<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MARCH 31, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[MORNINGSTAR RATINGS LOGO]
SEEKING MAXIMUM
APPRECIATION OF
INVESTORS CAPITAL
KEMPER
SMALL CAPITALIZATION EQUITY FUND
"... Despite the market's recent challenges,
we remain absolutely committed
to small-cap growth stock investing. ... "
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
9
Industry Sectors
10
Largest Holdings
11
Portfolio of Investments
14
Financial Statements
16
Notes to Financial Statements
19
Financial Highlights
21
Shareholders' Meeting
AT A GLANCE
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KEMPER SMALL CAPITALIZATION EQUITY
FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 1999
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
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<TABLE>
<S> <C>
CLASS A 12.17%
CLASS B 11.52%
CLASS C 11.68%
LIPPER SMALLCAP FUNDS CATEGORY AVERAGE* 12.53%
- --------------------------------------------------------------------------------
</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.
INVESTMENTS 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
3/31/99 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS A $5.54 $5.30
- --------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS B $5.15 $4.98
- --------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS C $5.18 $5.00
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION EQUITY
FUND LIPPER RANKINGS AS OF 3/31/99*
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER SMALL COMPANY GROWTH FUNDS CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #280 of #312 of #315 of
664 funds 664 funds 664 funds
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5-YEAR #161 of N/A N/A
230 funds
- --------------------------------------------------------------------------------
10-YEAR #38 of N/A N/A
72 funds
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15-YEAR #13 of N/A N/A
25 funds
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20-YEAR #4 of N/A N/A
15 funds
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</TABLE>
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DIVIDEND REVIEW
- --------------------------------------------------------------------------------
DURING THE SIX-MONTH PERIOD, KEMPER SMALL CAPITALIZATION EQUITY FUND PAID THE
FOLLOWING DIVIDENDS PER SHARE:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LONG-TERM CAPITAL GAIN $.41 $.41 $.41
- --------------------------------------------------------------------------------
</TABLE>
TERMS TO KNOW
YOUR FUND'S STYLE
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MORNINGSTAR EQUITY STYLE BOX
- -------------------------------------------------------------------------------
[DIAGRAM]
SOURCE: Data provided by Morningstar, Inc. Chicago, IL (312) 696- 6000. The
Equity Style Box placement is based on two variables: a fund's market
capitalization relative to the movements of the market, and a fund's valuation,
which is calculated by comparing the stocks in the fund's portfolio with the
most recent of the three market-cap groups.
THE STYLE BOX REPRESENTS A SNAPSHOT OF THE FUND'S PORTFOLIO ON A SINGLE DAY.
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.
BENCHMARK A comparison for measuring fund performance, typically a market index.
Kemper Small Capitalization Equity Fund uses the Russell 2000 Index, an
unmanaged pool of small-company stocks, as one of its primary index benchmarks.
INITIAL PUBLIC OFFERING (IPO) The first launch of a company's publicly traded
stock. IPOs often involve a relative small quantity of shares. When paired with
fluctuating demand, the small quantity of shares can contribute to increased
volatility.
LIQUIDITY Describes how easy it is to move in and out of a stock. Due to higher
recognition levels and greater quantity of shares, large-cap stocks are
typically more liquid than small-cap stocks. Reduced liquidity offers both
greater risk and return potential: Investors who wish to sell a less-liquid
stock may find it difficult to find a buyer, but may also be able to dictate a
higher price if the stock is in demand.
MARKET CAP (CAPITALIZATION) Market capitalization refers to the total value of a
company's outstanding stock.
<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 INVESTMENTS, HE WAS WITH
THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $280 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER:
Throughout April, investor enthusiasm drove the market to its second milestone
in a year -- the Dow Jones Industrial Average rose to 11,000 just a month after
it broke 10,000 for the first time. But those gains don't tell the whole story
- -- investors in the first four months of the year have endured significant
volatility. What drove the climb to 11,000 and what, at the same time, has led
to investor anxiety?
Driving the market, in part, was consumer confidence. In the first quarter of
1999, consumer spending surged 6.7 percent -- the largest rise in 11 years. The
market's rise seems to have buoyed consumer confidence, which rose for the sixth
consecutive month in April. And, the resilience of the economy has bolstered
more optimistic expectations for the next six months.
Inspiring consumer confidence also were the lowest levels of inflation in a
generation. As measured by the consumer price index (CPI), inflation has been
between 1 1/2 and 2 percent, compared to approximately 4 percent in the
beginning of the 1990s and 10-12 percent in the beginning of the 1980s. Still,
inflation worries have been seeping into the market. The growing conviction that
Asian and Latin American economies are recovering is raising commodity prices,
particularly oil. The price of West Texas Intermediate oil surged from less than
$12 in February to almost $19 in early May. That alone almost guarantees a rise
in the "headline" inflation rate this year, which is the rate of inflation as
measured by the entire CPI. But it's important to note that the Federal Reserve
Board looks primarily at the core inflation rate, which is the CPI minus food
and energy -- and the core inflation rate looks as if it will remain low at
about 2 percent this year.
Also contributing to consumer confidence, short-term and long-term interest
rates remained low over the first quarter, and can be expected to remain so.
Today's Fed policy is reactive, not proactive, which means that the Fed tends to
respond to inflation only when it picks up. Consequently, we expect no changes
in short-term interest rates during May and June, and there's only a small
chance that the Fed will raise interest rates in the second half of the year.
Moreover, the federal budget surplus continues to benefit from good revenue
gains (which are based on good income gains, especially from households), good
capital gains and continued restraint in federal spending. The surplus this year
is expected to approach $100 billion.
