<PAGE> 1
Kemper Small Capitalization
Equity Fund
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
SEEKING MAXIMUM APPRECIATION OF INVESTOR'S CAPITAL
"...the market began to recognize the improved fundamentals of small
capitalization stocks vs. larger companies..."
[KEMPER MUTUAL FUNDS LOGO]
<PAGE> 2
TABLE OF
CONTENTS
3
General
Economic Overview
5
Performance Update
7
Terms to Know
10
Industry Sectors
11
Largest Holdings
12
Portfolio of
Investments
15
Report of
Independent Auditors
16
Financial Statements
18
Notes to
Financial Statements
22
Financial Highlights
At A Glance
Kemper Small Capitalization Equity Fund Total Returns for the year ended
September 30, 1995 (unadjusted for any sales charge):
CLASS A 30.88%
CLASS B 29.59%
CLASS C 29.65%
LIPPER SMALL CAP
EQUITY FUNDS
CATEGORY AVERAGE* 28.93%
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
9/30/95 9/30/94
- ---------------------------------------------------------
<S> <C> <C>
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS A $7.14 $5.81
- ---------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS B $7.02 $5.78
- ---------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS C $7.02 $5.77
- ---------------------------------------------------------
</TABLE>
KEMPER SMALL CAPITALIZATION EQUITY
FUND LIPPER RANKINGS*
COMPARED TO ALL OTHER FUNDS IN THE LIPPER SMALL
CAPITALIZATION FUNDS CATEGORY
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------
<S> <C> <C> <C>
CLASS A #108 OF 288 FUNDS #36 OF 79 #15 OF 36
- ---------------------------------------------------------
CLASS B #116 OF 288 FUNDS N/A N/A
- ---------------------------------------------------------
CLASS C #114 OF 288 FUNDS N/A N/A
- ---------------------------------------------------------
</TABLE>
Returns are historical and do not represent future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
*Lipper Analytical Services, Inc. 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. Rankings
are historical and do not reflect future performance.
DIVIDEND REVIEW
DURING THE FISCAL YEAR, KEMPER SMALL CAPITALIZATION EQUITY
FUND PAID THE FOLLOWING DIVIDENDS:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- ---------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM
CAPITAL GAIN: $0.34 $0.34 $0.34
- ---------------------------------------------------------
</TABLE>
About Your Report
SHAREHOLDER REPORTS REVISED
Your fund's annual report is one of your best sources for tracking the progress
of your investment. This report includes several changes that have been made in
an effort to provide additional information to you as well as explain
significant changes to the fund over the last fiscal year. In addition, the
performance update includes commentary from your fund's portfolio manager or
management team on what might be expected in the coming months.
Specifically, your report now includes:
- - Terms you'd need to know related to your fund
- - A look at your fund's sector weightings and how they have changed
- - A comparison of your fund and its benchmark sector weightings
- - Your fund's largest individual holdings
If you have any comments about the revised format or if you have
suggestions for additional changes, please write to:
Kemper Mutual Funds
Shareholder Communications
120 South LaSalle Street
Chicago, IL 60603
<PAGE> 3
GENERAL ECONOMIC OVERVIEW
STEPHEN B. TIMBERS IS CHIEF EXECUTIVE AND CHIEF INVESTMENT
[PHOTO OF OFFICER OF KEMPER FINANCIAL SERVICES, INC. (KFS). KFS AND ITS
STEPHEN B. AFFILIATES MANAGE APPROXIMATELY $63 BILLION IN ASSETS, INCLUDING
TIMBERS] $44 BILLION IN RETAIL MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE
UNIVERSITY AND HOLDS AN M.B.A. FROM HARVARD UNIVERSITY.
DEAR SHAREHOLDER,
Investors enjoyed generally positive performance in both the fixed income and
stock markets in the first 10 months of 1995. At this point in the year, the
returns of most leading securities markets worldwide are significantly higher
than they were at the same time in 1994.
We have an excellent environment for financial assets. After several
quarters of robust growth, the United States economy seems to be growing at a
pace that investors find comfortable. Contrary to isolated reports that caused
some observers to become concerned, the economy is in no jeopardy of recession.
Its health was confirmed with the news that the economy grew (as measured by
real gross domestic product [GDP]) at an annual rate of 4.2% in the third
quarter. This follows much lower growth in the first two quarters, as the
economy was adjusting to the Federal Reserve Board's series of interest rate
increases. The slowdown, in fact, was acknowledged by the Fed when it eased
short-term rates by a small but symbolic 25 basis points in July. Now we know
that the economy was rebounding from July through September.
The economy's continued growth without a corresponding increase in
inflation is very encouraging. Although we are well along in the economic cycle
and at a point when prices often start hiking up, inflationary pressures have
actually been reduced somewhat.
Will the Federal Reserve Board adjust interest rates again? As of this
date -- which precedes any resolution on the federal budget issue -- we doubt
that the Fed has motivation to either ease or (which would be even less likely)
raise interest rates. Our forecast calls for lower growth ranging between 2% to
3% for the next few quarters, with the momentum likely to come from exports and
nonresidential construction.
MARKET OUTLOOK
Slow growth and low inflation is the optimal combination for investors
in the fixed income markets, and we expect them to continue to perform well.
We believe that the opportunities for common stock investors will be
increasingly concentrated in higher quality investments. After hitting new
highs and showing considerable strength for most of the year, the stock market
showed some vulnerability when it took a tumble in the summer. The market
recovered after a brief period and has gained ground since. But such a sudden,
severe mini-correction served to remind investors that the current bull market
will inevitably come to an end someday and that some sectors may even be
overextended today.
As we view the remainder of the year, companies cannot necessarily
count on the economy to provide above-average earnings support. Rather, stocks
that have proven themselves with a pattern of consistent earnings are likely to
attract investor support. Specifically, sectors that produce more consistent
earnings, such as health care, consumer nondurables, selected technology and
selected capital goods can be expected to do well. Picking the right sectors to
invest in will be the key challenge for equity investors during the next few
quarters.
International investing continues to be quite complex. After sinking to
its post-World War II low in April, the value of the U.S. dollar has gained
strength against most foreign currencies. While a stronger dollar favors the
U.S. economy because it reduces the cost of American imports and attracts
foreign capital, a strong dollar in relation to a local currency has the effect
of devaluing a foreign investment. The value of the dollar and the
attractiveness of U.S. investments to foreign investors will be key factors in
the next few months.
