONIC PRODUCTS--1.0%
Emerson Electric Co. 5,400 341
----------------------------------------------------------------------
INDUSTRIAL SPECIALTY--5.2%
Corning Inc. 26,175 1,795
----------------------------------------------------------------------
MACHINERY/COMPONENTS/
CONTROLS--1.5%
Parker-Hannifin Corp. 11,600 520
----------------------------------------------------------------------
OFFICE EQUIPMENT/
SUPPLIES--1.4%
Xerox Corp. 11,450 480
----------------------------------------------------------------------
SPECIALTY CHEMICAL--.5%
Air Products & Chemicals, Inc 5,600 163
----------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--1.6%
STEEL & METALS
Allegheny Teledyne Inc. 20,825 352
Oregon Steel Mills, Inc. 16,200 181
-----------------------------------------------------------------------
533
- --------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--1.0%
PRINTING/PUBLISHING
McGraw-Hill Inc. 7,400 356
-----------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TECHNOLOGY--4.8%
COMPUTER SOFTWARE--3.1%
Computer Associates International, Inc. 11,300 $ 692
Oracle Corp. 8,700 396
---------------------------------------------------------------------------
1,088
ELECTRONIC DATA
PROCESSING--1.7%
Hewlett-Packard Co. 6,300 580
---------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--5.5%
AIRLINES--.8% (a) AMR Corp. 3,300 180
(a) US Airways Group, Inc. 2,700 71
---------------------------------------------------------------------------
251
- -------------------------------------------------------------------------------------------------------------------------
RAILROADS--4.7%
CSX Corp. 26,500 1,123
Norfolk Southern Corp. 20,700 507
---------------------------------------------------------------------------
1,630
- -------------------------------------------------------------------------------------------------------------------------
UTILITIES--3.7%
ELECTRIC UTILITIES
CINergy Corp. 13,000 368
PacifiCorp 18,700 376
Unicom Corp. 14,025 518
---------------------------------------------------------------------------
1,262
- -------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS--3.2%
MISCELLANEOUS
Standard & Poor's 500 Depository Receipt 8,600 1,104
Trust Series I
--------------------------------------------------------------------------
TOTAL COMMON STOCK--95.7%
(Cost: $32,500) 32,939
--------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CONVERTIBLE BONDS--1.3% PRINCIPAL AMOUNT
CONSUMER DISCRETIONARY--1.3%
DEPARTMENT &
CHAIN STORES
Home Depot Inc., 3.25%, 2001 $ 155 461
---------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS--1.3%
(Cost: $400) 461
---------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
NUMBER OF
CONVERTIBLE PREFERRED STOCKS--1.4% SHARES
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HEALTH--0.4%
BIOTECHNOLOGY
Monsanto Co., 6.5% 3,700 133
----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
MEDIA--1.0%
CABLE TELEVISION
Adelphia Communications Corp., 5.5% 2,000 355
----------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS--1.4%
(Cost: $553) 488
----------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET INSTRUMENTS--1.6% (b) Repurchase Agreement with State Street
Bank & Trust Company dated 9/30/1999, $ 560 560
5.26%, due 10/01/1999
(Cost: $560)
----------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $34,013) 34,448
----------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
(a) Non-income producing securities.
(b) Repurchase agreements are fully collateralized by U.S. Treasury or
Government securities. The collateral is monitored daily by the fund so that
its market value exceeds the carrying value of the repurchase agreement.
Based on the cost of investments of $34,017 for federal income tax purposes at
September 30, 1999, the gross unrealized appreciation was $3,117, the gross
unrealized depreciation was $2,686 and the net unrealized appreciation on
investments was $431.
See accompanying Notes to Financial Statements.