Such a positive environment is exactly what poses risk for investors, and is
key to understanding recent volatility in the market. A stronger economy has the
potential to feed inflation fears and drive up interest rates. Events on April
30 illustrated the domino effect of investors reacting to positive economic
news, which they consider troubling at this point, more than eight years into
the economic expansion. The steady stream of positive economy's news prompted a
sell-off in the markets based on fears that the strong pace of economic growth
will eventually lead to higher inflation. The benchmark 30-year Treasury bond
fell nearly 2 points (close to $20 for a bond with a $1,000 face amount) as the
yield shot up to 5.657 percent. It was the biggest one-day plunge in bonds in
two months. Bonds, in turn, pulled stocks lower.
Where can we expect to go from here? The fundamentals by which we judge the
health of the economy suggested continued growth as we moved into the second
quarter of 1999. For example, the gross domestic product (GDP), the value of all
goods and services produced in the U.S., rose at an annual rate of 4.5 percent
in the first quarter, following a tremendous fourth-quarter surge of 6 percent.
This is very much in line with what we've grown accustomed to over the past year
- -- over the four quarters of 1998, the U.S. economy expanded by 4.3 percent.
Some people aren't surprised at all by strong GDP growth that once would have
alarmed them. That's partially because we've grown accustomed to a strong
economy in the past three or four years. But it's also because we've been able
to absorb growth without driving up inflation. That's important for investors.
If prices were rising as the economy was growing, the Fed would most likely
raise short-term interest rates, which would change the financial market
outlook. But again, that isn't happening right now.
However, we do see some vulnerability. Trade is a weak spot in the economy
right now. Exports of U.S. goods and services dropped in the first quarter while
imports soared. This reflects the fact that the U.S. is one of the few countries
financially fit enough to buy goods produced elsewhere in the world. But for as
long as less vibrant international economies are unable to buy U.S. goods, the
profitability of U.S. companies trying to export will be challenged.
When you think about it, vulnerability in regard to the international economy
is nothing new. Globally, the outlook is slightly more positive than it was a
few months ago. For example, the European markets are slowing down, which will
most likely lead to the central bank lowering interest rates in order to boost
domestic spending. In many countries in Europe, there are no fixed-rate
mortgages, only adjustable-rate mortgages. When interest rates go down,
mortgages are reduced and homeowners
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]
(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 MARCH 31, 1999.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
spend money elsewhere. This has a huge impact on consumer spending, and will
help European equities in the long term. Additionally, the situation in Japan
remains unchanged. And, problems in the emerging markets haven't had the
negative impact many people expected -- both the Mexican and Brazilian stock
markets have actually risen in the past two months.
But don't forget that international crises have the potential to affect the
U.S. markets drastically. An increase in military spending on Kosovo by the 11
European Monetary Union (EMU) countries could force them to spend less in other
areas, which could have economic implications, including higher interest rates.
That's because many European countries have small economies and little leeway in
their budgets. Consequently, those countries finance unplanned military
expenditures by selling government bonds -- which, in Europe's small bond
market, typically raises interest rates.
The international situation alone, however, is by no means an indicator of a
U.S. slowdown -- and without any such indications, complacency may be our
greatest concern. It's easy to look at the current economic situation and behave
as if no risk exists. But when you see the market soaring and are tempted to
jump in, note that the bull market grew to records on the strength of just a few
dozen stocks, while most other stock prices were flat or actually declined.
In summary, there are concerns that the current economy is unsustainable and
we soon could see an abrupt end. In many cases, however, people are looking for
a slowdown because they are fearful growth will drive up inflation -- these are
particularly older investors who are accustomed to inflation accompanying
growth. But we currently just don't see the pressure toward inflation at all, so
there's no reason to want a slowdown. The best approach now, as in any market,
is to diversify and invest for the long term.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ JOHN E. SILVIA
John E. Silvia
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF DR. JOHN SILVIA AS OF MAY 5, 1999, AND MAY
NOT ACTUALLY COME TO PASS. THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF
THIS MATERIAL IS INTENDED AS AN INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
PERFORMANCE UPDATE
[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 PORTFOLIO MANAGER OF KEMPER SMALL CAPITALIZATION
EQUITY FUND. HE IS ALSO A MEMBER OF THE FINANCIAL ANALYST FEDERATION AND THE
ASSOCIATION OF INVESTMENT MANAGEMENT AND RESEARCH. STALZER IS SUPPORTED BY
SCUDDER KEMPER INVESTMENTS' GLOBAL STAFF OF RESEARCH ANALYSTS, ECONOMISTS,
INVESTMENT SPECIALISTS AND TRADERS.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
DURING THE SEMIANNUAL PERIOD, SMALL-CAP STOCKS FACED AN OFTEN INHOSPITABLE
MARKET CLIMATE. NONETHELESS, KEMPER SMALL CAPITALIZATION EQUITY FUND EARNED A
RESPECTABLE RETURN. BELOW, LEAD PORTFOLIO MANAGER KURT STALZER DISCUSSES THE
CHALLENGES OF THE MARKET, HIS INVESTMENT STRATEGY AND HOW HE POSITIONED THE
FUND.
Q HOW DID THE FUND PERFORM DURING THE SEMIANNUAL PERIOD?
A The past six months were an extremely challenging time for small-cap
investing. Nonetheless, the fund earned a good return. For the six months ending
March 31, 1999, Kemper Small Capitalization Equity Fund returned 12.17 percent
(Class A shares, unadjusted for any sales charges).
The fund beat its benchmark, the Russell 2000 Index, up 10 percent, and
performed closely in line with its peer group average. For the semiannual
period, the Lipper Small Cap Fund Category average was 12.53 percent.
We know that many funds posted higher gains than Kemper Small
Capitalization Equity Fund. But, it's important to compare apples to apples.
Many of these recent top-performers are investing exclusively in the market's
currently favored areas, such as large-cap growth and technology. We encourage
shareholders to take a long-term perspective about these high flyers, and
remember that this current period is very unusual. Over the past fifty years,
stocks have returned an average of 14 percent a year. So, within this larger
historical context, we believe that the fund is on track.
Q IN GENERAL TERMS, HOW DID SMALL-CAP STOCKS PERFORM VERSUS LARGE-CAP
STOCKS?
