<PAGE> 1
KEMPER
SMALL CAPITALIZATION
EQUITY FUND
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED SEPTEMBER 30, 1996
Seeking maximum appreciation of investors' capital
" . . . By staying disciplined with
regard to the research, we've not only picked some
strong performers but
avoided a few disasters as well."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
2
At a Glance
Terms to Know
3
Economic Overview
5
Performance Update
8
Industry Sectors
9
Largest Holdings
10
Portfolio of
Investments
13
Report of
Independent Auditors
14
Financial Statements
16
Notes to
Financial Statements
20
Financial Highlights
AT A GLANCE
[BAR GRAPH]
- ------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND TOTAL RETURNS
- ------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(UNADJUSTED FOR ANY SALES CHARGE)
<TABLE>
<CAPTION>
<S> <C>
CLASS A 16.33%
CLASS B 15.13%
CLASS C 15.16%
LIPPER SMALL COMPANY
GROWTH FUNDS CATEGORY
AVERAGE* 18.40%
</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. returns and rankings are based upon changes in
net asset value with all dividends reinvested and do not include the effect of
sales charges and, if they had, results may have been less favorable. Returns
and rankings are historical and do not reflect future performance. The fund is
compared to the Lipper Small Company Growth Funds category.
- ------------------------------------------------------------------------------
NET ASSET VALUE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
9/30/96 9/30/95
- ------------------------------------------------------------------------------
<S> <C> <C>
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS A $7.01 $7.14
- ------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS B $6.81 $7.03
- ------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS C $6.80 $7.02
- ------------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND LIPPER RANKINGS*
- ------------------------------------------------------------------------------
Compared to all other funds in the Lipper Small Company Growth Funds category
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
-----------------------------------------------------------------------------
1-YEAR #175 OF #203 OF #201 OF
350 FUNDS 350 FUNDS 350 FUNDS
-----------------------------------------------------------------------------
5-YEAR #52 OF 94 N/A N/A
-----------------------------------------------------------------------------
10-YEAR #17 OF 45 N/A N/A
-----------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
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>
SHORT-TERM CAPITAL GAIN $0.23 $0.23 $0.23
- ------------------------------------------------------------------------------
LONG-TERM CAPITAL GAIN $0.82 $0.82 $0.82
- ------------------------------------------------------------------------------
</TABLE>
TERMS TO KNOW
BLUE CHIP COMPANIES Blue chip companies are generally identified by their
substantial capitalization, established history of earnings and dividends, easy
access to credit, good industry position and superior management structure. They
are believed to generally exhibit less investment risk and less price volatility
than companies lacking these high quality characteristics, such as smaller, less
seasoned companies.
FUNDAMENTAL RESEARCH This research includes analysis of the balance sheets and
income statements of companies used to forecast their future stock price
movements. Fundamental analysis considers past records of assets, earnings,
sales, products, management and markets in helping predict future trends in
these indicators and of a company's success or failure. By appraising a firm's
prospects, this analysis may be used to help assess whether a particular stock
or group of stocks is undervalued or overvalued at its current market price.
GROWTH STOCK The stock of a company whose earnings growth has consistently
exceeded the growth rate of the overall market and whose growth is expected to
continue or accelerate.
INDEX An unmanaged group of stocks that is considered representative of the
stock or bond markets. An index does not take into account any fees or expenses
related to the individual securities that it tracks. However, for performance
comparisons, the index is adjusted to reflect reinvestment of dividends of the
securities in the index.
MARKET CAPITALIZATION Capitalization is a measure of the size of a publicly
traded company, as determined by multiplying the current market price by the
number of shares outstanding. The market capitalization of a company has bearing
on its perceived earnings potential and risk. Small cap companies (less than $1
billion) may present the potential for greater growth than larger, more
established companies. On the other hand, the stock of small cap companies may
be expected to be more volatile and therefore greater risk to capital.
VOLATILITY Characteristic of a security, commodity or market to rise or fall
sharply in price within a short period of time. A stock may be volatile because
the outlook for the company is particularly uncertain or because of various
other reasons.
<PAGE> 3
GENERAL ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $76 BILLION IN ASSETS, INCLUDING $42 BILLION IN RETAIL
MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM
HARVARD UNIVERSITY.
DEAR SHAREHOLDER:
As we approach the close of 1996, it's remarkable how eventful the year has been
and yet, economically, we are essentially where we were one year ago.
The fundamentals of the economy are remarkably similar today to what they
were in 1995. Long-term interest rates are approximately 6.52% compared to 6.29%
in November 1995. The economy is growing at a rate of approximately 2.2%.
Inflation continues to be well under control, at about 3.0%.
One significant difference between today and one year ago is that prices of
the stocks are on average up 15% to 20%. While price movements were more
volatile in 1996 than in the past few years, the patient investor was amply
rewarded. The prime element sending the stock market higher was strong positive
cash flows. This liquidity in an environment of modestly increasing corporate
profits and relatively stable interest rates pushed stocks higher for most of
the year.
This higher stock market has caused many market observers to worry. While
we cannot ignore what has happened, we find no reason to be bearish over the
long term. The environment is benign to favorable for financial assets. Given
steady interest rates, moderate economic growth and continued moderate corporate
earnings growth, there are few excesses in the system. In fact, real interest
rates are probably too high considering our outlook for inflation, and we may
see them decline over time.
