<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MARCH 31, 1998
[LOGO]
Seeking maximum
appreciation of
investors capital
KEMPER SMALL CAPITALIZATION
EQUITY FUND
"...In the long run, the market
is proving the accuracy of
our expectations ..."
KEMPER FUNDS
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
SHAREHOLDERS' MEETING
8
INDUSTRY SECTORS
9
LARGEST HOLDINGS
10
PORTFOLIO OF INVESTMENTS
13
FINANCIAL STATEMENTS
15
NOTES TO FINANCIAL STATEMENTS
19
FINANCIAL HIGHLIGHTS
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 1998
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 2.14%
CLASS B 1.56%
CLASS C 2.30%
LIPPER SMALL COMPANY GROWTH FUNDS CATEGORY AVERAGE* 5.32%
- --------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not represent future performance.
Returns and net asset value fluctuate. Shares are redeemable at current net
asset value, which may be 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
3/31/98 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS A $7.23 $7.98
- --------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS B $6.84 $7.64
- --------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS C $6.88 $7.63
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION EQUITY
FUND LIPPER RANKINGS*
- --------------------------------------------------------------------------------
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 #347 of 493 funds #374 of 493 funds #356 of 493 funds
- --------------------------------------------------------------------------------
5-YEAR #87 of 154 funds N/A N/A
- --------------------------------------------------------------------------------
10-YEAR #34 of 59 funds N/A N/A
- --------------------------------------------------------------------------------
15-YEAR #6 of 18 funds N/A N/A
- --------------------------------------------------------------------------------
20-YEAR #3 of 12 funds N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
DURING THE PERIOD, 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>
TERMS TO KNOW
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR EQUITY STYLE BOX
- --------------------------------------------------------------------------------
Source: Morningstar, Inc., Chicago, IL (312) 696-6000. (Morningstar Style
Box is based on a portfolio date as of March 31, 1998.) The Equity Style Box
placement is based on a fund's price-to-earnings and price-to-book ratio
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.
PLEASE CONSULT THE PROSPECTUS FOR A DESCRIPTION OF INVESTMENT POLICIES.
GRAY MONDAY On Monday, October 27, 1997, turmoil in Southeast Asian markets
triggered a one-day drop of 7 percent in the U.S. equity market.
PRICE-EARNINGS RATIO A company's stock price, divided by its earnings for the
past four quarters, also referred to as its P/E.
CAPITALIZATION A measure of the size of a publicly traded company,
capitalization is determined by multiplying the current share price by the
number of shares outstanding. The market capitalization of a company has bearing
on its perceived earnings potential and risk. Small capitalization companies
(less than $1 billion) may present the potential for greater growth than larger,
more established companies. On the other hand, the stock of small cap companies
may be more volatile and therefore a greater risk to capital.
<PAGE> 3
ECONOMIC OVERVIEW
[SILVA'S 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. HE IS ALSO A MEMBER OF THE INVESTMENT POLICY AND STRATEGY COMMITTEE
FOR KEMPER FUNDS.
SILVIA HOLDS A BACHELOR OF ARTS AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND HAS 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 $200 BILLION IN ASSETS GLOBALLY FOR
MUTUAL FUND INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND
CORPORATE CLIENTS, INSURANCE COMPANIES AND PRIVATE, FAMILY AND INDIVIDUAL
ACCOUNTS. IT IS ONE OF THE 10 LARGEST MUTUAL FUND COMPLEXES IN THE UNITED
STATES.
DEAR SHAREHOLDERS,
Stable economic growth, low interest rates and sustained lower inflation have
continued to produce a beneficial market environment for investors in the second
quarter of 1998. Despite heightened sensitivity to earnings estimates and
announcements, the market continued to support financial assets. We can expect
this favorable climate to continue--in spite of the sensitivity--at least over
the shorter term.
As always, expectations have been at the heart of the actions and reactions
that move the markets. Expectations appear to be high, as demonstrated by a
record flow of new cash--$37.5 billion--into mutual funds in March. This record
flow surpassed the prior monthly record of $32.7 billion in net mutual fund
investing set in January 1996. Two years ago, many experts were concerned that
the bull market was close to being on its last legs. Quite remarkably today,
investors are still betting on equities. Nearly 75 percent of the new cash
flowing into mutual funds in March went into stock funds, according to the
Investment Company Institute, a trade organization that monitors the mutual
fund industry.
Unfortunately, high expectations often combine with high anxiety--today's
investors are attuned to even the smallest hint of economic change. The result
is volatility. Many who believe that our long-running bull market is too good to
be true or that stock prices are too high are wondering when the market will
reverse.
While a reversal may not be on the immediate horizon, investors are wise to
watch for several signs that change is underway: rising prices, indicating
higher inflation; repercussions of the Asian economic crisis on American
business, which could appear in the form of reduced earnings; and a continued
widening of our trade deficit, a serious imbalance caused by heightened American
demand for foreign goods and services.
On Monday, April 27, expectations were tested by reports that the Federal
Reserve Board (Fed) was considering a hike in interest rates. The markets
reacted immediately to this news, driving stock prices downward. Ultimately, we
do not anticipate that an interest rate hike will materialize in the second
quarter; however, the Fed's monetary policy meeting shortly after the release of
this overview will provide more information.