A Overall, small-cap stocks lagged their larger-cap counterparts by a wide
margin. We can see the discrepancy between small-and large-cap performance by
comparing the returns of two market benchmarks. (See Terms To Know.) The Russell
1000 Index, a benchmark for large-company stocks, earned 26.9 percent during the
past six months. Meanwhile, the Russell 2000 Index, a benchmark for
small-company stocks and for Kemper Small Capitalization Equity Fund, earned
just 10 percent.
Q PLEASE PROVIDE AN OVERVIEW OF THE MARKET CLIMATE DURING THE SEMIANNUAL
PERIOD, HIGHLIGHTING ANY ADDITIONAL CHALLENGES THAT SMALL-CAP STOCKS FACED.
A In a volatile market climate, investors' desire for liquidity and
perceived safety worked against small caps. The semiannual period began October
1, 1998, on an extremely uncertain note. Just weeks previously, the Russian debt
default sent global markets spiraling downward. Both large-cap and small-cap
stocks suffered.
While the markets rebounded from the August sell-off, large-cap growth
stocks rebounded with considerably more momentum. Investors believed that
mega-cap growth companies could better withstand global volatility than small
caps could. The environment for small-cap stocks worsened through October. Amid
concerns that small companies would have difficulty securing loans to finance
future growth, investors continued to sell off small caps, seemingly blind to
underlying
5
<PAGE> 6
PERFORMANCE UPDATE
fundamentals. The quantity of new IPOs (see Terms To Know) also dried up, as
small companies preferred to delay their stock launches until a more friendly
environment began.
The climate for small-caps did improve briefly, however. By cutting interest
rates in October, the Federal Reserve dispelled some of the concerns about the
opportunities for smaller companies to gain access to capital. (In a lower-rate
environment, companies can borrow money with greater ease.) Also, excitement
about the Internet propelled technology stocks, including many small-cap tech
stocks. As a result of these and other factors, small-caps surged in the fourth
quarter, enjoying particularly outstanding performance in December.
Unfortunately, the rebound was short-lived. Small-caps slowed their pace again
in 1999, hindered by renewed liquidity concerns and earnings disappointments.
Compared to large-cap stocks, small-caps were also hindered because the dollar
was weaker relative to many international currencies. (By "weak dollar," we mean
that an investor must pay more U.S. dollars for a given amount of a "stronger"
international currency.) In this environment, earnings generated from
international profits carry an extra positive impact. While domestic mega-cap
companies often derive a large portion of their income from international
markets, small companies typically earn a greater portion of revenue from
domestic markets.
Q PLEASE SUMMARIZE YOUR INVESTMENT STRATEGY.
A We follow a growth-at-a-reasonable-price strategy. First, we look for
superior companies. To meet our strict criteria, a company must have sustainable
and consistent earnings growth potential for a two-to five-year time horizon. We
look for firms with dominant market positions, those that occupy a niche market,
and those with innovative products, services, or distribution strategies.
But, finding a good company is just the first step. To meet our investment
criteria, a good company must also be a good stock. By that, we mean that the
stock must be trading at a reasonable price, relative to its earnings-growth
potential.
Our investment approach is research-intensive, and incorporates
qualitative and quantitative measures. We scrutinize company fundamentals,
including product positioning, business models, management capability, and
competitive position. We further analyze and project balance sheet information,
such as earnings growth, cash flow, and book value.
Q YOU'VE NOTED THAT TECHNOLOGY STOCKS HAVE BEEN STRONG PERFORMERS. HOW HAS
KEMPER SMALL CAPITALIZATION FUND PARTICIPATED IN THIS RALLY?
A We've found many attractive technology stocks. Generally, we've favored
networking, semiconductors and components, and communication equipment.
For instance, the fund benefited significantly from positions in Network
Appliance, Applied Micro Circuits, and Pegasus Systems. Network Appliance is a
dominant leader in the memory storage area. As Internet and intranet usage
grows, the need for cost-effective electronic data storage increases. Network
Appliance offers companies innovative solutions for addressing memory-storage
issues. Applied Micro Circuits offers a niche play on two high-growth areas,
computer components and telecommunications. Applied Micro Circuits manufactures
specialized semiconductors designed for wireless communications. In Pegasus
Systems, we found a company that offers an innovative service-oriented
application of Internet technology. Pegasus provides hotels across the globe
with Internet-based services, such as room-reservation systems.
In contrast, we're steering clear of untested pure Internet stocks, such
as search engines and firewall providers. Our investment discipline demands
strong underlying company fundamentals, demonstrated earnings-growth potential
and reasonable stock prices. Quite simply, many of the market's Internet
favorites -- the ".com" group -- fall short on one or more counts. We're also
cautious about information-technology (IT) services and software. While IT-
services companies benefited from increased need for Year 2000 consulting, the
demand has tapered off as companies complete their preparation. Also, there are
indications that companies could refrain from purchasing new software packages
until after the uncertainty surrounding Y2K lessens.
Q IN WHAT OTHER AREAS ARE YOU FINDING APPEALING OPPORTUNITIES?
A Our investment discipline has led us to many attractive specialty-retail
stocks. A low-inflation, high-employment climate has fostered high consumer
confidence, which in turn has benefited quality retailers. Service stocks also
enjoy a high level of representation in the portfolio. Our analysis indicates
that quality service companies have good potential for predictable earnings.
Also, they tend to have a lower level of international exposure.
6
<PAGE> 7
PERFORMANCE UPDATE
We also remain very interested in the stocks of medical supply and device
companies. Demographic trends support stable and growing demand for their
products, which in turn bodes well for consistent, above-average earnings
growth. Unfortunately, due to consolidation trends, the number of small-cap
health care companies has diminished markedly.
Q IN ADDITION TO THE TECHNOLOGY STOCKS YOU'VE DISCUSSED, GIVE US SOME
EXAMPLES OF YOUR STOCK-SELECTION PROCESS IN ACTION.