Naturally, we cannot rule out the possibility of a market correction. But,
in our belief, the downside would appear to be limited to 5% to 8%, which is the
size of a typical correction based on historical data. As we have said in
previous outlooks, three elements tend to move the market:
- - EARNINGS. We forecast corporate earnings to range between 0% and 5% on
average for the Standard & Poor's 500* in 1997 -- not as high as in recent
previous years but positive nonetheless.
- - INTEREST RATES. Rates should remain stable, and short-term interest
rates may even decline.
- - LIQUIDITY. Investors, through mutual funds, 401(k)s and qualified
contribution plans in particular, continue to create strong demand for
securities.
In order to move the market more than would be expected in a typical
decline, one or more of these elements will have to turn negative in 1997, and,
while future market conditions cannot be predicted with certainty, we fail to
see what would materially change our outlook. Our outlook going forward is that
1997 should be a lot like 1996.
While the economy continued along a relatively consistent path, the United
States took some politically significant steps in 1996. First, of course,
President Bill Clinton and a Republican Congress were re-elected by the voters.
In the first few days after the general election, especially, investors
demonstrated their support for such a balance in our leadership. But of much
greater long-term significance is the expressed commitment by both parties to
balance the federal budget and address certain entitlement programs. The first
year after an election can be a fertile time to accomplish major initiatives,
and we are hopeful that progress can be made.
The future of the Social Security system, which many experts believe will
run out of money about 20 years from now, will be a subject in which you can
expect Zurich Kemper Investments, Inc. to play a leadership role. The possible
solutions for "fixing Social Security" are finite: raise Social Security taxes,
reduce benefits, raise the retirement age, change inflation assumptions or
pursue a higher rate of return on assets contributed by workers. We believe that
a bipartisan solution will be worked out, which will include giving individuals
the option of investing a portion of their Social Security contributions in an
account earmarked for them. This change is needed to return credibility to the
system, which many Americans have lost faith in.
What to do with Social Security is a debate that spans generations and
promises to occupy much attention in the coming years. As we hope to help
advance constructive debate, we'll be advocating partial privatization for this
federal program while maintaining a safety net for many low-wage earners and
providing a seamless transition for seniors near or in retirement.
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 (10/31/96) 6 Months ago 1 year ago 2 years ago
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.53 6.74 6.04 7.74
Prime rate (2) 8.25 8.25 8.75 7.75
Inflation rate (3) 3 2.9 2.6 2.6
The U.S. dollar (4) 4.74 8.94 -1.05 -5.28
Capital goods orders (5)* 2.24 7.42 8.57 15.65
Industrial production (5) 3.5 2.56 1.92 6.77
Employment growth (6) 2.01 2.07 1.93 3.3
</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%. 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 the U.S. firms' foreign profits.
5 These influence corporate profits and equity performance.
6 An influence on family income and retail sales.
* Data as of September 30, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this letter as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
- ----------------------
Stephen B. Timbers
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
November 15, 1996
*THE STANDARD & POOR'S 500 IS AN UNMANAGED INDEX GENERALLY REPRESENTATIVE OF THE
U.S. STOCK MARKET.
4
<PAGE> 5
PERFORMANCE UPDATE
[LANGBAUM PHOTO]
GARY A. LANGBAUM HAS BEEN WITH ZURICH KEMPER INVESTMENTS, INC. (ZKI) SINCE
1988. HE IS SENIOR VICE PRESIDENT OF ZKI AND VICE PRESIDENT AND PORTFOLIO
MANAGER OF KEMPER SMALL CAPITALIZATION EQUITY FUND. LANGBAUM IS A CHARTERED
FINANCIAL ANALYST WITH 25 YEARS OF EXPERIENCE IN EQUITY RESEARCH AND SECURITIES
ANALYSIS. HE RECEIVED HIS BACHELOR'S DEGREE AND COMPLETED HIS MASTER'S OF
BUSINESS ADMINISTRATION COURSEWORK FROM THE UNIVERSITY OF MARYLAND.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
DESPITE A BRIEF CORRECTION FOR SMALL COMPANY STOCKS DURING THE SUMMER OF 1996,
EACH CLASS OF KEMPER SMALL CAPITALIZATION EQUITY FUND SHARES FINISHED ITS
FISCAL YEAR WITH A SOLID DOUBLE-DIGIT RETURN (UNADJUSTED FOR SALES CHARGE).
BELOW, PORTFOLIO MANAGER GARY LANGBAUM EXPLAINS HOW DISCIPLINE AND FUNDAMENTAL
RESEARCH HELPED THE FUND WEATHER A VOLATILE MARKET.
Q. HOW DID SMALL CAP STOCKS PERFORM OVER THE PAST 12 MONTHS?
A. With lingering uncertainty about the strength of the economy and the
direction of interest rates, the market in general has favored larger, blue chip
stocks. Nevertheless, we've been able to achieve strong performance. The fund
experienced a dip in early summer, coinciding with a broad-based correction for
small stocks. Since then, however, the fund has rebounded, closing the fiscal
year ended September 30, 1996, ahead of our benchmark (the Russell 2000 Index)
and just below the Lipper Small Company Growth Fund category average.
