<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MAY 31, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[MORNINGSTAR RATINGS LOGO]
Seeks Long-Term Capital Appreciation
KEMPER SMALL CAP
VALUE FUND
"... we never swayed from our principal investment
strategy. . . This hurt us in the beginning of the period,
but helped us quite a bit as the tide started to shift in
favor of small-cap and value stocks. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
8
Industry Sectors
9
Largest Holdings
10
Portfolio of Investments
13
Financial Statements
15
Notes to Financial Statements
18
Financial Highlights
21
Shareholders' Meeting
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER SMALL CAP VALUE FUND
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 1999
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
<S> <C>
CLASS A 7.64
CLASS B 7.27
CLASS C 7.25
Lipper Small Company Growth Funds Category Average* 9.41
- --------------------------------------------------------------------------------
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
*LIPPER ANALYTICAL SERVICES, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES
IN NET ASSET VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT
OF SALES CHARGES. IF THEY HAD, RESULTS MAY HAVE BEEN LESS FAVORABLE.
------------------------------------------------------------------------------
NET ASSET VALUE
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
AS OF AS OF
5/31/99 11/30/98
- -----------------------------------------------------------------------------------------
<S> <C> <C>
KEMPER SMALL CAP VALUE FUND CLASS A $19.16 $17.80
- -----------------------------------------------------------------------------------------
KEMPER SMALL CAP VALUE FUND CLASS B $18.59 $17.33
- -----------------------------------------------------------------------------------------
KEMPER SMALL CAP VALUE FUND CLASS C $18.65 $17.39
- -----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER SMALL CAP VALUE
FUND RANKINGS AS OF 5/31/99
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER
SMALL COMPANY GROWTH FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #532 OF 682 FUNDS #554 OF 682 FUNDS #554 OF 682 FUNDS
- -------------------------------------------------------------------------------------------------------------
3-YEAR #267 OF 397 FUNDS #300 OF 397 FUNDS #297 OF 397 FUNDS
- -------------------------------------------------------------------------------------------------------------
5-YEAR # 98 OF 236 FUNDS N/A N/A
- ------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT IN SECURITIES OF SMALL COMPANIES MAY INVOLVE A GREATER RISK OF LOSS
AND MORE ABRUPT FLUCTUATIONS IN MARKET PRICE THAN INVESTMENT IN LARGER
COMPANIES. CONCENTRATION OF THE FUND'S ASSETS IN SPECIFIC SECTORS MAY PRESENT A
GREATER RISK THAN INVESTMENT IN A MORE DIVERSIFIED FUND.
YOUR FUND'S STYLE
TERMS TO KNOW
- --------------------------------------------------------------------------------
MORNINGSTAR EQUITY STYLE BOX
- --------------------------------------------------------------------------------
[EQUITY STYLE BOX]
Morningstar, Inc. Chicago, IL. (312) 696-6000. The Equity Style Box placement is
based on two variables: a fund's market capitalization relative to the movements
of the market and a fund's valuation, which is calculated by comparing the
stocks in the fund's portfolio with the most relevant of the three market-cap
groups. THE STYLEBOX REPRESENTS A SNAPSHOT OF THE FUND'S PORTFOLIO ON A SINGLE
DAY. IT IS NOT AN EXACT ASSESSMENT OF RISK AND DOES NOT REPRESENT FUTURE
PERFORMANCE. THE FUND'S PORTFOLIO CHANGES FROM DAY-TO-DAY. A LONGER- TERM VIEW
IS REPRESENTED BY THE FUND'S MORNINGSTAR CATEGORY, WHICH IS BASED ON ITS ACTUAL
INVESTMENT STYLE AS MEASURED BY ITS UNDERLYING PORTFOLIO HOLDINGS OVER THE PAST
THREE YEARS. MORNINGSTAR HAS PLACED KEMPER SMALL CAP VALUE FUND IN THE SMALL
VALUE CATEGORY. PLEASE CONSULT THE PROSPECTUS FOR A DESCRIPTION OF INVESTMENT
POLICIES.
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 are usually found in related industries, such as financial
services. Stocks within a market sector may be similarly affected by financial,
economic, business and other developments.
NARROW MARKET Characteristic of a securities market in which most of the gains
are represented by only a small group of companies. In 1998, a narrow market
existed in which only the largest growth-style stocks enjoyed particularly
strong gains.
<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 PH.D. IN ECONOMICS FROM NORTHEASTERN UNIVERSITY IN BOSTON, MASS.
HE IS A MEMBER OF BOTH THE BLUE CHIP ECONOMIC AND FINANCIAL SURVEYS, AND SERVES
ON THE POLICY ADVISORY COMMITTEES OF THE FEDERAL RESERVE BOARDS OF CHICAGO AND
CLEVELAND.
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 $280 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:
As expected, the Federal Reserve Board raised its federal funds interest rate
(the rate at which banks lend to each other overnight) by one-fourth of a
percentage point in June. Although higher interest rates tend to have a
dampening effect on the market, investors rallied in response to this move. The
Dow Jones Industrial Average, which was down 50 points before the Fed's
statement on June 30, reversed course and ended the day at its highest closing
level in six weeks. The Dow went on to close at a record-setting high of 11,187
on July 7.
What led to the interest rate hike, and why does the market reaction suggest
that investors are happy about it?
It is generally recognized that a modest rate hike by the Fed may be effective
in slowing the economy sufficiently to suppress any simmering inflationary
pressures. Although the economy has been strong, there are concerns that it will
be unable to maintain its current rate of growth without prompting inflationary
pressures -- which is at the heart of the Fed's decision to raise interest
rates. The Fed is acting now to be proactive. In the past, Fed policy has been
reactive, which meant that the Fed tended to respond to inflation only when it
picked up. A rate hike now is intended to halt any future buildup in inflation.
Moreover, by hinting at an increase well in advance -- then by limiting the
increase to 25 basis points -- the Fed relieved worried investors and gave a
boost to the financial markets.
Despite the minor rate increase, the long-term economic situation appears to
be positive. The federal budget surplus continues to benefit from good revenue
gains (which are based on good income gains, especially for households), good
capital gains and continued restraint in federal spending. The surplus this year
is expected to approach $100 billion.