A As we've found many attractive stocks in the retail, services, and medical
supplies and devices groups, let's look at an example from each:
RETAIL: Linens 'N Things, a housewares retailer, exemplifies our
investment criteria. With few direct competitors and plenty of room to expand,
the firm has been successful in carving a niche for itself. Even though it's a
small company, Linens 'N Things has taken market share away from large mass
merchandisers. In addition to exceptionally strong and consistent top-line
growth, we found the company's centralized management particularly attractive.
Our analysis indicates that centralized management can contribute significantly
to above-average profit and earnings growth. Moreover, because its leading
competitor, Bed Bath & Beyond, has decentralized management, we feel that Linens
'N Things has an extra edge.
We went off the beaten path to find Linens 'N Things; it's not widely
followed by Wall Street analysts. But independent research served us well, and
the stock has been a standout performer since we purchased it during it the
fourth quarter of 1998.
SERVICES: Education Management Corp. is another noteworthy stock. This
company operates post-secondary education facilities -- including associate and
bachelor degree programs and a variety of vocational and technical non-degree
coursework. Similar to other well-managed service companies, Education
Management Corp. offers a predictable business model, stable growth and rational
expansion plans. And, the quality of its operations is top-notch, with a very
high placement level for its graduates. Education Management Corp. also has
pricing power, having increased its tuition rates between four to five percent
annually.
HEALTH CARE: VISX, currently one of the largest holdings in the portfolio,
develops laser machines for eye surgery. We've backed the stock with conviction
throughout the semiannual period, and this conviction paid off. High-quality
products and an excellent reputation among ophthalmologists establish VISX as a
dominant leader. Moreover, because its products are the only FDA-approved
options for certain procedures, VISX is well ahead of its competitors. As
corrective-vision surgeries become more common, we believe that VISX is well
positioned to further expand its market share.
Q WHAT DID NOT PERFORM AS WELL AS EXPECTED?
A As we noted, the markets focus on large-cap growth stocks and high-priced
technology stocks hindered our relative performance. However, there were also
individual stocks that impeded absolute performance.
The fund's stake in Stewart Enterprises, a funeral home and cemetery
operator, took a toll on performance. Stewart's decline demonstrates how
small-cap stocks are often painted with a broad brush. Stewart dropped after one
of its competitors fell short of earnings. And even though Stewart's
fundamentals remained strong and intact, investors got jittery and sold
indiscriminately. We don't think such an emotional response serves shareholders
well: Because Stewart's fundamentals remain in place, we continue to hold the
stock.
In contrast, due to its poor performance and potentially sliding
fundamentals, we eliminated Parexel International from the fund. Parexel
provides clinical trials for drug companies. Unfortunately, when a previously
strong flow of contracts became choppy, Parexel's management was unprepared. The
company lost steam and fell short of earnings expectations. Similarly, due to a
weakening business model, we sold Boron LePore & Associates, a firm that creates
promotional shows for pharmaceutical firms.
Global Industries, an oil-services firm, also clipped performance.
Initially, we were attracted to the company's diversified operations and its
attractive valuations. As the price of crude oil languished, though, Global
Industries was unable to deliver acceptable earnings. Based on the marked
deceleration of growth, we eliminated the stock from the portfolio.
Q HOW ARE YOU BALANCING LIQUIDITY CONCERNS WITH YOUR COMMITMENT TO YOUR
SMALL-CAP DISCIPLINE?
A While adhering to our investment discipline, we are steering clear of some
of the smallest stocks. While micro-caps provide the potential for high returns,
we don't feel that it's prudent for the fund to
7
<PAGE> 8
PERFORMANCE UPDATE
have a high degree of exposure to them. Quite simply, the profit potential
doesn't outweigh the liquidity risk.
The median market capitalization of the fund is just under $1 billion, up
from $750 million at the start of the fiscal year. We feel that at this level
the fund benefits from higher liquidity, while remaining committed to
small-caps.
We also believe that this modest increase makes sense given the increase
in the market's overall level of capitalization. Because the market's
capitalization fluctuates, we think that "small-cap" is best understood as a
relative term, not an absolute one. We're in good company: Morningstar, an
independent financial research and rating service, recently adapted its
style-box definitions to support this approach. Previously, Morningstar used a
static range, classifying small-caps funds as those with median market caps of
less than $1 billion. Now, however, Morningstar has adapted its methodology, and
defines small-cap in more flexible terms, based on the capitalization of the
market as a whole.
Q WHAT'S YOUR OUTLOOK FOR SMALL-CAP STOCKS?
A Well, it's important to remember that no one can predict with certainty
what the markets will do next, particularly over the short term. We still
believe that small-cap stocks offer the potential for good long-term capital
growth. Although the pace of small-cap earnings growth has slowed relative to
large-caps, small-caps are priced very favorably compared to their cash flows,
sales and book values.
We encourage shareholders to remain patient, however. In an uncertain
global market climate, liquidity may remain a driving force, turning market
sentiment toward large-caps.
Q GIVEN THE CHALLENGES IN THE RECENT MARKET CLIMATE, SHOULD INVESTORS
INCLUDE A SMALL-CAP COMPONENT IN THEIR LONG-TERM PORTFOLIOS?
A In exchange for their higher level of risk, small-cap stocks have
traditionally offered a higher potential return. We encourage shareholders to
keep this risk/reward trade-off in mind, and to make sure that their small-cap
exposure is consistent with their risk tolerance, time horizon and goals.
We believe that small caps can play an important role in a diversified
investment plan. Historically, small caps and large caps have tended to perform
countercyclically, rising and fading at different times. Having exposure to both
small and large companies means that your eggs aren't all in one basket. While
we don't know when the tide will turn, or what the catalyst will be, we do think
that it is unlikely that large-cap stocks will dominate forever.
We also have a high degree of conviction in our investment discipline.