Our positive outlook for this quarter is based primarily on the current
resiliency of our marketplace. The United States appears to be firmly planted in
the middle of an economic cycle, with no evidence of detrimental pressures that
might be associated with the market's phenomenal growth. We are not seeing price
increases for goods and services or a downturn in the housing market, both of
which we might expect late in an economic cycle.
Equities have continued to reward investors. The U.S. stock market, as
measured by the Standard & Poor's 500, gained nearly 14 percent in the first
quarter of 1998 and returned more than 15 percent year-to-date as of April 30.
Bonds have also rewarded investors in terms of real return, which is total
return less the rate of inflation. The high yield and corporate debt
fixed-income markets also have performed well.
U.S. economic growth, as measured by the gross domestic product (GDP) growth
rate, was slightly above 4 percent for the first quarter. Our general
expectation for the year is that growth will increase between 2.5 and 3 percent
over last year. In other words, the economy will remain strong, but will slow
down as the year progresses.
Consumer spending and corporate fixed investments have fueled the economy's
solid growth. Spending on both capital goods and high technology has been
strong. Corporate profits have grown between 5 and 10 percent, which appears to
be acceptable in an environment of stable interest rates. U.S. employment growth
has ranged from 2 to 2.25 percent, continuing to exceed expectations. Consumer
confidence has continued to hit near all-time highs. The increase in output
prices, an indicator of inflation measured by the Consumer Price Index (CPI),
has remained at 1.5 to 2 percent.
Adding to the good news, all seems to be quiet on the domestic policy front.
At the end of February, the U.S. federal budget deficit essentially vanished.
Recent efforts to reduce the deficit, combined with higher federal revenues due
to the robust economy, have left us with an expected budget surplus of $40
billion to $50 billion for fiscal 1998. To date, our Democratic president and
Republican Congress have not agreed on any significant legislation regarding tax
credits, spending cuts or health care that could threaten the newfound federal
budget surplus.
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 (4/30/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 5.64 5.88 6.71 6.74
PRIME RATE(2) 8.5 8.5 8.5 8.25
INFLATION RATE(3)* 1.38 2.08 2.43 2.9
THE U.S. DOLLAR(4) 3.92 9.65 6.55 8.51
CAPITAL GOODS ORDERS(5)* 10.89 11.72 8.17 6.82
INDUSTRIAL PRODUCTION(5)* 4.27 5.77 4.72 3.49
EMPLOYMENT GROWTH(6)* 2.59 2.36 2.27 1.78
</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 as 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 March 31, 1998.
Can we expect a little more excitement from overseas? A full-scale global
recession from last year's Asian economic crisis seems unlikely at this point.
The crisis has yet to hurt most U.S. businesses and investors. Quite the
contrary. While the mere threat of repercussions from the Asian crisis added to
the anxiety mentioned earlier, it has also had the effect of keeping U.S.
interest rates and prices in check, making the U.S. economy all the more
attractive to investors around the world.
In the global economy, the U.S. dollar continues to appreciate in value
compared to other currencies. In fact, more capital is flowing into U.S. markets
as investors generally avoid Asia. Europe has also been benefiting from the
crisis. Canada, which is a commodity-producing exporter, has been somewhat
negatively affected as commodity prices have fallen.
Other major developments abroad include the final selection of countries to
participate in Europe's single currency next year. Many European countries are
adopting more restrictive fiscal policy and reducing inflation in anticipation
of the momentous European Economic and Monetary Union (EMU). But after the EMU
is established in 1999, tensions may indeed mount as countries work to adapt to
the new structure.
As we approach the turn of the century, one caveat remains: Don't
underestimate the potential of the Year 2000 computer code problem. It appears
that a significant number of federal government agencies will not meet the
criteria necessary to avoid the problem. Many businesses are revealing that
billions of dollars are being spent on the situation. Some experts say a global
recession is in store. Others adamantly disagree. In any event, we may indeed
see a reduction in capital spending toward the end of 1998 and the first half of
next year as companies focus on fixing existing computers rather than on
purchasing new equipment. We'll keep you posted!
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ JOHN E. SILVIA
JOHN E. SILVIA
May 8, 1998
4
<PAGE> 5
PERFORMANCE UPDATE
[STALZER PHOTO]
KURT R. STALZER JOINED SCUDDER KEMPER INVESTMENTS, INC. IN JANUARY 1997 AND IS A
SENIOR VICE PRESIDENT. HE IS THE 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. STALZER HAS MORE THAN 16 YEARS OF INVESTMENT
EXPERIENCE.
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.
THE ASIAN FINANCIAL CRISIS TOOK A HEAVY TOLL ON SMALL COMPANY STOCKS DURING THE
PERIOD FROM OCTOBER 1997 THROUGH MARCH 1998. LEAD PORTFOLIO MANAGER KURT
STALZER EXPLAINS HOW HE POSITIONED KEMPER SMALL CAPITALIZATION EQUITY FUND
DURING THIS CHALLENGING TIME AND DISCUSSES HIS THOUGHTS ON THE MARKET.
Q KURT, OVER THE PAST SIX MONTHS, THE MARKET HAS EXPERIENCED CONSIDERABLE
TURMOIL. CAN YOU EXPLAIN WHY THE MARKET BEHAVED AS IT HAS?
