<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED SEPTEMBER 30, 1998
[MORNINGSTAR RATINGS LOGO]
SEEKING MAXIMUM
APPRECIATION OF
INVESTORS CAPITAL
KEMPER SMALL CAPITALIZATION EQUITY FUND
"... There will always be periods of short-term
volatility, but we believe that small-cap stocks
continue to present good opportunities for long-term,
patient investors. ... "
[KEMPER FUNDS LOGO]
<PAGE> 2
AT A GLANCE
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
9
INDUSTRY SECTORS
10
LARGEST HOLDINGS
11
PORTFOLIO OF
INVESTMENTS
14
REPORT OF
INDEPENDENT AUDITORS
15
FINANCIAL STATEMENTS
17
NOTES TO
FINANCIAL STATEMENTS
21
FINANCIAL HIGHLIGHTS
KEMPER SMALL CAPITALIZATION EQUITY
FUND TOTAL RETURNS
FOR THE YEAR ENDED SEPTEMBER 30, 1998 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
LIPPER
SMALL
CAP
CLASS CLASS GROWTH
CLASS A B C FUNDS*
<S> <C> <C> <C>
- -25.13 -26.06 -25.65 -20.06
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE PERFORMANCE.
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 AND, IF THEY HAD, RESULTS MAY HAVE BEEN LESS FAVORABLE.
INVESTMENT BY THE FUND IN SMALL COMPANIES PRESENTS GREATER RISK THAN INVESTMENT
IN LARGER, MORE ESTABLISHED COMPANIES.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
9/30/98 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS A $5.30 $7.98
- --------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS B $4.98 $7.64
- --------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS C $5.00 $7.63
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION EQUITY
FUND RANKINGS AS OF 9/30/98
- --------------------------------------------------------------------------------
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 #426 of #457 of #447 of
576 funds 576 funds 576 funds
- --------------------------------------------------------------------------------
5-YEAR #146 of N/A N/A
180 funds
- --------------------------------------------------------------------------------
10-YEAR #36 of N/A N/A
62 funds
- --------------------------------------------------------------------------------
15-YEAR #10 of N/A N/A
22 funds
- --------------------------------------------------------------------------------
20-YEAR #4 of N/A N/A
14 funds
- --------------------------------------------------------------------------------
</TABLE>
DIVIDEND REVIEW
DURING THE YEAR ENDED SEPTEMBER 30, 1998, KEMPER SMALL CAPITALIZATION EQUITY
FUND MADE THE FOLLOWING DISTRIBUTIONS PER SHARE:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM
CAPITAL GAIN $0.02 $0.02 $0.02
- --------------------------------------------------------------------------------
LONG-TERM
CAPITAL GAIN $0.79 $0.79 $0.79
- --------------------------------------------------------------------------------
</TABLE>
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR EQUITY STYLE BOX
- --------------------------------------------------------------------------------
[MORNINGSTAR EQUITY STYLE BOX]
Data provided by Morningstar, Inc., Chicago, IL (312) 696- 6000. The Equity
Style Box placement is based on a fund's price-to-earnings and price-to-book
ratios relative to the S&P 500, as well as the size of the companies in which it
invests, or median market capitalization. Please note that style boxes do not
represent an exact assessment of risk and do 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 Capitalization Equity Fund in the
small-cap growth category. Please consult the prospectus for a description of
investment policies.
TERMS TO KNOW
GROWTH STOCK The stock of a company whose earnings growth has consistently
exceeded the growth rate of the overall market and whose growth is expected to
continue.
MARKET CAPITALIZATION A measure of the size of a publicly traded company, as
determined by multiplying the current price by the number of shares outstanding.
The market capitalization of a company has bearing on its perceived earnings
potential and risk. Small cap companies (less than one billion dollars) may
present the potential for greater growth than larger, more established
companies. On the other hand, the stock of small cap companies may be expected
to be more volatile and therefore present greater risk to capital.
MARKET CORRECTION A reverse movement, usually downward, in the price of the
overall market. Corrections are to be expected over the long term.
<PAGE> 3
ECONOMIC OVERVIEW
[SILVIA PHOTO]
DR. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS.
SILVIA HOLDS A BACHELOR'S DEGREE AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND A MASTER'S DEGREE IN ECONOMICS FROM BROWN UNIVERSITY IN
PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS WITH THE HARRIS
BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT MANAGER FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $245 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES, AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS.
DEAR SHAREHOLDERS,
If you're like most investors, you may be wondering if you should allow yourself
to breathe a sigh of relief as 1998 comes to a close. After several months of
generally declining stock prices and extreme volatility, the U.S. stock market
seems to have rediscovered its resiliency. In the fourth quarter, the Standard &
Poor's 500, an unmanaged index generally representative of the U.S. stock
market, bounced back into the 1100-point range, up nearly 20 percent from its
third-quarter low of 957. The blue chip Dow Jones Industrial Average enjoyed a
comparable rise. Investor confidence suddenly overtook the investor uncertainty
that had plagued the markets at summer's end.
To what can we attribute the change? Simply this -- the cumulative effect of
some good news, not the least of which was a long-awaited reduction in interest
rates by the Federal Reserve Board. In September, the Fed reduced the federal
funds rate a modest 1/4 of a percentage point, however, the cut disappointed
some investors who were expecting a more dramatic gesture. In October, the Fed
reduced the rate an additional 1/4 of a percentage point. This was an unexpected
cut that seemed to have a positive effect on Wall Street. Investors were also
pleasantly surprised by better-than-expected corporate earnings reports early in
the fourth quarter. (Other contributors to the good vibrations included Mark
McGwire, Sammy Sosa and John Glenn. While they don't have the market clout of
Alan Greenspan, they may have played a role in elevating the national mood.)
Although there was no good news to be garnered from the sensationalized
presidential scandal, as the shock of Kenneth Starr's report wore off, the
nation seemed to refocus its attention on other matters. In this sense, another
veil of despair was lifted.
In many ways, 1998's market activity provides a study in how investor
perceptions can upstage economic realities. Certainly, the tumultuous lessons of
Russia and Southeast Asia renewed investors' awareness of risk in 1998, which
was an important wake-up call. At all times, investors must understand and
consider risk. But over the course of 1998, U.S. economic fundamentals have
essentially remained strong. In fact, inflation has remained low for the entire
year. Economic growth has been solid. Our consumer confidence has remained
fairly high, although not quite as high as last year.
Other signs of strength this year have included better-than-expected regional
retail sales, as well as robust housing starts and home sales. The nation's
budget surplus for 1998 came in at $60 billion, with another budget surplus
expected for fiscal 1999.