Despite the market's recent challenges, we remain absolutely committed to
small-cap growth stock investing. The fund's growth-at-a-reasonable-price
strategy leverages the capabilities of Scudder Kemper Investments' large staff
of portfolio managers, analysts and investment specialists. We are dedicated to
using these resources to help the fund's shareholders pursue their long-term
investment goals.
8
<PAGE> 9
INDUSTRY SECTORS
A SIX-MONTH COMPARISON
DATA SHOWS THE PERCENTAGE OF THE COMMON STOCKS IN THE PORTFOLIO THAT EACH SECTOR
REPRESENTED ON MARCH 31, 1999, AND ON SEPTEMBER 30, 1998.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL CAPITALIZATION KEMPER SMALL CAPITALIZATION
EQUITY FUND ON 3/31/99 EQUITY FUND ON 9/30/98
<S> <C> <C>
Consumer non-durables 26.10% 29.70%
Technology 22.20% 20.60%
Health care 11.90% 22.60%
Capital goods 10.30% 8.40%
Service industries 9.20% 0.00%
Finance 8.20% 6.80%
Consumer durables 3.80% 4.70%
Transportation 3.00% 3.10%
Basic industries 2.40% 2.90%
Communications 1.80% 0.00%
Energy 1.10% 1.20%
</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 MARCH 31, 1999,
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 ON 3/31/99 RUSSELL 2000 INDEX ON 3/31/99
--------------------------- -----------------------------
<S> <C> <C>
Consumer non-durables 26.10% 24.70%
Technology 22.20% 30.60%
Health care 11.90% 13.70%
Capital goods 10.30% 6.80%
Service industries 9.20% 0.00%
Finance 8.20% 12.70%
Consumer durables 3.80% 1.60%
Transportation 3.00% 2.00%
Basic industries 2.40% 2.60%
Communications 1.80% 0.00%
Energy 1.10% 1.50%
Utilities 0.00% 3.80%
</TABLE>
*The Russell 2000 Index is an unmanaged capitalization weighted index which is
comprised of 2000 of the smallest stocks (on the basis of capitalization) in
the Russell 3000 Index. Source is Lipper Analytical Services, Inc.
9
<PAGE> 10
LARGEST HOLDINGS
THE FUND'S 10 LARGEST HOLDINGS*
REPRESENTING 25.5 PERCENT OF THE FUND'S COMMON STOCK HOLDINGS ON MARCH 31, 1999
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
HOLDINGS PERCENT
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. COMVERSE Develops, manufactures, and 3.8%
TECHNOLOGY markets high-performance computer
systems designed to serve a broad
range of commercial and military
multimedia communications
processing applications.
2. JABIL CIRCUIT Contract manufacturer of electric 3.4%
circuit board assemblies.
3. DYCOM INDUSTRIES Providers fiber optic and copper 2.9%
transmission, installation,
telephone engineering and
electrical services to
telecommunications and electric
utility companies.
4. VISX Engaged in the design, 2.5%
manufacturing and marketing of
proprietary technologies and
systems for laser vision
correction.
5. REGIS Owns and operates the Regis 2.5%
Hairstylists and MasterCuts
salons. Sells beauty care
supplies.
6. SYKES ENTERPRISES Provides information technology 2.3%
outsourcing services, including
hardware and software support,
help desk services, consulting and
documentation development.
7. MEN'S WEARHOUSE Large off-price provider of men's 2.1%
business attire.
8. FOODMAKER Owns and operates the Jack In The 2.1%
Box restaurant chain.
9. CINAR Develops, produces and distributes 2.0%
family oriented programming and
educational services.
10. EDUCATION Operates secondary post-secondary 1.9%
MANAGEMENT programs including associate and
bachelor degree as well as
non-degree courses.
</TABLE>
*Portfolio composition and holdings are subject to change.
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
KEMPER SMALL CAPITALIZATION EQUITY FUND
PORTFOLIO OF INVESTMENTS AT MARCH 31, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC INDUSTRIES--2.4%
Spartech Corp. 571,500 $ 11,787
(a) United Rentals, Inc. 205,933 5,869
-------------------------------------------------------------------------------
17,656
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--10.1%
Applied Power, Inc. 188,700 5,142
(a) Astec Industries 257,800 7,960
(a) Dril-Quip, Inc. 420,700 9,282
(a) Jacobs Engineering Group 312,588 12,328
(a) Motivepower Industries, Inc. 481,800 12,105
(a) Novellus Systems 203,600 11,223
(a) RailWorks Corp. 491,100 5,279
(a) SPS Technologies 203,900 8,003
Westinghous Air Brake Co. 198,100 4,135
-------------------------------------------------------------------------------
75,457
- --------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--1.8%
(a) Pinnacle Holdings, Inc. 487,800 7,378
(a) Plantronics, Inc. 97,800 6,119
-------------------------------------------------------------------------------
13,497
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS--20.2%
(a) AnnTaylor Stores Corp. 150,300 6,641
(a) Cinar Corp. 630,800 14,508
(a) Consolidated Graphics, Inc. 123,200 7,115
(a) Cost Plus, Inc. 362,100 10,637
(a) Education Management Corp. 458,800 14,108
(a) Foodmaker 599,200 15,280
(a) ITT Educational Services, Inc. 270,700 10,168
(a) Linens 'n Things, Inc. 275,200 12,487
(a) Men's Wearhouse 545,550 15,753
(a) O'Reilly Automotive 272,100 12,176
(a) Select Appointments Hldgs. (ADR) 447,200 11,935
Stewart Enterprises, Inc. 454,100 7,294
(a) Zale Corp. 367,400 12,560
-------------------------------------------------------------------------------
150,662
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER DURABLES--3.7%
(a) Dura Automotive Systems, Inc. 333,100 9,410
(a) Gilat Satellite Networks Ltd. 172,600 10,356
(a) Tower Automotive, Inc. 439,100 8,178
-------------------------------------------------------------------------------
27,944
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--5.5%
(a) American Italian Pasta Co. 182,600 4,565
(a) Aurora Foods 427,900 7,007
Regis Corp. 687,450 18,303
(a) U.S. Foodservice, Inc. 235,800 10,965
-------------------------------------------------------------------------------
40,840
- --------------------------------------------------------------------------------------------------------------------------
ENERGY--1.1%
(a) Cal Dive International, Inc. 374,900 7,826
-------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCE--8.1% American Heritage Life Investment Corp. 364,900 $ 8,507
Bank United Corp. 181,800 7,431
Community First Bankshares 502,200 10,044
Legg Mason 179,800 6,057
Metris Companies, Inc. 225,600 9,109
(a) NCO Group Inc. 260,300 9,631
Texas Regional Bancshares 365,250 9,862
-------------------------------------------------------------------------------
60,641
- --------------------------------------------------------------------------------------------------------------------------
HEALTH CARE--11.7% (a) Advance Paradigm, Inc. 168,600 10,653
(a) Hanger Orthopedic Group, Inc. 388,000 5,238
(a) Medicis Pharmaceutical Corp. 363,750 10,913
(a) MedQuist, Inc. 378,900 11,367
(a) Osteotech, Inc. 306,150 10,524
(a) Priority Health Corp. 24,500 1,109
(a) ResMed, Inc. 284,100 8,025
(a) Serologicals Corp. 530,500 7,195
(a) Shire Pharmaceuticals Group PLC 172,700 3,940
(a) VISX, Inc. 171,500 18,447
-------------------------------------------------------------------------------
87,411
- --------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--9.0% (a) ChoicePoint, Inc. 185,500 9,252
(a) Complete Business Solutions, Inc. 518,800 10,181
(a) Dycom Industries, Inc. 486,750 21,174
(a) MAXIMUS, Inc. 170,000 4,951
(a) Metzler Group, Inc. 277,100 8,694
