<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MAY 31, 2000
Seeks long-term capital appreciation
KEMPER SMALL CAP
VALUE FUND
"... It was strictly a momentum investor's market, in which the largest and
highest-priced stocks were
rewarded -- a distinct disadvantage for small-cap
value investors like us. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
8
INDUSTRY SECTORS
9
LARGEST HOLDINGS
10
PORTFOLIO OF INVESTMENTS
18
FINANCIAL STATEMENTS
21
FINANCIAL HIGHLIGHTS
25
NOTES TO FINANCIAL STATEMENTS
AT A GLANCE
KEMPER SMALL CAP VALUE FUND
TOTAL RETURNS
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 2000 (UNADJUSTED FOR ANY SALES CHARGE).
[BAR GRAPH]
<TABLE>
<CAPTION>
LIPPER SMALL COMPANY
KEMPER SMALL CAP VALUE KEMPER SMALL CAP VALUE VALUE FUNDS CATEGORY
KEMPER SMALL CAP VALUE FUND CLASS A FUND CLASS B FUND CLASS C AVERAGE*
----------------------------------- ---------------------- ---------------------- --------------------
<S> <C> <C> <C>
-4.96 -5.31 -5.34 7.95
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
*LIPPER ANALYTICAL SERVICES, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES IN
NET ASSET VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF
SALES CHARGE; IF SALES CHARGE HAD BEEN INCLUDED, RESULTS MIGHT HAVE BEEN LESS
FAVORABLE.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
5/31/00 11/30/99
.........................................................
<S> <C> <C> <C> <C>
KEMPER SMALL CAP VALUE FUND
CLASS A $16.87 $17.75
.........................................................
KEMPER SMALL CAP VALUE FUND
CLASS B $16.24 $17.15
.........................................................
KEMPER SMALL CAP VALUE FUND
CLASS C $16.32 $17.24
.........................................................
</TABLE>
KEMPER SMALL CAP VALUE FUND
RANKINGS AS OF 5/31/00
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER SMALL COMPANY GROWTH FUNDS
CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
....................................................................................
<S> <C> <C> <C> <C> <C>
1-YEAR #312 of 331 funds #314 of 331 funds #313 of 331 funds
....................................................................................
3-YEAR #186 of 192 funds #189 of 192 funds #188 of 192 funds
....................................................................................
5-YEAR #104 of 110 funds N/A N/A
....................................................................................
</TABLE>
INVESTMENT IN SECURITIES OF SMALL COMPANIES MAY INVOLVE A GREATER RISK OF LOSS
AND MORE ABRUPT FLUCTUATIONS IN MARKET PRICE THAN INVESTMENT IN LARGER
COMPANIES. CONCENTRATION OF THE FUND'S ASSETS IN SPECIFIC SECTORS MAY PRESENT A
GREATER RISK THAN INVESTMENT IN A MORE DIVERSIFIED FUND.
TERMS TO KNOW
YOUR FUND'S STYLE
MORNINGSTAR EQUITY STYLE BOX(TM)
<TABLE>
<S> <C>
[MORNINGSTAR EQUITY STYLE Source: Morningstar, Inc. Chicago, IL. (312)
BOX] 696-6000. The Equity Style Box placement is based
on two variables: a fund's market capitalization
relative to the movements of the market and a
fund's valuation, which is calculated by
comparing the stocks in the fund's portfolio with
the most relevant of the three market-cap groups.
THE STYLE BOX REPRESENTS A SNAPSHOT OF THE FUND'S
PORTFOLIO ON A SINGLE DAY. IT IS NOT AN EXACT
ASSESSMENT OF RISK AND DOES NOT REPRESENT FUTURE
PERFORMANCE. THE FUND'S PORTFOLIO CHANGES FROM
DAY TO DAY. A LONGER- TERM VIEW IS REPRESENTED BY
THE FUND'S MORNINGSTAR CATEGORY, WHICH IS BASED
ON ITS ACTUAL INVESTMENT STYLE AS MEASURED BY ITS
UNDERLYING PORTFOLIO HOLDINGS OVER THE PAST THREE
YEARS. MORNINGSTAR HAS PLACED KEMPER SMALL CAP
VALUE FUND IN THE SMALL VALUE CATEGORY. PLEASE
CONSULT THE PROSPECTUS FOR A DESCRIPTION OF
INVESTMENT POLICIES.
</TABLE>
LIQUIDITY Liquidity is a measure of how easy or hard it is to buy or sell a
stock. Due to higher recognition levels and a greater quantity of shares,
large-cap stocks are typically more liquid than small-cap stocks. Reduced
liquidity offers both greater risk and greater return potential: Investors who
wish to sell a less-liquid stock may find it difficult to secure a buyer but may
also be able to dictate a higher price if the stock is in demand.
MOMENTUM INVESTOR One who invests in stocks that are rising and are perceived to
have strong potential for further price gains.
NARROW MARKET A period when market leadership is concentrated among a relatively
small number of stocks.
PRICE-TO-EARNINGS RATIO A price-to-earnings ratio, often referred to as "P/E" ,
or a "multiple," is a measure of how much an investor is paying for a company's
earning power. It is calculated by dividing a company's stock price by its
earnings for the most recent four quarters.
VALUATION The level at which an asset or company is trading, or the analytical
technique used to determine the value of an asset or a company.
<PAGE> 3
ECONOMIC OVERVIEW
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER,
When an irresistible force such as the ebullient U.S. economy meets an immovable
object, such as a determined Federal Reserve Board, the old song is right:
Something's gotta give. One possibility -- the economy could slow down as the
Fed has ordered. Or, if market volatility becomes true distress, the Fed could
back off, as it has in the past. A third possibility is that neither the Fed nor
the economy will give way until it's too late, which could lead to a recession.
Recent evidence suggests, however, that the economy probably will slow down as
ordered.
Before explaining why, perhaps it's best to start with a review of how
monetary policy works. Central bankers often sound like witch doctors reading
animal entrails, so it's understandable that many people are confused about
monetary policy. But monetary policy still works in the same way it always has.
First, it changes the price and availability of money. More subtly, it alters
people's perceptions about and confidence in the future, thereby adjusting their
willingness to take risks.
It's a bit early to tell how the Fed's monetary policy is working so far. The
policymakers only started raising interest rates about a year ago, and it takes
at least that long for higher rates to impact borrowers. There are two reasons.
First, interest rates on many existing loans are fixed. And, a family who has
just selected a dream house isn't going to walk away if mortgage rates rise a
notch. Similarly, a company that has just approved an expansion program won't
stop cold because the prime rate is higher. So it's foolish to think that
America's economy has become less interest-sensitive because the economy roared
through the first several months of this year. Americans are more in hock than
ever, so higher interest rates will hurt more than ever. The May dip in housing
starts and auto sales -- especially the higher priced, gas guzzling sport
utility vehicles -- is probably the first sign that higher rates are biting.
They will bite harder in coming months. We look for both housing starts and
vehicle sales to drop about 10 percent in 2001.
Confidence is harder to measure, but there are some early flutters of
weakness. It's true that consumers remain cheerily upbeat. But corporate bond
markets, the most sensitive barometer of business confidence and a vital source
of corporate funds, have been nervous. Investors are demanding a big premium
before they'll buy lower quality bonds, which means there's less new money for
companies to spend. Corporate bond issuance through mid-June was 35 percent
below the first five and a half months of 1999.
So far, companies have been able to get around the bond market stinginess by
turning to their bankers. Banks lent businesses 8 percent more from January
through May of this year than they did during the first five months of 1999. But
some banks are beginning to worry, too. Bank examiners have been questioning the
quality of loans and the level of reserves. In response, more bankers are
tightening lending standards and raising rates. This is a textbook case of how
tighter monetary policy eventually slows an economy.
Aren't bond market and banker concerns overdone? As long as the economy keeps
growing at 3 percent or so, won't that guarantee such good profits that paying
the bills will be a cinch? Not necessarily. Profits are far more cyclical than
economic growth. Earnings actually fell during 1998, even though the economy
continued to roll. That was a global crisis, when foreign earnings fell sharply.
But take a look at the last "soft landing" during 1995. Revenue growth dipped
and pricing power fell, squeezing profits. The same thing is likely to happen
again in the coming slowdown -- and this time, tight labor markets could make it
even tougher for companies to control costs quickly. Assuming growth is between
2.5 percent and 3 percent by the end of 2001, we believe year-over-year profit
comparisons will have turned slightly negative.