3
<PAGE> 4
GENERAL 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.
<TABLE>
<CAPTION>
Now (10/31/95) 6 months ago 1 year ago 2 years ago
<S> <C> <C> <C> <C>
10-year Treasury rate(1) 6.04 6.63 7.96 5.72
Prime rate(3) 8.75 9 8.15 6
Inflation rate(3)(*) 2.54 3.05 2.68 2.75
The U.S. Dollar(4) -1.05 -10.02 -5.65 1.23
Capital goods orders(5)(*) 11.72 9.44 18.9 19.12
Industrial production(6)(*) 3.03 3.84 6.08 3.50
Employment growth(7) 1.80 2.30 3.25 2.47
</TABLE>
(*)Data as of September 30, 1995
(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%. The low, moderate inflation of the last
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 corporate profits and equity performance.
(7) An influence on family income and retail sales.
SOURCE: ECONOMICS DEPARTMENT, KEMPER FINANCIAL SERVICES, INC.
We are in the midst of a global recovery, and the same fundamentals that
have driven markets higher in the U.S. can be found in many foreign countries
currently. However, leading international economies continue to lag the U.S.
Japan and Germany, whose economies typically follow U.S. growth, are not as
robust as in past cycles. Moreover, conditions in emerging market countries
underline the importance of careful research and experience in understanding how
these markets work.
Political leadership also has some bearing on the progress of the
economy and the state of the financial markets. In the months preceding a
presidential election year, it has been common for incumbents to attempt to
stimulate growth. Given our Republican Congress and Democratic President,
however, we do not consider this as likely this time.
With the rest of the country, we are closely following political
initiatives to produce a balanced federal budget. This is a political wild
card, but we would expect both the stock and fixed-income markets to react
with enthusiasm if progress can be made.
With that as an economic backdrop, we encourage you to read the
following detailed report of your fund, including a question-and-answer
interview with your fund's portfolio manager. Thank you for your continued
support. We appreciate the opportunity to serve your investment needs.
Sincerely,
Stephen B. Timbers
STEPHEN B. TIMBERS
CHIEF INVESTMENT AND EXECUTIVE OFFICER
November 6, 1995
4
<PAGE> 5
PERFORMANCE UPDATE
- ------------
PHOTO OF KAREN HUSSEY
- ------------
KAREN HUSSEY JOINED KEMPER FINANCIAL SERVICES, INC. IN SEPTEMBER 1994 AS FIRST
VICE PRESIDENT AND PORTFOLIO MANAGER OF KEMPER SMALL CAPITALIZATION EQUITY
FUND. MS. HUSSEY GRADUATED WITH A B.S. DEGREE FROM SOUTHWEST MISSOURI
UNIVERSITY.
PORTFOLIO MANAGER KAREN HUSSEY DISCUSSES A TURNAROUND FOR SMALL CAPITALIZATION
GROWTH STOCKS, THE HIGH-FLYING TECHNOLOGY SECTOR AND NEW OPPORTUNITIES IN THE
SMALL CAP ARENA.
Q. THE SMALL CAPITALIZATION EQUITY FUND ENDED ITS FISCAL YEAR WITH A
22.89% GAIN IN NET ASSET VALUE AND A TOTAL RETURN OF 30.88% FOR CLASS A SHARES
- -- A SHARP CONTRAST FROM THE NEGATIVE RETURN POSTED A YEAR EARLIER. WHAT
PROMPTED THIS STRONG PERFORMANCE?
A. Small cap stocks underperformed the market through 1994 and into the
second quarter of 1995. This can be attributed to two factors. First, rising
interest rates had compressed price to earning ratios (P/E), a measure of how
much investors are willing to pay for a company's earnings stream. This made
valuations less attractive, particularly for small company stocks. Second, the
weak dollar favored large companies with multinational exposure. Earnings for
those companies were boosted as profits from foreign sales increased when
translated back into U.S. dollars.
In recent months we've seen a reversal in both of these trends.
Interest rates have declined, which had a positive influence on small caps'
valuations and made forecast earnings relative to larger companies more
favorable. In addition, the dollar has strengthened. This makes small cap
domestic stocks more attractive compared to large multinationals, which will
see pressure on earnings from foreign sales. In June, the market began to
recognize the improved fundamentals of small capitalization stocks versus
larger companies. Since then both the Russell 2000 and the NASDAQ Composite
Index have risen to new highs.
Q. DID YOU MAKE ANY SIGNIFICANT CHANGES TO THE PORTFOLIO DURING THE PERIOD?
A. We continued to reduce the fund's average market capitalization, something
we'd started during the spring of 1995. Since then, the fund's relative
performance has risen from the third quartile of its Lipper Small Cap Growth
Funds category to the second quartile (see chart, page 2).
In terms of sector allocation and overall strategy, there haven't been
any significant changes. Since restructuring the portfolio during the latter
half of 1994, the fund's top 15 holdings (listed on page 9) are basically
unchanged, although there may have been a bit of shuffling in terms of actual
rank. As growth stock managers, we buy with a long-term view and, over time,
those holdings have really been workhorses in terms of performance.
5
<PAGE> 6
PERFORMANCE UPDATE
Q. TECHNOLOGY STOCKS HAVE BEEN LEADING THE MARKET FOR OVER A YEAR NOW. HOW
MUCH OF THE PORTFOLIO IS INVESTED IN TECHNOLOGY STOCKS, AND DO YOU SEE THIS
TREND CONTINUING?
A. We've had as much as 27% or 28% of the portfolio in technology during the
past year. As of September 30, we've trimmed that position to about 23% of
equities. That's still a substantial weighting, but below some other small
capitalization growth funds.
As for the continued strength of technology stocks, there's no question
that the long-term potential for semiconductors, software and communications is
very positive. However, the potential for a correction in the shorter-term
can't be ignored. Earlier in the year we modestly reduced our technology
exposure in light of the sector's strong moves and in anticipation of a
seasonal pull-back. However, it soon became apparent that we'd underestimated
the strength of the personal computer cycle and our reduced exposure was
limiting our performance. By May, when it was evident that the seasonal
slowdown was not going to occur over the summer, we added to several tech
positions which provided some additional gains.