14
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENT OF ASSETS & LIABILITIES
September 30, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------
Investment securities, at value
(Cost: $34,013) $34,448
- -----------------------------------------------------------------------
Cash 22
- -----------------------------------------------------------------------
Receivable for:
Investments sold 118
- -----------------------------------------------------------------------
Fund shares sold 80
- -----------------------------------------------------------------------
Dividends and interest 61
- -----------------------------------------------------------------------
Deferred organization expense 7
- -----------------------------------------------------------------------
TOTAL ASSETS 34,736
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
LIABILITIES
- -----------------------------------------------------------------------
Payable for:
Investments purchased 128
- -----------------------------------------------------------------------
Fund shares redeemed 105
- -----------------------------------------------------------------------
Other payables and accrued expenses 18
- -----------------------------------------------------------------------
Total liabilities 251
- -----------------------------------------------------------------------
NET ASSETS, AT MARKET VALUE $34,485
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Net assets consist of:
- -----------------------------------------------------------------------
Undistributed net investment income $ 24
- -----------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments 435
- -----------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (1,020)
- -----------------------------------------------------------------------
Paid-in capital 35,046
- -----------------------------------------------------------------------
NET ASSETS, AT MARKET VALUE $34,485
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET ASSETS VALUE
- -----------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share ($17,118 /
1,714 shares outstanding) $9.99
- -----------------------------------------------------------------------
Maximum offering price per share (net asset value, plus
6.10% of net asset value or 5.75% of offering price) $10.60
- -----------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($14,564 /
1,459 shares outstanding) $9.98
- -----------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($2,803 / 281
shares outstanding) $9.97
- -----------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
NET INVESTMENT INCOME
- ----------------------------------------------------------------------
Dividends $ 737
- ----------------------------------------------------------------------
Interest 34
- ----------------------------------------------------------------------
771
- ----------------------------------------------------------------------
Expenses:
Management fee 182
- ----------------------------------------------------------------------
Distribution services fee 122
- ----------------------------------------------------------------------
Administrative services fee 77
- ----------------------------------------------------------------------
Custodian, accounting and transfer agent fees 210
- ----------------------------------------------------------------------
Trustees' fees 24
- ----------------------------------------------------------------------
Reports to shareholders 68
- ----------------------------------------------------------------------
Audit 45
- ----------------------------------------------------------------------
Legal 26
- ----------------------------------------------------------------------
Organization expense 3
- ----------------------------------------------------------------------
Other 17
- ----------------------------------------------------------------------
Total expenses before expense waiver 774
- ----------------------------------------------------------------------
Less expenses waived and absorbed by investment manager (272)
- ----------------------------------------------------------------------
Total expenses after expense waiver 502
- ----------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 269
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ----------------------------------------------------------------------
Net realized gain (loss) from investments (583)
- ----------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on investments 1,959
- ----------------------------------------------------------------------
Net gain (loss) on investments 1,376
- ----------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $1,645
- ----------------------------------------------------------------------
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED SEPTEMBER 30, 1999 and 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998(A)
- ------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 269 $ 82
- ------------------------------------------------------------------------------------------
Net realized gain (loss) (583) (437)
- ------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) 1,959 (1,524)
- ------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 1,645 (1,879)
- ------------------------------------------------------------------------------------------
Distributions from net investment income (250) (76)
- ------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions 14,527 20,418
- ------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 15,922 18,463
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------------------------
Beginning of year $18,563 $ 100
- ------------------------------------------------------------------------------------------
End of year 34,485 18,563
- ------------------------------------------------------------------------------------------
Undistributed net investment income (loss) at end of year 24 6
- ------------------------------------------------------------------------------------------
</TABLE>
(a) Commenced operations on January 30, 1998.
16
<PAGE> 17
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") which is registered under the
Investment Company Act of 1940, as amended (the
"1940 Act"), as an open-end management investment
company organized as a Massachusetts business
trust.
The fund offers multiple classes of shares. Class A
shares are offered to investors subject to an
initial sales charge. Class B shares are offered
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are offered without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of the fund have
equal rights with respect to voting subject to
class specific arrangements.
The fund's financial statements are prepared in
accordance with generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by the fund in the
preparation of its financial statements.
- --------------------------------------------------------------------------------
2 SIGNIFICANT ACCOUNTING
POLICY SECURITY VALUATION. Investments are stated at value
determined as of the close of regular trading on
the New York Stock Exchange. Securities which are
traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on
the exchange on which the security is traded most
extensively. If no sale occurred, the security is
then valued at the calculated mean between the most
recent bid and asked quotations. If there are no
such bid and asked quotations, the most recent bid
quotation is used. Securities quoted on the Nasdaq
Stock Market ("Nasdaq"), for which there have been
sales, are valued at the most recent sale price
reported. If there are no such sales, the value is
the most recent bid quotation. Securities which are
not quoted on Nasdaq but are traded in another
over-the-counter market are valued at the most
recent sale price, or if no sale occurred, at the
calculated mean between the most recent bid and
asked quotations on such market. If there are no
such bid and asked quotations, the most recent bid
quotation shall be used.
Portfolio debt securities purchased with an
original maturity greater than sixty days are
valued by pricing agents approved by the officers
of the Trust, whose 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.