Q. HAS INCREASED VOLATILITY IN THE MARKET HAD AN INFLUENCE ON YOUR INVESTMENT
STRATEGY?
A. Not at all. One of the keys to our long-term success is having the
discipline to not change course in mid-stream. The fund invests in high quality
companies that boast predictable, stable growth, stocks that can withstand
short-term volatility. These are the kind of companies that form the core of our
portfolio. Our strong research capabilities, coupled with an ongoing commitment
to diversity and quality, help to protect the portfolio from broad market moves.
Q. HAVE THERE BEEN ANY SIGNIFICANT PORTFOLIO CHANGES IN THE PAST YEAR?
A. There's definitely been some shuffling. Certain stocks achieved our price
targets and we sold them to take advantage of new opportunities. Others were
eliminated after failing to perform up to expectations or contribute
meaningfully to the fund's performance. But overall, the portfolio's composition
is essentially the same. (See page 8 for a breakdown of the fund's asset
allocation compared with one year ago.)
Q. HOW DOES THE FUND'S SECTOR ALLOCATION COMPARE WITH THAT OF ITS BENCHMARK,
THE RUSSELL 2000 INDEX?
A. Kemper Small Capitalization Equity Fund's portfolio is significantly
overweighted in traditional growth stocks. In the small cap universe that means
mostly health care, technology and consumer stocks.
Although we've trimmed our exposure to health care in recent months, we remain
heavily overweighted relative to the index. This is a strategy that's worked
very well for us over the past year. In this sector we continue to favor service
companies like Omnicare, Steris and IDEXX Laboratories, Inc.--niche
5
<PAGE> 6
PERFORMANCE UPDATE
businesses with solid, predictable earnings flow.
The fund also remains overweight in technology. While this sector as a
whole saw increased volatility during the past year, and a moderate correction
in July, we achieved solid performance from our technology positions by
concentrating on a very select group of networking and software stocks. These
positions fared relatively well when the commodity-oriented stocks, like those
in the semiconductor area, tumbled.
Among consumer stocks, we particularly like information services, although
our overall exposure in this area has dropped a bit after taking profits on some
strong performers. In retail, we favor upscale niche companies that have strong
name recognition and market share. These include Kenneth Cole Productions, Ethan
Allen, Williams Sonoma, Starbucks and Intimate Brands, owner of the Victoria's
Secret and Bath & Body Works chains.
In recent months we've increased our position in financial stocks,
primarily regional banks and thrifts. In this area, it's not as easy to find
small cap opportunities. Again, however, our research has been very successful
in identifying strong growth potential.
Our fundamental research enables us to identify attractive growth
opportunities and to set price targets for both the buy and sell side. By
staying disciplined with regard to the research, we've not only picked some
strong performers but avoided a few disasters as well. For example we sold
Medaphis, which had contributed some attractive gains, at $40 -- near our
established price target. Shortly after, the stock dropped to $11 on the heels
of a disappointing earnings report. Similarly, HCIA, Inc. was eliminated as it
hit our price target, and soon fell 50%. So, as you can see, staying disciplined
on the sell side is every bit as important as choosing the right stocks in
building solid long-term performance.
Q. WHAT'S YOUR OUTLOOK FOR THE COMING YEAR?
A. Recent economic data indicates the economy isn't overheating, as many have
feared. This suggests that the Federal Reserve Board won't be inclined to make a
significant change in interest rates. Moderate growth and a stable interest rate
environment should create a favorable climate for small and emerging growth
stocks, although a strong economy is historically best for the small cap sector.
In the current market environment, where uncertainty is prompting volatility and
the market is acutely sensitive to earnings, it's important to buy stocks in
which we hold high convictions. While the market may remain choppy for the near
term, the portfolio is well positioned for consistent long-term growth
potential.
6
<PAGE> 7
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
Average Annual Total Returns*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED SEPTEMBER 30, 1996 (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 9.58% 14.52% 14.27% 12.70% (SINCE 2/20/69)
- ------------------------------------------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION EQUITY FUND CLASS B 12.23 N/A N/A 18.80 (SINCE 5/31/94)
- ------------------------------------------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION EQUITY FUND CLASS C 15.16 N/A N/A 19.75 (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 9/30/96
- --------------------------------------------------------------------------------
[LINE GRAPH]
<TABLE>
<CAPTION>
1/1/79 12/31/83 12/31/87 12/31/91 9/30/96
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- - KEMPER SMALL CAPITALIZATION EQUITY FUND 10,000 30,365 41,139 89,567 155,190
CLASS A (1)
- - RUSSELL 2000 INDEX + 10,000 32,648 38,239 65,339 128,462
- - STANDARD & POOR'S 500 STOCK INDEX ++ 10,000 22,203 38,734 74,980 140,326
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Kemper Small Capitalization Equity
Fund Class B from 5/31/94 through 9/30/96
- --------------------------------------------------------------------------------
[LINE GRAPH]
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 9/30/96
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- - KEMPER SMALL CAPITALIZATION EQUITY 10,000 10,146 13,179 14,964
FUND CLASS B (1)
- - RUSSELL 2000 INDEX + 10,000 10,141 13,027 14,427
- - STANDARD & POOR'S 500 STOCK INDEX ++ 10,000 10,284 14,135 16,037
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Kemper Small Capitalization Equity
Fund Class C from 5/31/94 through 9/30/96
- --------------------------------------------------------------------------------
[LINE GRAPH]
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 9/30/96
- ------------------------------------------------------------------------------------------------------------------
<S> <S> <S> <S> <S>
- - KEMPER SMALL CAPITALIZATION EQUITY 10,000 10,128 13,162 15,247
FUND CLASS C (1)
- - RUSSELL 2000 INDEX + 10,000 10,141 13,027 14,427
- - STANDARD & POOR'S 500 STOCK INDEX ++ 10,000 10,284 14,135 16,037
- ------------------------------------------------------------------------------------------------------------------
</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.
