<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED SEPTEMBER 30, 1997
Seeking maximum
appreciation of
investors capital
KEMPER SMALL CAPITALIZATION
EQUITY FUND
"...we've molded the portfolio so that
the securities have a price-to-earnings
ratio about the same as our benchmark,
but a projected earnings growth which
is significantly higher. ..."
[KEMPER FUNDS LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
<PAGE> 2
CONTENTS
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
- --------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 24.29%
CLASS B 22.83%
CLASS C 22.87%
LIPPER SMALL COMPANY GROWTH FUNDS CATEGORY AVERAGE* 29.79%
- --------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not represent future performance.
Returns and net asset value fluctuate. Shares are redeemable at current net
asset value, which may be more or less than original cost.
* Lipper Analytical Services, Inc. returns and rankings are based upon changes
in net asset value with all dividends reinvested and do not include the effect
of sales charges and, if they had, results may have been less favorable.
Investment by the fund in small companies presents greater risk than
investment in larger, more established companies.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
9/30/97 9/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS A $7.98 $7.01
- --------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS B $7.64 $6.81
- --------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS C $7.63 $6.80
- --------------------------------------------------------------------------------
</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 #291 OF 433 FUNDS #304 OF 433 FUNDS #303 OF 433 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #80 OF 125 FUNDS N/A N/A
- --------------------------------------------------------------------------------
10-YEAR #30 OF 52 FUNDS N/A N/A
- --------------------------------------------------------------------------------
15-YEAR #3 OF 15 FUNDS N/A N/A
- --------------------------------------------------------------------------------
20-YEAR #3 OF 12 FUNDS N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
DURING THE YEAR ENDED SEPTEMBER 30, 1997, KEMPER SMALL CAPITALIZATION EQUITY
FUND MADE THE FOLLOWING DISTRIBUTIONS PER SHARE:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM
CAPITAL GAIN $0.07 $0.07 $0.07
- --------------------------------------------------------------------------------
LONG-TERM
CAPITAL GAIN $0.50 $0.50 $0.50
- --------------------------------------------------------------------------------
</TABLE>
TERMS TO KNOW
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR EQUITY STYLE BOX
- --------------------------------------------------------------------------------
[STYLE/SIZE DIAGRAM]
Source: Morningstar, Inc., Chicago, IL (312) 696-6000. (Morningstar
Style Box is based on a portfolio date as of September 30, 1997.) The Equity
Style Box placement is based on a fund's price-to-earnings and price-to-book
ratio relative to the S&P 500, as well as the size of the companies in which it
invests, or median market capitalization.
Please note that style boxes do not represent an exact assessment of risk and
do not represent future performance. Please consult the prospectus for a
description of investment policies.
<PAGE> 3
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 $86 BILLION IN ASSETS, INCLUDING $49 BILLION IN RETAIL MUTUAL
FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM
HARVARD UNIVERSITY.
DEAR SHAREHOLDER:
Once again, investors experienced extreme market volatility in the month of
October. Unlike the October corrections of 1987 and 1989, this year's market
drop occurred at a time when the United States economy is remarkably healthy and
resilient. As we have noted, the U.S. economy has been moving forward for
several years with an alternating fast/slow pace that has proven successful in
removing whatever excesses build from quarter to quarter. As a consequence,
interest rates and the rate of inflation are both low and stable. Moreover, the
federal budget deficit has been reduced to such an extent that discussion has
now turned to what the government should do with a projected surplus in 1998.
Fortunately, no part of our strong economic foundation was shaken by the
market correction. If anything, the correction provided a short-lived and
relatively painless lesson about the vulnerability of a highly valued market.
When markets are high, everything -- economic news, corporate earnings and
liquidity -- must go right. When markets are high - as our equity market has
been for most of this year - they are vulnerable to relatively minor
disappointments.
As you have read, of course, the direct source of the October correction
was Southeast Asia, where the world's highest growth economies had been
stumbling since the summer. These economies had become overextended, banks ran
into trouble with bad loans and the local governments failed to take prompt
action. The result was a domino effect of competitive devaluations of
currencies, crashing markets and political chaos.
But while Southeast Asia produced the event that led to the mini-panic in
the U.S. equity market - resulting in a 7 percent loss on October 27 -- the
world quickly looked to the U.S. for solutions. When the U.S. market quickly
rebounded, other markets became less volatile. Considering U.S. economic
fundamentals and the relatively small effect that Southeast Asian problems have
on U.S. companies as a whole, rational investors had to expect our market to
bounce back. In fact, if the U.S. equity market had not been so highly valued,
we would have expected the market's reaction to the Asian problems to be quite
muted. For instance, if the Dow Jones Industrial Average had been closer to
7000 than to 8000, we would have expected that the market would have dropped
only slightly.
But as we have said before, today's markets move very fast. We experienced
in one day the kind of correction that we used to experience over a six-month
period. At this writing, the U.S. equity market remains very volatile. We expect
that condition to continue, as volatility is a factor of higher valued markets.