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
All other securities are valued at their fair value
as determined in good faith by the Valuation
Committee of the Board of Trustees.
REPURCHASE AGREEMENTS. The fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
FEDERAL INCOME TAXES. The fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies and to distribute
all of its taxable income to its shareholders.
Accordingly, the Fund paid no federal income taxes
and no federal income tax provision was required.
At September 30, 1999, the fund had a net tax basis
capital loss carryforward of approximately $670,000
which may be applied against any realized net
taxable gains of each succeeding year until fully
utilized or until September 30, 2006 ($407,000) and
September 30, 2007 ($263,000), the respective
expiration dates, whichever occurs first. In
addition, from November 1, 1998 through September
30, 1999, the fund incurred approximately $347,000
of net realized capital losses. As permitted by tax
regulations, the fund intends to defer these losses
and treat them as arising in the fiscal year ended
September 30, 2000.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made quarterly.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, the fund may periodically make
reclassifications among certain of its capital
accounts without impacting the net asset value of
the fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Dividend income is recorded on
the ex-dividend date. Realized gains and losses
from investment transactions are recorded on an
identified cost basis.
ORGANIZATION COSTS. Costs incurred by the fund in
connection with its organization have been deferred
and are being amortized on a straight-line basis
over a five-year period.
- --------------------------------------------------------------------------------
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 .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 year ended
September 30, 1999, after an expense waiver by
Scudder Kemper.
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
In addition, Scudder Kemper has agreed to
temporarily absorb certain operating expenses of
the fund. Under these arrangements, Scudder Kemper
waived and absorbed expenses of $272,000 for the
year ended September 30, 1999.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the year ended September 30,
1999 are $6,000.
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 and CDSC received by KDI
for the year ended September 30, 1999 are $149,000.
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 administrative services fees for the
year ended September 30, 1999, of $2,979 after an
expense waiver by Scudder Kemper.
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 $158,000 of
which $9,000 is unpaid at September 30, 1999.
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 accounting fees for the
year ended September 30, 1999, of $46,000 of which
$4,000 is unpaid.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. For the year ended September 30,
1999, the fund made no payments to its officers and
incurred trustees' fees of $24,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended September 30, 1999, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $36,881
Proceeds from sales 21,859
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------
SHARES SOLD
Class A 1,270 $13,510 1,058 $10,643
------------------------------------------------------------------------------
Class B 988 10,195 753 7,603
------------------------------------------------------------------------------
Class C 395 4,035 376 3,777
==============================================================================
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 16 164 5 48
------------------------------------------------------------------------------
Class B 5 50 2 16
------------------------------------------------------------------------------
Class C 2 22 1 7
==============================================================================
SHARES REDEEMED
Class A (548) (5,724) (104) (1,024)
------------------------------------------------------------------------------
Class B (252) (2,916) (29) (300)
------------------------------------------------------------------------------
Class C (459) (4,809) (38) (352)
==============================================================================
CONVERSION OF SHARES
Class A 13 140 -- --
------------------------------------------------------------------------------
Class B (13) (140) -- --
------------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS $14,527 $20,418
------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 LINE OF CREDIT The Fund and several Kemper funds (the
"Participants") share in a $750 million revolving
credit facility for temporary or emergency
purposes, including the meeting of redemption
requests that otherwise might require the untimely
disposition of securities. The Participants are
charged an annual commitment fee which is allocated
pro rata among each of the Participants. Interest
is calculated based on the market rates at the time
of the borrowing. The Fund may borrow up to a
maximum of 33 percent of its net assets under the
agreement.