*Average annual total return measures net investment income and capital
gain or loss from portfolio investments, assuming reinvestment of all
dividends and for Class A shares adjustment for the maximum sales charge of
5.75%, for Class B shares adjustment for the applicable contingent deferred
sales charge (CDSC) of 3% and for Class C shares no adjustment for sales
charge. The maximum B share CDSC is 4%. For C shares purchased on or after
4/1/96 there is a 1% CDSC on certain redemptions within the first year of
purchase. 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 Kemper Small
Capitalization Equity Fund. In comparing Kemper Small Capitalization Equity
Fund to the Russell 2000 Index and the Standard & Poor's 500 Stock Index,
you should also note that the fund's performance reflects the maximum sales
charge, while no such charges are reflected in the performance of the
indices.
+The Russell 2000 Index is a capitalization weighted price only index which
is comprised of 2000 of the smallest stocks (on the basis of
capitalization) in the Russell 3000 Index. The largest company in the index
has an approximate market cap of $591 million.
++The Standard & Poor's 500 Stock Index is an unmanaged index generally
representative of the U.S. stock market. Source is Towers Data Systems.
7
<PAGE> 8
INDUSTRY SECTORS
A YEAR-TO-YEAR COMPARISON
DATA SHOW THE PERCENTAGE OF THE COMMON STOCKS IN THE PORTFOLIO THAT EACH SECTOR
REPRESENTED ON SEPTEMBER 30, 1996, AND ON SEPTEMBER 30, 1995.
<TABLE>
<CAPTION>
KEMPER SMALL KEMPER SMALL
CAPITALIZATION CAPITALIZATION
EQUITY FUND ON EQUITY FUND ON
9/30/96 9/30/95
- --------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER NON-DURABLES 23.9% 26.8%
HEALTH CARE 24.4% 20.2%
TECHNOLOGY 21.4% 23.2%
FINANCE 10.4% 4.7%
CAPITAL GOODS 6.8% 13.4%
BASIC INDUSTRIES 4.5% 6.4%
CONSUMBER DURABLES 3.6% 0%
UTILITIES 2.9% 0%
ENERGY 1.6% 0.8%
TRANSPORTATION 1.5% 4.5%
- --------------------------------------------------------------------------------
</TABLE>
A COMPARISON WITH THE RUSSELL 2000 INDEX*
DATA SHOW THE PERCENTAGE OF THE COMMON STOCKS IN THE PORTFOLIO THAT EACH SECTOR
OF KEMPER SMALL CAPITALIZATION EQUITY FUND REPRESENTED ON SEPTEMBER 30, 1996,
COMPARED TO THE INDUSTRY SECTORS THAT MAKE UP THE FUND'S BENCHMARK, THE RUSSELL
2000 INDEX.
<TABLE>
<CAPTION>
KEMPER SMALL
CAPITALIZATION RUSSELL 2000
EQUITY FUND ON INDEX ON
9/30/96 9/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER NON-DURABLES 23.9% 20.2%
HEALTH CARE 23.4% 10.6%
TECHNOLOGY 21.4% 15.6%
FINANCE 10.4% 22.7%
CAPITAL GOODS 6.8% 9.5%
BASIC INDUSTRIES 4.5% 6.7%
CONSUMER DURABLES 3.6% 3.6%
UTILITIES 2.9% 3.8%
ENERGY 1.6% 5.4%
TRANSPORTATION 1.5% 1.7%
OTHER 0% 0.2%
- --------------------------------------------------------------------------------
</TABLE>
*The Russell 2000 Index is a capitalization weighted price only index which is
comprised of 2000 of the smallest stocks (on the basis of capitalization) in
the Russell 3000 Index. The largest company in the index has an approximate
market cap of $591 million.
8
<PAGE> 9
LARGEST HOLDINGS
THE FUND'S 10 LARGEST HOLDINGS*
REPRESENTING 21% OF THE FUND'S TOTAL COMMON STOCK HOLDINGS ON SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Holdings Percent
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------
1 LCI Worldwide long-distance telecommunications company 2.9%
INTERNATIONAL, that provides a full array of voice, data and video
INC. transmission services to business and residential
customers through its fiber optic network.
- ----------------------------------------------------------------------------------------
2 OMNICARE, Provides pharmaceutical management services and drug 2.3%
INC. therapies to nursing homes.
- ----------------------------------------------------------------------------------------
3 DURA Develops and markets prescription pharmaceuticals for 2.2%
PHARMACEUTICALS treatment of asthma, allergies, colds and other
respiratory ailments.