Despite what the last few years may have suggested, markets do not go in just
one direction.
Our recent experience supported many of the basic tenets of investing:
- Invest for the long term and don't react to the short-term noise.
Investors who got hurt in the October correction were those who had
borrowed the money they invested and were forced to sell at low prices.
Investors who were able to remain invested and did, lost only some of
their above-average gain for the year.
- Diversification helps reduce overall portfolio risk. Government
securities investors, for example, found the bond market to be a safe
haven as the bond market rallied during the stock market correction.
- Investing abroad is complex and requires expert advice. Currency
valuations, in particular, can have a significant effect on investment
returns.
Our forecast for the next several months calls for moderate economic
growth, stable interest rates and controlled inflation. While we cannot rule
out the possibility of another market event that would add to the excitement of
equity investing, we would expect the U.S. market to again demonstrate its
resiliency.
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 (10/31/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.03 6.71 6.2 5.93
PRIME RATE(2) 8.5 8.5 8.25 8.75
INFLATION RATE(3)* 2.15 2.5 2.99 2.74
THE U.S. DOLLAR(4) 7.62 6.55 3.46 -1.57
CAPITAL GOODS ORDERS(5)* 14.97 8.17 7.71 5.13
INDUSTRIAL PRODUCTION(5)* 5.52 4.39 3.27 2.35
EMPLOYMENT GROWTH(6)* 2.23 2.27 2.1 2.19
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commerical lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6 percent. The low, moderate inflation of
the last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of September 30, 1997.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this commentary 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 AND CHIEF INVESTMENT OFFICER
Zurich Kemper Investments, Inc.
November 13, 1997
4
<PAGE> 5
PERFORMANCE UPDATE
[STALZER PHOTO]
KURT R. STALZER JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN JANUARY 1997
WITH OVER 15 YEARS OF INVESTMENT EXPERIENCE. HE IS A SENIOR VICE PRESIDENT OF
ZKI AND PORTFOLIO MANAGER OF KEMPER SMALL CAPITALIZATION EQUITY FUND. STALZER
RECEIVED A B.B.A. DEGREE FROM THE UNIVERSITY OF MICHIGAN WHERE HE EARNED A DUAL
SPECIALIZATION IN FINANCE AND ACCOUNTING. HE IS ALSO A MEMBER OF THE FINANCIAL
ANALYST FEDERATION AND THE ASSOCIATION OF INVESTMENT MANAGEMENT AND RESEARCH.
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.
KURT STALZER BEGAN MANAGING THE KEMPER SMALL CAPITALIZATION EQUITY FUND IN
JANUARY 1997. SINCE THAT TIME, CLASS A SHARES OF THE FUND (UNADJUSTED FOR ANY
SALES CHARGE) HAVE OUTPERFORMED BOTH THE MARKET FOR SMALL CAP STOCKS AND THE
FUND'S PEER GROUP.
Q KURT, BEFORE DISCUSSING THE FUND'S PERFORMANCE, CAN YOU FIRST PROVIDE A
BRIEF OVERVIEW OF HOW SMALL COMPANY STOCKS PERFORMED VERSUS THE OVERALL MARKET
DURING THE FISCAL YEAR?
A Certainly. During the 12-month period ended September 30, 1997, nearly all
sectors of the U.S. stock market performed extremely well on the whole.
Performance was led by energy and consumer staples, while health care stocks
were the biggest laggards. Small company stocks as measured by our benchmark,
the Russell 2000 Index*, gained 33.19 percent. Yet this still trailed large
capitalization stocks, which were up 40.43 percent as measured by the Standard &
Poor's 500 Stock Index (S&P 500)**. During the first half of the fiscal year,
small company stocks dramatically underperformed their large cap cousins because
there was a high level of uncertainty regarding the strength of the economy.
This made investors nervous about the potential of small companies to deliver
growing earnings. Thus, investors gravitated to the greater liquidity and higher
earnings predictability of large cap stocks. However, as the year progressed and
the economic outlook brightened, small company stocks started to make up lost
ground. In fact, during the last six months of the fiscal year, the Russell 2000
outperformed the S&P 500 33.51 percent to 26.24 percent. As those figures
suggest, small cap stocks have rebounded strongly.
Q HOW DID THE FUND PERFORM IN COMPARISON?
A For the year ended September 30, the fund's total return was 24.29 percent
(Class A shares unadjusted for any sales charge), while the Russell 2000 Index
returned 33.19 percent.
Q ONE LAST PERFORMANCE-RELATED QUESTION ... YOU STARTED MANAGING THE FUND IN
JANUARY. HOW HAS IT PERFORMED SINCE THAT TIME?
A I'm pleased to report that from the beginning of the year through
September 30, the fund's return (Class A shares unadjusted for sales charge) was
27.27 percent. That topped both the Russell 2000 (26.60 percent) and the Lipper
Small Company Growth Category Average of 27.03 percent. Though our performance
is roughly in line with the market, we're very excited about the strategic
changes that we have made.