This positive environment is exactly what sometimes poses risk for investors,
and is key to understanding recent volatility in the market. A strong economy
has the potential to feed inflation fears and drive up interest rates. Indeed,
recent market events illustrate the domino effect of investors reacting to
positive economic news, which they consider troubling at this point, more than
eight years into the economic expansion. Prior to its strong close in the second
quarter, the steady stream of positive economic news led to a sell-off in the
financial markets based on fears that the strong pace of economic growth would
eventually lead to higher inflation. The benchmark 30-year Treasury bond yield
rose, which pulled stocks lower.
Where can we expect to go from here? The fundamentals by which we judge the
health of the economy suggest continued growth as we move into the second half
of 1999. For example, the gross domestic product (GDP), the value of all goods
and services produced in the U.S., is expected to rise at an annual rate of 4
percent in the first half of 1999, following a tremendous fourth-quarter surge
of 6 percent. This is very much in line with what we've grown accustomed to over
the past year -- over the four quarters of 1998, the U.S. economy expanded by
4.3 percent. Some people aren't surprised at all by strong GDP growth that once
would have alarmed them. That's partially because we've grown accustomed to a
strong economy. But it's also because we've been able to absorb growth without
driving up inflation. That's important for investors. If prices had been rising
as the economy was growing, the Fed would have most likely raised short-term
interest rates earlier and more drastically, and that would have changed the
financial market outlook.
However, we do see some vulnerability on the economic front. Trade is a weak
spot in the economy right now. Exports of U.S. goods and services dropped in the
first half of 1999, while imports soared. This reflects the fact that the U.S.
is one of the few countries financially fit enough to buy goods produced
elsewhere in the world. But for as long as less vibrant international economies
are unable to buy U.S. goods, the profitability of U.S. companies trying to
export will be challenged.
When you think about it, vulnerability in regard to the international economy
is nothing new. Globally, the outlook is slightly more positive than it was a
few months ago. For example, the European markets are slowing down, which has
already led to the European Central Bank lowering interest rates in order to
boost domestic spending. In many countries in Europe there are no fixed-rate
mortgages, only adjustable-rate mortgages. When interest rates go down, mortgage
payments are reduced and homeowners can spend money elsewhere. This has a huge
impact on consumer spending, and will help European equities over time.
Additionally, the situation in Japan remains unchanged. And, problems in the
emerging markets haven't had the negative impact many people expected -- both
the Mexican and Brazilian stock markets have actually risen in the past two
months.
But don't forget that international crises have the potential to affect the
U.S. markets dramatically. Although the Kosovo crisis seems to be waning, past
increases in military spending on Kosovo by the 11 European Monetary Union (EMU)
countries could force them to spend less in other areas, which could have
economic implications, including higher interest rates. That's because many
European countries (especially Italy) have small economies and
3
<PAGE> 4
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND
SHAREHOLDER DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR
DEFLATION, CREDIT EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON
MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR
INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE
10-YEAR TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES. THE
OTHER DATA REPORT YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (6/30/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Ten Year Treasury Rate 5.90 4.81 5.65 6.69
Prime Rate 7.75 8.49 8.50 8.30
Inflation* 2.03 1.62 1.44 3.03
The U.S. Dollar* -2.4 4.31 4.88 8.58
Capital goods orders* 7.73 11.44 8.10 5.52
Industrial production * 1.72 3.58 5.05 5.86
Employment growth* 2.15 2.48 2.61 2.51
</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 MAY 31, 1999.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
little leeway in their budgets. Consequently, those countries financed unplanned
military expenditures by selling government bonds -- which, in Europe's small
bond market, typically raises interest rates. As an example, consider Italy,
which recently asked for more leeway on its deficit targets. When leeway was
granted, this led to a further sell-off in the eurodollar.
The international situation alone, however, is by no means an indicator of a
U.S. slowdown -- and without any such indications, complacency may be our
greatest concern. It's easy to look at the current U.S. economic situation and
behave as if no risk exists. But when you see the market soaring and are tempted
to jump in, note that the bull market grew to records on the strength of just a
few dozen stocks, while most other stock prices were flat or actually declined.
In summary, there are concerns that the current economy is unsustainable and
we soon could see an abrupt end. In many cases, however, people are looking for
a slowdown because they are fearful growth will drive up inflation these are
particularly older investors who are accustomed to inflation accompanying
growth. But again, sustained inflation seems unlikely, so a sharp slowdown is
not necessary. In the short term, we expect a modest economic slowdown but no
recession. The best approach now, as in any market, is to diversify and invest
for the long term.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ JOHN E. SILVIA
John E. Silvia
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 JUNE 9, 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
[STOKES PHOTO]
STEVE STOKES IS LEAD PORTFOLIO MANAGER OF KEMPER SMALL CAP VALUE FUND. STOKES
RECEIVED A BACHELOR OF SCIENCE DEGREE IN FINANCE IN 1985 FROM STATE UNIVERSITY
OF NEW YORK AT NEW PALTZ. A CHARTERED FINANCIAL ANALYST, HE IS A MEMBER OF THE
ASSOCIATION OF INVESTMENT MANAGEMENT AND RESEARCH, FINANCIAL ANALYST FEDERATION
AND NYSSA.
THROUGHOUT THE SEMIANNUAL PERIOD, STEVE STOKES MANAGED THE FUND AS LEAD
PORTFOLIO MANAGER. EFFECTIVE AUGUST 1, 1999 JAMES (MAC) EYSENBACH WILL ASSUME
THE ROLE OF LEAD PORTFOLIO MANAGER, AND CALVIN YOUNG WILL ASSUME THE ROLE OF
PORTFOLIO MANAGER FOR THE FUND. BOTH EYSENBACH AND YOUNG HAVE NEARLY 10 YEARS OF
INVESTMENT EXPERIENCE WITH SCUDDER KEMPER INVESTMENTS, INC. THEY WILL BE
SUPPORTED BY SCUDDER KEMPER INVESTMENTS' LARGE STAFF OF RESEARCH ANALYSTS,
TRADERS AND INVESTMENT SPECIALISTS.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
DURING THE PERIOD THE SMALL CAP STOCK MARKET BEGAN TO SHOW SIGNS OF
IMPROVEMENT. KEMPER SMALL CAP VALUE FUND LEAD PORTFOLIO MANAGER STEVE STOKES
EXPLAINS WHAT FACTORS LED TO THE TURN AND HOW THE FUND PERFORMED IN THE CHANGING
ENVIRONMENT.