Growth in the nation's gross domestic product (GDP), which represents the
total value of all goods and services produced within the U.S. economy, has
remained remarkably steady. GDP is expected to have grown at an annualized rate
of between 2 and 3 percent for the second half of 1998 and is anticipated to
hover around 2 percent for the first half of 1999. The consumer price index
(CPI) remains at about 1.5 percent to 2 percent.
While employment growth has slowed a bit, the slowdown in wage gains may
provide the Fed with an incentive to reduce interest rates even further. U.S.
corporate profits have generally been flat, so we may see a decrease in capital
spending. Banks appear to be only a little less willing to lend, so the threat
of a general credit crunch is minimal.
Investors may take comfort in the fact that the U.S. markets and economy have
withstood the test of 1998's tumultuous third quarter. Similarly, while certain
countries, such as Malaysia, Indonesia, Brazil and Russia, are still suffering
from economic crises, others, including the Philippines, South Korea, Thailand
and China, appear to have survived. As long as the Fed and the Group of Seven
leading industrial nations (G7) are committed to avoiding recession on national
and global levels respectively, investors have a good chance of experiencing a
more stable economic environment.
At home, there has been somewhat of a slowdown in manufacturing, as reduced
U.S. exports reflect foreign economic turmoil. But the global impact of the
Asian crisis still has not hit the U.S. as hard as was expected. Indeed, Asian
turmoil has not affected U.S. trade as much as it has lowered import prices and
helped reduce global interest rates.
3
<PAGE> 4
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND SHAREHOLDER
DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR DEFLATION, CREDIT
EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR INVESTMENT
RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE 10-YEAR TREASURY
RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES. THE OTHER DATA REPORT
YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
OCTOBER 31, 1998 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 4.53 5.64 6.03 6.53
PRIME RATE(2) 8.12 8.50 8.50 8.25
INFLATION RATE(3)* 1.43 1.38 2.22 3.00
THE U.S. DOLLAR(4)* 0.89 3.92 7.62 4.74
CAPITAL GOODS ORDERS(5)* 10.21 10.47 15.67 4.79
INDUSTRIAL PRODUCTION(5)* 2.45 2.57 2.60 3.18
EMPLOYMENT GROWTH(6)* 2.34 2.57 2.65 2.22
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE
VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE VALUE OF U.S. FIRMS'
FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
* DATA AS OF SEPTEMBER 30, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
In Europe, the much anticipated Economic and Monetary Union (EMU) is on the
move, with a focus on more flexibility and growth potential for the region.
European equities may be the beneficiaries of increased spending, as governments
seek to foster growth and reduce unemployment.
If you're a long-term investor in today's short-term world, go ahead and
breathe that sigh of relief as 1998 comes to an end -- but get ready for 1999.
It's going to be an interesting year as the EMU emerges, the race for the next
presidency heats up and the year 2000 approaches. And, remember: Investors don't
like uncertainty, be it economic or political. A threat of impeachment, new acts
of terrorism or any other hints of crisis could help drag our markets downward
again.
I would like to take this opportunity to thank you for choosing to invest with
Kemper Funds. We appreciate the opportunity to serve your investment needs.
Sincerely,
/S/ John E. Silvia
JOHN E. SILVIA
November 9, 1998
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF DR. JOHN SILVIA AS OF NOVEMBER 9, 1998, AND
MAY NOT ACTUALLY COME TO PASS. THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF
THIS MATERIAL IS INTENDED AS AN INVESTMENT RECOMMENDATION.
4
<PAGE> 5
PERFORMANCE UPDATE
[STALZER PHOTO]
KURT R. STALZER JOINED SCUDDER KEMPER INVESTMENTS, INC. IN JANUARY 1997 AND HAS
MORE THAN 15 YEARS OF INVESTMENT EXPERIENCE. HE IS A MANAGING DIRECTOR OF
SCUDDER KEMPER INVESTMENTS AND LEAD PORTFOLIO MANAGER OF KEMPER SMALL
CAPITALIZATION EQUITY FUND. STALZER RECEIVED A B.B.A. DEGREE FROM THE UNIVERSITY
OF MICHIGAN WHERE HE EARNED A DUAL SPECIALIZATION IN FINANCE AND ACCOUNTING. HE
IS ALSO A MEMBER OF THE FINANCIAL ANALYST FEDERATION AND THE ASSOCIATION OF
INVESTMENT MANAGEMENT AND RESEARCH.
[BURSHTAN PHOTO]
DAVID H. BURSHTAN JOINED SCUDDER KEMPER INVESTMENTS IN SEPTEMBER 1995. HE IS A
SENIOR VICE PRESIDENT AND A MEMBER OF SCUDDER KEMPER'S GLOBAL EQUITY GROUP WHERE
HE FOCUSES ON SMALL CAP PORTFOLIO MANAGEMENT AND RESEARCH. HE IS ALSO A
PORTFOLIO MANAGER OF KEMPER SMALL CAPITALIZATION EQUITY FUND. BURSHTAN RECEIVED
HIS B.A. DEGREE IN ECONOMICS FROM BROWN UNIVERSITY AND HIS M.B.A. DEGREE IN
FINANCE FROM THE UNIVERSITY OF CHICAGO.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
THE PERIOD OCTOBER 1, 1997 THROUGH SEPTEMBER 30, 1998 WAS CHARACTERIZED BY
EXTREME BOUTS OF VOLATILITY BROUGHT ON BY GLOBAL EVENTS. SMALL-CAPITALIZATION
STOCKS STRUGGLED, WHILE VERY LARGE GROWTH STOCKS LED THE MARKET FOR MOST OF THE
PERIOD. LEAD PORTFOLIO MANAGER KURT STALZER EXPLAINS HOW HE MANAGED THE FUND IN
THIS TURBULENT ENVIRONMENT.
Q KURT, FOR THE PAST YEAR, THE NEWS HAS BEEN FULL OF STORIES OF MARKET
VOLATILITY. HOW DID THE FUND PERFORM?
A It was a difficult time for small-cap funds, and Kemper Small
Capitalization Equity Fund was no exception. The fund was down 25.13 percent
(Class A shares, unadjusted for any sales charges) for the one-year period
ending September 30, 1998. The fund suffered somewhat more severely than its
peers. The Lipper small cap funds group posted an average decline of 20.60
percent. The Russell 2000 Index lost 19.02 percent.
We know that the fund's performance will come as a disappointment to
shareholders. We share in that disappointment, and are never satisfied if the
fund falls. And while a short-term loss can be daunting, we feel that it is
particularly important for investors to maintain a longer-term focus. The stocks
of small companies have offered patient, long-term investors the opportunity to
reap considerable rewards, and of course, past performance is no guarantee of
future results.