In August we did begin to see a sell-off in technology, sparked by
concerns over valuations and that perhaps earnings had peaked. At that point,
we began to move into some lesser-known, less exploited technology stocks. Our
analysts identified several companies that are benefiting from the same trends
but have yet to experience the gains of their larger counterparts.
Q. WHAT OTHER MARKET SECTORS ARE YOU INVESTING IN?
A. We've established a 20% position in health care services, medical products
and supplies over the past year. Heart Technology and IDEXX Labs have been
winners. Financial stocks have done well, although there aren't a lot of growth
opportunities in this sector. Advanta did well for us, as did Aames Financial.
One area that we're very interested in is outsourcing. Many large companies are
eliminating certain operations that aren't a part of their core functions or
where they don't have a competitive advantage. This is creating new
opportunities for small companies to provide these services. Alternative
Resources, a company that provides technology-proficient personnel is a good
example.
We're especially interested in issues that are underresearched and
underfollowed by the investment community. To help in this area, we've expanded
our research team to include another senior analyst and an associate analyst
devoted exclusively to small capitalization growth stocks. This will allow us
to meet with more companies one-on-one, and help us identify new investment
opportunities.
Q. HOW ACTIVE HAS THE FUND BEEN IN THE IPO (INITIAL PUBLIC OFFERING) MARKET?
HOW HAVE THESE INVESTMENTS PERFORMED?
A. The IPO market has been very beneficial for us. During the past year we've
invested in several companies through initial offerings. Of those investments,
only one turned out to be a disappointment -- which shows the strength of our
analysis. IPOs have also broadened our exposure to new growth areas. For
example, we've recently established positions in three workers
compensation-related companies, CRA Managed Care, RTW and Occusystems. This is
a market which is estimated to reach $100 billion by the end of this year.
Workers compensation costs have been rising very rapidly and managed care
techniques such as those offered by the companies I just mentioned are just
starting to be employed.
Q. ISN'T TRADING IN THESE STOCKS EXPENSIVE FOR THE FUND?
A. It can be, if you're buying the issues and immediately selling them
for a quick profit. That can raise fund expenses and pile on taxable gains.
That's not our approach. Like any other stock, we purchase an IPO for its
long-term growth potential. Unless we're unable to establish a meaningful
position, or if the stock is bid up to ridiculous levels that can't be
6
<PAGE> 7
PERFORMANCE UPDATE
sustained, we intend to hold the position for awhile. As an example, we
participated in the initial offering of 7th Level (see sidebar) which has been
a real success story for us. We bought this stock last November on its offering
at just over $10. After several slow months, it's really come to life. As of
September 30, it had risen to $21. On the other hand, we also purchased the IPO
of Netscape -- a company that makes software to help users navigate the
Internet. That offering received a tremendous amount of publicity and the stock
tripled on its first day. We chose to take our profit and step away from that
stock.
Q. WHAT'S YOUR OUTLOOK FOR THE COMING YEAR?
A. Very positive. We're about four years into an expected six- to eight-year
cycle of small cap stocks showing strong relative performance. Now, after more
than a year of weak relative performance we're seeing a resumption of that
secular trend. Supporting this move are 1) compelling relative valuations, 2)
stronger relative earnings growth, 3) a stable to stronger dollar which is
comparatively more favorable for small companies with a more domestic
orientation and 4) lower long-term interest rates which favor long duration
assets such as small capitalization growth stocks. In addition, possible tax
reform -- in the form of a flat tax or a lower capital gains tax -- would be a
long-term positive for all stocks, but particularly for small growth
companies.
TERMS TO KNOW
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period assuming the
reinvestment of all dividends. It represents the aggregate percentage or dollar
value change over the period.
CAPITALIZATION The value of a corporation as determined by the market price of
its issued and outstanding common stock. It is calculated by multiplying the
number of outstanding shares by the current market price of a share.
P/E RATIO The price of a stock divided by its earnings per share. The P/E
ratio, also known as the MULTIPLE, is a measure of how much an investor is
paying for a company's earning power. The higher the P/E, the more investors
are paying and, therefore, the more earnings growth they are expecting. High
P/E stocks are typically young, fast-growing companies which generally
represent greater risk than longer more established companies.
NASDAQ COMPOSITE INDEX A market capitalization price only index that tracks
the performance of domestic common stocks traded on the regular NASDAQ
(National Association of Securities Dealers Automated Quotation system) market
as well as National Market System traded foreign common stocks and ADRs.
7
<PAGE> 8
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED SEPTEMBER 30, 1995 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR 5-YEAR 10-YEAR CLASS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS A 23.44% 21.33% 14.97% 12.57% (SINCE 2/20/69)
- -------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS B 26.59 N/A N/A 21.33 (SINCE 5/31/94)
- -------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS C 29.65 N/A N/A 23.30 (SINCE 5/31/94)
- -------------------------------------------------------------------------------
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER SMALL
CAPITALIZATION EQUITY FUND CLASS A FROM 1/1/79 THROUGH 9/30/95
<TABLE>
<CAPTION>
SMALL WILSHIRE RUSSELL STANDARD & POOR'S
CAPITAL A MID-CAP INDEX 2000 INDEX 500 STOCK INDEX
<S> <C> <C> <C> <C>
1/1/79 $ 10,000 $ 10,000 $ 10,000 $ 10,000
12/31/83 30,341 29,590 32,648 22,203
12/31/87 41,107 39,890 38,239 38,734
12/31/91 89,498 75,787 65,340 74,980
9/30/95 133,304 135,532 113,531 116,679
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER SMALL
CAPITALIZATION EQUITY FUND CLASS B FROM 5/31/94 THROUGH 9/30/95
<TABLE>
<CAPTION>
SMALL WILSHIRE RUSSELL STANDARD & POOR'S
CAPITAL A MID-CAP INDEX 2000 INDEX 500 STOCK INDEX
<S> <C> <C> <C> <C>
5/31/94 $ 10,000 $ 9,660 $ 9,496 $ 10,000
12/31/94 10,146 10,141 10,427 10,284
9/30/95 12,958 12,750 14,217 13,335
</TABLE>
Returns are historical and do not represent future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
The Kemper Small Capitalization Equity Fund's average market capitalization has
been reduced to approximately $800 million, placing it in the Lipper Small
Capitalization Growth Fund Category. This change necessitates the introduction
of a new peer group for the fund. For the next annual report, the fund will be
compared with the S&P 500 Index++ and the Russell 2000 Index** and will
not include the Wilshire Mid-Cap Index.+
* Average annual total return measures net investment income and capital gain or
loss from portfolio investments, assuming reinvestment of all dividends and for
A Shares adjustment for the maximum sales charge of 5.75% and for B Shares
adjustment for the applicable contingent deferred sales charge as follows:
1-year, 3%; 5-year, 1%; since inception, 0%. There is no sales charge for C
Shares. Average annual return reflects annualized change. During the periods
noted, securities prices fluctuated. For additional information, see the
Prospectus and Statement of Additional Information and the Financial Highlights
at the end of this report.