A profit slowdown when new lines of credit are hard to come by will take its
toll on capital spending. We expect growth in business outlays for buildings and
equipment to slip from over 12 percent this year to around 8 percent in 2001.
That's still quite robust, and the "high-tech imperative" is the reason why.
Executives believe that they have no option but to keep up with the
technological revolution that is transforming the world. The fact that high-tech
gear keeps getting cheaper year after year and also helps save on expensive
labor makes the decision to buy it easy. Indeed, unit sales of computers and
peripherals to businesses have sustained growth rates in excess of 40 percent
since 1995. And the rush is on to lay down the infrastructure for the next
generation of wireless communications. We estimate that the sector will see unit
growth of about 50 percent this year, double the growth in 1999. It's hard even
for superstars to sustain these stratospheric
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 (5/31/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.40 6.00 5.50 5.60
Prime rate (2) 9.50 8.50 7.75 8.50
Inflation rate (3)* 3.00 2.60 2.30 1.50
The U.S. dollar (4) 4.30 -0.70 -0.90 6.40
Capital goods orders (5)* 17.00 12.30 2.50 14.50
Industrial production (5)* 6.10 3.70 2.90 5.20
Employment growth (6) 2.60 2.20 2.30 2.60
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
*DATA AS OF 4/30/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
compound growth rates forever, and we do expect some moderation next year.
However, high-tech orders continue to ratchet upwards, and the shortage in
semiconductors and other components has persisted long enough to cause major
players to announce huge capacity additions.
Another battle the Fed must win before it succeeds in slowing the economy is
bringing consumers to heel. Most families still feel better off than they were
last year and much richer than they were five years ago. That's a powerful
incentive to spend and enjoy. Indeed, total real consumption has been galloping
at a 5 percent rate or better since early 1998. But consumers are so important
to the economy that if they don't start spending less freely, there won't be a
slowdown. We expect the Fed to be successful and slow down shoppers in the
months ahead -- but the victory won't be an easy one. We expect at least one
more rate hike and a few more financial fireworks before consumers and the
economy hoist the white flag.
So what will the slowdown look like? During the spring, retail sales, housing
starts and job creation slowed, but strength in high tech orders and capital
equipment production probably will help keep the slowdown from becoming too
abrupt. We expect about 3.5 percent growth in the second half. That would still
produce a hearty 5 percent growth for full year 2000. During 2001, the full
impact of the Fed's recent tightening will probably rein growth in to just 3
percent.
Sincerely,
Scudder Kemper Investments Economics Group
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF SCUDDER KEMPER
INVESTMENTS, INC. AS OF JUNE 29, 2000, 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
[EYSENBACH PHOTO]
JAMES (MAC) EYSENBACH IS THE LEAD PORTFOLIO MANAGER FOR KEMPER SMALL CAP VALUE
FUND. EYSENBACH JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1991. HE IS A
CHARTERED FINANCIAL ANALYST. HE HOLDS AN M.B.A. DEGREE IN FINANCE FROM THE
ANDERSON SCHOOL AT UCLA.
PORTFOLIO MANAGER CALVIN YOUNG ALSO CONTRIBUTES HIS INVESTMENT MANAGEMENT
EXPERIENCE TO THE FUND. HE JOINED THE ORGANIZATION IN 1990. YOUNG EARNED AN
M.B.A. FROM GOLDEN GATE UNIVERSITY IN SAN FRANCISCO.
THE TEAM IS SUPPORTED BY INVESTMENT PROFESSIONALS INCLUDING ECONOMISTS, RESEARCH
ANALYSTS, TRADERS AND OTHER SPECIALISTS THROUGHOUT THE UNITED STATES AND ABROAD.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
IN A MARKET DRIVEN TO EXTREMES BY INVESTORS WILLING
TO IGNORE FUNDAMENTALS AND PAY INORDINATELY HIGH
PRICES FOR STOCKS, WHERE DOES A SMALL-CAP VALUE
INVESTOR FIND VALUE? LEAD PORTFOLIO MANAGER MAC
EYSENBACH TELLS HOW KEMPER SMALL CAP VALUE FUND
FARED IN THIS MOMENTUM INVESTOR'S MARKET AND WHY HE
REMAINS COMMITTED TO THE RIGOROUS, TIME-TESTED
INVESTMENT DISCIPLINE THAT HE BELIEVES IS THE
FUND'S LONG-TERM STRENGTH.
Q WILL YOU PROVIDE AN OVERVIEW OF MARKET CONDITIONS DURING THE PERIOD,
HIGHLIGHTING PARTICULAR CHALLENGES OR BENEFITS TO FUND MANAGEMENT OR
PERFORMANCE?
A Wild swings in the stock market effectively divided the semiannual period
into distinct halves. During the first three months, investors continued to turn
a blind eye toward fundamentals, choosing instead to fuel the fire in so-called
new-economy stocks that had burned since early in 1999. A very narrow band of
stocks -- mostly technology, media and telecommunications (TMT)
companies -- tended to post robust gains, while the vast majority of stocks
outside these sectors were mired in a stagnant market. The major market indices,
such as the S&P 500 and the Nasdaq Composite, which are heavily weighted in TMT
names, climbed to all-time highs. The Russell 2000 index, a common small-stock
benchmark, also hit record highs, rising nearly 28 percent in three months.
However, the stocks leading this index were anything but small. At year-end, the
top 10 stocks in the index had an average market capitalization of $6 billion
and an average stock price that was more than 200 times earnings. It was
strictly a momentum investor's (see Terms To Know, on page 2) market, in which
the largest and highest-priced stocks were rewarded -- a distinct disadvantage
for small cap value investors like us.
A historically precipitous drop in the Nasdaq starting in March caused a
dramatic shift in the markets during the second half of the period. The
correction in TMT gave rise to more value-oriented investment opportunities than
we had seen in the past 18 months, during which the market was particularly
inhospitable to value investors. Unfortunately, the rebound was generally
limited to large-cap value stocks. Small-cap value stocks merely held flat in
the three-month period, in which the overall small-cap index dropped more than
17 percent.
Q HOW DID KEMPER SMALL CAP VALUE FUND PERFORM IN THIS EXTRAORDINARY MARKET
ENVIRONMENT?
A This has been a difficult period for the fund. Our commitment to a
rigorous, long-term value investment strategy prohibited us from fully
participating in the hottest stocks in the TMT sectors. Quite simply, most of
these stocks did not fit our criteria, in terms of either their valuations (see
Terms To Know, on page 2) or their size. Many of the leaders had outgrown the
small-cap universe, which would have prevented us from buying them even if their
valuations had not been extreme.
5
<PAGE> 6
PERFORMANCE UPDATE
Not surprisingly, the fund's diversified value approach held it back during the
first three months of the period. When the correction came, that strict value
discipline helped cushion the fund's drop relative to the overall small-cap
market but not compared with small-cap value benchmarks.
Despite having a portfolio of stocks with stronger fundamental values (P/Es 16
percent lower and earnings growth rates more than 50 percent higher than the
Russell 2000 Value index), the fund trailed the index. For the semiannual period
ended May 31, 2000, Kemper Small Cap Value Fund lost 4.96 percent (Class A
Shares, unadjusted for sales charge). This compares with the benchmark, the
Russell 2000 Value index, which gained 6.0 percent, and its peers in the Lipper
Small Cap Value Fund universe, which was up 7.95 percent.
We are indeed disappointed with fund performance. Our goal is, of course, to
outperform both the fund's benchmark and its peers. Our disappointment is
somewhat tempered, however, by the short-term nature of these performance
figures. First, our value-oriented investment style, which focuses on finding
fundamentally strong companies at low prices, was at total variance with the
market during the period. Second, because the fund was still completing its
transition to its new sector-relative value investment strategy, costs
associated with changes in the portfolio exacerbated the challenges presented by
the market. (In August 1999, the fund's management changed.) Going forward, we
are confident that we will be able to compete head-to-head with some of our
strongest and most capable peers. Finally, it's important to note that because
the index is reconfigured only once a year, many of the market leaders that had
far outgrown their small cap status continued to be included. To some extent,
their strong gains skewed the index average.
Q WILL YOU EXPLAIN THE DIFFERENCES BETWEEN AN ABSOLUTE-VALUE AND
RELATIVE-VALUE INVESTMENT APPROACH AND YOUR GOALS IN RESTRUCTURING THE
PORTFOLIO?