As I discuss the past fiscal year, we can take a look at some of the factors
that impacted the fund's performance, from market conditions and global events
to how some of the individual stocks in the portfolio performed.
Q BEFORE WE TALK ABOUT THE FUND, COULD YOU PROVIDE US WITH A BACKGROUND OF
THE MARKET CLIMATE DURING THE PAST YEAR?
A The dominant force driving the markets over the past year was volatility
borne out of uncertainty. In recent years, investing has become more globally
complex, and investors have begun to travel down a less familiar road. Soon
after the fiscal year began, we saw a steep sell-off in the market. On October
27, 1997, concerns about the economic stability of several Southeast Asian
nations came home to roost, and the U.S. market declined seven percent. The
impact of the flagging Asian economies was unclear: To what extent would gross
domestic product be impacted by a softer demand for exports? How would domestic
earnings be influenced by cheaper imports? Could the robust domestic growth of
the last four years continue much longer?
However, the market rebounded quickly, and people began to return to stocks
with heady enthusiasm, driving key indicators to new highs. Bailout plans
developed by the International Monetary Fund, paired with many strong earnings
announcements, soothed investors' fears. As 1997 ended, the markets rallied
forward, in a move that continued through the first quarter of 1998.
5
<PAGE> 6
PERFORMANCE UPDATE
By mid-summer, uncertainty and downward momentum supplanted this rally.
Investors were once again worried of prospects that Asia could derail domestic
stocks. The Russian debt crisis and anxiety about Latin America's potential
economic weakness caused the markets to drop precipitously in August.
Q HOW DID THIS UNCERTAINTY IMPACT INVESTORS AND THEIR STOCK SELECTIONS?
A In the first half of the fiscal year, nervous investors became far more
interested in predictable, stable earnings than in underlying values and company
fundamentals. Companies with perceived minimal susceptibility to Asia's woes
were rewarded. Liquidity became a huge buying point.
Investors flocked to perceived quality -- large, domestically oriented
companies, characterized by stable earnings. The stock prices of "household
names" were driven upward. Meanwhile, small-company stocks and those of
companies with international exposure felt the market's chill. Investors showed
scant forgiveness for any company that fell short of earnings expectations.
During the second half of the year, the consequences of the uncertainty
continued to unwind. The flight to quality reached dramatic proportions, as an
increasingly elite group of very large-cap stocks garnered all of the market's
attention. Earnings disappointments were punished with panicked selling.
Q COULD YOU SUMMARIZE WHY SMALL-COMPANY STOCKS SUFFERED MORE THAN LARGER
COMPANY STOCKS?
A Certainly. Even in the best of times, small-company stocks generally show
more volatility than larger companies. It's part of the classic risk/reward
tradeoff. In the recent market climate, small caps were further hampered because
they have less liquidity and often have shorter track records. The market's
turmoil has made investors more reluctant to take chances. The flight to the
perceived stability of large caps has also been a flight away from small caps.
Q HOW DO YOU SELECT STOCKS IN THIS SORT OF UNFRIENDLY ENVIRONMENT?
A Well, we don't let market conditions sway our investment strategy. We
follow at a growth-at-a-reasonable-price discipline. We use qualitative and
quantitative analysis to rigorously evaluate earnings potential and company
fundamentals. We examine growth trends of stocks and sectors, stock prices,
industry growth expectations and company balance sheets. Companies that catch
our eye are those that occupy a niche market, have minimum competition or offer
innovative products. Our goal is to use these criteria, and many others, to
create a portfolio of reasonably priced stocks that have strong earnings growth
potential for at least a two- to five-year time horizon.
Q WHAT WORKED OUT WELL FOR THE FUND?
A The fund's health care stake was a bright spot in the portfolio. We were
overweighted relative to the Russell 2000 index, and reaped gains from strong
performers. We favored device and product companies over service firms, because
we felt that service names could be negatively impacted by a rapidly changing
regulatory horizon. Serologicals Corp. is a stock that we've held for more than
a year, and we've been pleased with its performance. The firm provides antibody
testing for large pharmaceutical companies. Another strong performer over the
past year has been Sofamor-Danek, the largest producer of spinal implant
devices.
Consumer nondurable stocks have also served the fund well, thanks to their
good growth potential and low foreign exposure. One name that we've particularly
liked has been Men's Wearhouse, a leading presence in mid-priced men's tailored
clothing.
Our stock selection criteria has also led us to good performers in other
sectors, including Network Appliance, a firm involved in the development and
design of network data storage equipment, and Applied Power, a firm that has
carved a nice niche for itself in the hydraulic-power equipment arena. Now,
these might not be names that you hear about every day, but they exhibit the
franchise characteristics of strong small-cap growth stocks that we like. During
the past year, these nimble companies delivered.
Q WHAT DID NOT PERFORM AS WELL AS EXPECTED?
A The Asian situation took a marked toll on many of the stocks within the
fund's technology stake. Aspen Technology, Artisan Technology, and Sawtech were
among those that fell short. We have since eliminated them from the portfolio.
In hindsight, we would have been better served by a more aggressive reduction of
the fund's exposure to Asia. We started to trim technology in the wake of the
October correction, but we didn't trim enough.
Energy stocks also hampered the fund's gains. Commodity prices moved downward
more than we anticipated, and we didn't react
6
<PAGE> 7
PERFORMANCE UPDATE
quickly enough. The fund's exposure to transportation stocks, albeit modest,
also dampened performance. We were overly optimistic in our evaluation of rail
and trucking stocks. Within the fund's financial services holdings, Sirrom
Capital was a marked disappointment. Sirrom is involved in extending credit to
small businesses, and was battered as the result of poor loan quality and
funding issues.
Q YOU MENTIONED THAT THE FUND FOLLOWS A VALUATION DISCIPLINE AND THAT THE
MARKET REWARDED EARNINGS PREDICTABILITY OVER VALUATIONS. IN THIS UNUSUAL
CLIMATE, WHAT IMPACT DID YOUR INVESTMENT DISCIPLINE HAVE ON SHORT-TERM GAINS?
A Well, our valuation discipline kept out some high-flying small-cap stocks.
For instance, we avoided Internet stocks. The market was excited about some of
these names, but we don't feel that they've yet shown the sustainable earnings
strength that we want.
In addition to sticking to our valuation discipline, we also have a small-cap
discipline. Lately, as small-caps have been battered by nervous markets, we've
seen many managers of "small cap" funds drift upwards into mid- and large-cap
issues. I will never do that, even if it means that we may lag our "peers" in
liquidity-driven markets like 1998's. If we say we invest in small company
growth stocks, we believe that it's important that we invest in small-company
growth stocks. It's what our shareholders expect. We know it can be
disappointing enough when small-cap stocks suffer a bout of underperformance.