- ----------------------------------------------------------------------------------------
4 IDEXX Develops and manufactures biotechnology-based 2.1%
LABORATORIES detection systems. The company's products are used in
animal health and food quality assurance applications.
- ----------------------------------------------------------------------------------------
5 CRA Provides specialized cost containment services 2.0%
MANAGED designed to reduce workers compensation costs. The
CARE, company offers medical management and return to work
INC. services.
- ----------------------------------------------------------------------------------------
6 MGM Owns and operates hotels, casinos and theme parks. 2.0%
GRAND
- ----------------------------------------------------------------------------------------
7 TELLABS Designs, manufactures and services voice and data 1.9%
OPERATIONS equipment.
- ----------------------------------------------------------------------------------------
8 MOHAWK Major manufacturer of woven and tufted broadloom 1.9%
INDUSTRIES carpeting for residential and commercial markets.
- ----------------------------------------------------------------------------------------
9 RISK Global reinsurance company integrating reinsurance 1.9%
CAPITAL underwriting with an investment strategy focused on
HOLDINGS, the insurance industry.
INC.
- ----------------------------------------------------------------------------------------
10 ALTERNATIVE Leading provider of technical resources specializing 1.8%
RESOURCES in information service operations.
CORPORATION
- ----------------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER SMALL CAPITALIZATION EQUITY FUND
PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
NUMBER OF
COMMON STOCKS SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC INDUSTRIES--3.8% (a)Fort Howard Corp. 450,000 $ 10,969
(a)Jacobs Engineering Group 585,000 13,163
OM Group 100,000 3,800
Philip Environmental 825,000 7,837
----------------------------------------------------------------------------
35,769
- ----------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--5.8% (a)Elsag Bailey Process Automation 600,000 12,825
Federal Signal Corp. 367,000 8,854
Greenfield Industries 182,500 4,380
(a)MSC Industrial Direct, "A" 123,900 4,414
(a)Rofin-Sinar Technologies 409,100 4,449
Scientific Atlanta 496,500 7,882
TriMas Corp. 479,400 11,625
----------------------------------------------------------------------------
54,429
- ----------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS--17.2% (a)APAC TeleServices 160,000 8,200
(a)Kenneth Cole Productions 300,000 5,662
(a)Copart, Inc. 218,500 4,315
Danka Business Systems, ADR 262,500 10,434
Gaylord Entertainment Co. 564,900 12,781
(a)Global DirectMail 225,000 10,744
Hollinger International 1,061,600 11,943
(a)Infinity Broadcasting Corp. 150,000 4,725
(a)Interim Services 164,900 7,049
(a)MGM Grand 375,000 15,844
(a)OfficeMax, Inc. 450,000 6,300
Outdoor Systems, Inc. 175,000 8,225
(a)Primadonna Resorts 135,200 2,467
(a)Rental Service 170,500 3,687
(a)Renters Choice 223,900 4,198
(a)RockShox Inc. 46,500 698
SPX Corp. 300,000 8,963
(a)Snyder Communications, Inc. 93,900 1,784
Talbots 150,000 4,500
(a)Telespectrum Worldwide Inc. 164,500 3,208
(a)Teletech Holdings Inc. 144,700 5,282
(a)Viking Office Products 370,000 11,100
(a)Williams-Sonoma 300,000 8,513
----------------------------------------------------------------------------
160,622
- ----------------------------------------------------------------------------------------------------------------
CONSUMER DURABLES--3.1% Ethan Allen Interiors 424,100 13,200
(a)Mohawk Industries 600,000 15,375
----------------------------------------------------------------------------
28,575
- ----------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--3.2% Intimate Brands 225,000 4,106
(a)Revlon, Inc. 347,000 10,757
Richfood Holdings 285,700 10,642
(a)Starbucks Corp. 150,000 4,950
----------------------------------------------------------------------------
30,455
- ----------------------------------------------------------------------------------------------------------------
ENERGY--1.4% (a)Input/Output, Inc. 150,000 4,462
Ultramar Corp. 275,000 8,319
----------------------------------------------------------------------------
12,781
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCE--8.9% (a)Bank United Corp. 356,300 $ 8,863
Executive Risk 200,000 7,700
Kansas City Southern Industries 110,000 4,702
Meadowbrook Insurance Group 134,100 3,755
PMI Group 209,000 11,103
(a)Profit Recovery Group International 237,500 3,444
(a)Risk Capital Holdings, Inc. 790,000 15,010
Texas Regional Bancshares 150,000 4,312
(a)United Insurance Companies 214,100 5,567
Western National Corporation 598,500 11,147
Wilmington Trust Corp. 219,800 7,858
-------------------------------------------------------------------------------
83,461
- ----------------------------------------------------------------------------------------------------------------
HEALTH CARE--20.1% (a)ABR Information Services 200,000 14,400
(a)Access Health, Inc. 79,700 4,483
(a)CRA Managed Care, Inc. 295,000 15,930
(a)Dura Pharmaceuticals 483,000 17,811
(a)EndoSonics Corp. 265,000 3,710
(a)IDEXX Laboratories 375,000 16,969
(a)i-STAT Corp. 290,000 5,329
Integrated Health Services 200,000 5,050
Mentor Corp. 191,500 5,266
(a)Occusystems, Inc. 210,000 6,300
Omnicare, Inc. 600,000 18,300
Physician Computer Network 400,000 4,250
Physician Sales & Service 500,000 11,750
(a)Quest Medical 501,100 3,007
RTW, Inc. 301,650 8,710
(a)Renal Treatment Centers 220,000 7,315
(a)Serologicals Corporation 190,000 6,603
(a)Steris Corp. 260,000 8,807
Stewart Enterprises 400,000 13,500
(a)Total Renal Care Holdings 253,000 10,057
-------------------------------------------------------------------------------
187,547
- ----------------------------------------------------------------------------------------------------------------
TECHNOLOGY--18.3% Advanced Fibre Communications 17,300 433
(a)Alternative Resources Corporation 515,000 14,484
(a)Analog Devices 400,000 10,850
(a)Ascend Communications 145,000 9,588
(a)Auspex Systems, Inc. 370,000 5,689
(a)Cascade Communications 129,000 10,513
(a)Ciber, Inc. 100,000 3,800
(a)Cimlinc Incorporated, "D", convertible
preferred 75,431 283
(a)Dendrite International, Inc. 330,000 9,983
(a)ETEC Systems 300,000 10,200
(a)Gartner Group 120,000 4,080
(a)Integrated Systems 125,600 4,145
(a)InterVoice, Inc. 500,000 7,375
(a)Keane, Inc. 240,000 11,520
Linear Technology Corp. 125,000 4,609
(a)McAfee Associates, Inc. 145,000 10,005
(a)Parametric Technology Corp. 150,000 7,406
(a)SPSS, Inc. 200,000 5,550
(a)Solectron Corp. 190,000 9,310
(a)Tech Data Corporation 325,000 9,059
(a)Tellabs Operations 220,000 15,537
U.S. Robotics 100,000 6,463
-------------------------------------------------------------------------------
170,882