A Well, we did start off on a sour note. October and November were difficult
across the board. "Gray Monday" on October 27 dealt a blow to equities, and
continuing unrest in the Pacific Rim created an uncertain global market climate.
The situation in Southeast Asia influenced the market for a couple of reasons.
As Asian markets began to unravel, there was a general expectation that earnings
would slow down, but the question remained, where would they slow and to what
extent? This lack of certainty bred volatility.
As the fourth quarter progressed, the consequences of the choppy Asian
markets played out. People began to anticipate lower-than-previously-expected
earnings. For instance, a significant amount of component-related
manufacturing is based in Southeast Asian countries such as Taiwan and Korea,
and disappointing earnings announcements became a key element in many
technology stories.
Q HOW DID THE FUND PERFORM IN THIS ENVIRONMENT?
A Kemper Small Capitalization Equity Fund (Class A shares unadjusted for any
sales charge) was up 2.14 percent for the six-month period ending March 31,
1998. It lagged its benchmark, the Russell 2000, which gained 6.37 percent.
Early in the period, we were held back by underweightings in the basic
industries and capital goods sectors. The fund was invested a little bit too
heavily in component-related stocks, causing our technology position to drag.
Q WAS KEMPER SMALL CAPITALIZATION EQUITY FUND HIT ESPECIALLY HARD BY THE
TROUBLES IN THE ASIAN MARKETS?
A Absolutely. Early on, small capitalization stocks reacted more
dramatically than large capitalization stocks did. The market began to shy away
from small cap stocks because it perceived a higher risk.
That was an ironic response, though. The earnings of larger companies are
actually leveraged more toward Asia than are the earnings of small caps. Most
smaller companies have a domestic focus and aren't doing business in Asia.
Larger companies are more likely to have a multi-national bent, and therefore,
greater exposure to Asia. However, when confidence in the market drops, people
seek the liquidity they associate with large company stocks, rather than staying
focused on earnings. I think that's the primary reason why small caps
underperformed large caps during the fourth quarter of 1997 and the first
quarter of this year. It's going to take time for perceptions to correct.
Going into the semiannual period, we anticipated that small company
earnings would be stronger than
5
<PAGE> 6
PERFORMANCE UPDATE
those of large caps. Actually, in the long run, the market is proving the
accuracy of our expectations. Many large companies have recently revised their
earnings estimates downward. Overall, it's becoming apparent that the turmoil in
Asia isn't hitting small company earnings as hard as those of larger firms.
However, the market hasn't yet built this strength back into the prices of small
cap issues. It's too soon to determine when it will.
Q YOU CAN'T ELIMINATE SMALL CAPS FROM THE FUND. HOW ARE YOU POSITIONING THE
PORTFOLIO IN A MARKET GENERALLY UNFAVORABLE TO SMALL CAPS?
A We're steering the fund away from companies with significant exposure to
Asia. We began to do this in the fourth quarter. At that time, I felt that we
couldn't remove all Asian exposure from the portfolio, because otherwise we'd be
left with just service companies. In hindsight, however, it probably wouldn't
have been a bad route to take. More recently, we're moving the portfolio away
from component-related manufacturers.
The gap between the price-to-earnings ratios of small companies vs. their
larger counterparts has widened further. As a result, small cap stocks continue
to look more attractive. Eventually this should be reflected in small cap
prices. This process of recognition by the market may take some time, however.
Q IN FEBRUARY AND MARCH, THE FUND'S PERFORMANCE PICKED UP QUITE A BIT. WHAT
WAS BEHIND THIS?
A Over the past few months we've outperformed relative to the market in a
couple of industries. Health care and retail have been particularly strong for
the fund. Consumer confidence has improved and, as a result, we've seen more
people out shopping.
We also found some good stocks in the service sector. Two temporary
staffing firms contributed to the fund's gains. The portfolio also
benefited from its stake in a company which manages funeral homes and
cemeteries.
Q WHAT SECTORS LOOK ATTRACTIVE TO YOU NOW?
A After bottoming out earlier this quarter, the earnings growth in the basic
industries and capital goods sectors seems to have leveled out a little bit, and
we're seeing more attractive price-earnings ratios in these sectors. We're
continuing to find sustainable, predictable growth in consumer nondurables, so
that sector will likely remain an important part of the portfolio. We're also
starting to see respectable earnings growth in the health care sector.
I'm comfortable with our current underweighting in technology. Within that
sector, however, the more compelling possibilities seem to be in software and
services. We're mildly overweighted in finance today but I wouldn't expect to
buy more banks -- the extended valuations aren't appealing.
I'm also satisfied with the fund's position in transportation and energy.
Compared to our index, we are currently slightly overweighted in these sectors.
Transportation is showing good industry fundamentals and valuations. Given the
improved stabilization in commodity prices, we have added to our energy
weighting.
That said, while sector allocation is important, we are most concerned
with investing in the right stocks. We are committed to bottom-up stock
picking. I don't feel compelled to underweight or overweight a particular
area. If we've got some companies in the portfolio that need to be sold, we'll
do that, regardless of the sector. I feel fine having the fund overweighted in
a sector if I'm finding stocks with predictable earnings growth and low
valuations. Ultimately, we plan on outperforming in this market by following
this disciplined stock-focused strategy.