(a) Pegasus Systems, Inc. 73,100 2,915
(a) Plexus Corp. 167,300 4,663
(a) Quanta Services, Inc. 215,900 5,492
-------------------------------------------------------------------------------
67,322
- --------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--21.8% (a) Alpha Industries 329,550 6,055
(a) Applied Micro Circuits Corp. 178,900 7,648
(a) Axent Technologies, Inc. 228,000 5,486
Cimlinc Incorporated, "D" , convertible preferred 75,431 283
(a) Comverse Technology 326,700 27,770
(a) Cree Research 256,400 12,035
(a) Exigent International, Inc., with warrant 325 1
(a) Jabil Circuit 613,300 24,839
(a) Market Facts 335,400 7,379
(a) Mercury Interactive Corp. 335,800 11,963
(a) Network Appliance, Inc. 138,500 7,012
(a) New Era Networks, Inc. 82,300 5,576
(a) QLogic Corp. 107,900 7,243
(a) SEREMA Software, Inc. 288,100 4,033
(a) Sykes Enterprises, Inc. 532,600 17,210
(a) Transwitch Corp. 225,500 10,204
(a) Verity, Inc. 144,300 4,834
(a) Whittman-Hart, Inc. 170,000 3,655
-------------------------------------------------------------------------------
163,226
- --------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--2.9% C.H. Robinson Worldwide, Inc. 308,500 7,847
Expeditors International of Washington 192,700 10,406
(a) U.S. Xpress Enterprises 330,000 3,836
-------------------------------------------------------------------------------
22,089
-------------------------------------------------------------------------------
TOTAL COMMON STOCKS--98.3%
(Cost: $604,057) 734,571
-------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET INSTRUMENT--1.7% Yield--4.32%
Due--April 1999
(Cost: $12,986) $ 13,000 $ 12,986
-------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $617,043) $747,557
-------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security.
Based on the cost of investments of $617,043,000 for federal income tax purposes
at March 31, 1999, the gross unrealized appreciation was $157,144,000, the gross
unrealized depreciation was $26,630,000 and the net unrealized appreciation on
investments was $130,514,000.
See accompanying Notes to Financial Statements.
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $617,043) $747,557
- ------------------------------------------------------------------------
Receivable for:
Investments sold 4,268
- ------------------------------------------------------------------------
Fund shares sold 191
- ------------------------------------------------------------------------
Dividends 107
- ------------------------------------------------------------------------
TOTAL ASSETS 752,123
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Cash overdraft 1,755
- ------------------------------------------------------------------------
Payable for:
Investments purchased 8,886
- ------------------------------------------------------------------------
Fund shares redeemed 1,130
- ------------------------------------------------------------------------
Management fee 219
- ------------------------------------------------------------------------
Distribution services fee 91
- ------------------------------------------------------------------------
Administrative services fee 98
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 781
- ------------------------------------------------------------------------
Trustees' fees and other 135
- ------------------------------------------------------------------------
Total liabilities 13,095
- ------------------------------------------------------------------------
NET ASSETS $739,028
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $528,787
- ------------------------------------------------------------------------
Undistributed net realized gain on investments 79,727
- ------------------------------------------------------------------------
Net unrealized appreciation on investments 130,514
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $739,028
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share ($558,394 /
100,792 shares outstanding) $5.54
- ------------------------------------------------------------------------
Maximum offering price per share (net asset value, plus
6.10% of net asset value or 5.75% of offering price) $5.88
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($155,610 /
30,228 shares outstanding) $5.15
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($14,319 /
2,765 shares outstanding) $5.18
- ------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share ($10,705 /
1,891 shares outstanding) $5.66
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
INVESTMENT INCOME
- -----------------------------------------------------------------------
Dividends $ 585
- -----------------------------------------------------------------------
Interest 856
- -----------------------------------------------------------------------
Total investment income 1,441
- -----------------------------------------------------------------------
Expenses:
Management fee 1,554
- -----------------------------------------------------------------------
Distribution services fee 721
- -----------------------------------------------------------------------
Administrative services fee 846
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 2,055
- -----------------------------------------------------------------------
Reports to shareholders 115
- -----------------------------------------------------------------------
Professional fees 51
- -----------------------------------------------------------------------
Trustees' fees and other 47
- -----------------------------------------------------------------------
Total expenses 5,389
- -----------------------------------------------------------------------
NET INVESTMENT LOSS (3,948)
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized gain on sales of investments 7,284
- -----------------------------------------------------------------------
Change in net unrealized appreciation on investments 92,276
- -----------------------------------------------------------------------
Net gain on investments 99,560
- -----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $95,612
- -----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MARCH 31, YEAR ENDED
1999 SEPTEMBER 30,
(UNAUDITED) 1998
- ----------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment loss $ (3,948) (6,977)
- ----------------------------------------------------------------------------------------------------
Net realized gain 7,284 62,885
- ----------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 92,276 (301,603)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 95,612 (245,695)
- ----------------------------------------------------------------------------------------------------
Distribution from net realized gain (57,638) (110,208)
- ----------------------------------------------------------------------------------------------------
Net (decrease) from capital share transactions (17,295) (21,226)
- ----------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 20,679 (377,129)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------------------------
Beginning of period 718,349 1,095,478
- ----------------------------------------------------------------------------------------------------
END OF PERIOD $ 739,028 718,349