A Generally, absolute-value managers choose stocks based on one or more
fundamental criteria, such as price-to-earnings (P/E) ratios (see Terms To Know,
on page 2), applied to a broad universe of stocks. They screen stocks to find
those that fall within, for example, a certain P/E range and choose those with
the best expected returns. The problem is that low- P/E stocks are naturally
more prevalent in some sectors, such as financials and consumer cyclicals. On
the contrary, fewer are found in technology, health care and other growth
industries. Therefore, by focusing on a valuation measure applied to a broad
universe, managers may inadvertently end up making sector bets, which can
increase risk to the portfolio.
Relative value managers, on the other hand, seek to determine the value of
individual stocks vis-a-vis their peers in a given industry or sector. In
managing Kemper Small Cap Value Fund, we strive to keep the economic sector
weighting for the fund closely in line with the small cap market. Then we
concentrate our efforts where we believe we can add the greatest value: in
choosing the stocks within each sector that are most likely to fare well. This
is what drives performance.
We use a process of thorough quantitative analysis designed to uncover
companies that are undervalued, often because they are out of favor with
investors, for one reason or another. We systematically collect information on a
universe of approximately 2,000 companies and compare the attractiveness of
stocks within each economic sector on a relative basis to identify those with
the highest expected returns.
We look for stocks with discounted valuations, based on price-to-earnings,
price-to-book and price-to-cash-flow ratios. Typically the fund's holdings are
20 to 30 percent less pricey than the index averages. In addition, we look for
stable or improving company fundamentals, such as positive sales and earnings
trends and positive changes in earnings estimates -- characteristics that
suggest the market at large is more likely to recognize that these companies are
undervalued.
Q MANY OF THE FUND'S 10 LARGEST HOLDINGS ARE DIFFERENT FROM THE LIST AT THE
END OF THE LAST SEMIANNUAL PERIOD. WILL YOU ADDRESS THESE CHANGES?
A In an effort to build a portfolio designed to combat the challenges of
small-cap investing -- namely, high individual security risk and high trading
costs associated with less liquid stocks (see Terms To Know, on page 2) -- we've
increased the number of holdings to more than 200 names and capped the maximum
position size. As part of this restructuring, there have been changes in the top
holdings, but the differences among individual stock weightings are now
relatively small, particularly among the top holdings. This provides greater
diversification, which can significantly reduce risk, and it
6
<PAGE> 7
PERFORMANCE UPDATE
increases flexibility at the trading desk. While we believe that this broad
diversification will be beneficial over the long run, it can have an adverse
effect in periods when market leadership is concentrated among a few stocks,
such as the recent narrow market (see Terms to Know, on page 2).
Q IN WHICH ECONOMIC SECTORS DID YOU FIND THE GREATEST OPPORTUNITIES?
A The best-performing economic sectors were utilities and energy. The
strength in utility stocks came in the second half of the period as investors
looked for "safety." The continuing rise of oil prices prompted a rebound in oil
and gas stocks, making energy the top-performing market sector for the period.
Our stock selections outperformed the averages in utilities but trailed in
energy.
Likewise, our selections did not keep pace in the strong-performing health
care and technology sectors. In each case, a focus on companies with attractive
fundamentals proved to be counterproductive. The market instead rewarded stocks
with higher P/Es and lower earnings growth rates, but over the long run we do
not believe this is sustainable.
We recognize that our unwillingness to invest in some of the hot, so-called
new-economy stocks -- especially Internet-related companies with significant
losses and only dim hopes of ever reaching profitability -- has been detrimental
to short-term performance. But we believe that over time, these companies will
ultimately be confronted by the imperative to earn a profit, and failing that,
their stock prices will collapse. In fact, the Nasdaq's collapse in the last
three months of the period suggests to us that investors are beginning to
recognize that risk.
Q WHAT IS YOUR OUTLOOK FOR SMALL-CAP VALUE INVESTING?
A We are optimistic about a rebound in small-cap value stocks. At the turn
of the new millennium, the proportion of small-cap stocks with single-digit P/Es
is greater than at any time in the past 10 years. In addition, while the
phenomenal performance of growth stocks has made them THE place to be in the
recent past, history shows that performance leadership rarely remains
entrenched. The market may be driven to extremes by emotion in the short run,
but logic and rationalism tend to prevail over time. There are excellent
value-investment opportunities to be uncovered.
Q DO YOU HAVE ANY CLOSING COMMENTS?
A We remind our shareholders of the importance of evaluating performance
over the long term. Markets tend to change quickly and often radically, as can
relative fund performance. It's our belief that our commitment to a rigorous
investment discipline will be rewarded over time. It's ironic, really, to think
that the potential return advantage to long-term investors would be diminished
if everyone shared this view. Instead, short-term market dislocations can create
greater opportunities for investors who have the patience to stick with a
disciplined approach.
7
<PAGE> 8
INDUSTRY SECTORS
A SIX-MONTH COMPARISON
DATA SHOWS THE PERCENTAGE OF THE COMMON STOCKS IN THE PORTFOLIO THAT EACH SECTOR
REPRESENTED ON MAY 31, 2000, AND ON NOVEMBER 30, 1999.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL CAP VALUE FUND KEMPER SMALL CAP VALUE FUND
ON 5/31/00 ON 11/30/99
--------------------------- ---------------------------
<S> <C> <C>
Technology 18.4 16.8
Consumer non-durables 18.1 18.1
Capital goods 16 14.9
Finance 13.2 16.6
Health care 11.5 8.1
Basic materials 6.3 8.8
Transportation 4.8 4.8
Energy 4 3.5
Utilities 3.9 3.9
Communication services 3.8 4.5
</TABLE>
A COMPARISON WITH THE RUSSELL 2000 VALUE INDEX(+)
DATA SHOWS THE PERCENTAGE OF THE COMMON STOCKS IN THE PORTFOLIO THAT EACH SECTOR
OF KEMPER SMALL CAP VALUE FUND REPRESENTED ON MAY 31, 2000, COMPARED WITH THE
INDUSTRY SECTORS THAT MAKE UP THE FUND'S BENCHMARK, THE RUSSELL 2000 VALUE
INDEX.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL CAP VALUE FUND RUSSELL 2000 VALUE INDEX ON
ON 5/31/00 5/31/00
--------------------------- ---------------------------
<S> <C> <C>
Technology 18.4 13
Consumer non-durables 18.1 17.4
Capital goods 16 10.7
Finance 13.2 28.1
Health care 11.5 4.6
Basic materials 6.3 7.5
Transportation 4.8 3.1
Energy 4 6.7
Utilities 3.9 8.5
Communication services 3.8 0.4
</TABLE>
+ THE RUSSELL 2000 VALUE INDEX IS AN UNMANAGED, CAPITALIZATION-WEIGHTED,
PRICE-ONLY INDEX COMPRISING 2,000 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 18.6 percent of the fund's total investment portfolio on May 31,
2000.
<TABLE>
<CAPTION>
HOLDINGS PERCENT
<S> <C> <C> <C>
----------------------------------------------------------------------------------------
1. FORTRESS INVESTMENT The company invests in 2.3%
undervalued real estate-related
assets, both domestic and
international.
----------------------------------------------------------------------------------------
2. AMERICA WEST HOLDINGS The company is a full-service 2.3%
passenger airline serving more
than 100 destinations in the
continental U.S., Canada and
Mexico. It also operates a
tour-packaging division, America
West Vacations, and a travel
tour-packaging subsidiary,
America West's Leisure Company.
----------------------------------------------------------------------------------------
3. AMERICAN AXLE & AAM is a manufacturer of axles, 2.0%
MANUFACTURING HOLDINGS, INC. propeller shafts and chassis
components for light trucks, SUVs
and passenger cars for General
Motors and other automakers.
----------------------------------------------------------------------------------------
4. PRENTISS The company is a 1.9%
PROPERTIES self-administered and -managed
real estate investment trust that
invests primarily in office and
industrial buildings.
----------------------------------------------------------------------------------------
5. CONMED The company develops, 1.9%
manufactures and markets
disposable electrosurgical
instruments, accessories and
generators and disposable medical
devices for monitoring.
----------------------------------------------------------------------------------------
6. SPRING INDUSTRIES, INC. The company makes bed and bath 1.9%
products under the Springmaid and
Wamsutta brands and infant
bedding and layette products
under the Dundee brand. Spring
also makes fabrics for the
home-sewing market and decorative
window blinds and hardware.
----------------------------------------------------------------------------------------
7. EL PASO ELECTRIC The company generates and 1.8%
distributes electricity for
nearly 300,000 residential,
commercial, industrial and
wholesale customers in West
Texas.