(1) Performance includes reinvestment of dividends and adjustment for
the maximum sales charge for A Shares and the contingent deferred sales charge
in effect at the end of the period for B Shares. When reviewing the performance
chart, please note that the inception date for the Russell 2000 Index is
1/1/79. As a result, we are unable to illustrate the life of fund performance
for Class A Shares (since 2/20/69) for the Kemper Small Capitalization Equity
Fund. In comparing the Kemper Small Capitalization Equity Fund performance to
the Russell 2000 Index, the Standard & Poor's 500 Stock Index and the Wilshire
Mid-Cap Index you should also note that the fund's performance reflects the
maximum sales charge, while no such charges are reflected in the performance of
the indices.
** The Russell 2000 Index is a capitalization weighted price only index which
is comprised of 2000 of the smallest stocks (on the basis of capitalization) in
the Russell 3000 Index.
+ Wilshire Mid-Cap Index is an unmanaged index comprised of 750 mid-size
capitalization companies generally represented in large and small company
universes. The market capitalization range of the Mid-Cap 750 is currently from
$400 million to $1.7 billion. Data assumes reinvestment of dividends. Source is
Wilshire Associates Incorporated.
++ The Standard & Poor's 500 Stock Index is an unmanaged index generally
representative of the U.S. stock market. Source is Towers Data Systems.
8
<PAGE> 9
PERFORMANCE UPDATE
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER SMALL
CAPITALIZATION EQUITY FUND CLASS C FROM 5/31/94 THROUGH 9/30/95
<TABLE>
<CAPTION>
SMALL WILSHIRE RUSSELL STANDARD & POOR'S
CAPITAL A MID-CAP INDEX 2000 INDEX 500 STOCK INDEX
<S> <C> <C> <C> <C>
5/31/94 $ 10,000 $ 9,660 $ 9,496 $ 10,000
12/31/94 10,128 10,141 10,427 10,284
9/30/95 13,240 12,750 14,217 13,335
</TABLE>
Featured Investment
KAREN HUSSEY ON 7TH LEVEL
One of the Small Capitalization Equity Fund's most successful purchases of the
past year has been 7th Level, a company that develops and produces high-quality
interactive entertainment and educational software. Its current products
include Tuneland, an educational CD-ROM program for children starring Howie
Mandel; Battle Beast, an arcade-style game with fully animated, morphing
characters; and Monty Python's Complete Waste of Time, a CD-ROM comic strategy
game that includes original BBC highlights. According to Karen Hussey: "This
company has developed critically-acclaimed animated software products at a much
lower cost than its competitors due to their proprietary digital inking and
painting software tools." Upcoming projects include "The Universe According
to Virgil," an interactive cartoon that explores the wonders of science,
scheduled for release in early 1996; a joint venture with Disney to develop
games based on characters from movies like "The Lion King;" and joint ventures
with Morgan Creek (the company that owns rights to the Ace Ventura character),
Quincy Jones-David Salzman Entertainment and Mike Milken E.E.N. Communications.
9
<PAGE> 10
INDUSTRY SECTORS
A YEAR-TO-YEAR COMPARISON
DATA SHOW THE PERCENTAGE OF THE DOMESTIC COMMON STOCKS IN THE PORTFOLIO THAT
EACH SECTOR REPRESENTED ON SEPTEMBER 30, 1995 AND ON SEPTEMBER 30, 1994.
<TABLE>
<CAPTION> Small Cap Fund on 9/30/95 Small Cap Fund on 9/30/94
<S> <C> <C>
BASIC INDUSTRIES 6.4% 3.1%
CAPITAL GOODS 13.4% 8.2%
TECHNOLOGY 23.2% 26.2%
CONSUMER DURABLES 0% 5.9%
CONSUMER NON-DURABLES 26.8% 27.5%
HEALTH CARE 20.2% 15.1%
FINANCE 4.7% 5.8%
TRANSPORTATION 4.5% 5.2%
ENERGY 0.8% 0%
UTILITIES 0% 0.2%
OTHER 0% 2.8%
</TABLE>
A COMPARISON WITH THE RUSSELL 2000 INDEX
DATA SHOW THE PERCENTAGE OF THE DOMESTIC COMMON STOCKS IN THE PORTFOLIO THAT
EACH SECTOR OF THE KEMPER SMALL CAPITALIZATION EQUITY FUND REPRESENTED ON
SEPTEMBER 30, 1995, COMPARED TO THE INDUSTRY SECTORS THAT MAKE UP THE FUND'S
BENCHMARK, THE RUSSELL 2000 INDEX.