Q WHAT WERE THE MAJOR CHANGES?
A There have been three major strategies we've used. First was to increase
the quality and earnings predictability of the portfolio. Small company stocks
can be extremely volatile, so we look for the ones that, through a solid balance
sheet, capable management and a strong product position, offer a high level of
predictability in their earnings growth. We're most interested in companies that
can perform well CONSISTENTLY.
* 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 Standard & Poor's 500 Stock Index is an unmanaged index generally
representative of the U.S. stock market.
5
<PAGE> 6
PERFORMANCE UPDATE
Second, we've brought down the average market capitalization of the fund.
At the beginning of the year, the fund's median market cap was about $1 billion.
Now it's close to $700 million.
Finally, we've consolidated the fund's holdings into our "high confidence"
stocks. At the beginning of the year, the fund had well over 100 names. Now
we're down to 92.
Through these changes, we've molded the portfolio so that the securities
have a price-to-earnings ratio about the same as our benchmark, but a projected
earnings growth which is significantly higher, as well as quality balance
sheets.
Q WHAT MOVES HAVE WORKED OUT THE BEST THIS YEAR?
A One of the primary ways we manage the fund is to compare it to the Russell
2000 Index, then overweight the sectors that look most attractive and
underweight those that are least attractive. This year, we had success by
overweighting consumer nondurables, particularly lodging. Increasing demand and
limited new supply for luxury/upscale hotels led to good performance.
We have also been overweighted in retail over the last six months due to
an improving economy. Again, we concentrated on companies with good valuations.
We've also emphasized mall-based stores that tend to cater to the teenage
market. Teenagers are a group with increasing levels of disposable income, and
retailers stand to benefit.
In the finance area, our new commitments have been specialty lenders such
as Silicon Valley Bancshares and Healthcare Financial Partners. We think these
companies are attractive not only because interest rates have been flat to
lower, but also because the stocks are attractively valued in their own right
based on their solid earnings growth.
Transportation has also been an area of emphasis due to attractive
valuations and the growing economy. Examples include U.S. Xpress Enterprises
(trucking) and Expeditors International (freight).
Finally, our energy stocks were among our best performing holdings.
They've enjoyed strong earnings momentum due to increased energy demand. It's
been a long time since oil companies have committed capital to drilling new
wells and getting more out of existing wells. So we've played the energy surge
with services and drilling companies.
Q SOUNDS LIKE YOU DID A LOT OF THINGS RIGHT. WERE THERE ANY "MISSES" ALONG
THE WAY?
A We didn't experience "misses" as much as there were opportunities we
didn't take full advantage of. We were somewhat underweighted in technology in
the third quarter, in particular semiconductors. A host of technology names got
crushed in March and April, and we boosted our weighting then. But as they came
back strongly during the following months, we began to sell into the strength of
the rally. Semiconductors continued to perform well in the third quarter, but
we'd reduced our position for valuation reasons. We'd rather sell a little
early, however, than overstay our welcome and see our gains evaporate.
Q YOU MENTIONED THAT SMALL COMPANY STOCKS WERE OUTPERFORMING LARGE COMPANY
STOCKS AS THE FISCAL YEAR DREW TO A CLOSE. DO YOU EXPECT THAT TO CONTINUE?
A Small company stocks have trailed large cap stocks for about the last two
years. So there's a lot of ground they can make up from a valuation standpoint.
Relative earnings growth has also improved for small cap stocks. In addition,
the economy seems to be enjoying robust growth with few, if any signs, of
inflation or higher interest rates. So I think small company stocks could
continue to perform well for the foreseeable future. That's not to say we won't
have our occasional corrections and market rotations within groups that can
cause bouts of volatility. But overall, the economic climate appears to be a
good one for small companies.
Regardless, we'll continue to concentrate on holdings that share
demonstrated earnings growth, relatively predictable earnings, and a higher
level of earnings and quality than the market at prices that are comparable to
the market. In short, we want a portfolio that's populated by stocks offering
growth at a reasonable value. We believe we're there right now.