Q WHAT DO YOU EXPECT FROM THE MARKET AND FROM THIS FUND FOR THE NEXT
SIX-MONTH PERIOD?
A I think the next six months will likely be difficult for small caps. Even
the best and the brightest are having a difficult time maneuvering in these
waters. As long as people perceive that there are problems with the Asian
markets, the shadow of illiquidity hangs over small caps. If investors are
concerned about Asia they will keep moving to large company stocks for safety,
regardless of improved prices and earnings among small caps.
I don't think this situation is going to change over the next two or three
months as companies continue to report disappointing earnings. That negativity
filters down to the small caps.
I think we've got the fund set up properly to face the challenges of the
market, and I think our performance in the latter part of the six-month period
shows that our strategy is beginning to produce positive results.
6
<PAGE> 7
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 3, 1997, a special shareholders' meeting was held and adjourned as
necessary. Kemper Small Capitalization Equity Fund shareholders were asked to
vote on five separate issues: election of the nine members to the Board of
Trustees, ratification of Ernst & Young LLP as independent auditors, approval of
new investment management agreement, approval of changes in the fund's
fundamental investment policies to permit a master/feeder fund structure and
approval of a new rule 12b-1 distribution plan with Zurich Kemper Distributors,
Inc. for Class B shares and Class C shares. The following are the results for
each issue:
1) Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
David W. Belin 73,167,971 1,479,476
Lewis A. Burnham 73,216,594 1,430,853
Donald L. Dunaway 73,201,684 1,445,763
Robert B. Hoffman 73,213,872 1,433,575
Donald R. Jones 73,209,820 1,437,628
Shirley D. Peterson 73,160,923 1,486,525
Daniel Pierce 73,153,670 1,493,777
William P. Sommers 73,233,097 1,414,351
Edmond D. Villani 73,157,826 1,489,621
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the current fiscal year
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
72,480,025 484,463 1,682,958
</TABLE>
3) Approval of new investment management agreement with Scudder Kemper
Investments, Inc.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
70,317,585 1,435,229 2,562,810 331,823
</TABLE>
4) Approval of changes in the fund's fundamental investment policies to permit a
master/feeder fund structure.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
63,418,719 3,399,185 4,350,361
</TABLE>
5) To Approve a new rule 12b-1 distribution plan with Zurich Kemper
Distributors, Inc.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
Class B 18,908,305 508,990 1,156,176
Class C 1,373,043 7,818 26,960
</TABLE>
7
<PAGE> 8
INDUSTRY SECTORS
A SIX-MONTH COMPARISON
Data show the percentage of the common stocks in the portfolio that each sector
represented on March 31, 1998, and on September 30, 1997.
[EQUITY PORTION BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL CAPITALIZATION KEMPER SMALL CAPITALIZATION
EQUITY FUND ON 3/31/98 EQUITY FUND ON 9/30/97
<S> <C> <C>
CONSUMER NON-DURABLES 27.8% 22.1%
TECHNOLOGY 17.3% 22.0%
HEALTH CARE 16.4% 14.5%
FINANCE 15.5% 14.7%
CAPITAL GOODS 5.5% 13.6%
ENERGY 5.3% 4.3%
CONSUMER DURABLES 4.7% 3.4%
TRANSPORTATION 3.9% 3.0%
BASIC INDUSTRIES 3.6% 2.4%
</TABLE>
A COMPARISON WITH THE RUSSELL 2000 INDEX*
Data show the percentage of the common stocks in the portfolio that each sector
of the Kemper Small Capitalization Equity Fund represented on March 31, 1998,
compared to the industry sectors that make up the fund's benchmark, the Russell
2000 Index.
[RUSSELL COMPARISON BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL CAPITALIZATION RUSSELL 2000 GROWTH INDEX
EQUITY FUND ON 3/31/98 ON 3/31/98
<S> <C> <C>
CONSUMER NON-DURABLES 27.8% 21.2%
TECHNOLOGY 17.3% 15.6%
HEALTH CARE 16.4% 9.2%
FINANCE 15.5% 23.4%
CAPITAL GOODS 5.5% 9.3%
ENERGY 5.3% 4.3%
CONSUMER DURABLES 4.7% 3.1%
TRANSPORTATION 3.9% 2.5%
BASIC INDUSTRIES 3.6% 5.7%
</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.
8
<PAGE> 9
LARGEST HOLDINGS
THE FUND'S 10 LARGEST HOLDINGS*
REPRESENTING 18.20 PERCENT OF THE FUND'S TOTAL NET ASSETS ON MARCH 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
HOLDINGS PERCENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. SOFAMOR-DANEK GROUP Manufactures spinal implant devices. 2.17%
- -------------------------------------------------------------------------------------------------------
2. PACIFIC SUNWEAR OF A mall-based specialty retailer of young men's 2.02%
CALIFORNIA everyday apparel and accessories reflecting the casual
lifestyle of California.
- -------------------------------------------------------------------------------------------------------
3. INTERIM SERVICES Provides a comprehensive range of customized staffing 1.88%
solutions, including flexible staffing, home care full
time placement, consulting and other value-added
services on a national basis.
- -------------------------------------------------------------------------------------------------------
4. GLOBAL INDUSTRIES A major supplier of pipeline construction, derrick and 1.83%
diving services to the offshore oil and gas industry
in the Gulf of Mexico.