<TABLE>
<CAPTION>
Small Cap Fund on 9/30/95 Russell 2000 on 9/30/95
<S> <C> <C>
BASIC INDUSTRIES 6.4% 6.4%
CAPITAL GOODS 13.4% 9.2%
TECHNOLOGY 23.2% 16.7%
CONSUMER DURABLES 0% 3.6%
CONSUMER NON-DURABLES 26.8% 21.5%
HEALTH CARE 20.2% 9.8%
FINANCE 4.7% 21.8%
TRANSPORTATION 4.5% 2.4%
ENERGY 0.8% 5.1%
UTILITIES 0% 2.6%
OTHER 0% 0.9%
</TABLE>
10
<PAGE> 11
LARGEST HOLDINGS
THE FUND'S 15 LARGEST HOLDINGS
Representing 29% of the fund's total net assets on September 30, 1995
<TABLE>
<CAPTION>
Holdings Percent
- -------------------------------------------------------------------------
<S> <C> <C> <C>
1. Wisconsin Central Regional railroad system 3.0%
Transportation
- -------------------------------------------------------------------------
2. LCI International Long-distance communications 2.5%
- -------------------------------------------------------------------------
3. IDEXX Labs Manufacturer of animal biomedical test 2.0%
products
- -------------------------------------------------------------------------
4. FMC Corp. Chemicals; machinery 2.0%
- -------------------------------------------------------------------------
5. Caremark Pharmacy services; physician practice 2.0%
International management
- -------------------------------------------------------------------------
6. Alternative Provides information services personnel 1.9%
Resources, Inc.
- -------------------------------------------------------------------------
7. Allen Group, Inc. Electronic telecommunications equipment 1.9%
- -------------------------------------------------------------------------
8. Omnicare, Inc. Long-term care pharmacy services 1.9%
- -------------------------------------------------------------------------
9. Fort Howard Corp. Leading producer of recycled paper-based 1.8%
tissue
- -------------------------------------------------------------------------
10. Gaylord Cable television programming; 1.8%
Entertainment entertainment
- -------------------------------------------------------------------------
11. Danka Business Distributor of office automation 1.8%
equipment
- -------------------------------------------------------------------------
12. TriMas Corp. Manufactures steel alloy fasteners, 1.7%
specialty containers, towing systems
and precision tools
- -------------------------------------------------------------------------
13. Viking Office Direct catalogue marketer of office 1.6%
Products, Inc. supplies
- -------------------------------------------------------------------------
14. Risk Capital Inc. Global reinsurance 1.6%
- -------------------------------------------------------------------------
15. 7th Level, Inc. Develops interactive consumer software 1.5%
- -------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
KEMPER SMALL CAPITALIZATION EQUITY FUND
PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE
<S> <C> <C> <C> <C>
COMMON STOCKS
CABLE TELEVISION, (b) Evergreen Media Corp. 192,900 $ 5,498
BROADCASTING, AND Gaylord Entertainment Co. 546,000 14,810
WIRELESS (b) Infinity Broadcasting Corp. 94,500 3,095
COMMUNICATIONS -- 4.5% International CableTel Incorporated 437,167 12,241
Sinclair Broadcasting Group 86,600 2,490
===================================================================
38,134
CHEMICALS -- 3.9% (b) FMC Corp. 220,000 16,720
Lawter International 250,000 2,813
Minerals Technologies 200,000 7,525
OM Group 190,000 5,771
===================================================================
32,829
COMPUTER SOFTWARE AND Alternative Resources Corporation 500,000 16,000
TECHNOLOGY -- 13.5% (b) Artisoft, Inc. 250,000 2,656
(b) Atmel Corporation 160,000 5,400
(b) Auspex Systems 250,000 3,906
(b) Checkfree Corporation 37,500 750
(b) C.P. Clare 134,600 3,432
(b) Gartner Group 60,000 1,965
(b) HNC Software 8,900 234
(b) Information Storage Development 135,900 3,075
(b) Intergraph Corp. 50,000 606
Keane, Inc. 337,000 9,731
McAfee Associates Inc. 100,000 5,150
(b) Microchip Technology 271,700 10,291
(b) NETCOM On-Line Communications
Service, Inc. 70,000 3,080
(b) Network Equipment Technologies 80,000 3,330
(b) Novadigm, Inc. 151,000 2,548
(b) OnTrak Systems, Inc. 4,500 124
(b) Parametric Technology Corp. 80,000 4,920
Pioneer-Standard Electronics 102,000 1,785
(b) Premenos Technology Corp. 26,500 861
(b) 7th Level, Inc. 614,600 12,907
(b) Solectron Corp. 230,000 9,085
(b) SPSS Incorporated 95,600 1,649
(b) Ultratech Stepper, Inc. 221,000 9,337
(b) Videoserver 5,000 176
===================================================================
112,998
CONSUMER PRODUCTS (b) Franklin Quest Co. 216,900 5,314
AND SERVICES -- 5.6% Hudson Foods 650,000 9,019
(b) Kenneth Cole Productions 150,000 5,269
(b) Opta Food Ingredients 120,000 1,890
(b) Play By Play Toys & Novelties, Inc. 100,000 1,325
(b) Redhook Ale Brewing, Incorporated 40,400 1,192
(b) Safety 1st 200,000 4,250
Stewart Enterprises, Inc. 240,000 8,700
(b) Whole Foods Market 100,000 1,312
(b) Williams-Sonoma 426,500 8,850
===================================================================
47,121
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ENERGY AND Cairn Energy USA 175,000 $ 2,231
RELATED SERVICES -- .8% (b) Input/Output, Inc. 50,000 1,919
(b) Nuevo Energy Co. 100,000 2,250
===================================================================
6,400
CBI Industries 270,000 6,413
ENGINEERING -- 2.0% (b) Jacobs Engineering Group 425,000 10,572
World Fuel Services 6,124 89
===================================================================
17,074
FINANCIAL SERVICES -- 4.4% ADVANTA Corp. 150,000 6,375
(b) Risk Capital Holdings, Inc. 619,900 13,483
(b) SPS Transaction Services 354,600 10,283
Western National Corporation 460,000 6,325
===================================================================
36,466
(b) Hammons (John Q) Hotels, Inc. 500,000 6,438
(b) MGM Grand 145,000 3,698
(b) Players International 65,850 947
(b) Prime Hospitality Corp. 500,000 5,125
===================================================================
16,208
MANUFACTURING Applied Extrusion Technologies 200,000 3,675
(b) Burr Brown Corp. 70,000 2,607
Elsag Bailey 300,000 9,787
Federal Signal Corp. 561,000 12,482
(b) Fort Howard Corporation 1,000,000 15,375
Greenfield Industries 365,000 11,224
IMCO Recycling 235,500 5,328
(b) KEMET Electronics Corp. 130,000 4,453
(b) Mohawk Industries 396,200 6,933
Nordson Corp. 75,000 4,406
Superior Industries International 171,500 4,609
(b) Thompson PBE 250,000 4,281
TriMas Corp. 700,000 14,525
(b) Trimble Navigation Ltd. 96,800 2,444
Wabash National Corp. 80,000 2,830
===================================================================
104,959
MEDICAL PRODUCTS AND Arrow International 210,000 9,082
EQUIPMENT -- 8.6% (b) Dura Pharmaceuticals 264,000 7,854
(b) Genzyme Corporation 100,000 1,450
(b) Healthdyne Technologies 400,000 5,450
(b) Heart Technology 93,000 2,592
(b) ICU Medical 248,000 3,348