6
<PAGE> 7
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED SEPTEMBER 30, 1997 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER SMALL CAPITALIZATION EQUITY FUND CLASS A 17.10% 18.01% 12.96% 13.09% (since 2/20/69)
- -------------------------------------------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION EQUITY FUND CLASS B 19.83 N/A N/A 20.33 (since 5/31/94)
- -------------------------------------------------------------------------------------------------------------------
KEMPER SMALL CAPITALIZATION EQUITY FUND CLASS C 22.87 N/A N/A 20.69 (since 5/31/94)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
KEMPER SMALL CAPITALIZATION EQUITY FUND CLASS A
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Kemper Small Capitalization Equity
Fund Class A Shares from 1/1/79 to 9/30/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1/1/79 12/31/83 12/31/91 9/30/97
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Small Capitalization Equity Fund Class A(1) 10,000 30,365 89,567 192,880
Russell 2000 Index+ 10,000 32,648 65,339 171,107
Standard & Poor's 500 Stock Index++ 10,000 22,203 74,980 197,009
</TABLE>
KEMPER SMALL CAPITALIZATION EQUITY FUND CLASS B
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Kemper Small Capitalization Equity
Fund Class B from 5/31/94 through 9/30/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/95 12/31/96 9/30/97
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Small Capitalization Equity Fund Class B(1) 10,000 13,179 14,871 18,748
Russell 2000 Index+ 10,000 13,027 15,177 19,216
Standard & Poor's 500 Stock Index++ 10,000 14,135 17,372 22,515
</TABLE>
KEMPER SMALL CAPITALIZATION EQUITY FUND CLASS C
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Kemper Small Capitalization Equity
Fund Class C from 5/31/94 through 9/30/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/95 12/31/96 9/30/97
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Small Capitalization Equity Fund Class C(1) 10,000 13,162 14,854 18,734
Russell 2000 Index+ 10,000 13,027 15,177 19,216
Standard & Poor's 500 Stock Index++ 10,000 14,135 17,372 22,515
</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
percent, for Class B shares adjustment for the applicable contingent
deferred sales charge (CDSC) of 3 percent and for Class C shares no
adjustment for sales charge. The maximum CDSC for Class B shares is 4
percent. For Class C shares, there is a 1 percent 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 Class A shares and the contingent deferred sales
charge in effect at the end of the period for Class B shares. When reviewing
the performance chart, please note that the inception date for the Russell
2000 Index is January 1, 1979. As a result, we are unable to illustrate the
life of fund performance for Class A shares (since February 20, 1969) for
Kemper Small Capitalization Equity Fund. In comparing Kemper Small
Capitalization Equity Fund Class A shares 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 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, 1997, and on September 30, 1996.
[A YEAR-TO-YEAR COMPARISON BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL CAPITALIZATION KEMPER SMALL CAPITALIZATION
EQUITY FUND ON 9/30/97 EQUITY FUND ON 9/30/96
<S> <C> <C>
CONSUMER NON-DURABLES 22.1% 23.9%
TECHNOLOGY 22.0% 21.4%
FINANCE 14.7% 10.4%
HEALTH CARE 14.5% 23.4%
CAPITAL GOODS 13.6% 6.8%
ENERGY 4.3% 1.6%
CONSUMER DURABLES 3.4% 3.6%
TRANSPORTATION 3.0% 1.5%
BASIC INDUSTRIES 2.4% 4.5%
UTILITIES 0.0% 2.9%
</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, 1997,
compared to the industry sectors that make up the fund's benchmark, the Russell
2000 Index.
[RUSSELL COMPARISON BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL CAPITALIZATION RUSSELL 2000 INDEX
EQUITY FUND ON 9/30/97 ON 9/30/97
<S> <C> <C>
CONSUMER NON-DURABLES 22.1% 20.0%
TECHNOLOGY 22.0% 16.8%
FINANCE 14.7% 22.5%
HEALTH CARE 14.5% 10.0%
CAPITAL GOODS 13.6% 9.4%
ENERGY 4.3% 5.1%
CONSUMER DURABLES 3.4% 2.8%
TRANSPORTATION 3.0% 2.2%
BASIC INDUSTRIES 2.4% 6.1%
UTILITIES 0.0% 5.0%
SMALL CAP/INTERNATIONAL 0.0% 0.1%
</TABLE>
* THE RUSSELL 2000 INDEX IS A CAPITALIZATION WEIGHTED PRICE ONLY INDEX WHICH IS
COMPRISED OF 2000 OF THE SMALLEST STOCKS (ON THE BASIS OF CAPITALIZATION) IN
THE RUSSELL 3000 INDEX.
8
<PAGE> 9
LARGEST HOLDINGS
THE FUND'S 10 LARGEST HOLDINGS*
REPRESENTING 16.27 PERCENT OF THE FUND'S TOTAL NET ASSETS ON SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Holdings Percent
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. PRECISION DRILLING The leading Canadian company engaged in contract 1.75%
drilling of oil and gas wells.
2. FOUR SEASONS HOTELS Operates 37 luxury hotels worldwide, with additional 1.68%
hotels currently under development.
3. FRONTIER INSURANCE GROUP Engaged in providing specialty property and casualty 1.66%
insurance.
4. CONCENTRA MANAGED CARE The largest physician practice management company, 1.66%
this firm provides facilities for occupational health
care services.
5. CAPSTAR HOTELS Owns, acquires, manages and renovates hotels 1.64%
throughout the United States.
6. SOFAMOR-DANEK GROUP Manufacturer of spinal implant devices. 1.62%
7. BMC INDUSTRIES The only U.S. and European manufacturer of aperture 1.59%
masks for color picture tubes used in television and
computer monitors. Also a leading producer of
polycarbonate, glass, and plastic eye wear.
8. GLOBAL INDUSTRIES, LTD. A major supplier of pipeline construction, derrick and 1.56%
diving services to the offshore oil and gas industry
in the Gulf of Mexico.