But, we believe it pales in comparison to the disappointment that investors
would feel if we abandoned our stated focus, only to miss out on a small-cap
rally.
Q AS THE FUND BEGINS A NEW FISCAL YEAR, WHERE ARE YOU UNCOVERING ATTRACTIVE
OPPORTUNITIES?
A We expect consumer nondurables stocks will remain an important theme. They
have limited foreign exposure and good potential for sustainable growth.
Broadcasting stocks present some interesting stories, as do service stocks.
Within the retail subsector, we feel that the stronger companies will be those
that cater to young people, rather than high-end retail chains. When it comes to
shopping, teens are less fazed by recessionary concerns than adults.
Additionally, many restaurant stocks have corrected, so there could be some good
values in this area.
Within technology, semiconductors and semiconductor-related equipment hold
appeal. There are indications that these stocks have already gone through their
bear market: their earnings have gone down, but their stock prices have stopped
declining. This trend may be a sign of a brighter horizon.
Contract manufacturing stocks such as Solectron and Jabil Circuits also merit
consideration. Companies like IBM and Hewlett-Packard will likely have increased
needs to outsource, and that's the sort of environment that will allow companies
like Solectron and Jabil Circuits to shine. In contrast, in a slowing economy,
software and information technology stocks are less appealing to us, and firms
will likely divert what money they do have for Year 2000 consulting work.
Energy stocks may have bottomed out, and we are keeping an eye out for
emerging opportunities there as well.
Q HOW DO YOU FEEL ABOUT THE PROSPECTS OF SMALL-CAP STOCKS?
A There are several factors that could bode well for small-cap stocks. On a
relative basis, small-cap stocks are as cheap as they've been in nearly twenty
years. If the market's recent slide was actually a discounting of a recession,
the horizon for small caps could improve. (Historically, small-cap stocks
perform briskly coming out of a recession.) Also, the initial public offering
(IPO) stream has dried up over past months, reducing the supply of small-cap
names. Should the tide turn -- as we believe it eventually will -- an increased
demand, paired with this reduced supply, should be beneficial for small-cap
stock prices. Lastly, as international markets improve, foreign investors will
be pulling out of the large-cap U.S. stocks where they've been investing their
cash. Small-cap stocks won't have to worry as much about that sell-off.
There will be always be periods of short-term volatility, but we believe that
small-cap stocks continue to present good opportunities for long-term, patient
investors.
7
<PAGE> 8
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR THE PERIODS ENDED SEPTEMBER 30, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER SMALL CAPITALIZATION EQUITY FUND
CLASS A -29.46% 5.04% 11.86% 11.52% (since 2/20/69)
- ----------------------------------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION EQUITY FUND
CLASS B -28.02 N/A N/A 7.50 (since 5/31/94)
- ----------------------------------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION EQUITY FUND
CLASS C -25.65 N/A N/A 7.94 (since 5/31/94)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION EQUITY FUND CLASS A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Small Standard &
Capital Poor's 500
Equity Russell Stock
Fund A1 2000 Index' Index"
<S> <C> <C> <C>
1/1/79 10000 10000 10000
10331 11688 10710
10931 12473 11002
12510 13857 11844
13408 14307 11861
12171 12475 11368
14122 14995 12901
17011 18391 14349
19537 19829 15710
19399 21471 15927
19241 22270 15561
16734 18365 13968
19235 20231 14937
16671 18345 13845
16832 18081 13767
18742 19988 15353
24556 25278 18155
27725 29687 19973
32998 35713 22191
31188 33961 22161
30365 32642 22250
27855 30453 21717
27212 29538 21159
28362 31162 23210
28059 30259 23646
30752 34468 25817
32800 35689 27711
31157 34136 26576
35765 39653 31148
41135 45266 35541
42796 47461 37636
38543 41649 35011
12/31/86 41041 41905 36962
49795 52049 44854
50117 51680 47106
53731 53869 50213
41139 38217 38902
43930 45512 41114
46236 48526 43851
44415 48082 43997
44330 47778 45341
47162 51462 48552
51226 54740 52832
57998 58426 58483
55914 55548 59685
53895 54302 57890
58817 56361 61530
47836 42573 53083
52995 44729 57838
66175 58029 66228
64649 57108 66073
74221 61780 69601
89567 65324 75426
87449 70217 73524
77766 65411 74919
79430 67294 77280
12/31/92 89678 77350 81164
87201 80656 84708
93146 82424 85116
106523 89632 87312
104737 91953 89333
101579 89504 85951
93158 86002 86312
101930 91977 90528
101270 90276 90510
107435 94444 99316
117151 103298 108786
133407 113500 117425
132830 115960 124491
142128 121877 131172
147884 127974 137053
155190 128407 141293
12/31/96 151549 135087 153063
141155 128102 157175
171368 148868 184595
192880 171024 198416
182566 165297 204114
197008 181924 232573
187199 173442 240248
9/30/98 144418 138501 216388
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION EQUITY FUND CLASS B
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Small Standard &
Capital Poor's 500
Equity Russell Stock
Fund B1 2000 Index' Index"
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9398.23 9660 9757
10230.1 10332 10234
10145.9 10141 10232
10730.5 10609 11227
11673.5 11603 12298
13257.6 12749 13274
13179.2 13026 14073
14053.4 13690 14828
14591.3 14375 15493
15263.7 14424 15972
12/31/96 14870.9 15174 17303
13815.7 14389 17768
16711.3 16722 20867
18748.1 19211 22430
12/31/97 17675.7 18567 23074
19039.6 20435 26291
18037.5 19482 27158
9/30/98 13685.9 15558 24461
</TABLE>
[LINE GRAPH]
KEMPER SMALL CAPITALIZATION EQUITY FUND CLASS C
<TABLE>
<CAPTION>
Kemper
Small Standard &
Capital Poor's 500
Equity Russell Stock
Fund C1 2000 Index' Index"
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9434 9660 9757
10212 10332 10234
10128 10141 10232
10713 10609 11227
11656 11603 12298
13240 12749 13274
13162 13026 14073
14059 13690 14828
14597 14375 15493
15247 14424 15972
12/31/96 14854 15174 17303
13799 14389 17768
16696 16722 20867
18734 19211 22430
12/31/97 17661 18567 23074
19165 20435 26291
18162 19482 27158
9/30/98 13928 15558 24461
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURNS AND
PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN ORIGINAL COST.