20
<PAGE> 21
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------
CLASS A
-----------------------------
JANUARY 30,
YEAR ENDED 1998 TO
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------
Net asset value, beginning of period $ 9.12 9.50
- ------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .13 .07
- ------------------------------------------------------------------------
Net realized and unrealized gain (loss) .86 (.38)
- ------------------------------------------------------------------------
Total from investment operations .99 (.31)
- ------------------------------------------------------------------------
Less distribution from net investment
income .12 .07
- ------------------------------------------------------------------------
Net asset value, end of period $ 9.99 9.12
- ------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 10.87% (3.36)
- ------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------
Expenses 1.24% 1.36
- ------------------------------------------------------------------------
Net investment income (loss) 1.29 1.56
- ------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------
Expenses 2.10% 2.59
- ------------------------------------------------------------------------
Net investment income (loss) 0.42 .33
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------
CLASS B
-----------------------------
JANUARY 30,
YEAR ENDED 1998 TO
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------
Net asset value, beginning of period $ 9.12 9.50
- ------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .05 .03
- ------------------------------------------------------------------------
Net realized and unrealized gain (loss) .86 (.38)
- ------------------------------------------------------------------------
Total from investment operations .91 (.35)
- ------------------------------------------------------------------------
Less distribution from net investment
income .05 .03
- ------------------------------------------------------------------------
Net asset value, end of period $ 9.98 9.12
- ------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 9.96% (3.72)
- ------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------
Expenses 2.01% 2.01
- ------------------------------------------------------------------------
Net investment income (loss) .52 .91
- ------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------
Expenses 2.97% 3.49
- ------------------------------------------------------------------------
Net investment income (loss) (.45) (.57)
- ------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------
CLASS C
-----------------------------
YEAR JANUARY 30,
ENDED 1998 TO
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------
Net asset value, beginning of period $ 9.12 9.50
- ------------------------------------------------------------------------
Income from investment operations:
Net investment income .06 .03
- ------------------------------------------------------------------------
Net realized and unrealized gain (loss) .84 (.38)
- ------------------------------------------------------------------------
Total from investment operations .90 (.35)
- ------------------------------------------------------------------------
Less distribution from net investment
income .05 .03
- ------------------------------------------------------------------------
Net asset value, end of period $ 9.97 9.12
- ------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 9.88% (3.71)
- ------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------
Expenses 1.99% 1.99
- ------------------------------------------------------------------------
Net investment income (loss) .54 .93
- ------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------
Expenses 2.78% 3.25
- ------------------------------------------------------------------------
Net investment income (loss) (.26) (.33)
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ------------------------------------------------------------------------
SIX MONTHS PERIOD
ENDED ENDED
MARCH 31, SEPTEMBER 30,
1999 1998(A)
- ------------------------------------------------------------------------
<S> <C> <C>
Net assets at end of period (in
thousands) $34,485 18,563
- ------------------------------------------------------------------------
Portfolio turnover rate (annualized) 74% 93
- ------------------------------------------------------------------------
</TABLE>
Total returns do not reflect the effect of any sale charges. Scudder Kemper
agreed to temporarily waive certain operating expenses of the fund during the
year ended September 30, 1999. The Other ratios to average net assets are
computed without this waiver.
Per share data was determined based on average shares outstanding during the
year ended September 30, 1999.
- --------------------------------------------------------------------------------
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
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, 1999, and the related statement
of operations for the year then ended and the
statements of changes in net assets and the
financial highlights for the year then ended and
the period from January 30, 1998 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 audits.
We have conducted our audits 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, 1999, by correspondence with the custodian and
brokers or other appropriate auditing procedures
when replies from brokers were not received. 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 audits 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, 1999, the results of its operations,
the changes in net assets and the financial
highlights for the periods referred to above, in
conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
November 16, 1999
23
<PAGE> 24
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
JAMES E. AKINS MARK S. CASADY
Trustee President
JAMES R. EDGAR PHILLIP J. COLLORA
Trustee Vice President and
Secretary
ARTHUR R. GOTTSCHALK
Trustee JOHN R. HEBBLE
Treasurer
FREDERICK T. KELSEY
Trustee LORI J. ENSINGER
Vice President
KATHRYN L. QUIRK
Trustee and Vice President JAMES M. EYSENBACH
Vice President
FRED B. RENWICK
Trustee THOMAS W. LITTAUER
Vice President
JOHN G. WEITHERS
Trustee ANN M. MCCREARY
Vice President
CORNELIA SMALL
Vice President
LINDA J. WONDRACK
Vice President
MAUREEN E. KANE
Assistant Secretary
CAROLINE PEARSON
Assistant Secretary
BRENDA LYONS
Assistant Treasurer
- -------------------------------------------------------------------------------
LEGAL COUNSEL DECHERT PRICE & RHOADS
Ten Post Office Square South
Boston, MA 02109
- -------------------------------------------------------------------------------
TRANSFER AGENT AND KEMPER SERVICE COMPANY
SHAREHOLDER P.O. Box 219557
SERVICE AGENT Kansas City, MO 64121
- -------------------------------------------------------------------------------
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02109
- -------------------------------------------------------------------------------
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]
Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed unless
preseded or accompanied by a Kemper
Equity Style/Value Style prospectus.
KUSGIF - 2 (11/23/99) 1094250
