<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED SEPTEMBER 30, 2000
Seeking maximum
appreciation of
investors' capital
KEMPER SMALL CAPITALIZATION
EQUITY FUND
"... Despite a year of intense market volatility,
a rally in biotechnology stocks and strong
stock selection within the technology sector
helped the fund deliver solid results. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
7
PERFORMANCE UPDATE
12
INDUSTRY SECTORS
13
LARGEST HOLDINGS
15
PORTFOLIO OF INVESTMENTS
20
FINANCIAL STATEMENTS
23
FINANCIAL HIGHLIGHTS
25
NOTES TO FINANCIAL STATEMENTS
30
REPORT OF INDEPENDENT AUDITORS
31
TAX INFORMATION
AT A GLANCE
KEMPER SMALL CAPITALIZATION EQUITY FUND TOTAL RETURNS
FOR THE YEAR ENDED SEPTEMBER 30, 2000 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL KEMPER SMALL
CAPITALIZATION EQUITY CAPITALIZATION EQUITY LIPPER MID-CAP GROWTH
KEMPER SMALL CAPITALIZATION EQUITY FUND CLASS A FUND CLASS B FUND CLASS C FUNDS CATEGORY AVERAGE*
----------------------------------------------- --------------------- --------------------- -----------------------
<S> <C> <C> <C>
55.94 53.95 55.38 63.89
</TABLE>
PERFORMANCE IS HISTORICAL AND INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL
GAINS. INVESTMENT RETURN AND PRINCIPAL VALUE FLUCTUATE WITH CHANGING MARKET
CONDITIONS, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
TOTAL RETURN MEASURES NET INVESTMENT INCOME AND CAPITAL GAIN OR LOSS FROM
PORTFOLIO INVESTMENTS, ASSUMING REINVESTMENT OF ALL DIVIDENDS. DURING THE PERIOD
NOTED, SECURITIES PRICES FLUCTUATED. FOR ADDITIONAL INFORMATION SEE THE
PROSPECTUS, STATEMENT OF ADDITIONAL INFORMATION AND FINANCIAL HIGHLIGHTS AT THE
END OF THIS REPORT.
*LIPPER, 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, IF
SALES CHARGES HAD BEEN INCLUDED, RESULTS MAY HAVE BEEN LESS FAVORABLE.
INVESTMENT BY THE FUND IN SMALL COMPANIES PRESENTS GREATER RISK THAN INVESTMENT
IN LARGER, MORE ESTABLISHED COMPANIES.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
9/30/00 9/30/99
.........................................................
<S> <C> <C> <C> <C>
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS A $9.10 $6.12
.........................................................
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS B $8.29 $5.67
.........................................................
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS C $8.39 $5.71
.........................................................
</TABLE>
KEMPER SMALL CAPITALIZATION EQUITY
FUND RANKINGS AS OF 9/30/00
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER MID-CAP GROWTH FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
....................................................................................
<S> <C> <C> <C> <C> <C>
1-YEAR #133 of 221 funds #144 of 221 funds #134 of 221 funds
....................................................................................
5-YEAR #66 of 79 funds #69 of 79 funds #68 of 79 funds
....................................................................................
10-YEAR #20 of 24 funds n/a n/a
....................................................................................
20-YEAR #3 of 6 funds n/a n/a
....................................................................................
</TABLE>
DIVIDEND REVIEW
DURING THE FISCAL YEAR, KEMPER SMALL CAPITALIZATION EQUITY FUND PAID THE
FOLLOWING DIVIDENDS:
<TABLE>
<CAPTION>
LONG-TERM
CAPITAL GAIN
.................................................................
<S> <C> <C> <C>
CLASS A $0.36
.................................................................
CLASS B $0.36
.................................................................
CLASS C $0.36
.................................................................
</TABLE>
YOUR FUND'S STYLE
MORNINGSTAR EQUITY STYLE BOX(TM)
<TABLE>
<S> <C>
[MORNINGSTAR EQUITY STYLE Source: Morningstar, Inc. Chicago, IL, (312)
BOX] 696-6000. The Morningstar Equity Style Box(TM)
placement is based on two variables: a fund's
market capitalization relative to the movements
of the market and a fund's valuation, which is
calculated by comparing the stocks in the fund's
portfolio with the most relevant of the three
market-cap groups.