* AVERAGE ANNUAL TOTAL RETURN AND TOTAL RETURN MEASURES NET INVESTMENT
INCOME AND CAPITAL GAIN OR LOSS FROM PORTFOLIO INVESTMENTS OVER THE PERIODS
SPECIFIED, ASSUMING REINVESTMENT OF DIVIDENDS AND, WHERE INDICATED,
ADJUSTMENT FOR THE MAXIMUM SALES CHARGE. THE MAXIMUM SALES CHARGE FOR CLASS
A SHARES IS 5.75%. FOR CLASS B SHARES, THE MAXIMUM CONTINGENT DEFERRED
SALES CHARGE IS 4%. CLASS C SHARES HAVE NO SALES CHARGE ADJUSTMENT, BUT
REDEMPTIONS WITHIN ONE YEAR OF PURCHASE MAY BE SUBJECT TO A CONTINGENT
DEFERRED SALES CHARGE OF 1%. SHARE CLASSES INVEST IN THE SAME UNDERLYING
PORTFOLIO. AVERAGE ANNUAL TOTAL RETURN REFLECTS ANNUALIZED CHANGE WHILE
TOTAL RETURN REFLECTS AGGREGATE CHANGE. DURING THE PERIODS NOTED SECURITIES
PRICES FLUCTUATED. FOR ADDITIONAL INFORMATION, SEE THE PROSPECTUS AND
STATEMENT OF ADDITIONAL INFORMATION AND THE FINANCIAL HIGHLIGHTS AT THE END
OF THIS REPORT.
(1) PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS AND ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE FOR CLASS A SHARES AND THE CONTINGENT DEFERRED
SALES CHARGE IN EFFECT AT THE END OF THE PERIOD FOR CLASS B SHARES.
WHEN REVIEWING THE PERFORMANCE CHART, PLEASE NOTE THAT THE INCEPTION
DATE FOR THE RUSSELL 2000 INDEX IS JANUARY 1, 1979. AS A RESULT, WE
ARE UNABLE TO ILLUSTRATE THE LIFE OF FUND PERFORMANCE FOR CLASS A
SHARES (SINCE FEBRUARY 20, 1969) FOR KEMPER SMALL CAPITALIZATION
EQUITY FUND. IN COMPARING KEMPER SMALL CAPITALIZATION EQUITY FUND TO
THE RUSSELL 2000 INDEX AND THE STANDARD & POOR'S 500 STOCK INDEX, YOU
SHOULD ALSO NOTE THAT THE FUND'S PERFORMANCE REFLECTS THE MAXIMUM
SALES CHARGE, WHILE NO SUCH CHARGES ARE REFLECTED IN THE PERFORMANCE
OF THE INDICES.
+ THE RUSSELL 2000 INDEX IS A CAPITALIZATION WEIGHTED PRICE ONLY INDEX WHICH
IS COMPRISED OF 2000 OF THE SMALLEST STOCKS (ON THE BASIS OF
CAPITALIZATION) IN THE RUSSELL 3000 INDEX.
++ THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET. SOURCE IS TOWERSDATA.
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, 1998, and on September 30, 1997.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL KEMPER SMALL
CAPITALIZATION CAPITALIZATION
EQUITY FUND EQUITY FUND
ON 9/30/98 ON 9/30/97
<S> <C> <C>
CONSUMER NON-DURABLES 29.7% 22.1%
HEALTH CARE 22.6% 14.5%
TECHNOLOGY 20.6% 22.0%
CAPITAL GOODS 8.4% 13.6%
FINANCE 6.8% 14.7%
CONSUMER DURABLES 4.7% 3.4%
TRANSPORTATION 3.1% 3.0%
BASIC INDUSTRIES 2.9% 2.4%
ENERGY 1.2% 4.3%
</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 Capitalization Equity Fund represented on September 30, 1998,
compared to the industry sectors that make up the fund's benchmark, the Russell
2000 Index.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL
CAPITALIZATION
EQUITY FUND RUSSELL 2000
ON 9/30/98 INDEX
<S> <C> <C>
CONSUMER NON-DURABLES 29.7% 20.3%
HEALTH CARE 22.6% 9.1%
TECHNOLOGY 20.6% 15.9%
CAPITAL GOODS 8.4% 8.5%
FINANCE 6.8% 24.7%
CONSUMER DURABLES 4.7% 2.7%
TRANSPORTATION 3.1% 2.4%
BASIC INDUSTRIES 2.9% 6.2%
ENERGY 1.2% 4.7%
UTILITIES 0.0% 5.3%
</TABLE>
* The Russell 2000 Index is a capitalization weighted price only index which is
comprised of 2000 of the smallest stocks (on the basis of capitalization) in
the Russell 3000 Index.
9
<PAGE> 10
LARGEST HOLDINGS
THE FUND'S 10 LARGEST HOLDINGS*
Representing 19.6 percent of the fund's total net assets on September 30, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
HOLDINGS PERCENT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. SOFAMOR-DANEK GROUP Manufactures spinal implant devices. 2.7%
2. CONCORD COMMUNICATIONS Develops and markets software solutions for computer 2.2%
networks.
3. MERCURY INTERACTIVE Creates products to automate the testing and quality 2.0%
assurance of client-server software.
4. APPLIED POWER Manufactures and sells a wide variety of portable 1.9%
hydraulic-powered equipment and systems including
hydraulic pumps, cylinders, valves and power packages.
5. SEROLOGICALS Global provider of specialty human antibody-based 1.9%
services to pharmaceutical companies.
6. PHYSICIAN RELIANCE NETWORK Provides management, facilities and services to 1.8%
oncologists through management service contracts.
7. RESMED Develops, manufactures and distributes respiratory 1.8%
products, specializing in treating respiratory-related
sleep disorders.
8. HEARST-ARGYLE TELEVISION Produces programs for broadcast and cable networks and 1.8%
owns television stations.
9. OMNICARE Provides services to long-term care institutions such 1.8%
as nursing homes, retirement centers and other
institutional health care facilities.
10. U.S. FOODSERVICE Distributes foodstuff, cleaning supplies and paper 1.7%
products to a variety of businesses and organizations,
including restaurants, hotels, schools, and health care
facilities.
</TABLE>
* Portfolio composition and holdings are subject to change.