(b) IDEXX Laboratories 450,000 16,763
(b) Isolyser 150,700 5,143
(b) i-STAT Corp. 175,000 6,519
(b) Research Industries 320,000 9,320
(b) Respironics 225,000 4,331
(b) U.S. Bioscience, with warrants
expiring 1998 1,578 11
===================================================================
71,863
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MEDICAL SERVICES -- 10.2% (b) ABR Information Services 190,200 $ 4,803
(b) American Oncology 20,000 860
(b) Caremark International, Inc. 775,000 16,663
(b) Cerner Corporation 125,000 4,281
(b) Coastal Physician Group 400,000 7,000
(b) CRA Managed Care 205,000 4,433
(b) Dendrite International, Inc. 250,000 3,812
(b) HCIA Inc. 100,000 2,575
(b) IMNET Systems, Inc. 87,500 2,253
(b) Medaphis Corp. 120,000 3,360
(b) Occusystems 210,000 4,358
Omnicare, Inc. 400,000 15,600
(b) Orthodontic Centers of America 100,000 3,225
(b) Owen Healthcare, Inc. 100,000 1,631
(b) Renal Treatment Centers 160,000 5,920
(b) RTW Inc. 191,100 5,303
===================================================================
86,077
OFFICE EQUIPMENT AND Danka Business Systems ADR 408,000 14,688
SUPPLIES -- 4.9% (b) Officemax 524,250 12,713
(b) Viking Office Products 325,000 13,569
===================================================================
40,970
PUBLISHING -- 1.4% (b) Mecklermedia Corporation 211,600 3,968
Thomas Nelson, Inc. 300,000 7,575
===================================================================
11,543
RETAILING AND (b) Department 56, Inc. 180,000 8,415
RESTAURANTS -- 6.7% (b) General Nutrition 200,000 9,100
(b) Gymboree 275,000 8,284
(b) Movie Gallery 189,400 8,097
(b) PETsMART 205,500 6,936
(b) Proffitt's 23,800 654
(b) Starbucks Corp. 225,000 8,522
Tandy Corp. 100,000 6,075
===================================================================
56,083
TELECOMMUNICATIONS AND Allen Group 436,800 15,834
EQUIPMENT -- 8.2% (b) Intervoice, Inc. 400,000 9,150
(b) LCI International, Inc. 541,600 21,258
MIDCOM Communications, Inc. 325,600 4,965
(b) Stratacom, Inc. 16,400 906
(b) Tellabs Operations 200,000 8,425
Teltrend Inc. 59,700 1,970
U.S. Robotics 70,000 5,967
===================================================================
68,475
TRANSPORTATION -- 4.2% (b) ABC Rail Products 225,000 4,725
(b) Copart, Inc. 260,000 5,915
(b) Wisconsin Central Transportation
Corporation 375,000 25,031
===================================================================
35,671
TOTAL COMMON STOCKS--93.3%
(Cost: $573,234) 782,871
===================================================================
CONVERTIBLE PREFERRED (a)(b) Cimlinc Incorporated "D"
STOCK (Cost: $660) 75,431 283
===================================================================
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
MONEY MARKET Yield-5.83% to 5.94%
INSTRUMENTWS Due -- October and November 1995
ConAgra, Inc. $4,000 $ 3,973
Dynamic Funding Corporation 11,000 10,964
GTE Corporation 4,000 3,984
Renaissance Energy Co. 7,300 7,285
===================================================================
Total money market instruments--3.1%
(Cost: $26,211) 26,206
===================================================================
Total investments--96.4%
(Cost: $600,105) 809,360
===================================================================
Cash and other assets, less liabilities--3.6% 30,545
===================================================================
Net assets--100% $839,905
===================================================================
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The following security may require registration under the Securities Act
of 1933 or an exemption therefrom in order to effect sale in the ordinary
course of business; it was valued at cost on the date of acquisition. No
market quotation was available for unrestricted securities of the same
class on the date of acquisition or on September 30, 1995. This security
is valued at fair market value as determined in good faith by the Board of
Trustees of the Fund.
<TABLE>
<CAPTION>
SECURITY DESCRIPTION DATE OF ACQUISITION NUMBER OF SHARES COST PER SHARE
<S> <C> <C> <C> <C>
Cimlinc Incorporated,
convertible preferred, "D" December 1983 75,431 $8.75
</TABLE>
(b) Non-income producing security.
Based on the cost of investments of $600,105,000 for federal income tax
purposes at September 30, 1995, the aggregate gross unrealized appreciation was
$220,077,000, the aggregate gross unrealized depreciation was $10,822,000 and
the net unrealized appreciation on investments was $209,255,000.
See accompanying Notes to Financial Statements.
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER SMALL CAPITALIZATION EQUITY FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Small Capitalization Equity
Fund as of September 30, 1995, the related statements of operations for the
year then ended and changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the fiscal periods
since 1991. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
September 30, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Kemper Small Capitalization Equity Fund at September 30, 1995, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for
each of the fiscal periods since 1991, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 14, 1995
15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Investments, at value
(Cost: $600,105) $809,360
Cash
87
Receivable for:
Fund shares sold
550
Investments sold 42,085
Dividends and interest 70
TOTAL ASSETS 852,152
==============================================================================================
LIABILITIES AND NET ASSETS
Payable for:
Fund shares redeemed
1,732
Investments purchased 9,437
Management fee 367
Distribution services fee 140
Administrative services fee 161
Custodian and transfer agent fees and related expenses 356
Other 54
Total liabilities 12,247
NET ASSETS $839,905
==============================================================================================
ANALYSIS OF NET ASSETS
Paid-in capital $521,082
Undistributed net realized gain on investments 109,568
Net unrealized appreciation on investments 209,255
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $839,905
==============================================================================================
THE PRICING OF SHARES
CLASS A SHARES
Net asset value and redemption price per share
($588,842 / 82,487 shares outstanding) $7.14
Maximum offering price per share (net asset value, plus
6.10% of net asset value or 5.75% of offering price) $7.58
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($227,221 / 32,302 shares outstanding) $7.03
CLASS C SHARES
Net asset value and redemption price per share
($3,232 / 460 shares outstanding) $7.02
CLASS I SHARES
Net asset value and redemption price per share
($20,610 / 2,882 shares outstanding) $7.15
</TABLE>
See accompanying Notes to Financial Statements.