- ----------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
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
generally have lower ongoing expenses than other
classes. Differences in class expenses will result
in the payment of different per share income
dividends by class. All shares of the fund have
equal rights with respect to voting, dividends and
assets, subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES 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. If
there are no such sales, the value is the most
recent bid quotation. Securities which are not
quoted on Nasdaq but are traded in another
over-the-counter market are valued at the most
recent sale price on such market. If no sale
occurred, the security is then valued at the
calculated mean between the most recent bid and
asked quotations. If there are no such bid and
asked quotations, the most recent bid quotation is
used. Money market instruments purchased with an
original maturity of sixty days or less are valued
at amortized cost. All other securities are valued
at their fair market value as determined in good
faith by the Valuation Committee of the Board of
Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date. Dividend income is recorded on the ex-
dividend date, and interest income is recorded on
the accrual basis and includes discount
amortization on money market instruments. Realized
gains and losses from investment transactions are
reported on an identified cost basis.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the close of the Exchange. The net
asset value per 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.
16
<PAGE> 17
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 than
generally accepted accounting principles.
- --------------------------------------------------------------------------------
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 six months ended March 31, 1999, the
fund incurred management fees as follows (in
thousands):
<TABLE>
<S> <C>
Base fee $ 2,887
Performance adjustment (1,333)
-------
Total fees $ 1,554
=======
</TABLE>
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the six months ended March
31, 1999 are $36,000.
For services under the distribution services
agreement, the fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares pursuant to separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the six months ended March 31, 1999 are
$954,000.
ADMINISTRATIVE SERVICES AGREEMENT. The fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of fund accounts that the
firms service. Administrative services fees paid by
the fund to KDI for the six months ended March 31,
1999 are $846,000, of which $1,000 was paid by KDI
to affiliates.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the fund. Under the agreement,
KSvC received shareholder services fees of
$1,388,000 for the six months ended March 31, 1999.
17
<PAGE> 18
NOTES TO FINANCIAL
STATEMENTS
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. For the six months ended March 31,
1999, the fund made no payments to its officers and
incurred trustees' fees of $24,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended March 31, 1999, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
<TABLE>
<S> <C>
Purchases $516,669
Proceeds from sales 535,750
</TABLE>
- --------------------------------------------------------------------------------
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, 1999 SEPTEMBER 30, 1998
------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------
SHARES SOLD
------------------------------------------------------------------------------------
Class A 118,932 $ 657,242 150,146 $ 984,735
------------------------------------------------------------------------------------
Class B 8,899 45,630 10,789 69,768
------------------------------------------------------------------------------------
Class C 18,384 95,679 52,417 329,342
------------------------------------------------------------------------------------
Class I 245 1,435 847 6,088
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
------------------------------------------------------------------------------------
Class A 6,862 38,497 10,966 69,742
------------------------------------------------------------------------------------
Class B 2,700 14,122 5,045 30,421
------------------------------------------------------------------------------------
Class C 201 1,057 245 1,476
------------------------------------------------------------------------------------
Class I 160 914 315 2,030
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
SHARES REDEEMED
------------------------------------------------------------------------------------
Class A (127,317) (710,786) (163,024) (1,077,863)
------------------------------------------------------------------------------------
Class B (12,551) (64,631) (14,691) (95,212)
------------------------------------------------------------------------------------
Class C (17,448) (91,709) (52,521) (331,527)
------------------------------------------------------------------------------------
Class I (804) (4,745) (1,464) (10,226)
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
CONVERSION OF SHARES
------------------------------------------------------------------------------------
Class A 5,766 32,394 3,201 21,822
------------------------------------------------------------------------------------
Class B (6,171) (32,394) (3,390) (21,822)
------------------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE TRANSACTIONS $ (17,295) $ (21,226)
------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------
CLASS A
-------------------------------------------
SIX MONTHS
ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, ------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------
Net asset value, beginning of period $5.30 7.98 7.01 7.14 5.81
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (.02) (.03) (.01) (.02) (.01)
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .67 (1.84) 1.55 .94 1.68
- --------------------------------------------------------------------------------------
Total from investment operations .65 (1.87) 1.54 .92 1.67
- --------------------------------------------------------------------------------------
Less distribution from net realized gain .41 .81 .57 1.05 .34
- --------------------------------------------------------------------------------------
Net asset value, end of period $5.54 5.30 7.98 7.01 7.14
- --------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 12.17% (25.13) 24.29 16.33 30.88
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------
Expenses 1.03% .90 .90 1.08 1.14
- --------------------------------------------------------------------------------------
Net investment loss (.66)% (.38) (.20) (.26) (.18)
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------
CLASS B
-----------------------------------------------
SIX MONTHS
ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, ------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------
Net asset value, beginning of period $4.98 7.64 6.81 7.03 5.78
- ------------------------------------------------------------------------------------------
Income from investment operations: Net
investment loss (.06) (.11) (.10) (.09) (.07)