Q WOULD YOU PROVIDE A BRIEF OVERVIEW OF THE MARKET DURING THE FUND'S
SEMIANNUAL PERIOD?
A As we entered the semiannual period last December, the market remained
very narrow. A small group of the largest growth stocks, primarily those with a
technology or Internet emphasis, dominated the market. Nearly all other stocks,
especially small-cap stocks and value-style stocks continued to struggle as they
had for the previous 12 months. In February, we began to see signs of a
turnaround. The performance of small-caps and value stocks began to improve and
with some pauses, gained ground throughout the remainder of the period.
Although the market broadened quite a bit during the period, it did not
totally reverse itself. It took about 18 months for the market to narrow as much
as it did. It will certainly take more than a few months for it to broaden
again.
Q WHAT PROMPTED THE TURNAROUND?
A Basically it was a return of investor confidence. To explain the
turnaround, let's discuss why investor confidence had been undermined over the
past year and a half.
You may recall that in late 1997 economies in Southeast Asia began to
tumble. With their decline other economies across the world also faltered. While
the U.S. was not directly affected, investors were concerned that the "Asian
Flu" would spread to the U.S. at some point down the road. To mitigate potential
losses, investors flocked to securities that they deemed "safe." U.S. Treasuries
benefited from this flight-to-quality, as did very large growth stocks with long
histories of consistent earnings. Small-cap and value-style stocks were shunned.
Investors wanted to be in "liquid" stocks -- those that they could liquidate
quickly if a market downturn occurred in the U.S.
In early 1999 it became very clear that the Asia crisis would not be a
factor in the U.S. economy. World economies were regaining their strength and
U.S. companies with foreign exposure or those with large exporting businesses
were thriving. With this good news investors began moving their assets into
other parts of the market such as the small-cap and value areas. Essentially,
investors were gaining confidence and they were therefore willing to assume more
risk for potentially higher returns. This increased demand for small-cap and
value stocks in turn raised the liquidity of those stocks, making them even more
attractive.
Q DID THE FUND'S PERFORMANCE IMPROVE WITH THE MARKETS?
A Yes it did. We're very pleased with the fund's performance, especially in
relation to small-cap value stocks in general. From December through May, the
fund
5
<PAGE> 6
PERFORMANCE UPDATE
gained 7.64 percent (for Class A shares unadjusted for any sales charges) while
the Russell 2000 Value Index gained 4.77 percent. The Russell 2000 Value Index
is a common benchmark of small-cap value stocks. The Russell 2000 Index, a
benchmark for both small-cap value and growth stocks, gained 11.03 percent for
the same period. It's important to note, however, that a significant portion of
the Russell 2000 is comprised of Internet growth companies -- stocks that don't
fit our investment criteria.
Q HOW DID YOU POSITION THE FUND DURING THE PERIOD?
A Although we're always making structural changes to the portfolio,
we never swayed from our principal investment strategy. As small cap value
investors, it would have been wrong for us to seek returns by jumping ship and
investing in large growth stocks. Nor did we jump on the Internet bandwagon and
begin investing in small growth-oriented Internet start-ups that were so
popular. That's not what we do, nor do we think it is why people invest in this
fund. Instead we focused on looking for the best values we could find. And the
depressed small-cap market produced plenty of value. We found a variety of great
opportunities to invest in fundamentally sound and financially strong companies
that are suffering as a result of the narrow market.
This hurt us in the beginning of the period, but helped us quite a bit as
the tide started to shift in favor of small-cap and value stocks. The exception
was Internet stocks. Investors never seemed to lose their passion for these
stocks -- no matter how high or unreasonable their valuations climbed.
Q CAN YOU EXPLAIN YOUR STOCK SELECTION CRITERIA?
A Basically we look for companies that are out of favor with the market for
what we believe are the wrong reasons. First we screen potential candidates by
their price-to-earnings multiple (P/E). We look for stocks that are priced low
relative to their earnings stream in comparison to the overall market and the
Russell 2000 Index. We also look for low price-to-book and price-to-cash-flow
ratios. We then consider the management of the company and decide whether we
believe they can lead the company out of its current market slump. The overall
health of the industry and the market in general also comes into play. We want
to buy stocks that have the potential to gain significant value, not those that
will just get cheaper.
As we mentioned before, the narrow market environment has been difficult,
but it has presented us with great opportunities to buy companies that we
believe will be only temporarily depressed. Patience is the key to this
strategy. We're heartened by the recent broadening of the market, but believe it
will take a while longer before the small group of the largest growth stocks
loses their leadership position. The fund, however, has performed quite well in
the early stages of this broadening. Our portfolio, we believe, is constructed
of good, strong companies that have the potential for a long period of growth
ahead of them.
Q WHERE WERE THE BEST PERFORMING AREAS OF THE MARKET?
A As a sector companies within the consumer discretionary area performed
quite well during the period and the fund's exposure to that sector was no
different. Companies like Pacific Sunwear, Dollar Thrifty Automotive, Four
Seasons Hotels and Applebee's all made substantial gains. Although these all
fell into the consumer discretionary area, we chose them each for their
individual attributes, not just because we were bullish on the sector. Pacific
Sunwear, for instance, had struggled over the last few selling seasons, but came
on strong this year as they were ahead of the industry in Hawaiian-look
beachwear. Dollar Thrifty had been left behind as many of the car rental
companies went public over the last few years. We liked the fundamentals of the
company and believed that there was plenty of room for growth in the car rental
business. The market substantiated our belief and the stock made great gains
over the last six months.
Q WHAT ABOUT DISAPPOINTMENTS?
A We were disappointed with our financial services holdings, many of which
struggled for the period. Some of the underperformance was due to company-
specific fundamental reasons. Financial services as a whole, however, struggled
as fears of rising interest rates entered the market in March and April.