16
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended September 30, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
NET INVESTMENT INCOME
Dividends $ 2,082
Interest 4,459
Total investment income 6,541
Expenses:
Management fee 3,273
Distribution services fee 1,354
Administrative services fee 1,587
Custodian and transfer agent fees and related expenses 3,252
Professional fees 60
Reports to shareholders 130
Trustees' fees and other 37
Total Expenses 9,693
NET INVESTMENT LOSS (3,152)
===============================================================================================
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on sales of investments 120,667
Change in net unrealized appreciation on investments 76,338
Net gain on investments 197,005
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $193,853
==============================================================================================
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1995 1994
<S> <C> <C>
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
Net investment loss $(3,152) (4,349)
Net realized gain on investments 120,667 29,175
Change in net unrealized appreciation 76,338 (44,153)
Net increase (decrease) in net assets resulting from operations 193,853 (19,327)
Distribution from net realized gain on investments (37,835) (26,718)
Net increase from capital share transactions 52,280 167,592
TOTAL INCREASE IN NET ASSETS 208,298 121,547
=====================================================================================================
NET ASSETS
Beginning of year 631,607 510,060
END OF YEAR $839,905 631,607
=====================================================================================================
</TABLE>
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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 or a
contingent deferred sales charge but are subject to higher ongoing
expenses than Class A shares and do not convert into another class.
Class I shares, which are sold to a limited group of investors, are
not subject to initial or contingent deferred sales charges and have
lower ongoing expenses than other classes. Each share represents an
identical interest in the investments of the Fund and has the same
rights.
2 SIGNIFICANT ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at value. Portfolio
securities that are traded on a domestic securities exchange or
securities listed on the NASDAQ National Market are valued at the
last sale price on the exchange or market where primarily traded or
listed or, if there is no recent sale, at the last current bid
quotation. Portfolio securities that are primarily traded on foreign
securities exchanges are generally valued at the preceding closing
values of such securities on their respective exchanges where
primarily traded. Securities not so traded or listed are valued at
the last current bid quotation if market quotations are available.
Fixed income securities are valued by using market quotations, or
independent pricing services that use prices provided by market
makers or estimates of market values obtained from yield data
relating to instruments or securities with similar characteristics.
Equity options are valued at the last sale price unless the bid price
is higher or the asked price is lower, in which event such bid or
asked price is used. Financial futures and options thereon are valued
at the settlement price established each day by the board of trade or
exchange on which they are traded. Forward foreign currency contracts
are valued at the forward rates prevailing on the day of valuation.
Other securities and assets are valued at fair value as determined in
good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME. Investment
transactions are accounted for on the trade date (date the order to
buy or sell is executed). Dividend income is recorded on the ex-
dividend date, and interest income is recorded on the accrual basis
and includes amortization of money market instrument premium and
discount. 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 shares will be reduced by the amount of any applicable
contingent deferred sales charge. On each day the New York Stock
Exchange is open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago time or the close
of the Exchange. The net asset value per share is determined
separately for each class by dividing the
</TABLE>
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Fund's net assets attributable to that class by the number of shares
of the class outstanding.
FEDERAL INCOME TAXES AND DIVIDENDS TO SHAREHOLDERS. The Fund has
complied with the special provisions of the Internal Revenue Code
available to investment companies and therefore no federal income tax
provision is required.
Differences in dividends per share are due to different class
expenses. Dividends payable to its shareholders are recorded by the
Fund on the ex-dividend date.
Distributions are determined in accordance with income tax principles
which may treat certain transactions differently from generally
accepted accounting principles.
3 TRANSACTIONS WITH AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management agreement with Kemper
Financial Services, Inc. (KFS) and pays a management fee at a base
annual rate of .65% of average daily net assets which is then
adjusted upward or downward by a maximum of .30% based upon the
Fund's performance as compared to the performance of the Standard &
Poor's 500 Stock Index (thus the fee on an annual basis can range
from .35% to .95% of average daily net assets).
During the year ended September 30, 1995, the Fund incurred
management fees as follows (in thousands):
Base fee $4,039
Performance adjustment (766)
------
Total fees $3,273
======
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT. The Fund has an
underwriting and distribution services agreement with Kemper
Distributors, Inc. (KDI). As principal underwriter for the Fund, KDI
retained commissions of $105,000 for the year ended September 30,
1995 for sales of Class A shares, after allowing $798,000 as
commissions to firms of which $133,000 was paid to firms affiliated
with KDI. For distribution services, the Fund pays KDI a fee of .75%
of average daily net assets of the Class B and Class C shares.
Pursuant to the agreement, KDI enters into related selling group
agreements with various firms that provide distribution services to
investors. KDI compensates these firms at various rates for sales of
Class B and Class C shares. During the year ended September 30, 1995,
the Fund incurred a distribution services fee for Class B and Class C
shares of $1,354,000, and KDI paid $1,201,000 for commissions and
distribution fees to firms, including $146,000 to firms affiliated
with KDI. In addition, KDI received $518,000 of contingent deferred
sales charges.
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
</TABLE>
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
accounts the firms service. For the year ended September 30, 1995,
the Fund incurred an administrative services fee of $1,587,000 and
KDI paid $1,579,000 to firms, including $334,000 that was paid to
firms affiliated with KDI.
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. For the year ended September
30, 1995, the transfer agent remitted shareholder services fees to
KSvC of $2,512,000.
OFFICERS AND TRUSTEES. Certain officers or trustees of the Fund are
also officers or directors of KFS. During the year ended September
30, 1995, the Fund made no payments to its officers and incurred
trustees' fees of $22,000 to independent trustees.