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
KEMPER SMALL CAPITALIZATION EQUITY FUND
Portfolio of Investments at September 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
COMMON STOCKS NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC INDUSTRIES--2.6% Spartech Corp. 550,000 $ 9,453
(a)Superior Services, Inc. 335,100 9,429
-----------------------------------------------------------------------------
18,882
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--7.6% Applied Power, Inc. 502,400 13,722
(a)Jacobs Engineering Group 335,500 10,401
(a)MotivePower Industries, Inc. 436,200 10,196
(a)RailWorks Corp. 473,000 3,725
(a)SPS Technologies 250,800 11,678
Westinghouse Air Brake Co. 248,500 4,908
-----------------------------------------------------------------------------
54,630
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS--21.3% (a)Cavanaughs Hospitality Corp. 330,600 2,624
(a)Cinar Films, Inc. 607,400 10,895
(a)Consolidated Graphics, Inc. 252,000 9,530
(a)Cost Plus, Inc. 306,000 8,147
(a)Education Management Corp. 308,400 10,948
Four Seasons Hotels, Ltd. 181,400 3,719
(a)Guitar Center, Inc. 433,400 8,126
(a)Hearst-Argyle Television, Inc. 393,900 13,146
(a)ITT Educational Services, Inc. 353,000 11,296
(a)Interim Services 585,100 12,031
(a)Keystone Automotive Industries, Inc. 419,700 8,289
(a)Lamalie Associates, Inc. 164,700 967
(a)MSC Industrial Direct 210,200 4,204
(a)Men's Wearhouse 582,900 10,055
(a)Morton's Restaurant Group 204,500 4,397
(a)Pacific Sunwear of California 228,525 5,085
Select Appointments Holdings, PLC, ADR 436,100 7,577
Stewart Enterprises, Inc. 484,800 8,120
(a)Sylvan Learning Systems, Inc. 177,900 4,158
(a)United Rentals, Inc. 247,555 5,926
Wolverine World Wide, Inc. 334,100 3,633
-----------------------------------------------------------------------------
152,873
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER DURABLES--4.3% (a)Dura Automotive Systems, Inc. 321,100 8,309
Ethan Allen Interiors 179,900 6,521
SPX Corp. 87,900 3,631
(a)Tower Automotive, Inc. 631,900 12,480
-----------------------------------------------------------------------------
30,941
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--5.7% (a)American Italian Pasta Co. 439,900 11,547
(a)NBTY, Inc. 721,100 5,679
Regis Corp. 370,900 11,674
(a)U.S. Foodservice, Inc. 295,300 12,292
-----------------------------------------------------------------------------
41,192
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ENERGY--1.1% (a)Global Industries, Ltd. 688,900 $ 7,965
-----------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
FINANCE--6.2% Associated Banc Corp. 223,397 7,023
Bank United Corp. 182,900 6,550
Community First Bankshares 483,600 8,584
(a)Headland Mortgage Co. 450,000 7,200
(a)Healthcare Financial Partners 91,900 3,860
Metris Companies, Inc. 106,900 4,984
Texas Regional Bancshares 285,000 6,448
-----------------------------------------------------------------------------
44,649
- ----------------------------------------------------------------------------------------------------------------------
HEALTH CARE--20.6% (a)CryoLife, Inc. 583,700 9,187
(a)Hanger Orthopedic Group, Inc. 312,100 5,813
(a)Medicis Pharmaceutical Corp. 289,200 11,460
(a)MedQuist, Inc. 276,400 8,741
(a)Ocular Sciences, Inc. 300,000 6,300
Omnicare, Inc. 362,100 12,764
(a)PAREXEL International Corp. 251,700 9,816
(a)PathoGenesis Corp. 211,700 7,066
(a)Pediatrix Medical Group 161,200 7,234
(a)Physician Reliance Network 1,126,800 13,240
(a)QuadraMed Corp. 412,400 8,300
(a)ResMed, Inc. 254,500 13,234
(a)Serologicals Corp. 530,500 13,329
(a)Sofamor-Danek Group 216,800 19,295
U.S. Surgical Corp 57 2
(a)VISX, Inc. 28,400 1,903
-----------------------------------------------------------------------------
147,684
- ----------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--18.8% (a)Applied Micro Circuits Corp. 262,300 3,902
Cimlinc Incorporated, "D", convertible
preferred 75,431 283
(a)Comverse Technology 271,900 11,114
(a)Concord Communications, Inc. 393,500 15,642
(a)Daisytek International Corp. 266,800 6,003
(a)Exigent International, Inc., with
warrants 125 1
(a)JDA Software Group, Inc. 481,400 6,649
(a)Keane, Inc. 171,600 6,028
(a)MAPICS, Inc. 254,700 5,601
(a)Market Facts 290,000 8,048
(a)Mercury Interactive Corp. 364,800 14,478
(a)Network Appliance, Inc. 233,200 11,806
(a)SBS Technologies 295,200 7,380
(a)Sapient Corp. 138,200 4,716
(a)Solectron Corp. 164,000 7,872
(a)Tech Data Corp. 230,000 11,514
(a)Uniphase Corp. 159,100 6,523
(a)Whittman-Hart, Inc. 399,900 7,348
-----------------------------------------------------------------------------
134,908
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TRANSPORTATION--2.8% C.H. Robinson Worldwide, Inc. 264,400 $ 5,321
Expeditors International of Washington 330,300 9,166
(a)U.S. Xpress Enterprises 480,000 5,880
--------------------------------------------------------------------------------
20,367
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS--91.0%
(Cost: $615,854) 654,091
--------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
MONEY MARKET Yield--5.53% to 5.56%
INSTRUMENTS--9.9%
Due--October 1998
Enron Corp. $ 30,000 29,929
Renaissance Energy 16,000 15,998
Other 25,000 24,992
--------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--9.9%
(Cost: $70,918) 70,919
--------------------------------------------------------------------------------
TOTAL INVESTMENTS--100.9%
(Cost: $686,772) 725,010
--------------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(.9)% (6,661)
--------------------------------------------------------------------------------
NET ASSETS--100% $718,349
--------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) Non-income producing security.
Based on the cost of investments of $686,772,000 for federal income tax purposes
at September 30, 1998, the gross unrealized appreciation was $105,375,000, the
gross unrealized depreciation was $67,137,000 and the net unrealized
appreciation on investments was $38,238,000.
See accompanying Notes to Financial Statements.