9. EXECUTIVE RISK A specialty insurance holding company that, through 1.56%
its subsidiaries, develops, markets, underwrites and
issues directors and officers (D&O) liability
insurance.
10. DURA PHARMACEUTICALS A specialty pharmaceutical company marketing 1.55%
prescription pharmaceuticals in the U.S. for treatment
of asthma, allergies and other respiratory ailments.
</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, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
COMMON STOCKS NUMBER OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC INDUSTRIES--2.2% Intertape Polymer Group 338,100 $ 8,199
(a)Mycogen Corp. 117,900 2,771
OM Group 335,000 13,379
-----------------------------------------------------------------------------
24,349
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--12.8% (a)Advanced Lighting Technologies 400,000 10,800
Applied Industrial Technologies 413,100 14,226
Applied Power, Inc. 206,400 12,990
BMC Industries 548,000 17,433
(a)Culligan Water Technologies 216,200 9,945
(a)Jacobs Engineering Group 477,700 14,629
(a)Littelfuse, Inc. 400,000 13,950
Precision Castparts Corp. 166,200 10,803
(a)Rofin-Sinar Technologies, Inc. 323,600 5,420
(a)Roper Industries 282,000 9,518
TriMas Corp. 341,000 10,400
Watsco, Inc. 334,300 10,447
-----------------------------------------------------------------------------
140,561
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS--19.2% Arbor Drugs 500,000 11,625
CKE Restaurants 240,000 10,080
(a)CapStar Hotels Co. 535,000 17,956
(a)Caribiner International, Inc. 390,000 15,893
Claire's Stores 470,800 10,534
(a)Consolidated Graphics, Inc. 261,200 12,995
(a)Equity Corporation International 490,000 11,423
Four Seasons Hotels, Ltd. 450,000 18,450
(a)Interim Services 550,000 15,469
(a)Interstate Hotels Co. 323,200 10,544
(a)MSC Industrial Direct 143,900 6,619
(a)Men's Wearhouse 425,000 15,831
(a)Nautica Enterprises 185,300 5,212
(a)Pacific Sunwear of California 249,100 10,213
Pier 1 Imports 643,600 11,545
Stewart Enterprises, Inc. 320,000 14,000
U.S. Rentals 440,700 11,596
-----------------------------------------------------------------------------
209,985
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER DURABLES--3.2% Ethan Allen Interiors 281,700 8,733
SPX Corp. 260,000 15,242
(a)Tower Automotive, Inc. 255,000 11,475
-----------------------------------------------------------------------------
35,450
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
COMMON STOCKS NUMBER OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER STAPLES--1.7% (a)JP Foodservice 330,000 $ 10,395
(a)Revlon, Inc. 160,000 7,930
-----------------------------------------------------------------------------
18,325
- -----------------------------------------------------------------------------------------------------------------------
ENERGY--4.1% (a)Global Industries, Ltd. 430,000 17,146
(a)Precision Drilling Corp. 300,000 19,163
(a)Trico Marine Services, Inc. 250,000 8,688
-----------------------------------------------------------------------------
44,997
- -----------------------------------------------------------------------------------------------------------------------
FINANCE--13.8% (a)ABR Information Services 550,000 15,194
(a)B A Merchant Services 440,000 8,140
Bank United Corp. 356,300 15,766
CapMAC Holdings, Inc. 237,700 7,681
Executive Risk 250,000 17,094
First Financial Corp. 358,900 12,225
Frontier Insurance Group 477,500 18,145
(a)Healthcare Financial Partners 251,600 7,768
PMI Group 71,200 4,081
(a)Silicon Valley Bancshares 168,200 9,840
Sirrom Capital Corp. 195,000 10,116
Texas Regional Bancshares 285,000 8,906
Western National Corp. 288,400 8,273
Wilmington Trust Corp. 152,200 8,314
-----------------------------------------------------------------------------
151,543
- -----------------------------------------------------------------------------------------------------------------------
HEALTH CARE--13.6% (a)Concentra Managed Care, Inc. 513,620 18,137
(a)Dura Pharmaceuticals 390,000 17,014
Mentor Corp. 241,500 7,668
(a)National Surgery Centers 363,750 7,912
(a)Ocular Sciences, Inc. 357,100 8,258
Omnicare, Inc. 508,100 16,513
(a)PAREXEL International Corp. 300,000 11,850
(a)Pediatrix Medical Group 277,900 12,262
(a)Renal Treatment Centers 180,000 6,401
(a)Safeskin Corp. 366,700 16,272
(a)Serologicals Corp. 415,000 9,441
(a)Sofamor-Danek Group 310,000 17,709
-----------------------------------------------------------------------------
149,437
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
COMMON STOCKS NUMBER OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TECHNOLOGY--20.9% (a)Brightpoint 280,300 $ 12,999
(a)CFM Technologies, Inc. 205,100 8,037
(a)CHS Electronics, Inc. 501,000 13,715
(a)Cimlinc Incorporated, "D," convertible
preferred 75,431 283
(a)Computer Products, Inc. 494,700 14,717
(a)Comverse Technology 205,000 10,814
(a)Encad, Inc. 37,000 1,138
Innovex, Inc. 159,000 5,128
(a)KLA Instruments 100,000 6,756
(a)Keane, Inc. 411,200 13,056
Linear Technology Corp. 105,000 7,219
(a)MRV Communications 383,100 13,983
Natural MicroSystems Corp. 131,600 5,001
(a)Network Appliance, Inc. 213,500 11,582
(a)SBS Technologies 295,200 7,048
(a)Sawtek, Inc. 94,700 4,380
(a)Smart Modular Technologies, Inc. 123,000 10,209
(a)Solectron Corp. 334,000 14,863
(a)Tech Data Corp. 315,000 14,490
(a)Tecnomatix Technologies 341,600 13,066
(a)Tellabs, Inc. 287,900 14,827
(a)Visio Corp. 251,400 10,496
(a)World Access, Inc. 417,800 13,578
------------------------------------------------------------------------------
227,385
- -----------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--2.8% Expeditors International of Washington 300,000 12,563
Heartland Express 330,000 9,116
(a)U.S. Xpress Enterprises 450,000 9,000
------------------------------------------------------------------------------
30,679
------------------------------------------------------------------------------
TOTAL COMMON STOCKS--94.3%
(Cost: $692,870) 1,032,711
-----------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET Yield--5.57% to 6.65%
INSTRUMENTS--5.6% Due--October 1997
Mid-Atlantic Fuel Co. $25,000 24,980
Other 37,200 37,125
-----------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--5.6%
(Cost: $62,105) 62,105
-----------------------------------------------------------------------------