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TRANSPORTATION--1.3% Tranz Rail Holdings, Ltd. 413,500 $ 5,996
(a)Wisconsin Central Transportation 171,900 6,167
-------------------------------------------------------------------------------
12,163
- ----------------------------------------------------------------------------------------------------------------
UTILITIES--2.5% (a)LCI International, Inc. 730,000 22,995
-------------------------------------------------------------------------------
TOTAL COMMON STOCKS--85.6%
(Cost: $561,298) 799,679
-------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET
INSTRUMENTS--14.5% Yield--5.29% to 5.62%
Due--October 1996
CSW Credit, Inc. $ 9,800 9,766
ConAgra, Inc. 13,700 13,678
Countrywide Funding Corporation 12,800 12,773
Enserch Corporation 14,200 14,193
Madison Funding Corporation 16,000 15,972
Sanwa Business Credit Corporation 10,000 9,965
Whirlpool Financial Corporation 10,000 9,997
Xerox Corporation 10,000 9,991
Other 39,300 39,223
-------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--14.5%
(Cost: $135,559) 135,558
-------------------------------------------------------------------------------
TOTAL INVESTMENTS--100.1%
(Cost: $696,857) 935,237
-------------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER
ASSETS--(.1)% (1,162)
-------------------------------------------------------------------------------
NET ASSETS--100% $934,075
-------------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- ------------------------------------------------------------------------------
(a) Non-income producing security.
Based on the cost of investments of $696,857,000 for federal income tax
purposes at September 30, 1996, the gross unrealized appreciation was
$258,307,000, the gross unrealized depreciation was $19,927,000 and the net
unrealized appreciation on investments was $238,380,000.
See accompanying Notes to Financial Statements.
12
<PAGE> 13
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, 1996, 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
1992. 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, 1996, 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, 1996, 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 1992, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 18, 1996
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------
Investments, at value
(Cost: $696,857) $935,237
- -------------------------------------------------------------------------------------------------------
Cash 2,135
- -------------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 1,030
- -------------------------------------------------------------------------------------------------------
Investments sold 12,475
- -------------------------------------------------------------------------------------------------------
Dividends 120
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS 950,997
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------------------------------------
Payable for:
Fund shares redeemed 1,845
- -------------------------------------------------------------------------------------------------------
Investments purchased 14,156
- -------------------------------------------------------------------------------------------------------
Management fee 319
- -------------------------------------------------------------------------------------------------------
Distribution services fee 159
- -------------------------------------------------------------------------------------------------------
Administrative services fee 171
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 207
- -------------------------------------------------------------------------------------------------------
Trustees' fees 65
- -------------------------------------------------------------------------------------------------------
Total liabilities 16,922
- -------------------------------------------------------------------------------------------------------
NET ASSETS $934,075
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------------------------------------
Paid-in capital $607,943
- -------------------------------------------------------------------------------------------------------
Undistributed net realized gain on investments 87,752
- -------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 238,380
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $934,075
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- -------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($649,824 / 92,752 shares outstanding) $7.01
- -------------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering price) $7.44
- -------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($257,912 / 37,882 shares outstanding) $6.81
- -------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($6,470 / 952 shares outstanding) $6.80
- -------------------------------------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($19,869 / 2,818 shares outstanding) $7.05
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended September 30, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------
Dividends $ 1,616
- -------------------------------------------------------------------------------------------------------
Interest 5,378
- -------------------------------------------------------------------------------------------------------
Total investment income 6,994
- -------------------------------------------------------------------------------------------------------
Expenses:
Management fee 4,418
- -------------------------------------------------------------------------------------------------------
Distribution services fee 1,778
- -------------------------------------------------------------------------------------------------------
Administrative services fee 1,907
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 3,300
- -------------------------------------------------------------------------------------------------------
Professional fees 68
- -------------------------------------------------------------------------------------------------------
Reports to shareholders 150
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 53
- -------------------------------------------------------------------------------------------------------
Total expenses 11,674
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS (4,680)
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Net realized gain on sales of investments 98,994
- -------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 29,125
- -------------------------------------------------------------------------------------------------------
Net gain on investments 128,119
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $123,439
- -------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------------
Net investment loss $ (4,680) (3,152)