- -------------------------------------------------------------------------------------------------------
5. APPLIED POWER Manufactures and sells a wide variety of portable 1.79%
hydraulic-powered equipment and systems including
hydraulic pumps, rams, cylinders, valves and power
packages.
- -------------------------------------------------------------------------------------------------------
6. OMNICARE Provides services to long-term care institutions such 1.75%
as nursing homes, retirement centers and other
institutional health care facilities.
- -------------------------------------------------------------------------------------------------------
7. CONCENTRA MANAGED CARE A large physician practice management company focusing 1.73%
on occupational health care with 160 physicians in 90
sites in 13 states providing worker's compensation and
other job-related services.
- -------------------------------------------------------------------------------------------------------
8. SELECT APPOINTMENTS Performs recruitment consulting services. 1.69%
- -------------------------------------------------------------------------------------------------------
9. CONSOLIDATED GRAPHICS A printing company whose operating and growth strategy 1.67%
is to acquire local printing companies with
established operating histories in growing markets and
then to apply the benefits and economies of a large
organization.
- -------------------------------------------------------------------------------------------------------
10. JACOBS ENGINEERING Provides engineering, design and consulting services, 1.67%
construction and construction management services and
process plant management services to a variety of
industries.
- -------------------------------------------------------------------------------------------------------
</TABLE>
* PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER SMALL CAPITALIZATION EQUITY FUND
PORTFOLIO OF INVESTMENTS AT MARCH 31, 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
COMMON STOCKS NUMBER OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC INDUSTRIES--3.6% Intertape Polymer Group 241,400 $ 5,582
OM Group 265,500 11,184
Spartech Corp. 550,000 12,066
(a)Superior Services, Inc. 305,100 9,515
------------------------------------------------------------------------------
38,347
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--5.3% Applied Industrial Technologies 238,100 6,414
Applied Power, Inc. 502,400 19,342
(a)Jacobs Engineering Group 555,100 17,971
(a)SPS Technologies 253,600 13,679
------------------------------------------------------------------------------
57,406
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS--24.3%
Arbor Drugs 750,000 17,672
(a)B A Merchant Services 445,300 8,071
CKE Restaurants 264,000 9,702
(a)Cinar Films, Inc. 125,800 5,362
(a)Consolidated Graphics, Inc. 311,200 18,011
(a)Cost Plus, Inc. 285,500 9,073
(a)Education Management Corp. 308,400 10,486
(a)Equity Corporation International 225,000 5,386
Four Seasons Hotels, Ltd. 427,800 14,599
(a)Hearst-Argyle Television, Inc. 421,100 14,844
(a)Interim Services 600,900 20,280
(a)Landry's Seafood Restaurants 322,700 9,923
(a)MSC Industrial Direct 143,900 7,798
(a)Men's Wearhouse 475,000 17,575
(a)Morton's Restaurant Group 251,700 5,805
(a)Pacific Sunwear of California 524,850 21,781
Pier 1 Imports 467,100 12,670
Select Appointments Holdings, ADR 721,900 18,228
(a)Staff Leasing, Inc. 247,500 6,868
Stewart Enterprises, Inc. 298,000 16,576
(a)U.S. Rentals 425,900 11,765
------------------------------------------------------------------------------
262,475
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER DURABLES--4.5% Ethan Allen Interiors 281,700 16,831
SPX Corp. 204,400 15,598
(a)Tower Automotive, Inc. 371,900 16,736
------------------------------------------------------------------------------
49,165
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--2.8% (a)American Italian Pasta Co. 173,100 6,253
(a)NBTY, Inc. 191,000 11,603
(a)U.S. Foodservice, Inc. 330,000 12,148
------------------------------------------------------------------------------
30,004
- -----------------------------------------------------------------------------------------------------------------------
ENERGY--5.2% (a)Global Industries, Ltd. 970,400 19,772
(a)Petroleum Development Corp. 625,000 3,711
(a)Precision Drilling Corp. 660,000 13,943
(a)Superior Energy Services, Inc. 657,500 6,411
(a)Veritas DGC, Inc. 235,200 11,892
------------------------------------------------------------------------------
55,729
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCE--15.1% (a)ABR Information Services 550,000 $ 15,469
Associated Banc Corp. 238,658 12,873
Bank United Corp. 289,700 14,485
Community First Bankshares 213,100 10,868
ESG Re, Ltd. 393,800 10,239
Executive Risk 89,000 6,341
(a)Headland Mortgage Co. 500,000 8,484
(a)Healthcare Financial Partners 291,600 13,815
Metris Cos., Inc. 235,700 10,253
(a)Ocwen Financial Corp. 375,000 10,406
(a)Silicon Valley Bancshares 279,900 17,091
Sirrom Capital Corp. 475,100 14,283
Texas Regional Bancshares 285,000 9,565
Wilmington Trust Corp. 129,200 8,576
-----------------------------------------------------------------------------
162,748
- ----------------------------------------------------------------------------------------------------------------------
HEALTH CARE--16.0% (a)Concentra Managed Care, Inc. 606,120 18,638
(a)CryoLife, Inc. 181,200 3,080
(a)Dura Pharmaceuticals 315,000 7,757
(a)Medicis Pharmaceutical Corp. 255,000 11,124
Mentor Corp. 298,200 8,238
(a)National Surgery Centers 424,950 10,863
(a)Ocular Sciences, Inc. 407,900 13,002
Omnicare, Inc. 478,100 18,945
(a)PAREXEL International Corp. 300,000 9,375
(a)Pediatrix Medical Group 247,600 11,513
(a)Physician Reliance Network 313,300 4,308
(a)QuadraMed Corp. 219,900 7,339
(a)Safeskin Corp. 170,700 12,610
(a)Serologicals Corp. 427,200 12,068
(a)Sofamor-Danek Group 274,900 23,435
-----------------------------------------------------------------------------
172,295
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TECHNOLOGY--16.9% (a)Brightpoint, Inc. 275,200 $ 4,730
(a)CHS Electronics, Inc. 235,000 4,406
(a)Cimlinc Incorporated, "D," convertible
preferred 75,431 283
(a)Computer Products, Inc. 438,800 10,229
(a)Comverse Technology 153,200 7,488
(a)Daisytek International Corp. 303,000 7,386
(a)General Scanning 381,900 8,211
(a)Keane, Inc. 250,100 14,131
Linear Technology Corp. 70,600 4,871
(a)Littelfuse, Inc. 283,000 7,358
(a)MRV Communications 208,100 4,864
(a)Market Facts 290,000 5,728
(a)Microsemi Corp. 357,500 5,899
(a)Natural Microsystems Corp. 151,800 6,015
(a)Network Appliance, Inc. 337,600 11,985
(a)Omtool, Ltd. 89,000 1,246
(a)SBS Technologies 295,200 8,487
(a)Smart Modular Technologies, Inc. 244,000 5,566
(a)Solectron Corp. 179,000 7,563
(a)Tech Data Corp. 196,700 7,573
(a)Tecnomatix Technologies 395,000 14,862
(a)VIASOFT, Inc. 208,500 5,708
(a)Visio Corp. 411,200 17,682
(a)Whittman - Hart, Inc. 107,100 4,846
(a)World Access, Inc. 161,500 5,249