Although we believe there's a possibility for a rate increase by the Federal
Reserve Board, we don't anticipate an extended series of rate hikes. We look for
improvement in many of our financial stocks as these fears are quelled.
6
<PAGE> 7
PERFORMANCE UPDATE
Q WILL SMALL-CAP STOCKS BE ABLE TO SUSTAIN THEIR RECENT PERFORMANCE?
A We do believe the market may continue to broaden. However the timing and
extent of the broadening will likely be determined by what happens this fall. By
fall, we should begin to see whether or not merger and acquisition (M&A)
activity will increase in the coming year. If signals point to continued healthy
M&A activity, small-company stocks should benefit.
We'll continue to manage the fund conservatively, while maintaining our
value discipline. Our philosophy is built on long-term historical evidence that
"low-P/E" investing within the small cap market provides above average returns.
The discrepancy in valuations among growth versus value and large versus small,
although improving, continues to exist. We expect that the market euphoria in
the high-growth segments of the market like the Internet will give way to a
return to fundamental valuation techniques, which will favor our investment
style.
7
<PAGE> 8
INDUSTRY SECTORS
A SIX-MONTH COMPARISON
DATA SHOWS THE PERCENTAGE OF THE COMMON STOCKS IN THE PORTFOLIO THAT EACH SECTOR
REPRESENTED ON MAY 31, 1999, AND ON NOVEMBER 30, 1998.
[SIX-MONTH COMPARISON]
<TABLE>
<CAPTION>
KEMPER SMALL CAP VALUE FUND KEMPER SMALL CAP VALUE FUND
ON 5/31/99 ON 11/30/98
<S> <C> <C>
CAPITAL GOODS 23.2% 22.3%
FINANCE 21.0% 24.6%
CONSUMER NONDURABLES 14.3% 18.0%
UTILITIES 8.7% 4.1%
TECHNOLOGY 6.9% 7.2%
ENERGY 6.7% 5.7%
TRANSPORTATION 5.7% 8.4%
BASIC INDUSTRIES 5.3% 5.0%
CONSUMER DURABLES 2.6% 0.0%
HEALTH CARE 3.3% 2.2%
OTHER 2.3% 2.5%
</TABLE>
A COMPARISON WITH THE RUSSELL 2000 INDEX+
DATA SHOWS THE PERCENTAGE OF THE COMMON STOCKS IN THE PORTFOLIO THAT EACH SECTOR
OF KEMPER SMALL CAP VALUE FUND REPRESENTED ON MAY 31, 1999, COMPARED TO THE
INDUSTRY SECTORS THAT MAKE UP THE FUND'S BENCHMARK, THE RUSSELL 2000 INDEX.
[RUSSELL COMPARISON BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL CAP VALUE FUND RUSSELL 2000 INDEX
ON 5/31/99 ON 5/31/99
--------------------------- -----------------------------
<S> <C> <C>
CAPITAL GOODS 23.2% 8.1%
FINANCE 21.0% 21.9%
CONSUMER NONDURABLES 14.3% 21.1%
UTILITIES 8.7% 5.6%
TECHNOLOGY 6.9% 19.3%
ENERGY 6.7% 4.1%
TRANSPORTATION 5.7% 2.5%
BASIC INDUSTRIES 5.3% 5.6%
CONSUMER DURABLES 2.6% 2.8%
HEALTH CARE 3.3% 8.7%
OTHER 2.3% 0.3%
</TABLE>
+ The Russell 2000 Index is an unmanaged capitalization weighted price only
index which is comprised of 2000 of the smallest stocks (on the basis of
capitalization) in the Russell 3000 Index.
8
<PAGE> 9
LARGEST HOLDINGS
THE FUND'S 10 LARGEST HOLDINGS*
Representing 16.0 percent of the fund's total common stock holdings on May 31,
1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
HOLDINGS PERCENTAGE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
1. CONMED Develops, manufactures and 2.1%
markets disposable
electrosurgical instruments and
accessories, electrosurgical
generators and disposable medical
devices for monitoring.
- ------------------------------------------------------------------------------------------
2. ELCOR One of the leading manufacturers 1.9%
of residential premium laminated
fiberglass asphalt roofing
shingles and proprietary finishes
for original equipment and
recycled diesel engine cylinder
liners for the railroad, marine
and stationary power industries.
- ------------------------------------------------------------------------------------------
3. DOLLAR THRIFTY AUTOMOTIVE Operates car rental companies 1.6%
Dollar Rent A Car Systems and
Thrifty Rent-A-Car System.
- ------------------------------------------------------------------------------------------
4. JONES INTERCABLE Engaged in acquiring, developing 1.6%
and operating cable television
systems.
- ------------------------------------------------------------------------------------------
5. YOUNG BROADCASTING Owns network-affiliated TV 1.6%
stations and one independent TV
station.
- ------------------------------------------------------------------------------------------
6. COMPLETE BUSINESS SOLUTIONS A provider of information 1.5%
technology services to large and
mid-size companies. Its services
include information technology
consulting services, contract
programming services and
millennium conversion services.
- ------------------------------------------------------------------------------------------
7. FORTRESS INVESTMENT Opportunistically invests in 1.5%
undervalued real estate-related
assets, both domestic and
international.
- ------------------------------------------------------------------------------------------
8. FURON Engaged in the designing, 1.4%
developing and manufacturing of
superior performance, highly
engineered components made
primarily from specially
formulated high performance
polymers and elastomeric
materials.
- ------------------------------------------------------------------------------------------
9. VALASSIS COMMUNICATIONS A leading sales promotion 1.4%
company, offering the broadest
array of consumer promotion
techniques.
- ------------------------------------------------------------------------------------------
10. PRENTISS PROPERTIES TRUST A self-administered and managed 1.4%
real estate investment trust that
invests primarily in office and
industrial buildings.