----------------------------------------------------------------------------------------
8. PERFORMANCE The company distributes products 1.5%
FOOD GROUP to more than 20,000 food service
COMPANY customers throughout much of the
U.S. as well as restaurant
equipment, cleaning and paper
supplies. It also offers
inventory management and
efficiency evaluation services.
----------------------------------------------------------------------------------------
9. TRINITY INDUSTRIES, INC. The company primarily is a 1.5%
manufacturer of railcars, metal
containers and highway
guardrails. It also builds barges
for transporting commodities,
such as grain and coal.
----------------------------------------------------------------------------------------
10. AMCOL INTERNATIONAL The company produces a wide range 1.5%
of specialty minerals and
chemicals used for industrial,
environmental and
consumer-related applications.
----------------------------------------------------------------------------------------
</TABLE>
*The fund's holdings are subject to change and should not be considered a
recommendation to buy individual securities.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER SMALL-CAP VALUE FUND
Portfolio of Investments at May 31, 2000 (unaudited)
<TABLE>
<CAPTION>
REPURCHASE AGREEMENTS--2.6% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
State Street Bank and Trust Company,
6.370%, to be repurchased at
$10,652,884 on 06/01/2000
(Cost $10,651,000)** $10,651,000 $ 10,651,000
--------------------------------------------------------------------------
<CAPTION>
COMMON STOCKS--97.4% NUMBER OF SHARES
<S> <C> <C> <C> <C>
CONSUMER DISCRETIONARY--5.2%
APPAREL & SHOES--1.2%
Genesco Inc.* 146,500 2,261,594
K-Swiss Inc."A" 33,900 444,938
Tarrant Apparel Group* 35,000 280,000
The Buckle, Inc.* 14,500 196,656
Wolverine World Wide, Inc.* 152,600 1,716,750
--------------------------------------------------------------------------
4,899,938
DEPARTMENT & CHAIN STORES--0.9%
Deb Shops, Inc.* 102,400 1,267,200
Dress Barn Inc.* 51,500 1,100,812
Goody's Family Clothing, Inc.* 92,800 504,600
Pacific Sunwear of California, Inc.* 15,250 244,953
Shopko Stores, Inc.* 38,300 703,763
--------------------------------------------------------------------------
3,821,328
HOME FURNISHINGS--0.3%
American Woodmark Corp. 54,100 1,021,137
Haverty Furniture Co., Inc. 7,200 81,000
--------------------------------------------------------------------------
1,102,137
HOTELS & CASINOS--0.7%
Anchor Gaming* 39,100 1,747,281
Pinnacle Entertainment, Inc. 59,100 1,126,594
--------------------------------------------------------------------------
2,873,875
RECREATIONAL PRODUCTS--0.1%
Fairfield Communities, Inc. 46,300 390,656
--------------------------------------------------------------------------
RESTAURANTS--1.7%
CEC Entertainment, Inc. 92,700 2,132,100
NPC International, Inc. 188,200 1,752,613
O'Charley's Inc.* 93,100 1,297,581
Ruby Tuesday, Inc. 174,600 1,724,175
Ryan's Family Steak Houses, Inc.* 28,300 254,700
--------------------------------------------------------------------------
7,161,169
SPECIALTY RETAIL--0.3%
Cellstar Corp.* 77,500 217,968
Trans World Entertainment Corp.* 107,400 1,074,000
--------------------------------------------------------------------------
1,291,968
-----------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--7.0%
ALCOHOL & TOBACCO--0.2%
Schweitzer-Mauduit International,
Inc. 66,600 915,750
--------------------------------------------------------------------------
CONSUMER ELECTRONIC--0.8%
Applica Inc.* 73,900 1,090,025
Salton, Inc.* 66,800 2,116,725
--------------------------------------------------------------------------
3,206,750
CONSUMER SPECIALTIES--0.1%
Russ Berrie & Co., Inc. 10,300 195,056
Sola International, Inc.* 83,900 419,500
--------------------------------------------------------------------------
614,556
</TABLE>
10 The accompanying notes are an integral part of the financial statements.
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE
<S> <C> <C> <C> <C> <C>
FOOD & BEVERAGE--3.4%
Earthgrains Co. 51,900 $ 856,350
Fresh Del Monte Produce Inc.* 441,700 3,202,325
Imperial Sugar Co. 99,200 136,400
J & J Snack Foods Corp.* 82,400 1,225,700
Jack in the Box Inc.* 52,300 1,297,694
Michael Foods, Inc. 34,200 786,600
Performance Food Group Co.* 201,800 6,381,925
---------------------------------------------------------------------------
13,886,994
-----------------------------------------------------------------------------------------------------------------------