- ------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .64 (1.74) 1.50 .92 1.66
- ------------------------------------------------------------------------------------------
Total from investment operations .58 (1.85) 1.40 .83 1.59
- ------------------------------------------------------------------------------------------
Less distribution from net realized gain .41 .81 .57 1.05 .34
- ------------------------------------------------------------------------------------------
Net asset value, end of period $5.15 4.98 7.64 6.81 7.03
- ------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 11.52% (26.06) 22.83 15.13 29.59
- ------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------
Expenses 2.49% 2.14 2.14 2.15 2.17
- ------------------------------------------------------------------------------------------
Net investment loss (2.12)% (1.62) (1.44) (1.33) (1.21)
- ------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------
CLASS C
-----------------------------------------------
SIX MONTHS
ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, ----------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 5.00 7.63 6.80 7.02 5.77
- -------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (.05) (.14) (.09) (.09) (.07)
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .64 (1.68) 1.49 .92 1.66
- -------------------------------------------------------------------------------------------
Total from investment operations .59 (1.82) 1.40 .83 1.59
- -------------------------------------------------------------------------------------------
Less distribution from net realized gain .41 .81 .57 1.05 .34
- -------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.18 5.00 7.63 6.80 7.02
- -------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 11.68% (25.65) 22.87 15.16 29.65
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------
Expenses 2.15% 2.06 1.95 2.15 2.10
- -------------------------------------------------------------------------------------------
Net investment loss (1.78)% (1.54) (1.25) (1.33) (1.14)
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------
CLASS I
---------------------------------------------------
SIX MONTHS JULY 3
ENDED YEAR ENDED SEPTEMBER 30, TO
MARCH 31, ------------------------ SEPT. 30,
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 5.39 8.07 7.05 7.15 6.27
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income -- -- .01 .01 --
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .68 (1.87) 1.58 .94 .88
- ---------------------------------------------------------------------------------------------
Total from investment operations .68 (1.87) 1.59 .95 .88
- ---------------------------------------------------------------------------------------------
Less distribution from net realized gain .41 .81 .57 1.05 --
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.66 5.39 8.07 7.05 7.15
- ---------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 12.54% (24.82) 24.89 16.76 14.04
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------
Expenses .52% .48 .53 .66 .79
- ---------------------------------------------------------------------------------------------
Net investment income (loss) (.15)% .04 .17 .16 (.14)
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, -------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in
thousands) $739,028 718,349 1,095,478 934,075 839,905
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 138% 86 102 85 102
- ---------------------------------------------------------------------------------------------------
</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, 1999 is unaudited.
20
<PAGE> 21
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 17, 1998, a special shareholders' meeting was held and adjourned to
January 15,1999. Kemper Small Capitalization Equity Fund shareholders were asked
to vote on two separate issues: approval of the new Investment Management
Agreement between the fund and Scudder Kemper Investments, Inc., and to modify
or eliminate certain policies and to eliminate the shareholder approval
requirements as to certain other matters. The following are the results.
1) Approval of the new Investment Management Agreement between the fund and
Scudder Kemper Investments, Inc. This item was approved.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
76,934,087 2,254,954 3,813,801
</TABLE>
2) To modify or eliminate certain policies and to eliminate the shareholder
approval requirements as to certain other matters. These items were approved.
Investment objectives
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
63,409,907 4,988,222 7,749,297
</TABLE>
Investment policies
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
63,377,763 5,021,610 7,748,054
</TABLE>
Diversification
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
63,463,009 4,936,363 7,748,054
</TABLE>
Borrowing
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
63,369,612 5,029,760 7,748,054
</TABLE>
Senior securities
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
63,477,546 4,921,826 7,748,054
</TABLE>
Concentration
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
63,469,952 4,929,421 7,748,054
</TABLE>
Underwriting of securities
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
63,463,320 4,936,052 7,748,054
</TABLE>
Investment in real estate
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
63,465,888 4,933,484 7,748,054
</TABLE>
Purchase of commodities
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
63,404,172 4,995,200 7,748,054
</TABLE>
Lending
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
63,414,759 4,965,636 7,767,032
</TABLE>
Margin purchases and short sales
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
63,279,845 5,119,527 7,748,054
</TABLE>
Pledging of assets
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
63,313,348 5,079,345 7,754,733
</TABLE>
Purchases of securities
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
63,464,212 4,928,480 7,754,733
</TABLE>
Purchases of options and warrants
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
63,383,688 5,015,684 7,748,054
</TABLE>
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY MAUREEN E. KANE
Chairman and Trustee President Assistant Secretary
LEWIS A. BURNHAM PHILIP J. COLLORA CAROLINE PEARSON
Trustee Vice President and Secretary Assistant Secretary
DONALD L. DUNAWAY JOHN R. HEBBLE ELIZABETH C. WERTH
Trustee Treasurer Assistant Secretary
ROBERT B. HOFFMAN ANN M. MCCREARY BRENDA LYONS
Trustee Vice President Assistant Treasurer
DONALD R. JONES KATHRYN L. QUIRK
Trustee Vice President
THOMAS W. LITTAUER CORNELIA SMALL
Trustee and Vice President Vice President
SHIRLEY D. PETERSON KURT R. STALZER
Trustee Vice President
WILLIAM P. SOMMERS LINDA J. WONDRACK
Trustee Vice President
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02109
INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue Kansas City, MO 64105
- --------------------------------------------------------------------------------
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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This report is not to be distributed
unless preceded or accompanied by a
Kemper Equity Fund/Growth Style prospectus.
KSCF - 3 (5/22/99) 1073980