- ------------------------------------------------------------------------------------------
</TABLE>
*The fund's holdings are subject to change.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER SMALL CAP VALUE FUND
PORTFOLIO OF INVESTMENTS AT MAY 31, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
COMMON STOCKS--98.4% NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSTRUCTION--4.9%
Blount International, Inc. 400,100 $ 11,153
Del Webb Corp. 277,500 6,244
Elcor Corp. 387,950 15,663
Lone Star Industries, Inc. 90,200 3,213
Southdown, Inc. 88,200 5,590
------------------------------------------------------------------------------
41,863
- ---------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY--4.7%
(a) Anchor Gaming 57,200 2,560
(a) Carmike Cinemas, Inc. 201,300 3,535
(a) Dollar Thrifty Automotive Group, Inc. 649,200 13,795
Herbalife International, Inc. 183,833 1,700
Pacific Sunwear of California 251,100 9,416
Wolverine World Wide, Inc. 662,000 8,937
------------------------------------------------------------------------------
39,943
- ---------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--6.0%
(a) Fresh Del Monte Produce, Inc. 456,100 6,471
Harman International Industries, Inc. 227,500 10,095
(a) Nautica Enterprises, Inc. 367,500 5,949
(a) Performance Food Group Co. 362,500 8,632
(a) Sola International, Inc. 452,600 7,553
Springs Industries, Inc. 161,100 6,384
(a) Swisher International Group, Inc. 570,000 5,344
------------------------------------------------------------------------------
50,428
- ---------------------------------------------------------------------------------------------------------------------
DURABLES-- 2.6%
Borg-Warner Automotive, Inc. 192,800 10,688
Inter-Tel, Inc. 299,600 4,438
Stewart & Stevenson Services, Inc. 592,500 6,518
------------------------------------------------------------------------------
21,644
- ---------------------------------------------------------------------------------------------------------------------
ENERGY--6.6%
ATMOS Energy Corp. 200,200 5,130
(a) Basin Exploration, Inc. 368,600 6,174
Chieftain International, Inc. 441,700 7,702
Cross Timbers Oil Co. 341,700 3,695
(a) Eagle Geophysical, Inc. 24,148 82
Giant Industries, Inc. 214,600 2,267
(a) Newpark Resources, Inc. 695,500 6,259
(a) Nuevo Energy Co. 355,700 5,424
Seitel, Inc. 375,500 5,938
(a) Tesoro Petroleum Corp. 630,000 7,442
USEC, Inc. 543,500 5,979
------------------------------------------------------------------------------
56,092
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--20.7%
(a) Acceptance Insurance Cos., Inc. 355,100 5,571
Apartment Investment & Management Co. 196,038 8,234
Associated Banc-Corp. 191,111 6,617
Chartwell Re Corp. 252,500 3,961
Commercial Federal Corp. 350,750 8,001
Compass Bancshares, Inc. 261,750 7,746
Cullen\Frost Bankers, Inc. 123,000 6,919
Fortress Investment Corp. 750,000 12,656
Fremont General Corp. 513,000 10,869
HCC Insurance Holdings, Inc. 282,000 6,275
Health Care Property Investment, Inc. 259,700 7,872
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hudson United Bancorp 158,161 $ 4,844
(a) Imperial Bancorp 318,300 6,127
LandAmerica Financial Group, Inc. 115,000 3,299
Nationwide Health Properties, Inc. 501,700 10,222
North Fork Bancorporation, Inc. 354,920 7,564
(a) Pacific Bank, N.A. 157,000 3,219
People's Heritage Financial Group, Inc. 519,100 9,733
Prentiss Properties Trust 492,800 11,642
Redwood Trust, Inc. 301,000 5,004
Reliance Group Holdings, Inc. 617,900 6,140
Resource Bancshares Mortgage Group, Inc. 781,200 8,203
W.R. Berkley Corp. 224,500 5,697
Webster Financial Corp. 326,100 9,477
------------------------------------------------------------------------------
175,892
- ---------------------------------------------------------------------------------------------------------------------
HEALTH CARE--3.3%
(a) CONMED Corp. 509,700 17,330
(a) Genesis Health Ventures, Inc. 665,400 2,953
(a) Quorom Health Group, Inc. 603,700 7,584
------------------------------------------------------------------------------
27,867
- ---------------------------------------------------------------------------------------------------------------------
MANUFACTURING--17.9%
Albany International Corp. 330,975 7,757
(a) Alliant Techsystems, Inc. 109,400 9,299
(a) American Axle & Manufacturing Holdings, Inc. 553,800 8,411
Apogee Enterprises, Inc. 694,900 8,295
Applied Power, Inc. 177,900 4,314
Belden, Inc. 417,300 9,833
Briggs & Stratton Corp. 105,000 6,563
(a) Buckeye Technologies, Inc. 441,000 7,194
Fleetwood Enterprises 316,900 8,061
Flowserve Corp. 463,513 9,502
General Cable Corp. 456,100 6,927
(a) Hologic, Inc. 490,500 3,740
Intermet Corp. 711,500 9,872
(a) Lydall, Inc. 452,700 5,461
(a) MasTec, Inc. 400,000 9,700
Mississippi Chemical Corp. 714,200 6,874
Myers Industries, Inc. 391,890 8,964
(a) Shaw Group, Inc. 415,100 5,422
Watts Industries, Inc. 538,000 9,112
(a) Wyman-Gordon Co. 359,600 6,945
------------------------------------------------------------------------------
152,246
- ---------------------------------------------------------------------------------------------------------------------
MEDIA--6.0%
(a) AMC Entertainment, Inc. 436,800 7,426
(a) Jones Intercable, Inc. 255,000 13,643
True North Communications, Inc. 218,500 5,107
(a) Valassis Communications, Inc. 339,600 11,822
(a) Young Broadcasting, Inc. 325,200 13,211
------------------------------------------------------------------------------
51,209
- ---------------------------------------------------------------------------------------------------------------------
METALS AND MINERALS--5.2%
AK Steel Holding Corp. 204,000 4,896
AMCOL International Corp. 800,000 11,350
Carpenter Technology Corp. 276,900 7,892
(a) CONSOL Energy, Inc. 261,900 3,536
(a) Lone Star Technologies 480,500 7,478
Quanex Corp. 352,500 9,209
------------------------------------------------------------------------------
44,361
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--3.4%
(a) Complete Business Solutions, Inc. 524,500 $ 12,719
Group Maintenance America Corp. 299,700 4,083
(a) Keane, Inc. 96,500 2,799
(a) Modis Professional Services, Inc. 640,600 9,449
------------------------------------------------------------------------------
29,050
- ---------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--6.8%
(a) Benchmark Electronics, Inc. 339,800 10,194
(a) Burr-Brown Corp. 315,750 10,104
(a) Cabletron Systems, Inc. 443,100 6,591
(a) Etec Systems, Inc. 69,300 1,858
Furon Corp. 650,000 11,862
(a) HMT Technology Corp. 1,167,200 4,705
(a) Hutchinson Technology, Inc. 163,400 3,799
Technitrol, Inc. 178,800 5,319
(a) Tech-Sym Corp. 154,500 3,389
------------------------------------------------------------------------------
57,821
- ---------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--5.6%
Airborne Freight Corp. 198,600 5,139
(a) America West Holdings Corp. 564,000 10,998
NedLloyd Group, N.V. 642,300 7,587
Teekay Shipping Corp. 231,400 3,905
Trinity Industries, Inc. 280,500 8,748
(a) Wisconsin Central Transportation Co. 577,300 11,402
------------------------------------------------------------------------------
47,779
- ---------------------------------------------------------------------------------------------------------------------
UTILITIES--2.5%
(a) El Paso Electric Co. 616,100 5,275
MCN Energy Group, Inc. 66,400 1,328
New England Electric System 90,800 4,546