PACKAGE GOODS/ COSMETICS--0.2%
Chattem, Inc.* 59,600 $ 707,750
--------------------------------------------------------------------------
TEXTILES--2.3%
Nautica Enterprises, Inc.* 131,700 1,629,788
Polymer Group, Inc. 57,400 419,738
Springs Industries, Inc. "A" 161,100 7,652,250
--------------------------------------------------------------------------
9,701,776
HEALTH--11.2%
BIOTECHNOLOGY--0.4%
Bio-Rad Laboratories, Inc. "A"* 47,500 1,101,406
Catalytica, Inc.* 41,400 393,300
--------------------------------------------------------------------------
1,494,706
HEALTH INDUSTRY SERVICES--2.8%
AmeriPath, Inc.* 239,500 2,050,718
Covance, Inc.* 32,000 228,000
Hanger Orthopedic Group, Inc.* 149,000 717,063
Hooper Holmes, Inc. 84,200 863,050
Magellan Health Services, Inc.* 200,700 426,488
PAREXEL International Corp.* 152,700 1,374,300
Quest Diagnostics Inc.* 12,300 822,563
Res-Care, Inc.* 33,400 258,850
Superior Consultant Holdings Corp.* 64,400 507,150
Syncor International Corp.* 75,100 3,698,675
US Oncology, Inc.* 147,500 700,625
--------------------------------------------------------------------------
11,647,482
HOSPITAL MANAGEMENT--2.2%
Coventry Health Care, Inc.* 183,300 2,176,687
Province Healthcare Co.* 61,700 1,735,313
Quorom Health Group, Inc.* 526,200 5,081,119
--------------------------------------------------------------------------
8,993,119
MEDICAL SUPPLY & SPECIALTY--4.7%
Acuson Corporation* 118,900 1,456,525
Bacou USA, Inc.* 132,800 2,622,800
Conmed Corp.* 318,400 7,681,400
Cooper Companies, Inc.* 75,600 2,608,200
ResMed, Inc.* 1,600 38,400
Theragenics Corp.* 115,300 1,030,494
Twinlab Corp.* 207,500 1,478,438
Ventana Medical Systems, Inc.* 6,900 259,181
Vital Signs Inc. 84,200 1,778,725
Wesley Jessen VisionCare, Inc.* 16,600 613,163
--------------------------------------------------------------------------
19,567,326
PHARMACEUTICALS--1.1%
Advance Paradigm, Inc.* 86,300 1,337,650
Alpharma Inc. 25,300 1,252,350
Bio-Technology General Corp.* 8,800 92,400
Rexall Sundown, Inc.* 78,200 1,862,138
Sicor Inc* 7,700 65,931
--------------------------------------------------------------------------
4,610,469
-----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--2.5%
TELEPHONE/ COMMUNICATIONS--2.4%
AVT Corp.* 120,400 1,091,125
CT Communications, Inc. 43,700 1,398,400
CapRock Communications Corp.* 23,500 470,000
</TABLE>
12 The accompanying notes are an integral part of the financial statements.
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE
<S> <C> <C> <C> <C> <C>
Commonwealth Telephone Enterprises,
Inc.* 18,300 $ 842,943
General Communication, Inc. "A"* 117,900 574,763
IDT Corp.* 5,100 166,069
North Pittsburgh Systems, Inc. 94,300 1,178,750
Pacific Gateway Exchange, Inc.* 116,800 372,300
Plantronics, Inc.* 1,200 102,450
US LEC Corp.CL A* 33,900 644,100
Westell Technologies, Inc.* 22,100 363,269
Xircom, Inc.* 70,800 2,920,500
--------------------------------------------------------------------------
10,124,669
MISCELLANEOUS--0.1%
Tut Systems, Inc.* 6,400 331,200
--------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
FINANCIAL--12.9%
BANKS--3.6%
Dime Community Bancshares 47,600 776,475
Downey Financial Corp. 20,000 595,000
First Federal Financial Corp.* 88,800 1,193,250
First Republic Bank* 40,800 688,500
First Washington Bancorp, Inc. 78,500 1,133,343
GBC Bancorp 64,500 1,842,281
Imperial Bancorp* 320,464 5,688,236
MAF Bancorp, Inc. 31,500 620,156
PFF Bancorp, Inc. 103,000 1,416,250
St. Francis Capital Corp. 62,200 859,138
--------------------------------------------------------------------------
14,812,629
INSURANCE--3.7%
AmerUS Life Holdings, Inc. 32,100 639,993
CNA Surety Corp. 100,100 1,251,250
Delphi Financial Group, Inc. "A"* 25,704 861,084
Farm Family Holdings, Inc.* 70,200 1,895,400
First American Financial Co. 70,000 1,163,750
LandAmerica Financial Group, Inc. 115,000 2,120,313
PMA Capital Corp. 77,900 1,470,363
Philadelphia Consolidated Holding
Corp.* 79,800 1,356,600
RLI Corp. 48,100 1,749,638
SCPIE Holdings Inc. 19,000 461,938
Selective Insurance Group, Inc. 55,700 1,026,969
Stewart Information Services Corp. 57,200 722,150
The Midland Co. 3,500 87,500
White Mountains Insurance Group, Inc. 5,100 720,056
--------------------------------------------------------------------------
15,527,004
CONSUMER FINANCE--0.1%
New Century Financial Corp.* 65,100 618,450
--------------------------------------------------------------------------
OTHER FINANCIAL COMPANIES--1.0%
Advanta Corp. "A" 71,900 1,208,818
Phoenix Investment Partners, Ltd. 194,700 1,630,613
Walter Industries, Inc. 101,400 1,096,388
--------------------------------------------------------------------------
3,935,819
REAL ESTATE--4.5%
Castle & Cooke, Inc.* 55,600 1,035,550
Fortress Investment Corp. 750,000 9,656,250
Prentiss Properties Trust (REIT) 322,200 7,732,800
--------------------------------------------------------------------------
18,424,600
-----------------------------------------------------------------------------------------------------------------------
MEDIA--1.1%
PRINT MEDIA
Valassis Communications, Inc.* 139,900 4,616,700
--------------------------------------------------------------------------
</TABLE>
12 The accompanying notes are an integral part of the financial statements.
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE
<S> <C> <C> <C> <C> <C>
SERVICE INDUSTRIES--5.4%
EDP SERVICES--1.1%
Analysts International Corp. 36,900 $ 299,812
Keane, Inc.* 96,500 2,587,406
QRS Corp.* 19,900 547,250
Systems & Computer Technology Corp.* 44,600 841,825
--------------------------------------------------------------------------
4,276,293
ENVIRONMENTAL SERVICES--0.4%
URS Corp.* 116,700 1,531,688
--------------------------------------------------------------------------
INVESTMENT--0.4%
Raymond James Financial, Inc. 34,900 684,913
Southwest Securities Group, Inc. 38,100 1,104,900
--------------------------------------------------------------------------
1,789,813
MISCELLANEOUS COMMERCIAL--3.0%
AnswerThink Consulting Group, Inc. * 14,400 254,700
Bell & Howell Holdings Co.* 113,200 2,426,725
Century Business Services, Inc.* 140,900 369,862
Computer Task Group Inc. 184,100 1,323,218
Encompass Services Corp.* 212,194 1,206,853
First Consulting Group, Inc.* 9,200 71,300
Harbinger Corp.* 29,700 443,644
IT Group, Inc.* 94,200 547,538
Kelly Services, Inc. "A" 60,300 1,386,900
Lason, Inc.* 59,700 156,713
Morrison Knudsen Corp.* 46,400 359,600
Personnel Group of America, Inc.* 128,000 512,000
Syntel, Inc.* 90,400 1,096,100
Technology Solutions Co. 41,500 203,609
Volt Information Sciences, Inc.* 51,600 1,489,950
eLoyalty Corp.* 41,500 622,500
--------------------------------------------------------------------------
12,471,212
MISCELLANEOUS CONSUMER--0.3%
CDI Corp.* 57,500 1,239,843
--------------------------------------------------------------------------
PRINTING/PUBLISHING--0.1%
Mail-Well, Inc.* 51,800 485,625
--------------------------------------------------------------------------
MISCELLANEOUS--0.1%
Interlogix Inc* 21,412 473,741
--------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
DURABLES--4.8%
AEROSPACE--1.4%
Aeroflex, Inc.* 103,500 3,738,937
Alliant Techsystems, Inc.* 18,900 1,304,100
Primex Technologies, Inc. 39,600 762,300
--------------------------------------------------------------------------
5,805,337
AUTOMOBILES--1.5%
Borg-Warner Automotive Inc. 142,700 5,672,325
Oshkosh Truck Corp. 15,200 463,600
--------------------------------------------------------------------------
6,135,925
CONSTRUCTION/AGRICULTURAL--0.1%
Terex Corp.* 24,000 382,500
--------------------------------------------------------------------------
LEASING COMPANIES--1.5%
Aaron Rents, Inc. 23,800 309,400
Dollar Thrifty Automotive Group, Inc. 316,300 5,693,400
--------------------------------------------------------------------------
6,002,800
TELECOMMUNICATIONS EQUIPMENT--0.3%
Brooktrout Technology Inc.* 20,000 451,250
Inter-Tel, Inc. 64,500 923,156
--------------------------------------------------------------------------
1,374,406
-----------------------------------------------------------------------------------------------------------------------
MANUFACTURING--10.8%
CONTAINERS & PAPER--0.1%
P.H. Glatfelter Co. 37,200 439,425
--------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE
<S> <C> <C> <C> <C> <C>
DIVERSIFIED MANUFACTURING--1.9%
Briggs & Stratton Corp. 47,000 $ 1,880,000
Myers Industries, Inc. 431,079 5,873,451
--------------------------------------------------------------------------
7,753,451
ELECTRICAL PRODUCTS--0.4%
Methode Electronics "A" 46,500 1,668,188
--------------------------------------------------------------------------
INDUSTRIAL SPECIALTY--2.6%
Buckeye Technologies, Inc.* 113,500 2,163,593
Fleetwood Enterprises, Inc. 290,800 4,143,900
Gardner Denver Inc.* 28,300 495,250
General Cable Corp. 178,300 1,482,118
UNOVA, Inc.* 177,100 2,446,194
--------------------------------------------------------------------------
10,731,055
MACHINERY/COMPONENTS--5.6%
American Axle & Manufacturing
Holdings, Inc.* 503,400 8,274,637
CIRCOR International, Inc. 146,900 1,551,631
Intermet Corp. 421,200 2,895,750
RadiSys Corp.* 49,450 1,928,550
Shaw Group, Inc.* 90,400 3,943,700
Varco International Inc* 31,563 686,495
Watts Industries, Inc. "A" 333,800 3,796,975
Woodward Governor Co. 1,700 41,438
--------------------------------------------------------------------------
23,119,176
WHOLESALE DISTRIBUTORS--0.0%
WESCO International, Inc.* 6,500 62,969
--------------------------------------------------------------------------
MISCELLANEOUS--0.2%
MKS Instruments Inc* 6,800 267,750
Sipex Corp.* 35,000 766,172
--------------------------------------------------------------------------
1,033,922
-----------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--18.0%