13
<PAGE> 14
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER SMALL CAPITALIZATION EQUITY FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Small Capitalization Equity
Fund as of September 30, 1998, the related statements of operations for the year
then ended and changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the fiscal periods since
1994. 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 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, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Small Capitalization Equity Fund at September 30, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the fiscal periods since 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 17, 1998
14
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $686,772) $725,010
- ------------------------------------------------------------------------
Receivable for:
Investments sold 16,013
- ------------------------------------------------------------------------
Fund shares sold 2,222
- ------------------------------------------------------------------------
Dividends 155
- ------------------------------------------------------------------------
TOTAL ASSETS 743,400
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Cash overdraft 4,131
- ------------------------------------------------------------------------
Payable for:
Investments purchased 10,777
- ------------------------------------------------------------------------
Fund shares redeemed 9,122
- ------------------------------------------------------------------------
Management fee 255
- ------------------------------------------------------------------------
Distribution services fee 122
- ------------------------------------------------------------------------
Administrative services fee 90
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 484
- ------------------------------------------------------------------------
Trustees' fees and other 70
- ------------------------------------------------------------------------
Total liabilities 25,051
- ------------------------------------------------------------------------
NET ASSETS $718,349
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
Paid-in capital $607,668
- ------------------------------------------------------------------------
Undistributed net realized gain on investments 72,443
- ------------------------------------------------------------------------
Net unrealized appreciation on investments 38,238
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $718,349
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
CLASS A SHARES
Net asset value and redemption price per share
($511,706 / 96,549 shares outstanding) $5.30
- ------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering price) $5.62
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($186,155 / 37,351 shares outstanding) $4.98
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($8,141 / 1,628 shares outstanding) $5.00
- ------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($12,347 / 2,290 shares outstanding) $5.39
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended September 30, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------
INVESTMENT INCOME
- -------------------------------------------------------------------------
Dividends $ 2,668
- -------------------------------------------------------------------------
Interest 2,454
- -------------------------------------------------------------------------
Total investment income 5,122
- -------------------------------------------------------------------------
Expenses:
Management fee 3,519
- -------------------------------------------------------------------------
Distribution services fee 2,044
- -------------------------------------------------------------------------
Administrative services fee 2,054
- -------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 4,014
- -------------------------------------------------------------------------
Reports to shareholders 338
- -------------------------------------------------------------------------
Professional fees 52
- -------------------------------------------------------------------------
Trustees' fees and other 78
- -------------------------------------------------------------------------
Total expenses 12,099
- -------------------------------------------------------------------------
NET INVESTMENT LOSS (6,977)
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on sales of investments 62,885
- -------------------------------------------------------------------------
Change in net unrealized appreciation on investments (301,603)
- -------------------------------------------------------------------------
Net loss on investments (238,718)
- -------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(245,695)
- -------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1998 1997
- ------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment loss $ (6,977) (5,099)
- ------------------------------------------------------------------------------------------
Net realized gain 62,885 108,862
- ------------------------------------------------------------------------------------------
Change in net unrealized appreciation (301,603) 101,461
- ------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (245,695) 205,224
- ------------------------------------------------------------------------------------------
Distribution from net realized gain (110,208) (76,845)
- ------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions (21,226) 33,024
- ------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (377,129) 161,403
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------------------------
Beginning of year 1,095,478 934,075
- ------------------------------------------------------------------------------------------
END OF YEAR $ 718,349 1,095,478
- ------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Small Capitalization Equity Fund is an
open-end management investment company organized as
a business trust under the laws of Massachusetts.
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
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 SECURITY 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 on
the Nasdaq. If there are no such sales, the value
is the most recent bid quotation. Securities which
are not quoted on the Nasdaq but are traded in
another over-the-counter market are valued at the
most recent sale price on such market. If no sale
occurred, the security is then valued at the
calculated mean between the most recent bid and
asked quotations. If there are no such bid and
asked quotations, the most recent bid quotation
shall be used. Forward foreign currency contracts
are valued at the prevailing forward exchange rate
of the underlying currencies on that day. All other
securities are valued at their fair market value as
determined in good faith by the Valuation Committee
of the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). 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 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.
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
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.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income and any net
realized capital gains annually, which are recorded
on the ex-dividend date. Dividends are determined
in accordance with income tax principles which may
treat certain transactions differently from
generally accepted accounting principles.
EQUALIZATION ACCOUNTING. Prior to October 1, 1997,
the Fund used equalization accounting to keep a
continuing shareholder's per share interest in
undistributed net investment income unaffected by
shareholder activity. This was accomplished by
allocating a portion of the proceeds from sales and
the cost of redemptions of fund shares to
undistributed net investment income. As of October
1, 1997, the Fund discontinued using equalization.
This change has no effect on the Fund's net assets,
net asset value per share or distributions to
shareholders. Discontinuing the use of equalization
accounting will result in simpler financial
statements. The cumulative effect of the
discontinuance of equalization accounting was to
increase undistributed net investment income and
decrease paid-in-capital previously reported
through September 30, 1997 by $368,000.
- --------------------------------------------------------------------------------
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 base annual rate of
.65% of average daily net assets which is then
adjusted upward or downward by a maximum of .30%
based upon the Fund's performance as compared to
the performance of the Standard & Poor's 500 Stock
Index (thus the fee on an annual basis can range
from .35% to .95% of average daily net assets).
During the year ended September 30, 1998, the Fund
incurred management fees as follows (in thousands):
<TABLE>
<S> <C>
Base fee $ 6,310
Performance adjustment (2,791)
-------
Total fees $ 3,519
=======
</TABLE>
ZURICH/B.A.T MERGER. On September 7, 1998, Zurich
Insurance Company (Zurich), majority owner of
Scudder Kemper, entered into an agreement with
B.A.T Industries p.l.c. (B.A.T) pursuant to which
the financial services businesses of B.A.T were
combined with Zurich's businesses to form a new
global insurance and financial services company
known as Zurich Financial Services. Upon
consummation of the transaction, the Fund's
investment management agreement with Scudder Kemper
was deemed to have been assigned and, therefore,
terminated. The Board of Trustees of the Fund has
approved a new investment management agreement with
Scudder Kemper, which is substantially identical to
the former investment management agreement, except
for the dates of execution and termination. The
Board of Trustees of the Fund will seek shareholder
approval of the new investment management agreement
through a proxy solicitation that is currently
scheduled to conclude in mid-December.