TNP Enterprises, Inc. 270,100 10,078
------------------------------------------------------------------------------
21,227
- ---------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS--2.2%
S & P Mid-Cap 400 Depository Receipts 252,300 18,891
------------------------------------------------------------------------------
TOTAL COMMON STOCKS--98.4%
(Cost: $845,509) 836,313
- ---------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS--1.6% PRINCIPAL AMOUNT VALUE
------------------------------------------------------------------------------
(B)REPURCHASE AGREEMENT
State Street Bank and Trust Company,
dated 5/28/99, 4.80%, due 6/1/99
(Cost: $13,476) $ 13,476 13,476
------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $858,985) $849,789
------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security.
(b) Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency 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 $858,985,000 for federal income tax purposes
at May 31, 1999, the gross unrealized appreciation was $130,876,000, the gross
unrealized depreciation was $140,072,000 and the net unrealized depreciation on
investments was $9,196,000.
See accompanying Notes to Financial Statements.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value (Cost: $858,985) $849,789
- ------------------------------------------------------------------------
Receivable for:
Investments sold 333
- ------------------------------------------------------------------------
Fund shares sold 786
- ------------------------------------------------------------------------
Dividends 1,183
- ------------------------------------------------------------------------
TOTAL ASSETS 852,091
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Payable for:
Investments purchased 71
- ------------------------------------------------------------------------
Fund shares redeemed 2,947
- ------------------------------------------------------------------------
Management fee 426
- ------------------------------------------------------------------------
Distribution services fee 223
- ------------------------------------------------------------------------
Administrative services fee 113
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 483
- ------------------------------------------------------------------------
Directors' fees and other 17
- ------------------------------------------------------------------------
TOTAL LIABILITIES 4,280
- ------------------------------------------------------------------------
NET ASSETS $847,811
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $873,500
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (16,493)
- ------------------------------------------------------------------------
Net unrealized depreciation on investments (9,196)
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $847,811
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share ($422,437 /
22,049 shares outstanding) $19.16
- ------------------------------------------------------------------------
Maximum offering price per share (net asset value, plus
6.10% of net asset value or 5.75% of offering price) $20.33
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($343,248 /
18,469 shares outstanding) $18.59
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($74,574 /
3,999 shares outstanding) $18.65
- ------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price ($7,552 / 386 shares
outstanding) $19.56
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MAY 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
NET INVESTMENT INCOME
- -----------------------------------------------------------------------
Dividends (net of foreign taxes withheld of $31) $ 7,840
- -----------------------------------------------------------------------
Interest income 452
- -----------------------------------------------------------------------
Total investment income 8,292
- -----------------------------------------------------------------------
Expenses:
Management fee 3,077
- -----------------------------------------------------------------------
Distribution services fee 1,564
- -----------------------------------------------------------------------
Administrative services fee 998
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 2,256
- -----------------------------------------------------------------------
Professional fees 54
- -----------------------------------------------------------------------
Reports to shareholders 272
- -----------------------------------------------------------------------
Directors' fees and other 55
- -----------------------------------------------------------------------
Total expenses 8,276
- -----------------------------------------------------------------------
NET INVESTMENT INCOME 16
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized gain on sales of investments 3,476
- -----------------------------------------------------------------------
Change in net unrealized depreciation on investments 51,827
- -----------------------------------------------------------------------
Net gain on investments 55,303
- -----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $55,319
- -----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED MAY 31, 1999 (UNAUDITED), AND THE YEAR ENDED
NOVEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income (loss) $ 16 (2,016)
- -----------------------------------------------------------------------------------------------
Net realized gain (loss) 3,476 (16,112)
- -----------------------------------------------------------------------------------------------
Change in net unrealized depreciation 51,827 (175,453)
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 55,319 (193,581)
- -----------------------------------------------------------------------------------------------
Distribution from net realized gain -- (37,724)
- -----------------------------------------------------------------------------------------------
Net decrease from capital share transactions (187,919) (51,428)
- -----------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (132,600) (282,733)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------------------------------
Beginning of period 980,411 1,263,144
- -----------------------------------------------------------------------------------------------
END OF PERIOD $ 847,811 980,411
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF
THE FUND Kemper Small Cap Value Fund (the fund) is a
separate series of Kemper Value Series, Inc.
(KVAL), an open-end management investment company
organized as a corporation in the state of
Maryland. KVAL is authorized to issue three billion
shares of $.01 par value common stock.
The fund currently offers four 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. Class I shares are sold to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
generally have lower ongoing expenses than other
classes. 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 INVESTMENT VALUATION. Investments are stated at
value. Portfolio 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 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. Money market instruments purchased
with an original maturity of sixty days or less are
valued at amortized cost. All other securities are
valued at their fair market value as determined in
good faith by the Valuation Committee of the Board
of Directors.