------------------------------------------------------------------------------
182,366
- -----------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--3.8% C.H. Robinson Worldwide, Inc. 265,800 6,911
Expeditors International of Washington 313,000 13,420
(a)Heartland Express 330,000 9,158
(a)U. S. Xpress Enterprises 545,000 11,309
------------------------------------------------------------------------------
40,798
------------------------------------------------------------------------------
TOTAL COMMON STOCKS--97.5%
(Cost: $753,185) 1,051,333
------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
MONEY MARKET Yield--5.53% to 5.56%
INSTRUMENTS--2.7%
Due--April 1998
(Cost: $28,985) $29,000 28,985
------------------------------------------------------------------------------
TOTAL INVESTMENTS--100.2%
(Cost: $782,170) 1,080,318
------------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(.2)% (1,899)
------------------------------------------------------------------------------
NET ASSETS--100% $1,078,419
------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) Non-income producing security.
Based on the cost of investments of $782,170,000 for federal income tax purposes
at March 31, 1998, the gross unrealized appreciation was $309,672,000, the gross
unrealized depreciation was $11,524,000 and the net unrealized appreciation on
investments was $298,148,000.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investments, at value
(Cost: $782,170) $1,080,318
- --------------------------------------------------------------------------
Cash 1,320
- --------------------------------------------------------------------------
Receivable for:
Investments sold 11,426
- --------------------------------------------------------------------------
Fund shares sold 343
- --------------------------------------------------------------------------
Dividends 235
- --------------------------------------------------------------------------
TOTAL ASSETS 1,093,642
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Payable for:
Investments purchased 13,722
- --------------------------------------------------------------------------
Fund shares redeemed 253
- --------------------------------------------------------------------------
Management fee 312
- --------------------------------------------------------------------------
Distribution services fee 184
- --------------------------------------------------------------------------
Administrative services fee 195
- --------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 482
- --------------------------------------------------------------------------
Trustees' fees 75
- --------------------------------------------------------------------------
Total liabilities 15,223
- --------------------------------------------------------------------------
NET ASSETS $1,078,419
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------
Paid-in capital $ 703,344
- --------------------------------------------------------------------------
Undistributed net realized gain on investments 76,927
- --------------------------------------------------------------------------
Net unrealized appreciation on investments 298,148
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $1,078,419
- --------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($763,428 / 105,581 shares outstanding) $7.23
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering price) $7.67
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($284,413 / 41,589 shares outstanding) $6.84
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($11,749 / 1,707 shares outstanding) $6.88
- --------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($18,829 / 2,567 shares outstanding) $7.34
- --------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
INVESTMENT INCOME
- ------------------------------------------------------------------------
Dividends $ 1,483
- ------------------------------------------------------------------------
Interest 1,372
- ------------------------------------------------------------------------
Total investment income 2,855
- ------------------------------------------------------------------------
Expenses:
Management fee 1,686
- ------------------------------------------------------------------------
Distribution services fee 1,093
- ------------------------------------------------------------------------
Administrative services fee 1,092
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 2,059
- ------------------------------------------------------------------------
Reports to shareholders 195
- ------------------------------------------------------------------------
Professional fees 25
- ------------------------------------------------------------------------
Trustees' fees and other 43
- ------------------------------------------------------------------------
Total expenses 6,193
- ------------------------------------------------------------------------
NET INVESTMENT LOSS (3,338)
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------
Net realized gain on sales of investments 67,374
- ------------------------------------------------------------------------
Change in net unrealized appreciation on investments (41,693)
- ------------------------------------------------------------------------
Net gain on investments 25,681
- ------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 22,343
- ------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MARCH 31, YEAR ENDED
1998 SEPTEMBER 30,
(UNAUDITED) 1997
- -----------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment loss $ (3,338) (5,099)
- -----------------------------------------------------------------------------------------------
Net realized gain 67,374 108,862
- -----------------------------------------------------------------------------------------------
Change in net unrealized appreciation (41,693) 101,461
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 22,343 205,224
- -----------------------------------------------------------------------------------------------
Distribution from net realized gain (110,213) (76,845)
- -----------------------------------------------------------------------------------------------
Net increase from capital share transactions 70,811 33,024
- -----------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (17,059) 161,403
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------------------------------
Beginning of period 1,095,478 934,075
- -----------------------------------------------------------------------------------------------
END OF PERIOD $1,078,419 1,095,478
- -----------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
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 INVESTMENT VALUATION. Investments are stated at
value. Portfolio securities that are traded on a
domestic securities exchange or securities listed
on the NASDAQ National Market are valued at the
last sale price on the exchange or market where
primarily traded or listed or, if there is no
recent sale, at the last current bid quotation.