COMPUTER SOFTWARE--7.0%
3Dfx Interactive, Inc.* 102,900 758,888
Activision, Inc.* 106,400 658,350
Advanced Digital Information Corp.* 78,800 1,004,700
Advent Software, Inc.* 31,400 1,181,425
Axent Technologies, Inc.* 13,000 240,906
Banyan Systems Inc. 50,200 414,150
Cybex Computer Products Corp.* 18,450 618,075
Epicor Software Corp.* 265,000 944,062
Factset Research Systems Inc. 89,200 2,296,900
Great Plains Software, Inc.* 27,600 1,145,400
Hyperion Solutions Corp.* 36,000 1,129,500
IMRglobal Corp.* 101,000 1,666,500
ISS Group, Inc.* 7,000 518,000
InfoCure Corp.* 67,200 294,000
JDA Software Group, Inc.* 78,800 1,211,550
MAPICS, Inc.* 75,000 384,375
MICROS Systems, Inc.* 45,300 1,432,613
MTI Technology Corp.* 121,600 858,800
MTS Systems Corp. 140,000 1,019,375
Mercator Software Inc.* 15,700 467,075
Metro Information Services Inc.* 111,400 1,110,519
Progress Software Corp.* 29,000 438,625
Remedy Corp.* 70,700 2,934,050
Santa Cruz Operations Inc.* 232,400 973,175
Structural Dynamics Research Corp.* 153,500 1,746,063
THQ, Inc.* 163,800 1,576,575
Unigraphics Solutions Inc.* 21,800 506,850
Verity, Inc. * 37,600 1,269,000
--------------------------------------------------------------------------
28,799,501
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE
<S> <C> <C> <C> <C> <C>
DIVERSE ELECTRONIC PRODUCTS--0.7%
Cable Design Technologies Corp.* 57,200 $ 1,583,725
DSP Group, Inc.* 26,600 1,190,350
--------------------------------------------------------------------------
2,774,075
EDP PERIPHERALS--0.7%
Gerber Scientific, Inc. 80,500 966,000
In Focus Systems, Inc.* 60,000 1,676,250
NeoMagic Corp.* 111,600 345,263
--------------------------------------------------------------------------
2,987,513
ELECTRONIC COMPONENTS--1.5%
Apex Inc.* 15,500 563,812
Brightpoint, Inc.* 41,100 480,356
Kent Electronics Corp.* 23,000 638,250
Maxwell Technologies, Inc.* 44,000 610,500
Pioneer-Standard Electronics, Inc. 94,500 1,134,000
Technitrol, Inc. 37,600 2,594,400
--------------------------------------------------------------------------
6,021,318
ELECTRONIC DATA PROCESSING--0.4%
Information Resources, Inc.* 98,300 491,500
SAGA Systems, Inc.* 19,400 284,938
Sunquest Information Systems, Inc.* 142,200 1,035,394
--------------------------------------------------------------------------
1,811,832
MILITARY ELECTRONICS--0.5%
Titan Corp.* 61,300 2,199,138
--------------------------------------------------------------------------
OFFICE/PLANT AUTOMATION--1.6%
CACI International, Inc.* 151,500 2,992,125
FileNet Corp.* 20,000 420,000
Kronos, Inc.* 17,000 505,750
Mercury Computer Systems, Inc.* 55,600 1,744,450
Pinnacle Systems, Inc.* 4,600 110,400
Radiant Systems Inc.* 41,500 648,438
--------------------------------------------------------------------------
6,421,163
PRECISION INSTRUMENTS--0.7%
Analogic Corp. 32,500 1,174,062
Molecular Devices Corp.* 27,300 1,457,138
Moog Inc. "A"* 12,400 265,050
Silicon Valley Group Inc.* 4,600 122,475
--------------------------------------------------------------------------
3,018,725
SEMICONDUCTORS--4.5%
Actel Corp.* 7,000 203,875
Alliance Semiconductor Corp.* 105,000 2,605,312
Alpha Industries, Inc. * 74,400 3,427,050
Burr-Brown Corp.* 85,625 4,875,273
Cree Research, Inc. * 29,300 3,559,492
Exar Corp.* 52,050 3,578,437
General Semiconductor, Inc.* 17,000 267,750
--------------------------------------------------------------------------
18,517,189
MISCELLANEOUS--0.4%
Phoenix Technologies ltd* 32,600 586,800
SEREMA Software, Inc.* 30,000 858,750
iGATE Capital Corp.* 4,200 65,888
--------------------------------------------------------------------------
1,511,438
-----------------------------------------------------------------------------------------------------------------------
ENERGY--3.9%
OIL & GAS PRODUCTION--3.0%
Atwood Oceanics, Inc.* 29,400 1,607,812
Chieftain International, Inc.* 200,000 4,400,000
Cross Timbers Oil Company 75,700 1,537,656
Tesoro Petroleum Corp.* 466,600 4,782,650
--------------------------------------------------------------------------
12,328,118
</TABLE>
The accompanying notes are an integral part of the financial statements. 15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE
<S> <C> <C> <C> <C> <C>
OIL COMPANIES--0.5%
Giant Industries, Inc.* 214,600 $ 1,891,163
--------------------------------------------------------------------------
OILFIELD SERVICES--0.4%
Oceaneering International, Inc.* 81,000 1,579,500
Seitel, Inc.* 33,900 288,150
--------------------------------------------------------------------------
1,867,650
-----------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--2.0%
STEEL & METALS
AMCOL International Corp. 369,200 6,137,950
IMCO Recycling Inc. 50,000 334,375
Quanex Corp. 125,200 1,831,050
--------------------------------------------------------------------------
8,303,375
-----------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--4.1%
BUILDING MATERIALS--1.9%
Elcor Corp. 41,825 797,289
Florida Rock Industries, Inc. 32,400 1,281,825
Southdown, Inc. 88,200 5,413,275
Universal Forest Products, Inc. 36,300 476,438
--------------------------------------------------------------------------
7,968,827
BUILDING PRODUCTS--0.6%
Emcor Group, Inc.* 59,500 1,312,718
Genlyte Group, Inc.* 30,200 611,550
Nortek, Inc.* 21,100 452,331
--------------------------------------------------------------------------
2,376,599
HOMEBUILDING--1.6%
Del Webb Corp.* 277,500 4,231,875
MDC Holdings, Inc. 22,200 428,738
NVR Inc.* 23,200 1,276,000
Standard Pacific Corp. 39,300 447,038
--------------------------------------------------------------------------
6,383,651
-----------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--4.7%
AIR FREIGHT--0.3%
Airborne Freight Corp. 57,700 1,164,818
--------------------------------------------------------------------------
AIRLINES--2.3%
America West Holdings Corp. "B"* 528,200 9,408,562
--------------------------------------------------------------------------
RAILROADS--1.5%
Trinity Industries, Inc. 280,500 6,188,531
--------------------------------------------------------------------------
TRUCKING--0.6%
M.S. Carriers Inc.* 40,600 781,550
Roadway Express, Inc. 64,600 1,380,825
Yellow Corp.* 24,500 401,188
--------------------------------------------------------------------------
2,563,563
-----------------------------------------------------------------------------------------------------------------------
UTILITIES--3.8%
ELECTRIC UTILITIES--2.6%
Anixter International Inc.* 61,500 1,737,375
El Paso Electric Co.* 616,100 7,316,187
Public Service Co. of New Mexico 102,100 1,703,794
--------------------------------------------------------------------------
10,757,356
NATURAL GAS DISTRIBUTION--1.2%
Energen Corp. 88,200 1,951,425
NUI Corp. 82,400 2,307,200
ONEOK, Inc. 10,000 291,250
South Jersey Industries, Inc. 20,900 544,706
--------------------------------------------------------------------------
5,094,581
--------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $422,444,255) 402,414,875
--------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost $433,095,255) (a) $413,065,875
--------------------------------------------------------------------------
</TABLE>
16 The accompanying notes are an integral part of the financial statements.
<PAGE> 17
PORTFOLIO OF INVESTMENTS
NOTES TO PORTFOLIO OF INVESTMENTS
* Non-income producing security.
** Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
(a) Cost for federal income tax purposes was $433,095,255. At May 31, 2000 net
unrealized depreciation for all securities based on tax cost was
$20,029,380. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $63,551,468, and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$83,580,848.
The accompanying notes are an integral part of the financial statements. 17
<PAGE> 18
FINANCIAL STATEMENTS
STATEMENT OF ASSETS & LIABILITIES
As of May 31, 2000
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $433,095,255) $413,065,875
----------------------------------------------------------------------------
Cash 1,578,008
----------------------------------------------------------------------------
Receivable for investments sold 3,241,838
----------------------------------------------------------------------------
Dividends receivable 195,290
----------------------------------------------------------------------------
Interest receivable 1,885
----------------------------------------------------------------------------
Receivable for Fund shares sold 318,769
----------------------------------------------------------------------------
TOTAL ASSETS 418,401,665
----------------------------------------------------------------------------
LIABILITIES
Payable for Fund shares redeemed 6,143,133
----------------------------------------------------------------------------
Accrued management fee 267,477
----------------------------------------------------------------------------
Other accrued expenses and payables 668,979
----------------------------------------------------------------------------
Total liabilities 7,079,589
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $411,322,076
----------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income (loss) $ (2,480,893)
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (20,029,380)
----------------------------------------------------------------------------
Accumulated net realized gain (loss) (78,249,823)
----------------------------------------------------------------------------
Paid-in capital 512,082,172
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $411,322,076
----------------------------------------------------------------------------
NET ASSET VALUE AND OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($195,857,980 / 11,609,422 shares of capital stock