TOTAL INVESTMENTS--99.9%
(Cost: $754,975) 1,094,816
-----------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--.1% 662
-----------------------------------------------------------------------------
NET ASSETS--100% $1,095,478
-----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security.
Based on the cost of investments of $754,975,000 for federal income tax purposes
at September 30, 1997, the gross unrealized appreciation was $341,665,000, the
gross unrealized depreciation was $1,824,000 and the net unrealized appreciation
on investments was $339,841,000.
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, 1997, 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
1993. 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, 1997, 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, 1997, 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 1993, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 18, 1997
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investments, at value
(Cost: $754,975) $1,094,816
- --------------------------------------------------------------------------
Cash 21
- --------------------------------------------------------------------------
Receivable for:
Investments sold 11,478
- --------------------------------------------------------------------------
Fund shares sold 1,563
- --------------------------------------------------------------------------
Dividends 90
- --------------------------------------------------------------------------
TOTAL ASSETS 1,107,968
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Payable for:
Fund shares redeemed 7,923
- --------------------------------------------------------------------------
Investments purchased 3,436
- --------------------------------------------------------------------------
Management fee 270
- --------------------------------------------------------------------------
Distribution services fee 191
- --------------------------------------------------------------------------
Administrative services fee 198
- --------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 403
- --------------------------------------------------------------------------
Trustees' fees 69
- --------------------------------------------------------------------------
Total liabilities 12,490
- --------------------------------------------------------------------------
NET ASSETS $1,095,478
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------
Paid-in capital $ 635,871
- --------------------------------------------------------------------------
Undistributed net realized gain on investments 119,766
- --------------------------------------------------------------------------
Net unrealized appreciation on investments 339,841
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $1,095,478
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($760,549 / 95,260 shares outstanding) $7.98
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering price) $8.47
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($302,665 / 39,598 shares outstanding) $7.64
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($11,347 / 1,487 shares outstanding) $7.63
- --------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($20,917 / 2,592 shares outstanding) $8.07
- --------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
INVESTMENT INCOME
- ------------------------------------------------------------------------
Interest $ 3,633
- ------------------------------------------------------------------------
Dividends 2,748
- ------------------------------------------------------------------------
Total investment income 6,381
- ------------------------------------------------------------------------
Expenses:
Management fee 3,193
- ------------------------------------------------------------------------
Distribution services fee 1,992
- ------------------------------------------------------------------------
Administrative services fee 2,029
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 3,860
- ------------------------------------------------------------------------
Reports to shareholders 259
- ------------------------------------------------------------------------
Professional fees 60
- ------------------------------------------------------------------------
Trustees' fees and other 87
- ------------------------------------------------------------------------
Total expenses 11,480
- ------------------------------------------------------------------------
NET INVESTMENT LOSS (5,099)
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- ------------------------------------------------------------------------
Net realized gain on sales of investments 108,862
- ------------------------------------------------------------------------
Change in net unrealized appreciation on investments 101,461
- ------------------------------------------------------------------------
Net gain on investments 210,323
- ------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $205,224
- ------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996
- ----------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment loss $ (5,099) (4,680)
- ----------------------------------------------------------------------------------------------
Net realized gain 108,862 98,994
- ----------------------------------------------------------------------------------------------
Change in net unrealized appreciation 101,461 29,125
- ----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 205,224 123,439
- ----------------------------------------------------------------------------------------------
Distribution from net realized gain (76,845) (120,799)
- ----------------------------------------------------------------------------------------------
Net increase from capital share transactions 33,024 91,530
- ----------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 161,403 94,170
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------------------
Beginning of year 934,075 839,905
- ----------------------------------------------------------------------------------------------
END OF YEAR $1,095,478 934,075
- ----------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Small Capitalization Equity Fund is an
open-end management investment company organized as
a business trust under the laws of Massachusetts.