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
paid in connection with the distribution of Class A
shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS ALLOWED
RETAINED BY KDI BY KDI TO FIRMS
--------------- -------------------
<S> <C> <C>
Year ended September 30, 1998 $154,000 875,000
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares pursuant to separate 12b-1 plans for the
Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees, CDSC and commissions
related to Class B and Class C shares are as
follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES
RECEIVED BY KDI PAID BY KDI TO FIRMS
----------------- ----------------------
<S> <C> <C>
Year ended September 30, 1998 $2,486,000 1,329,000
</TABLE>
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 that the
firms service. Administrative services fees (ASF)
paid are as follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY -----------------------------
THE FUND TO KDI TO ALL FIRMS TO AFFILIATES
---------------- ------------ -------------
<S> <C> <C> <C>
Year ended September 30, 1998 $2,054,000 2,071,000 5,000
</TABLE>
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
$3,107,000 for the year ended September 30, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. During the year ended September 30,
1998, the Fund made no payments to its officers and
incurred trustees' fees of $32,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended September 30, 1998, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $790,046
Proceeds from sales 929,947
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 SEPTEMBER 30,
1998 1997
-------------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 150,146 $ 984,735 27,197 $ 186,417
---------------------------------------------------------------------------------
Class B 10,789 69,768 14,228 92,204
---------------------------------------------------------------------------------
Class C 52,417 329,342 8,306 58,655
---------------------------------------------------------------------------------
Class I 847 6,088 1,369 9,385
---------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 10,966 69,742 8,074 50,144
---------------------------------------------------------------------------------
Class B 5,045 30,421 3,584 21,543
---------------------------------------------------------------------------------
Class C 245 1,476 105 630
---------------------------------------------------------------------------------
Class I 315 2,030 232 1,451
---------------------------------------------------------------------------------
SHARES REDEEMED
Class A (163,024) (1,077,863) (33,969) (225,207)
---------------------------------------------------------------------------------
Class B (14,691) (95,212) (14,844) (93,796)
---------------------------------------------------------------------------------
Class C (52,521) (331,527) (7,876) (55,966)
---------------------------------------------------------------------------------
Class I (1,464) (10,226) (1,827) (12,436)
---------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 3,201 21,822 1,206 8,422
---------------------------------------------------------------------------------
Class B (3,390) (21,822) (1,252) (8,422)
---------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $ (21,226) $ 33,024
---------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------
CLASS A
----------------------------------------------
YEAR ENDED SEPTEMBER 30,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 7.98 7.01 7.14 5.81 6.45
- --------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (.03) (.01) (.02) (.01) (.01)
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (1.84) 1.55 .94 1.68 (.27)
- --------------------------------------------------------------------------------------------------
Total from investment operations (1.87) 1.54 .92 1.67 (.28)
- --------------------------------------------------------------------------------------------------
Less distribution from net realized gain .81 .57 1.05 .34 .36
- --------------------------------------------------------------------------------------------------
Net asset value, end of year $ 5.30 7.98 7.01 7.14 5.81
- --------------------------------------------------------------------------------------------------
TOTAL RETURN (25.13)% 24.29 16.33 30.88 (4.31)
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------
Expenses .90% .90 1.08 1.14 1.34
- --------------------------------------------------------------------------------------------------
Net investment loss (.38)% (.20) (.26) (.18) (.76)
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------
CLASS B
----------------------------------------------
MAY 31
YEAR ENDED SEPTEMBER 30, TO
------------------------------ SEPT. 30,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 7.64 6.81 7.03 5.78 5.65
- --------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (.11) (.10) (.09) (.07) (.02)
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (1.74) 1.50 .92 1.66 .15
- --------------------------------------------------------------------------------------------------
Total from investment operations (1.85) 1.40 .83 1.59 .13
- --------------------------------------------------------------------------------------------------
Less distribution from net realized gain .81 .57 1.05 .34 --
- --------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.98 7.64 6.81 7.03 5.78
- --------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) (26.06)% 22.83 15.13 29.59 2.30
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------
Expenses 2.14% 2.14 2.15 2.17 2.29
- --------------------------------------------------------------------------------------------------
Net investment loss (1.62)% (1.44) (1.33) (1.21) (1.38)
- --------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------
CLASS C
------------------------------------------
MAY 31
YEAR ENDED SEPTEMBER 30, TO
------------------------------ SEPT. 30,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 7.63 6.80 7.02 5.77 5.65
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (.14) (.09) (.09) (.07) (.03)
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (1.68) 1.49 .92 1.66 .15
- ----------------------------------------------------------------------------------------------
Total from investment operations (1.82) 1.40 .83 1.59 .12
- ----------------------------------------------------------------------------------------------
Less distribution from net realized gain .81 .57 1.05 .34 --
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.00 7.63 6.80 7.02 5.77
- ----------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) (25.65)% 22.87 15.16 29.65 2.12
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------
Expenses 2.06% 1.95 2.15 2.10 2.10
- ----------------------------------------------------------------------------------------------
Net investment loss (1.54)% (1.25) (1.33) (1.14) (1.21)
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------
CLASS I
----------------------------------
YEAR ENDED SEPTEMBER JULY 3
30, TO
---------------------- SEPT. 30,
1998 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 8.07 7.05 7.15 6.27
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income -- .01 .01 --
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (1.87) 1.58 .94 .88
- --------------------------------------------------------------------------------------
Total from investment operations (1.87) 1.59 .95 .88
- --------------------------------------------------------------------------------------
Less distribution from net realized gain .81 .57 1.05 --
- --------------------------------------------------------------------------------------
Net asset value, end of period $ 5.39 8.07 7.05 7.15
- --------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) (24.82)% 24.89 16.76 14.04
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------
Expenses .48% .53 .66 .79
- --------------------------------------------------------------------------------------
Net investment income (loss) .04% .17 .16 (.14)
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $718,349 1,095,478 934,075 839,905 631,607
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate 86% 102 85 102 58
- ----------------------------------------------------------------------------------------------------------
</TABLE>
NOTES: Total return does not reflect the effect of any sales charges. Per share
data for the year ended September 30, 1996 were determined based on average
shares outstanding.
TAX INFORMATION
The Fund paid distributions of $.79 per share from net long-term capital gains
during the year ended September 30, 1998, of which 51% represent 20% rate gains.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$62,885,000, as capital gain dividends for the year ended September 30, 1998, of
which 100% represent 20% rate gains.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Kemper Fund account, please call 1-800-621-1048.
22
<PAGE> 23
23
NOTES
<PAGE> 24
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY LINDA J. WONDRACK
Chairman and Trustee President Vice President
DAVID W. BELIN PHILIP J. COLLORA MAUREEN E. KANE
Trustee Vice President and Assistant Secretary
Secretary
LEWIS A. BURNHAM CAROLINE PEARSON
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
DONALD L. DUNAWAY ELIZABETH C. WERTH
Trustee JERARD K. HARTMAN Assistant Secretary
Vice President
ROBERT B. HOFFMAN BRENDA LYONS
Trustee THOMAS W. LITTAUER Assistant Treasurer
Vice President
DONALD R. JONES
Trustee ANN M. MCCREARY
Vice President
SHIRLEY D. PETERSON
Trustee KATHRYN L. QUIRK
Vice President
WILLIAM P. SOMMERS
Trustee STEVEN H. REYNOLDS
Vice President
EDMOND D. VILLANI
Trustee KURT R. STALZER
Vice President
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania Avenue
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[RECYCLED LOGO]
Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Equity Funds/Growth Style prospectus.
KSCF - 2 (11/98) 1059660
Printed in the U.S.A.
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world(SM)