Portfolio securities that are primarily traded on
foreign securities exchanges are generally valued
at the preceding closing values of such securities
on their respective exchanges where primarily
traded. Securities not so traded or listed are
valued at the last current bid quotation if market
quotations are available. Fixed income securities
are valued by using market quotations, or
independent pricing services that use prices
provided by market makers or estimates of market
values obtained from yield data relating to
instruments or securities with similar
characteristics. Equity options are valued at the
last sale price unless the bid price is higher or
the asked price is lower, in which event such bid
or asked price is used. Financial futures and
options thereon are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Forward foreign
currency contracts are valued at the forward rates
prevailing on the day of valuation. Other
securities and assets are valued at fair value as
determined in good faith by 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 earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
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 has complied with
the special provisions of the Internal Revenue Code
available to investment companies for the six
months ended March 31, 1998.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income and net
realized capital gains annually, which are recorded
on the ex-dividend date. Dividends are determined
in accordance with income tax principles which may
treat certain transactions differently from
generally accepted accounting principles.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES INVESTMENT MANAGER COMBINATION. Effective December
31, 1997, Zurich Insurance Company, the parent of
Zurich Kemper Investments, Inc. (ZKI), acquired a
majority interest in Scudder, Stevens & Clark, Inc.
(Scudder), another major investment manager. As a
result of this transaction, the operations of ZKI
were combined with Scudder to form a new global
investment organization named Scudder Kemper
Investments, Inc. (Scudder Kemper). The transaction
resulted in the termination of the Fund's
investment management agreement with ZKI, however,
a new investment management agreement between the
Fund and Scudder Kemper was approved by the Fund's
Board of Trustees and by the Fund's shareholders.
The new management agreement, which was effective
December 31, 1997, is the same in all material
respects as the previous management agreement,
except that Scudder Kemper is the new investment
adviser to the Fund. In addition, the names of the
Fund's principal underwriter and shareholder
service agent were changed to Kemper Distributors,
Inc. (KDI) and Kemper Service Company (KSvC),
respectively.
MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper and pays a management
fee at a 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 six months ended March 31, 1998, the
Fund incurred management fees as follows (in
thousands):
<TABLE>
<S> <C>
Base fee $ 3,115
Performance adjustment (1,429)
-------
Total fees $ 1,686
=======
</TABLE>
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with 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>
Six months ended March 31, 1998 $ 72,000 348,000
</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 the agreement, KDI enters into
related selling group agreements with various
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
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>
Six months ended March 31, 1998 $1,338,000 715,000
</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 ASF PAID BY
THE FUND TO KDI KDI TO FIRMS
---------------- ------------
<S> <C> <C>
Six months ended March 31, 1998 $1,092,000 1,104,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
KSvC is the shareholder service agent of the Fund.