The Fund currently offers four classes of shares.
Class A shares are sold to investors subject to an
initial sales charge. Class B shares are sold
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares are sold to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
Differences in class expenses will result in the
payment of different per share income dividends by
class. All shares of the Fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Portfolio securities that are traded on a
domestic securities exchange or securities listed
on the NASDAQ National Market are valued at the
last sale price on the exchange or market where
primarily traded or listed or, if there is no
recent sale, at the last current bid quotation.
Portfolio securities that are primarily traded on
foreign securities exchanges are generally valued
at the preceding closing values of such securities
on their respective exchanges where primarily
traded. Securities not so traded or listed are
valued at the last current bid quotation if market
quotations are available. Fixed income securities
are valued by using market quotations, or
independent pricing services that use prices
provided by market makers or estimates of market
values obtained from yield data relating to
instruments or securities with similar
characteristics. Equity options are valued at the
last sale price unless the bid price is higher or
the asked price is lower, in which event such bid
or asked price is used. Financial futures and
options thereon are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Forward foreign
currency contracts are valued at the forward rates
prevailing on the day of valuation. Other
securities and assets are valued at fair value as
determined in good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Dividend income is recorded on the
ex-dividend date, and interest income is recorded
on the accrual basis and includes discount
amortization on money market instruments. Realized
gains and losses from investment transactions are
reported on an identified cost basis.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
by dividing the Fund's net assets attributable to
that class by the number of shares of the class
outstanding.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies 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, 1997, the Fund
incurred management fees as follows (in thousands):
<TABLE>
<S> <C>
Base fee $5,810
Performance adjustment (2,617)
------
Total fees $3,193
======
</TABLE>
Zurich Investment Management Limited, an affiliate
of ZKI, serves as sub-adviser with respect to
foreign securities investments in the Fund and is
paid by ZKI for its services.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with Zurich Kemper
Distributors, Inc. (ZKDI). Underwriting commissions
paid in connection with the distribution of Class A
shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS ALLOWED
RETAINED BY ZKDI BY ZKDI TO FIRMS
---------------- -------------------
<S> <C> <C>
Year ended September 30, 1997 $104,000 705,000
</TABLE>
For services under the distribution services
agreement, the Fund pays ZKDI a fee of .75% of
average daily net assets of the Class B and Class C
shares. Pursuant to the agreement, ZKDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, ZKDI 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 and Class C shares and the CDSC received in
connection with the redemption of such shares are
as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES
AND CDSC COMMISSIONS AND
RECEIVED BY DISTRIBUTION FEES
ZKDI PAID BY ZKDI TO FIRMS
----------------- ----------------------
<S> <C> <C>
Year ended September 30, 1997 $2,411,000 1,371,000
</TABLE>
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with ZKDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays ZKDI a fee at an annual rate of up to
.25% of average daily net assets of each class.
ZKDI 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 ZKDI
ASF PAID BY -----------------------------
THE FUND TO ZKDI TO ALL FIRMS TO AFFILIATES
----------------- ------------- -------------
<S> <C> <C> <C>
Year ended September 30, 1997 $2,029,000 2,027,000 7,000
</TABLE>
SHAREHOLDER SERVICES AGENT AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Zurich Kemper Service Company (ZKSvC) is the
shareholder service agent of the Fund. Under the
agreement, ZKSvC received shareholder services fees
of $2,814,000 for the year ended September 30,
1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the year ended September 30, 1997, 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, 1997, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $916,127
Proceeds from sales 893,417
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,
1997 1996
----------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 27,197 $ 186,417 30,868 $ 202,700
--------------------------------------------------------------------------------
Class B 14,228 92,204 14,887 95,149
--------------------------------------------------------------------------------
Class C 8,306 58,655 756 4,816
--------------------------------------------------------------------------------
Class I 1,369 9,385 1,486 9,698
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 8,074 50,144 13,634 77,454
--------------------------------------------------------------------------------
Class B 3,584 21,543 5,749 32,025
--------------------------------------------------------------------------------
Class C 105 630 95 525
--------------------------------------------------------------------------------
Class I 232 1,451 505 2,875
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES REDEEMED
Class A (33,969) (225,207) (34,939) (226,681)
--------------------------------------------------------------------------------
Class B (14,844) (93,796) (14,337) (91,287)
--------------------------------------------------------------------------------
Class C (7,876) (55,966) (359) (2,253)
--------------------------------------------------------------------------------
Class I (1,827) (12,436) (2,055) (13,491)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 1,206 8,422 702 4,562
--------------------------------------------------------------------------------
Class B (1,252) (8,422) (719) (4,562)
--------------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL SHARE
TRANSACTIONS $ 33,024 $ 91,530