- ---------------------------------------------------------------------------------------------------------
Net realized gain 98,994 120,667
- ---------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 29,125 76,338
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 123,439 193,853
- ---------------------------------------------------------------------------------------------------------
Distribution from net realized gain (120,799) (37,835)
- ---------------------------------------------------------------------------------------------------------
Net increase from capital share transactions 91,530 52,280
- ---------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 94,170 208,298
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------
Beginning of year 839,905 631,607
- ---------------------------------------------------------------------------------------------------------
END OF YEAR $ 934,075 839,905
- ---------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE FUND Kemper Small Capitalization Equity Fund is an
open-end management investment company organized as
a business trust under the laws of Massachusetts.
The Fund currently offers four classes of shares.
Class A shares are sold to investors subject to an
initial sales charge. Class B shares are sold
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and, for shares sold on or
after April 1, 1996, 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, 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.
Differences in class expenses will result in the
payment of different per share income dividends by
class. All shares of the Fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT ACCOUNTING
POLICIES INVESTMENT VALUATION. Investments are stated at
value. Portfolio securities that are traded on a
domestic securities exchange or securities listed
on the NASDAQ National Market are valued at the
last sale price on the exchange or market where
primarily traded or listed or, if there is no
recent sale, at the last current bid quotation.
Portfolio securities that are primarily traded on
foreign securities exchanges are generally valued
at the preceding closing values of such securities
on their respective exchanges where primarily
traded. Securities not so traded or listed are
valued at the last current bid quotation if market
quotations are available. Fixed income securities
are valued by using market quotations, or
independent pricing services that use prices
provided by market makers or estimates of market
values obtained from yield data relating to
instruments or securities with similar
characteristics. Equity options are valued at the
last sale price unless the bid price is higher or
the asked price is lower, in which event such bid
or asked price is used. Financial futures and
options thereon are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Forward foreign
currency contracts are valued at the forward rates
prevailing on the day of valuation. Other
securities and assets are valued at fair value as
determined in good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Dividend income is recorded on the
ex-dividend date, and interest income is recorded
on the accrual basis and includes discount
amortization on money market instruments. Realized
gains and losses from investment transactions are
reported on an identified cost basis.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
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 Fund's net assets
attributable to that class by the number of shares
of the class outstanding.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies and therefore no
federal income tax provision is required.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income and net
realized capital gains annually, which are recorded
on the ex-dividend date. Dividends are determined
in accordance with income tax principles which may
treat certain transactions differently from
generally accepted accounting principles.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI) 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, 1996, the Fund
incurred management fees as follows (in thousands):
<TABLE>
<S> <C>
Base fee $5,088
Performance adjustment (670)
------
Total fees $4,418
======
</TABLE>
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS -----------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------- -------------
<S> <C> <C> <C>
Year ended September 30, 1996 $ 130,000 849,000 16,000
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, KDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees and
commissions paid in connection with the sale of
Class B
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
and Class C shares and the CDSC received in
connection with the redemption of such shares are
as follows:
<TABLE>
<CAPTION>
COMMISSIONS AND
DISTRIBUTION FEES
DISTRIBUTION FEES PAID BY KDI
AND CDSC -----------------------------
RECEIVED BY KDI TO ALL FIRMS TO AFFILIATES
----------------- ------------- -------------
<S> <C> <C> <C>
Year ended September 30, 1996 $ 2,167,000 1,412,000 18,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of Fund accounts that the
firms service. Administrative services fees (ASF)
paid are as follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY -----------------------------
THE FUND TO KDI TO ALL FIRMS TO AFFILIATES
---------------- ------------- -------------
<S> <C> <C> <C>
Year ended September 30, 1996 $1,907,000 1,918,000 34,000
</TABLE>
SHAREHOLDER SERVICES AGENT 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
$2,840,000 for the year ended September 30, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the year ended September 30, 1996, the Fund
made no payments to its officers and incurred
trustees' fees of $31,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended September 30, 1996, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $682,617
Proceeds from sales 794,207
18
<PAGE> 19
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,
1996 1995
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------
SHARES SOLD
--------------------------------------------------------------------------------
Class A $ 30,868 $ 202,700 $ 31,018 $181,695
--------------------------------------------------------------------------------
Class B 14,887 95,149 14,738 87,414
--------------------------------------------------------------------------------
Class C 756 4,816 369 2,253
--------------------------------------------------------------------------------
Class I 1,486 9,698 3,091 19,863
--------------------------------------------------------------------------------
SHARES ISSUED IN
REINVESTMENT OF DIVIDENDS
--------------------------------------------------------------------------------
Class A 13,634 77,454 4,829 25,278
--------------------------------------------------------------------------------
Class B 5,749 32,025 1,801 9,352