outstanding, $.01 par value, 320,000,000 shares
authorized) $16.87
----------------------------------------------------------------------------
Maximum offering price per share (100/94.25 of $16.87) $17.90
----------------------------------------------------------------------------
CLASS B SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($174,711,360
/ 10,760,994 shares of capital stock outstanding, $.01 par
value, 320,000,000 shares authorized) $16.24
----------------------------------------------------------------------------
CLASS C SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($36,943,127 /
2,264,061 shares of capital stock outstanding, $.01 par
value, 60,000,000 shares authorized) $16.32
----------------------------------------------------------------------------
CLASS I SHARES
Net asset value, offering and redemption price per share
($3,809,609 / 219,786 shares of capital stock outstanding,
$.01 par value, 60,000,000 shares authorized) $17.33
----------------------------------------------------------------------------
</TABLE>
18 The accompanying notes are an integral part of the financial statements.
<PAGE> 19
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended May 31, 2000
(UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME
Income:
Dividends $ 2,593,516
----------------------------------------------------------------------------
Interest 164,377
----------------------------------------------------------------------------
Total income 2,757,893
----------------------------------------------------------------------------
Expenses:
Management fee 1,897,839
----------------------------------------------------------------------------
Services to shareholders 1,405,886
----------------------------------------------------------------------------
Custodian fees 6,111
----------------------------------------------------------------------------
Distribution services fees 994,743
----------------------------------------------------------------------------
Administrative services fees 639,617
----------------------------------------------------------------------------
Auditing 23,790
----------------------------------------------------------------------------
Legal 7,503
----------------------------------------------------------------------------
Directors' fees and expenses 25,986
----------------------------------------------------------------------------
Reports to shareholders 164,888
----------------------------------------------------------------------------
Registration fees 62,246
----------------------------------------------------------------------------
Other 31,180
----------------------------------------------------------------------------
Total expenses, before expense reductions 5,259,789
----------------------------------------------------------------------------
Expense reductions (21,003)
----------------------------------------------------------------------------
Total expenses, after expense reductions 5,238,786
----------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (2,480,893)
----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from investments 12,148,856
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on investments (30,238,631)
----------------------------------------------------------------------------
Net gain (loss) on investment transactions (18,089,775)
----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $(20,570,668)
----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 19
<PAGE> 20
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MAY 31, YEAR ENDED
2000 NOVEMBER 30,
(UNAUDITED) 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ (2,480,893) (1,508,861)
-------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions 12,148,856 (72,560,720)
-------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period (30,238,631) 71,232,250
-------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (20,570,668) (2,837,331)
-------------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 292,803,534 665,900,388
-------------------------------------------------------------------------------------------------------
Cost of shares redeemed (482,715,967) (1,021,668,880)
-------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions (189,912,433) (355,768,492)
-------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets (210,483,101) (358,605,823)
-------------------------------------------------------------------------------------------------------
NET ASSETS AT BEGINNING OF PERIOD 621,805,177 980,411,000
-------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment loss of $2,480,893 for the period ended May 31,
2000) $ 411,322,076 621,805,177
-------------------------------------------------------------------------------------------------------
</TABLE>
20 The accompanying notes are an integral part of the financial statements.
<PAGE> 21
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FOR THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
CLASS A
SIX MONTHS YEAR ENDED ELEVEN MONTHS YEAR ENDED
ENDED NOVEMBER 30, ENDED DECEMBER 31,
MAY 31, 2000 ------------------ NOVEMBER 30, -------------------------
(UNAUDITED) 1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $17.75 17.80 21.83 18.28 14.50 10.85 11.23
---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.05)(a) .04(a) .06 .05 .14(a) (.02) --
---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment transactions (.83) (.09) (3.39) 3.50 4.14 4.64 .02
---------------------------------------------------------------------------------------------------------------------
Total from investment operations (.88) (.05) (3.33) 3.55 4.28 4.62 .02
---------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- -- -- (.07) -- --
---------------------------------------------------------------------------------------------------------------------
Net realized gains on investment
transactions -- -- (.70) -- (.43) (.97) (.40)
---------------------------------------------------------------------------------------------------------------------
Total distributions -- -- (.70) -- (.50) (.97) (.40)
---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $16.87 17.75 17.80 21.83 18.28 14.50 10.85
---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (C) (4.96)** (.28) (15.69) 19.42** 29.60(B) 43.29(B) .15(B)
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in
thousands) 195,858 296,864 489,734 736,412 144,812 20,684 6,931
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) 1.64* 1.52 1.42 1.32* 1.47 1.83 1.82
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) 1.63* 1.52 1.42 1.32* 1.31 1.25 1.25
---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
(%) (.56)* .21 .25 .51* .87 (.16) (.03)
---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 9* 47 50 83* 23 86 140
---------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS B
FOR THE PERIOD
SEPTEMBER 11
SIX MONTHS YEAR ENDED ELEVEN MONTHS YEAR (COMMENCEMENT
ENDED NOVEMBER 30, ENDED ENDED OF OPERATIONS)
MAY 31, 2000 ----------------- NOVEMBER 30, DECEMBER 31, TO DECEMBER 31,
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $17.15 17.33 21.46 18.14 14.48 15.75
---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.12)(a) (.11)(a) (.12) (.04) .01(a) (.02)
---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment transactions (.79) (.07) (3.31) 3.36 4.11 (.41)
---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.91) (.18) (3.43) 3.32 4.12 (.43)
---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- -- -- (.03) --
---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment
transactions -- -- (.70) -- (.43) (.84)
---------------------------------------------------------------------------------------------------------------------------
Total distributions -- -- (.70) -- (.46) (.84)
---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $16.24 17.15 17.33 21.46 18.14 14.48
---------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (C) (5.31)** (1.04) (16.45) 18.30** 28.54(B) (2.52)**(B)
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in
thousands) 174,711 261,953 390,043 412,479 99,355 8,072
---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) 2.43* 2.36 2.34 2.34* 2.49 2.39*
---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) 2.42* 2.36 2.34 2.34* 2.12 2.00*
---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
(loss) (%) (1.35)* (.63) (.67) (.51)* .06 (.99)*
---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 9* 47 50 83* 23 86*
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
FOR THE PERIOD
SEPTEMBER 11
SIX MONTHS YEAR ENDED ELEVEN MONTHS (COMMENCEMENT
ENDED NOVEMBER 30, ENDED YEAR ENDED OF OPERATIONS)
MAY 31, 2000 --------------- NOVEMBER 30, DECEMBER 31, TO DECEMBER 31,
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $17.24 17.39 21.51 18.17 14.48 15.75
---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.11)(a) (.09)(a) (.12) (.03) .01(a) (.02)
---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment transactions (.81) (.06) (3.30) 3.37 4.14 (.41)
---------------------------------------------------------------------------------------------------------------------
Total from investment operations (.92) (.15) (3.42) 3.34 4.15 (.43)
---------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- -- -- (.03) --
---------------------------------------------------------------------------------------------------------------------
Net realized gains on investment
transactions -- -- (.70) -- (.43) (.84)
---------------------------------------------------------------------------------------------------------------------
Total distributions -- -- (.70) -- (.46) (.84)
---------------------------------------------------------------------------------------------------------------------
Net assets value, end of period $16.32 17.24 17.39 21.51 18.17 14.48
---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (C) (5.34)** (.86) (16.37) 18.38** 28.77(B) (2.51)**(B)
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in
thousands) 36,943 57,420 91,473 99,526 20,054 985
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) 2.39* 2.25 2.28 2.24* 2.19 2.35*
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) 2.38* 2.25 2.28 2.24* 2.06 1.95*
---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
(%) (1.31)* (.52) (.61) (.41)* .12 (.94)*
---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 9* 47 50 83* 23 86*
---------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS I
FOR THE PERIOD
SIX MONTHS NOVEMBER 1
ENDED YEAR ENDED ELEVEN MONTHS YEAR (COMMENCEMENT
MAY 31, NOVEMBER 30, ENDED ENDED OF OPERATIONS)
2000 -------------- NOVEMBER 30, DECEMBER 31, TO DECEMBER 31,
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $18.19 18.13 22.08 18.40 14.52 14.25
----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .01(a) .15(a) .28 .13 .25(a) --
----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment transactions (.87) (.09) (3.53) 3.55 4.13 1.11
----------------------------------------------------------------------------------------------------------------------
Total from investment operations (.86) .06 (3.25) 3.68 4.38 1.11
----------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- -- -- (.07) --
----------------------------------------------------------------------------------------------------------------------
Net realized gains on investment
transactions -- -- (.70) -- (.43) (.84)
----------------------------------------------------------------------------------------------------------------------
Total distributions -- -- (.70) -- (.50) (.84)
----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $17.33 18.19 18.13 22.08 18.40 14.52
----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (4.73)** .33 (15.14) 20.00** 30.28(B) 8.03**(B)
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in
thousands) 3,810 5,568 9,161 14,727 9,001 1,865
----------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) .99* .92 .86 .89* .84 .90*
----------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) .98* .92 .86 .89* .84 .47*
----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .09* .81 .81 .94* 1.34 .28*
----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 9* 47 50 83* 23 86*
----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Not Annualized
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Total return does not reflect the effect of sales charges.