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 and includes discount
amortization on money market instruments. 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
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
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.
At November 30, 1998, the fund had a tax basis net
capital loss carryforward of approximately
$7,348,000, which may be applied against any
realized net taxable gains of each succeeding year
until fully utilized or it will expire during the
period ended 2006. In addition, from November 1,
1998 through November 30, 1998 the fund incurred
approximately $11,442,000 of net realized capital
losses. As permitted by tax regulations, the fund
intends to elect to defer these losses and treat
them as arising in the fiscal year ended November
30, 1999.
DIVIDENDS TO SHAREHOLDERS. The fund generally
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.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper). The fund 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. The fund
incurred a management fee of $3,077,000 for the six
months ended May 31, 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 six months ended May 31,
1999 are $41,000.
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 six months ended May 31, 1999 are
$2,444,000.
ADMINISTRATIVE SERVICES AGREEMENT. The fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C 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. Administrative services fees paid by the
fund to KDI for the six months ended May 31, 1999
are $998,000.
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the fund. Under the agreement,
KSvC received shareholder services fees of
$1,583,000 for the six months ended May 31, 1999.
OFFICERS AND DIRECTORS. Certain officers or
directors of the fund are also officers or
directors of Scudder Kemper. For the six months
ended May 31, 1999, the fund made no payments to
its officers and incurred directors' fees of
$20,000 to independent directors.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended May 31, 1999, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $115,624
Proceeds from sales 261,827
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the fund:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MAY 31, 1999 YEAR ENDED
(UNAUDITED) NOVEMBER 30, 1998
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 16,229 $ 290,216 20,519 $ 411,778
--------------------------------------------------------------------------------
Class B 2,551 44,530 8,848 179,219
--------------------------------------------------------------------------------
Class C 651 11,448 2,452 50,136
--------------------------------------------------------------------------------
Class I 193 3,569 306 6,403
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A -- -- 902 18,655
--------------------------------------------------------------------------------
Class B -- -- 590 11,977
--------------------------------------------------------------------------------
Class C -- -- 116 2,362
--------------------------------------------------------------------------------
Class I -- -- 23 476
--------------------------------------------------------------------------------
SHARES REDEEMED
Class A (22,013) (392,282) (28,336) (579,143)
--------------------------------------------------------------------------------
Class B (6,254) (106,822) (5,452) (105,691)
--------------------------------------------------------------------------------
Class C (1,913) (32,797) (1,933) (37,381)
--------------------------------------------------------------------------------
Class I (312) (5,781) (491) (10,219)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 323 5,726 688 14,254
--------------------------------------------------------------------------------
Class B (333) (5,726) (703) (14,254)
--------------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE TRANSACTIONS $(187,919) $ (51,428)
--------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------------------------
CLASS A
---------------------------------------------------------
SIX MONTHS YEAR ELEVEN MONTHS YEAR ENDED
ENDED ENDED ENDED DECEMBER 31,
MAY 31, NOVEMBER 30, NOVEMBER 30, -------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------
Net asset value, beginning of period $17.80 21.83 18.28 14.50 10.85
- ----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .07 .06 .05 .14 (.02)
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 1.29 (3.39) 3.50 4.14 4.64
- ----------------------------------------------------------------------------------------------------
Total from investment operations 1.36 (3.33) 3.55 4.28 4.62
- ----------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income -- -- -- .07 --
- ----------------------------------------------------------------------------------------------------
Distribution from net realized gain -- .70 -- .43 .97
- ----------------------------------------------------------------------------------------------------
Total dividends -- .70 -- .50 .97
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $19.16 17.80 21.83 18.28 14.50
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.64% (15.69) 19.42 29.60 43.29
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------
Expenses 1.49% 1.42 1.32 1.31 1.25
- ----------------------------------------------------------------------------------------------------
Net investment income (loss) .42% .25 .51 .87 (.16)
- ----------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------
Expenses 1.49% 1.42 1.32 1.47 1.83
- ----------------------------------------------------------------------------------------------------
Net investment income (loss) .42% .25 .51 .71 (.74)
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
CLASS B
-----------------------------------------------------------------------
SIX MONTHS YEAR ELEVEN MONTHS YEAR SEPTEMBER 11
ENDED ENDED ENDED ENDED TO
MAY 31, NOVEMBER 30, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $17.33 21.46 18.14 14.48 15.75
- ------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.08) (.12) (.04) .01 (.02)
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 1.34 (3.31) 3.36 4.11 (.41)
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.26 (3.43) 3.32 4.12 (.43)
- ------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income -- -- -- .03 --
- ------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- .70 -- .43 .84
- ------------------------------------------------------------------------------------------------------------------
Total dividends -- .70 -- .46 .84
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $18.59 17.33 21.46 18.14 14.48
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.27% (16.45) 18.30 28.54 (2.52)
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------
Expenses 2.35% 2.34 2.34 2.12 2.00
- ------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (.44)% (.67) (.51) .06 (.99)
- ------------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------
Expenses 2.35% 2.34 2.34 2.49 2.39
- ------------------------------------------------------------------------------------------------------------------
Net investment loss (.44)% (.67) (.51) (.31) (1.38)
- ------------------------------------------------------------------------------------------------------------------
Expenses 2.35% -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Net investment loss (.44)% -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
CLASS C
-----------------------------------------------------------------------
SIX MONTHS YEAR ELEVEN MONTHS YEAR SEPTEMBER 11
ENDED ENDED ENDED ENDED TO
MAY 31, NOVEMBER 30, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $17.39 21.51 18.17 14.48 15.75
- ------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.09) (.12) (.03) .01 (.02)
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 1.35 (3.30) 3.37 4.14 (.41)
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.26 (3.42) 3.34 4.15 (.43)
- ------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income -- -- -- .03 --
- ------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- .70 -- .43 .84
- ------------------------------------------------------------------------------------------------------------------
Total dividends -- .70 -- .46 .84
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $18.65 17.39 21.51 18.17 14.48
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.25% (16.37) 18.38 28.77 (2.51)
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------
Expenses 2.33% 2.28 2.24 2.06 1.95
- ------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (.42)% (.61) (.41) .12 (.94)
- ------------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------
Expenses 2.33% 2.28 2.24 2.19 2.35
- ------------------------------------------------------------------------------------------------------------------
Net investment loss (.42)% (.61) (.41) (.01) (1.34)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
CLASS I
-----------------------------------------------------------------------
SIX MONTHS YEAR ELEVEN MONTHS YEAR NOVEMBER 1
ENDED ENDED ENDED ENDED TO
MAY 31, NOVEMBER 30, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $18.13 22.08 18.40 14.52 14.25
- ------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .26 .28 .13 .25 --
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 1.17 (3.53) 3.55 4.13 1.11
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.43 (3.25) 3.68 4.38 1.11
- ------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income -- -- -- .07 --
- ------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- .70 -- .43 .84
- ------------------------------------------------------------------------------------------------------------------
Total dividends -- .70 -- .50 .84
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $19.56 18.13 22.08 18.40 14.52
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.94% (15.14) 20.00 30.28 8.03
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------
Expenses .94% .86 .89 .84 .47
- ------------------------------------------------------------------------------------------------------------------
Net investment income .97% .81 .94 1.34 .28
- ------------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------
Expenses .94% .86 .89 .84 .90
- ------------------------------------------------------------------------------------------------------------------
Net investment income (loss) .97% .81 .94 1.34 (.15)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR ELEVEN MONTHS YEAR ENDED
ENDED ENDED ENDED DECEMBER 31,
MAY 31, NOVEMBER 30, NOVEMBER 30, ----------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in
thousands) $847,811 980,411 1,263,144 273,222 31,606
- -------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 28% 50 83 23 86
- -------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
Per share data for the year ended December 31, 1996 were determined based on
average shares outstanding. Total return does not reflect the effect of any
sales charges. Data for the period ended May 31, 1999 is unaudited.