PLEASE NOTE THAT STYLE BOXES DO NOT REPRESENT AN
EXACT ASSESSMENT OF RISK AND DO NOT REPRESENT
FUTURE PERFORMANCE. THE FUND'S PORTFOLIO CHANGES
FROM DAY TO DAY. A LONGER-TERM VIEW IS
REPRESENTED BY THE FUND'S MORNINGSTAR CATEGORY,
WHICH IS BASED ON ITS ACTUAL INVESTMENT STYLE AS
MEASURED BY ITS UNDERLYING PORTFOLIO HOLDINGS
OVER THE PAST THREE YEARS. MORNINGSTAR HAS PLACED
KEMPER SMALL CAPITALIZATION EQUITY FUND IN THE
SMALL-CAP GROWTH CATEGORY. PLEASE CONSULT THE
PROSPECTUS FOR A DESCRIPTION OF INVESTMENT
POLICIES.
</TABLE>
<PAGE> 3
ECONOMIC OVERVIEW
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER:
Times have been good. During the first half of 2000, the global economy grew
faster than it has in over a decade. All regions participated. The United
States, of course, was still powering ahead. The growth rate in Europe was
nearly 4 percent. Asia fed off an electronics boom and a revitalized China.
South America got a boost from an improved credit rating. New money pumped up
energy producers from Mexico to the Middle East.
Now for the bad news, which is that the best news is probably behind us.
Global growth peaked in the spring, and in the United States, at least, the
slowdown was abrupt. After 6 percent growth in the year ending June 30, the
economy grew at a rate of just 2.7 percent during the summer. It seems that
expensive energy, currency volatility and more widespread profit problems, are
bringing the exuberant global economy, including the United States, to heel.
Let's explore these factors in more detail.
OIL, OIL, TOIL AND TROUBLE
Although oil prices have receded somewhat, everyone's still jittery, and with
good reason: Of the seven recessions since World War II, six were preceded by a
spike in crude oil prices.
Oil prices have already been strong enough for long enough to crimp growth,
and they're biting the rest of the world even harder than the United States. But
there are two factors working to our advantage. First, oil prices are still
historically low. Oil is slightly more than $30 per barrel today, but it peaked
at over $75 per barrel back in 1980 (stated in today's dollars). Second, our
dependence on oil has decreased: The United States uses only roughly half as
much oil to produce a unit of GDP as it did thirty years ago. This gives us hope
that the economy can escape recession this time around.
What would make us worry more? Outright energy shortages or a political
crisis. If either happens, the odds of a recession occurring would rise steeply.
People panic or become excessively cautious when they have to fret. Can I fill
up my oil tank? Will there be a war? Their loss of confidence can be much more
devastating than price increases alone.
CURRENCY CONCERNS
Currency turmoil is a second danger to the economy. Central bankers have
intervened to halt the euro's decline, and they're right that the euro is
fundamentally undervalued. But intervention is a hazardous game. Let's hope they
don't convince the markets that the euro should rise a lot very quickly. A
suddenly weak dollar might make Europeans think about selling all those American
stocks and bonds they've been buying, and would greatly complicate the Fed's
inflation fight.
BUSINESS: BIG PLANS BUT PROFIT DISAPPOINTMENTS
Profit warnings escalated late this summer, and we believe there's fire amid
that smoke.
Sure, businesses have had a voracious appetite for money -- and until very
recently, corporate treasurers were finding it easily: Banks increased business
lending by 10.8 percent in the past year. Bond markets have suddenly become a
lot more picky, especially for low-quality credits, but money is still available
for investment grade borrowers. Capital goods orders reflect executives'
enthusiasm -- they've been accelerating since early in the year, and in
September were up more than 20 percent compared to a year ago.
Still, we expect total capital spending to slow, from this year's estimated 14
percent to 12.5 percent in 2001. The reason? A profit squeeze is about to take
some of the edge off executives' animal spirits.
We've always been more cautious than Wall Street about 2001 profits, and our
forecast hasn't changed. Profits are likely to be flat to down next year for
several reasons. First, the growth slowdown will make it harder to keep up the
productivity gains that have kept labor costs under control. Second, interest
expense will surge thanks to higher rates and all that new debt. Third,
depreciation costs are escalating. And finally, the excessively weak euro and
higher oil costs will sap earnings.
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 (10/31/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
-------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 5.70 6.00 6.10 4.50
Prime rate (2) 9.50 9.00 8.25 8.25
Inflation rate (3)* 3.50 3.80 2.60 1.40
The U.S. dollar (4) 11.30 1.10 -0.90 1.10
Capital goods orders (5)* 22.70 13.30 4.70 8.60
Industrial production (5)* 5.70 5.40 3.50 3.70
Employment growth (6) 1.80 2.50 2.30 2.50
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
*DATA AS OF 9/30/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
SAVING GRACES: FISCAL POLICY AND CONSUMER SPENDING
While growth has peaked and is now slowing, we can be thankful that growth
probably won't slow too much, thanks in part to a more stimulative fiscal policy
and consumer spending.