--------------------------------------------------------------------------------
Class C 95 525 14 74
--------------------------------------------------------------------------------
Class I 505 2,875 -- --
--------------------------------------------------------------------------------
SHARES REDEEMED
Class A (34,939) (226,681) (35,471) (208,460)
--------------------------------------------------------------------------------
Class B (14,337) (91,287) (10,859) (63,342)
--------------------------------------------------------------------------------
Class C (359) (2,253) (73) (426)
--------------------------------------------------------------------------------
Class I (2,055) (13,491) (209) (1,421)
--------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 702 4,562 739 4,350
--------------------------------------------------------------------------------
Class B (719) (4,562) (746) (4,350)
--------------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL SHARE
TRANSACTIONS $ 91,530 $ 52,280
--------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------
CLASS A
-------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $7.14 5.81 6.45 5.25 5.35
- -----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (.02) (.01) (.01) (.02) (.02)
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .94 1.68 (.27) 1.71 .40
- -----------------------------------------------------------------------------------------------
Total from investment operations .92 1.67 (.28) 1.69 .38
- -----------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income -- -- -- -- .01
- -----------------------------------------------------------------------------------------------
Distribution from net realized gain 1.05 .34 .36 .49 .47
- -----------------------------------------------------------------------------------------------
Total dividends 1.05 .34 .36 .49 .48
- -----------------------------------------------------------------------------------------------
Net asset value, end of year $7.01 7.14 5.81 6.45 5.25
- -----------------------------------------------------------------------------------------------
TOTAL RETURN 16.33% 30.88 (4.31) 34.11 7.02
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------
Expenses 1.08% 1.14 1.34 1.03 1.28
- -----------------------------------------------------------------------------------------------
Net investment loss (.26)% (.18) (.76) (.43) (.43)
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------
CLASS B
-----------------------------------
YEAR ENDED MAY 31
SEPTEMBER 30, TO SEPT. 30,
1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------
Net asset value, beginning of period $7.03 5.78 5.65
- ------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (.09) (.07) (.02)
- ------------------------------------------------------------------------------------
Net realized and unrealized gain .92 1.66 .15
- ------------------------------------------------------------------------------------
Total from investment operations .83 1.59 .13
- ------------------------------------------------------------------------------------
Less distribution from net realized gain 1.05 .34 --
- ------------------------------------------------------------------------------------
Net asset value, end of period $6.81 7.03 5.78
- ------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 15.13% 29.59 2.30
- ------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------
Expenses 2.15% 2.17 2.29
- ------------------------------------------------------------------------------------
Net investment loss (1.33)% (1.21) (1.38)
- ------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------- ------------------------------------
CLASS C CLASS I
---------------------------------- ------------------------------------
MAY 31 JULY 3
YEAR ENDED TO YEAR ENDED TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1994 1996 1995
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------- ------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------- ------------------------------------
Net asset value, beginning of period $7.02 5.77 5.65 7.15 6.27
- ---------------------------------------------------------------------------- ------------------------------------
Income from investment operations:
Net investment income (loss) (.09) (.07) (.03) .01 --
- ---------------------------------------------------------------------------- ------------------------------------
Net realized and unrealized gain .92 1.66 .15 .94 .88
- ---------------------------------------------------------------------------- ------------------------------------
Total from investment operations .83 1.59 .12 .95 .88
- ---------------------------------------------------------------------------- ------------------------------------
Less distribution from net realized gain 1.05 .34 -- 1.05 --
- ---------------------------------------------------------------------------- ------------------------------------
Net asset value, end of period $6.80 7.02 5.77 7.05 7.15
- ---------------------------------------------------------------------------- ------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 15.16% 29.65 2.12 16.76 14.04
- ---------------------------------------------------------------------------- ------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------- ------------------------------------
Expenses 2.15% 2.10 2.10 .66 .79
- ---------------------------------------------------------------------------- ------------------------------------
Net investment income (loss) (1.33)% (1.14) (1.21) .16 (.14)
- ---------------------------------------------------------------------------- ------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $934,075 839,905 631,607 510,060 329,116
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 85% 102 58 82 73
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Average commission rate paid per share on stock transactions for the year
ended September 30, 1996 was $.0557.
- --------------------------------------------------------------------------------
NOTE: Total return does not reflect the effect of any sales charges. Per share
data for the year ended September 30, 1996 was determined based on average
shares outstanding.
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS CHARLES R. MANZONI, JR.
President and Trustee Vice President
DAVID W. BELIN JOHN E. NEAL
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 JEROME L. DUFFY
Treasurer
DONALD R. JONES
Trustee ELIZABETH C. WERTH
Assistant Secretary
DOMINIQUE P. MORAX
Trustee
SHIRLEY D. PETERSON
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
1-800-621-1048
- --------------------------------------------------------------------------------
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 ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza
Chicago, IL 60606
http://www.kemper.com
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