Scudder Kemper Investments, Inc. waived a portion of its management fee and
absorbed certain operating expenses of the fund through the period ended
December 31, 1996. The Other Ratios to Average Net Assets are computed without
this expense waiver or absorption.
20
<PAGE> 21
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 17, 1998, a special shareholders' meeting was held and adjourned to
January 15, 1999. Kemper Small Cap Value Fund shareholders were asked to vote on
two separate issues: approval of the new Investment Management Agreement between
the fund and Scudder Kemper Investments, Inc., and to modify or eliminate
certain policies and to eliminate the shareholder approval requirements as to
certain other matters. The following are the results.
1) Approval of the new Investment Management Agreement between the fund and
Scudder Kemper Investments, Inc. This item was approved.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
36,293,302 491,585 1,195,718
</TABLE>
2) To modify or eliminate certain policies and to eliminate the shareholder
approval requirements as to certain other matters. These items were approved.
<TABLE>
<CAPTION>
Diversification
For Against Abstain
<S> <C> <C>
22,056,011 1,405,079 2,719,034
</TABLE>
<TABLE>
<CAPTION>
Borrowing
For Against Abstain
<S> <C> <C>
22,045,521 1,415,676 2,718,927
</TABLE>
<TABLE>
<CAPTION>
Senior securities
For Against Abstain
<S> <C> <C>
22,058,052 1,403,038 2,719,034
</TABLE>
<TABLE>
<CAPTION>
Concentration
For Against Abstain
<S> <C> <C>
22,055,506 1,405,584 2,719,034
</TABLE>
<TABLE>
<CAPTION>
Underwriting of securities
For Against Abstain
<S> <C> <C>
22,048,233 1,412,857 2,719,034
</TABLE>
<TABLE>
<CAPTION>
Investment in real estate
For Against Abstain
<S> <C> <C>
22,046,979 1,414,111 2,719,034
</TABLE>
<TABLE>
<CAPTION>
Purchase of commodities
For Against Abstain
<S> <C> <C>
22,015,707 1,445,383 2,719,034
</TABLE>
<TABLE>
<CAPTION>
Lending
For Against Abstain
<S> <C> <C>
22,043,726 1,417,364 2,719,034
</TABLE>
<TABLE>
<CAPTION>
Margin purchases and short sales
For Against Abstain
<S> <C> <C>
22,014,074 1,447,016 2,719,034
</TABLE>
<TABLE>
<CAPTION>
Pledging of assets
For Against Abstain
<S> <C> <C>
22,010,952 1,450,138 2,719,034
</TABLE>
<TABLE>
<CAPTION>
Restricted and illiquid securities
For Against Abstain
<S> <C> <C>
22,036,055 1,425,035 2,719,034
</TABLE>
<TABLE>
<CAPTION>
Investment in mineral exploration
For Against Abstain
<S> <C> <C>
22,005,211 1,455,879 2,719,034
</TABLE>
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
DIRECTORS&OFFICERS
DIRECTORS OFFICERS
JAMES E. AKINS MARK CASADY
Director President
JAMES R. EDGAR PHILIP J. COLLORA
Director Vice President and
Secretary
ARTHUR R. GOTTSCHALK
Director JOHN R. HEBBLE
Treasurer
FREDERICK T. KELSEY
Director ANN M. MCCREARY
Vice President
THOMAS W. LITTAUER
Director and Vice President KATHRYN L. QUIRK
Vice President
FRED B. RENWICK
Director THOMAS F. SASSI
Vice President
JOHN G. WEITHERS
Director CORNELIA SMALL
Vice President
LINDA J. WONDRACK
Vice President
MAUREEN E. KANE
Assistant Secretary
CAROLINE PEARSON
Assistant Secretary
ELIZABETH C. WORTH
Assistant Secretary
BRENDA LYONS
Assistant Secretary
- ------------------------------------------------------------------------------
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 STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA, 02110
- ------------------------------------------------------------------------------
PRINCIPAL KEMPER DISTRIBUTORS, INC.
UNDERWRITER 222 South Riverside Plaza Chicago, IL, 60606
www.kemper.com
- ------------------------------------------------------------------------------
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A.
Kemper Equity Fund/Value Style Prospectus.
KSCVF - 3 (7/26/99) 1080140
This report is not to be distributed unless preceded or accompanied by a Kemper
Equity Fund/Value Style prospectus.