Under the agreement, KSvC received shareholder
services fees of $1,636,000 for the six months
ended March 31, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. During the six months ended March
31, 1998, the Fund made no payments to its officers
and incurred trustees' fees of $15,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended March 31, 1998, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $381,061
Proceeds from sales 388,120
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, 1998 SEPTEMBER 30, 1997
--------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 47,482 $ 331,602 27,197 $ 186,417
------------------------------------------------------------------------------
Class B 5,567 38,430 14,228 92,204
------------------------------------------------------------------------------
Class C 20,568 138,027 8,306 58,655
------------------------------------------------------------------------------
Class I 619 4,558 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 (49,690) (351,604) (33,969) (225,207)
------------------------------------------------------------------------------
Class B (6,967) (47,742) (14,844) (93,796)
------------------------------------------------------------------------------
Class C (20,593) (139,253) (7,876) (55,966)
------------------------------------------------------------------------------
Class I (959) (6,876) (1,827) (12,436)
------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 1,563 10,939 1,206 8,422
------------------------------------------------------------------------------
Class B (1,654) (10,939) (1,252) (8,422)
------------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL SHARE
TRANSACTIONS $ 70,811 $ 33,024
------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
SIX MONTHS
ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, ---------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.98 7.01 7.14 5.81 6.45
- --------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (.04) (.01) (.02) (.01) (.01)
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .10 1.55 .94 1.68 (.27)
- --------------------------------------------------------------------------------------------------
Total from investment operations .06 1.54 .92 1.67 (.28)
- --------------------------------------------------------------------------------------------------
Less distribution from net realized gain .81 .57 1.05 .34 .36
- --------------------------------------------------------------------------------------------------
Net asset value, end of period $7.23 7.98 7.01 7.14 5.81
- --------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.14% 24.29 16.33 30.88 (4.31)
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------
Expenses .86% .90 1.08 1.14 1.34
- --------------------------------------------------------------------------------------------------
Net investment loss (.30)% (.20) (.26) (.18) (.76)
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
SIX MONTHS MAY 31
ENDED YEAR ENDED SEPTEMBER 30, TO
MARCH 31, ------------------------ 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 (.08) (.10) (.09) (.07) (.02)
- ---------------------------------------------------------------------------------------------------------
Net realized and unrealized gain .09 1.50 .92 1.66 .15
- ---------------------------------------------------------------------------------------------------------
Total from investment operations .01 1.40 .83 1.59 .13
- ---------------------------------------------------------------------------------------------------------
Less distribution from net realized gain .81 .57 1.05 .34 --
- ---------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.84 7.64 6.81 7.03 5.78
- ---------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.56% 22.83 15.13 29.59 2.30
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------------------
Expenses 2.13% 2.14 2.15 2.17 2.29
- ---------------------------------------------------------------------------------------------------------
Net investment loss (1.57)% (1.44) (1.33) (1.21) (1.38)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
SIX MONTHS MAY 31
ENDED YEAR ENDED SEPT. 30, TO
MARCH 31, --------------------- 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 (.03) (.09) (.09) (.07) (.03)
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain .09 1.49 .92 1.66 .15
- --------------------------------------------------------------------------------------------------
Total from investment operations .06 1.40 .83 1.59 .12
- --------------------------------------------------------------------------------------------------
Less distribution from net realized gain .81 .57 1.05 .34 --
- --------------------------------------------------------------------------------------------------
Net asset value, end of period $6.88 7.63 6.80 7.02 5.77
- --------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.30% 22.87 15.16 29.65 2.12
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------
Expenses 2.01% 1.95 2.15 2.10 2.10
- --------------------------------------------------------------------------------------------------
Net investment loss (1.45)% (1.25) (1.33) (1.14) (1.21)
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS I
SIX MONTHS YEAR ENDED JULY 3
ENDED SEPTEMBER 30, TO
MARCH 31, ------------- 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 (loss) (.02) .01 .01 --
- ------------------------------------------------------------------------------------------
Net realized and unrealized gain .10 1.58 .94 .88
- ------------------------------------------------------------------------------------------
Total from investment operations .08 1.59 .95 .88
- ------------------------------------------------------------------------------------------
Less distribution from net realized gain .81 .57 1.05 --
- ------------------------------------------------------------------------------------------
Net asset value, end of period $7.34 8.07 7.05 7.15
- ------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.38% 24.89 16.76 14.04
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------
Expenses .49% .53 .66 .79
- ------------------------------------------------------------------------------------------
Net investment income (loss) .07% .17 .16 (.14)
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL DATA FOR ALL CLASSES
SIX MONTHS
ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, ---------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $1,078,419 1,095,478 934,075 839,905 631,607
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 78% 102 85 102 58
- ------------------------------------------------------------------------------------------------------------
Average commission rates paid per share on stock transactions for the six months ended March 31, 1998 and
the years ended September 30, 1997 and 1996 were $.0580, $.0573 and $.0557, respectively.
- ------------------------------------------------------------------------------------------------------------
</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. Data for the period ended March 31, 1998 is unaudited.
20
<PAGE> 21
21
NOTES
<PAGE> 22
NOTES
22
<PAGE> 23
23
NOTES
<PAGE> 24
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY KURT R. STALZER
Chairman and Trustee President Vice President
DAVID W. BELIN PHILIP J. COLLORA LINDA J. WONDRACK
Trustee Vice President Vice President
Secretary and Treasurer
LEWIS A. BURNHAM JOHN R. HEBBLE
Trustee JERALD K. HARTMAN Assistant Treasurer
Vice President
DONALD L. DUNAWAY MAUREEN E. KANE
Trustee THOMAS W. LITTAUER Assistant Secretary
Vice President
ROBERT B. HOFFMAN CAROLINE PEARSON
Trustee ANN M. MCCREARY Assistant Secretary
Vice President
DONALD R. JONES ELIZABETH C. WERTH
Trustee KATHRYN L. QUIRK Assistant Secretary
Vice President
SHIRLEY D. PETERSON
Trustee STEVEN H. REYNOLDS
Vice President
WILLIAM P. SOMMERS
Trustee
EDMOND D. VILLANI
Trustee
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LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
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SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
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CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania
Kansas City, MO 64105
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PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER FUNDS LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
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KSCF - 3 (5/98) 1047000