4 INVESTMENT TRANSACTIONS For the year ended September 30, 1995, investment transactions
(excluding short-term instruments) are as follows (in thousands):
Purchases $678,046
Proceeds from sales 634,276
</TABLE>
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
5 CAPITAL SHARE TRANSACTIONS The following table summarizes the
activity in capital shares of the Fund
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1995 1994
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 31,018 $181,695 31,360 $ 186,294
Class B 14,738 87,414 4,652 25,933
Class C 369 2,253 161 894
Class I 3,091 19,863 -- --
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 4,829 25,278 4,038 23,345
Class B 1,801 9,352 -- --
Class C 14 74 -- --
SHARES REDEEMED
Class A (35,471) (208,460) (35,106) (208,289)
Class B (10,859) (63,342) (2,601) (14,502)
Class C (73) (426) (11) (64)
Class I (209) (1,421) -- --
CONVERSION OF SHARES
Class A 739 4,350 163 904
Class B (746) (4,350) (163) (904)
SHARES ISSUED IN ACQUISITION (A)
Class A -- -- 1,783 9,995
Class B -- -- 25,480 143,986
NET INCREASE
FROM CAPITAL SHARE
TRANSACTIONS $ 52,280 $ 167,592
============================================================
(a) On May 27, 1994, the Fund acquired the assets of Kemper
Investment Portfolios--Small Capitalization Equity Portfolio in a
tax-free exchange.
</TABLE>
21
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED SEPTEMBER 30,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $5.81 6.45 5.25 5.35 3.79
Income from investment operations:
Net investment income (loss) (.01) (.01) (.02) (.02) .02
Net realized and unrealized gain (loss) 1.68 (.27) 1.71 .40 1.89
Total from investment operations 1.67 (.28) 1.69 .38 1.91
Less dividends:
Distribution from net investment income -- -- -- .01 .06
Distribution from net realized gain .34 .36 .49 .47 .29
Total dividends .34 .36 .49 .48 .35
Net asset value, end of year $7.14 5.81 6.45 5.25 5.35
====================================================================================================
TOTAL RETURN (NOT ANNUALIZED) 30.88% (4.31) 34.11 7.02 55.16
ANNUALIZED RATIOS TO AVERAGE NET ASSETS
Expenses 1.14% 1.34 1.03 1.28 1.25
Net investment income (loss) (.18) (.76) (.43) (.43) .27
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C CLASS I
MAY 31, MAY 31, JULY 3,
YEAR ENDED 1994 TO YEAR ENDED 1994 TO 1995 TO
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1995 1994 1995 1994 1995
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $5.78 5.65 5.77 5.65 6.27
Income from investment operations:
Net investment loss (.07) (.02) (.07) (.03) .--
Net realized and unrealized gain 1.66 .15 1.66 .15 .88
Total from investment operations 1.59 .13 1.59 .12 .88
Less distribution from net realized gain .34 .-- .34 .-- .--
Net asset value, end of period $7.03 5.78 7.02 5.77 7.15
======================================================================================================
TOTAL RETURN (NOT ANNUALIZED) 29.59% 2.30 29.65 2.12 14.04
ANNUALIZED RATIOS TO AVERAGE NET ASSETS
Expenses 2.17% 2.29) 2.10 2.10 .79
Net investment loss (1.21) (1.38) (1.14) (1.21) (.14)
SUPPLEMENTAL DATA FOR ALL CLASSES
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $839,905 631,607 510,060 329,116 289,345
Portfolio turnover rate 102% 58% 82% 73% 126%
</TABLE>
Note: Total return does not reflect the effect of any sales charges.
22
<PAGE> 23
SHAREHOLDER MEETING
SPECIAL SHAREHOLDERS MEETING
On September 19, 1995 the results of the proxy solicitation were announced at a
joint special shareholders meeting. Kemper Small Capitalization Equity Fund
shareholders were asked to vote on four separate issues: election of nine
Trustees to the Board of Trustees, ratification of Ernst & Young LLP as
independent auditors, approval of a new investment management agreement with
Kemper Financial Services, Inc. or its successor on the same terms as the
current plan and for Class B and Class C shareholders only, approval of a new
12b-1 distribution plan with Kemper Distributors, Inc. or its successor on the
same terms as the current plan. We are pleased to report that all nominees were
elected and all other items were approved. Following are the results for each
issue:
- -Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
David W. Belin 68,461,155 1,561,505
Lewis A. Burnham 68,531,177 1,491,483
Donald L. Dunaway 68,482,161 1,540,499
Robert B. Hoffman 68,517,173 1,505,487
Donald R. Jones 68,531,177 1,491,483
David B. Mathis 68,363,123 1,659,537
Shirley D. Peterson 68,447,150 1,575,510
William P. Sommers 68,489,164 1,533,496
Stephen B. Timbers 68,545,182 1,477,478
</TABLE>
- -Ratification of the selection of Ernst & Young LLP as independent auditors for
the fund
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
66,803,291 916,326 2,303,041
</TABLE>
- -Approval of new investment management agreement
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
65,690,248 1,375,097 2,957,314
</TABLE>
- -Approval of new 12b-1 distribution plan
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
Class B Shares 14,184,834 531,044 1,197,133
Class C Shares 163,501 3,057 19,158
</TABLE>
23
<PAGE> 24
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS KAREN A. HUSSEY
President and Trustee Vice President
DAVID W. BELIN JOHN E. PETERS
Trustee Vice President
LEWIS A. BURNHAM STEVEN H. REYNOLDS
Trustee Vice President
DONALD L. DUNAWAY PHILIP J. COLLORA
Trustee Vice President
and Secretary
ROBERT B. HOFFMAN
Trustee CHARLES F. CUSTER
Vice President and
DONALD R. JONES Assistant Secretary
Trustee
JEROME L. DUFFY
DAVID B. MATHIS Treasurer
Trustee
ELIZABETH C. WERTH
SHIRLEY D. PETERSON Assistant Secretary
Trustee
WILLIAM P. SOMMERS
Trustee
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
800-621-1048
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
INVESTMENT MANAGER KEMPER FINANCIAL SERVICES, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
120 South LaSalle Street
Chicago, IL 60603
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