--------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------
CLASS A
-------------------------------------
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------
Net asset value, beginning of year $7.01 7.14 5.81 6.45 5.25
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (.01) (.02) (.01) (.01) (.02)
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 1.55 .94 1.68 (.27) 1.71
- --------------------------------------------------------------------------------
Total from investment operations 1.54 .92 1.67 (.28) 1.69
- --------------------------------------------------------------------------------
Less distribution from net realized gain .57 1.05 .34 .36 .49
- --------------------------------------------------------------------------------
Net asset value, end of year $7.98 7.01 7.14 5.81 6.45
- --------------------------------------------------------------------------------
TOTAL RETURN 24.29% 16.33 30.88 (4.31) 34.11
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Expenses .90% 1.08 1.14 1.34 1.03
- --------------------------------------------------------------------------------
Net investment loss (.20)% (.26) (.18) (.76) (.43)
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
CLASS B
------------------------------------
YEAR ENDED SEPTEMBER MAY 31
30, TO
--------------------- SEPT. 30,
1997 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------
Net asset value, beginning of period $6.81 7.03 5.78 5.65
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (.10) (.09) (.07) (.02)
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) 1.50 .92 1.66 .15
- ---------------------------------------------------------------------------------------
Total from investment operations 1.40 .83 1.59 .13
- ---------------------------------------------------------------------------------------
Less distribution from net realized gain .57 1.05 .34 --
- ---------------------------------------------------------------------------------------
Net asset value, end of period $7.64 6.81 7.03 5.78
- ---------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 22.83% 15.13 29.59 2.30
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------
Expenses 2.14% 2.15 2.17 2.29
- ---------------------------------------------------------------------------------------
Net investment loss (1.44)% (1.33) (1.21) (1.38)
- ---------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------ -----------------------------------
CLASS C CLASS I
------------------------------------------ -----------------------------------
MAY 31 YEAR ENDED JULY 3
YEAR ENDED SEPT. 30, TO SEPT. 30, TO
--------------------------- SEPT. 30, ---------------- SEPT. 30,
1997 1996 1995 1994 1997 1996 1995
- ------------------------------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------- -----------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------- -----------------------------------
Net asset value, beginning of period $6.80 7.02 5.77 5.65 7.05 7.15 6.27
- ------------------------------------------------------------------------------------- -----------------------------------
Income from investment operations:
Net investment income (loss) (.09) (.09) (.07) (.03) .01 .01 --
- ------------------------------------------------------------------------------------- -----------------------------------
Net realized and unrealized gain 1.49 .92 1.66 .15 1.58 .94 .88
- ------------------------------------------------------------------------------------- -----------------------------------
Total from investment operations 1.40 .83 1.59 .12 1.59 .95 .88
- ------------------------------------------------------------------------------------- -----------------------------------
Less distribution from net realized
gain .57 1.05 .34 -- .57 1.05 --
- ------------------------------------------------------------------------------------- -----------------------------------
Net asset value, end of period $7.63 6.80 7.02 5.77 8.07 7.05 7.15
- ------------------------------------------------------------------------------------- -----------------------------------
TOTAL RETURN (NOT ANNUALIZED) 22.87% 15.16 29.65 2.12 24.89 16.76 14.04
- ------------------------------------------------------------------------------------- -----------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------- -----------------------------------
Expenses 1.95% 2.15 2.10 2.10 .53 .66 .79
- ------------------------------------------------------------------------------------- -----------------------------------
Net investment income (loss) (1.25)% (1.33) (1.14) (1.21) .17 .16 (.14)
- ------------------------------------------------------------------------------------- -----------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $1,095,478 934,075 839,905 631,607 510,060
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 102% 85 102 58 82
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Average commission rates paid per share on stock transactions for the years
ended September 30, 1997 and 1996 were $.0573 and $.0557, respectively.
- --------------------------------------------------------------------------------
NOTE: Total return does not reflect the effect of any sales charges. Per share
data for the year ended September 30, 1996 were determined based on average
shares outstanding.
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES AND 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 KURT R. STALZER
Trustee Vice President
ROBERT B. HOFFMAN PHILIP J. COLLORA
Trustee Vice President
and Secretary
DONALD R. JONES
Trustee JEROME L. DUFFY
Treasurer
SHIRLEY D. PETERSON
Trustee ELIZABETH C. WERTH
Assistant Secretary
WILLIAM P. SOMMERS
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT ZURICH KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER
AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania
Kansas City, MO 64105
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INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
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INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER ZURICH KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
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Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Equity Funds/Growth Style prospectus.
KSCF - 2 (11/97) 1039800
Printed in the U.S.A.
[KEMPER FUNDS LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