24
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES Kemper Small Cap Value Fund (the "Fund") is a
diversified series of Kemper Value Series, Inc.
(the "Corporation") which is registered under the
Investment Company Act of 1940, as amended (the
"1940 Act"), as an open management investment
company organized as a Maryland Corporation.
The Fund offers multiple classes of shares. Class A
shares are offered to investors subject to an
initial sales charge. Class B shares are offered
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are offered without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares are offered to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of the Fund have
equal rights with respect to voting subject to
class specific arrangements.
The Fund's financial statements are prepared in
accordance with generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Investments are stated at value
determined as of the close of regular trading on
the New York Stock Exchange. Securities which are
traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on
the exchange on which the security is traded most
extensively. If no sale occurred, the security is
then valued at the calculated mean between the most
recent bid and asked quotations. If there are no
such bid and asked quotations, the most recent bid
quotation is used. Securities quoted on the Nasdaq
Stock Market ("Nasdaq"), for which there have been
sales, are valued at the most recent sale price
reported. If there are no such sales, the value is
the most recent bid quotation. Securities which are
not quoted on Nasdaq but are traded in another
over-the-counter market are valued at the most
recent sale price, or if no sale occurred, at the
calculated mean between the most recent bid and
asked quotations on such market. If there are no
such bid and asked quotations, the most recent bid
quotation shall be used.
Portfolio debt securities purchased with an
original maturity greater than sixty days are
valued by pricing agents approved by the officers
of the Corporation, whose quotations reflect
broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents
are unable to provide such quotations, the most
recent bid quotation supplied by a bona fide market
maker shall
25
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
be used. Money market instruments purchased with an
original maturity of sixty days or less are valued
at amortized cost.
All other securities are valued at their fair value
as determined in good faith by the Valuation
Committee of the Board of Directors.
REPURCHASE AGREEMENTS. The Fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
FEDERAL INCOME TAXES. The Fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies and to distribute
all of its taxable income to its shareholders.
Accordingly, the Fund paid no federal income taxes
and no federal income tax provision was required.
In addition, from November 1, 1999 through November
30, 1999 the Fund incurred approximately
$19,901,000 of net realized capital losses. As
permitted by tax regulations, the Fund intends to
elect to defer these losses and treat them as
arising in the fiscal year ended November 1, 2000.
At November 30, 1999, the Fund had a tax basis net
capital loss carryforward of approximately
$70,541,000, which may be applied against any
realized net taxable gains of each succeeding year
until fully utilized or until November 30, 2006
($6,815,000) and November 30, 2007 ($63,726,000),
the respective expiration dates.
DISTRIBUTIONS OF INCOME AND GAINS. Distributions of
net investment income, if any, are made annually.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the Fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital
accounts without impacting the net asset value of
the Fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Dividend income is recorded on
the ex-dividend date. Certain dividends from
foreign securities may be recorded subsequent to
the ex-dividend date as soon as the Fund is
informed of such dividends. Realized gains and
losses from investment transactions are recorded on
an identified cost basis.
All discounts are accreted for both tax and
financial reporting purposes.
26
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2 PURCHASE & SALES
OF SECURITIES For the six months ended May 31, 2000, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $ 23,145,105
Proceeds from sales 213,342,494
--------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper). The Fund pays a monthly
investment management fee of 1/12 of the annual
rate of .75% of the first $250 million of average
daily net assets declining to .62% of average daily
net assets in excess of $12.5 billion. The Fund
incurred a management fee of $1,897,839 for the six
months ended May 31, 2000, which was equivalent to
an annualized effective rate of .73% of the Fund's
average daily net assets.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the six months ended May 31,
2000 are $21,004.
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
sale of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the six months ended May 31, 2000 are
$1,791,240, of which $123,105 was unpaid at May 31,
2000.
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of Fund accounts the firms
service. Administrative services fees paid by the
Fund to KDI for the six months ended May 31, 2000
are $639,617, of which $81,607 was unpaid at May
31, 2000.
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 $976,963
for the six months ended May 31, 2000, of which
$326,124 was unpaid at May 31, 2000.
OFFICERS AND DIRECTORS. Certain officers or
directors of the Fund are also officers or
directors of Scudder Kemper. For the six months
ended May 31, 2000, the Fund made no payments to
its officers and incurred directors fees of $25,986
to independent directors.
27
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MAY 31, 2000 NOVEMBER 30, 1999
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 14,917,746 $ 267,127,536 31,425,146 $ 562,252,632
--------------------------------------------------------------------------------------
Class B 934,345 16,081,601 3,877,050 68,166,631
--------------------------------------------------------------------------------------
Class C 372,811 6,474,313 1,137,319 20,355,534
--------------------------------------------------------------------------------------
Class I 63,193 1,170,240 336,913 6,404,017
--------------------------------------------------------------------------------------
SHARES REDEEMED
Class A (20,141,399) (360,973,563) (42,695,981) (773,760,212)
--------------------------------------------------------------------------------------
Class B (5,331,543) (92,074,031) (10,611,386) (175,703,372)
--------------------------------------------------------------------------------------
Class C (1,440,300) (24,992,621) (3,066,404) (53,368,588)
--------------------------------------------------------------------------------------
Class I (149,504) (2,725,908) (536,067) (10,115,134)
--------------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 109,466 1,949,844 484,095 8,721,574
--------------------------------------------------------------------------------------
Class B (113,510) (1,949,844) (498,722) (8,721,574)
--------------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $(189,912,433) $(355,768,492)
--------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
5 EXPENSE OFF-SET
ARRANGEMENTS The Fund has entered into arrangements with its
custodian and transfer agent whereby credits
realized as a result of uninvested cash balances
were used to reduce a portion of the Fund's
expenses. During the period, the Fund's custodian
and transfer agent fees were reduced by $937 and
$20,066, respectively, under these arrangements.
--------------------------------------------------------------------------------
6 LINE OF
CREDIT The Fund and several Kemper funds (the
"Participants") share in a $750 million revolving
credit facility for temporary or emergency
purposes, including the meeting of redemption
requests that otherwise might require the untimely
disposition of securities. The Participants are
charged an annual commitment fee which is allocated
pro rata among each of the Participants. Interest
is calculated based on the market rates at the time
of the borrowing. The Fund may borrow up to a
maximum of 33 percent of its net assets under the
agreement.
28
<PAGE> 29
NOTES
29
<PAGE> 30
NOTES
30
<PAGE> 31
NOTES
31
<PAGE> 32
<TABLE>
<S> <C> <C>
DIRECTORS OFFICERS
JAMES E. AKINS MARK S. CASADY THOMAS F. SASSI
Director President Vice President
JAMES R. EDGAR PHILIP J. COLLORA WILLIAM F. TRUSCOTT
Director Vice President and Vice President
Secretary
ARTHUR R. GOTTSCHALK LINDA J. WONDRACK
Director JAMES M. EYSENBACH Vice President
Vice President
FREDERICK T. KELSEY MAUREEN E. KANE
Director JOHN R. HEBBLE Assistant Secretary
Treasurer
THOMAS W. LITTAUER CAROLINE PEARSON
Director and Vice President ANN M. MCCREARY Assistant Secretary
Vice President
FRED B. RENWICK BRENDA LYONS
Director KATHRYN L. QUIRK Assistant Secretary
Vice President
JOHN G. WEITHERS
Director LOIS R. ROMAN
Vice President
</TABLE>
<TABLE>
<S> <C>
.............................................................................................
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
.............................................................................................
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 219557
Kansas City, MO 64121
.............................................................................................
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02110
.............................................................................................
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
.............................................................................................
INDEPENDENT ERNST & YOUNG LLP
AUDITORS 233 South Wacker Drive
Chicago, IL 60606
.............................................................................................
PRINCIPAL KEMPER DISTRIBUTORS, INC.
UNDERWRITER 222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
</TABLE>
DIRECTORS&OFFICERS
[KEMPER FUNDS LOGO] Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Equity Fund/Value Style prospectus.
KSCVF - 3(7/25/00) 1116570
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