Fiscal policy is likely to be more stimulative. Of course, most economists
agree that the last thing this pumped-up economy needs is another shot of
stimulants -- too much stimulus, after all, is widely believed to cause
inflation. But economists weren't running for office; politicians were. And
inflation risk was about the last thing on the mind of either candidate in the
heat of election campaigning. They wanted to win votes, and the time-tested way
to do so was to make promises. Although we didn't have the name of the winner as
of press time, neither candidate seems to be planning a lot of fiscal
restraint -- but the good news is that neither candidate's plan is likely to be
enacted until 2002 at the earliest.
Second, consumers continue to spend, spend, spend. The personal savings rate
keeps falling, from an already low 2.2 percent last year to a nearly invisible
0.1 percent this year. Critics of this admittedly squishy statistic claim it
doesn't adequately capture households' growing wealth. As it turns out, however,
the average American not only doesn't save much, but he's not getting wealthier
in leaps and bounds, either.
Net worth for the median family where the head of the household is over 45
(and where thoughts are presumably beginning to turn to retirement), rose less
than $13,000 between 1995 and 1998. That's less than a 12 percent gain during
the same three years the stock market nearly doubled and the market value of
owner-occupied homes jumped 21 percent. Why didn't the average family get richer
in that time? Because they were borrowing and spending like crazy. House values
were up 21 percent -- but mortgage debt rose even faster, by 25 percent!
Consumers' profligacy worries many financial professionals. Some people aren't
saving enough for retirement because they have inflated expectations of future
investment returns. Other people aren't saving enough for retirement because
they don't realize just how much money they'll need. Either way, people aren't
saving.
Still, no one wants consumers to change their profligate ways too fast. After
all, hearty consumer spending is a prime reason America's growth has stayed on a
fast track so far. Most economists would like to see shoppers be a bit more
moderate -- but only a bit. If Americans suddenly turned thrifty, the economy
would lurch into reverse.
4
<PAGE> 5
ECONOMIC OVERVIEW
Luckily, there's little chance of that happening, unless lenders get cold
feet. So far, they're hot to trot. In the past year, mortgage lending by banks
rocketed nearly 17 percent while loans to consumers jumped 10 percent. Brokers
are selling the loans banks don't want on their balance sheets to mortgage pools
and the asset-backed securities market, where eager non-bank lenders are
snapping them up. In the past year, these markets provided $625 billion of new
credit, a leap of more than 12 percent.
With so much money at their disposal, consumers didn't stay out of the
shopping centers and restaurants for long. Consumer spending growth jumped up to
4.5 percent in the summer, and we expect it to stay well above 3 percent through
2001.
OMINOUS SIGNS?
Decelerations are always tricky, to be sure. But barring some unexpected
shock, overall economic growth should to pop back into the 3.5 percent to 4
percent range in 2001. Why? Borrowing costs a little more than it did last year,
but money is still freely available for most borrowers. Capital goods orders are
strong, so there's a lot of life left in business spending. Shoppers are a
little pickier, but they're still more interested in visiting the mall than in
filling their piggy banks. And after the election, no matter who wins, fiscal
policy is likely to be more stimulative than it has been for years. The price to
pay will likely be a rise in core inflation (inflation excluding food and
energy). We expect it to hit 3 percent next year, up from its recent rate of 2.5
percent. We believe we'll make it safely through 2001, but investors should keep
their hands on the wheel and their eyes peeled.
Sincerely,
Kemper Distributors, Inc.
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF SCUDDER KEMPER
INVESTMENTS, INC. AS OF NOVEMBER 8, 2000, AND MAY NOT ACTUALLY COME TO PASS.
THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF THIS MATERIAL IS INTENDED AS
AN INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
5
<PAGE> 6
ECONOMIC OVERVIEW
[INTENTIONALLY LEFT BLANK]
6
<PAGE> 7
OVERALL, THE SMALL-CAP GROWTH SEGMENT OF THE STOCK MARKET WAS AN EXCEPTIONALLY
ATTRACTIVE PLACE TO BE DURING FISCAL YEAR 2000. MANY LARGE MULTINATIONAL-COMPANY
STOCKS SUFFERED DURING THE PAST YEAR AS GROWTH FELL SHORT OF EXPECTATIONS, THE
FEDERAL RESERVE BOARD RAISED INTEREST RATES AND THE EURO FELL TO NEW LOWS.
Q HOW DID KEMPER SMALL CAPITALIZATION EQUITY FUND PERFORM DURING THE PAST
FISCAL YEAR?
A Kemper Small Capitalization Equity Fund provided a strong 55.94 percent
total return (Class A shares, unadjusted for a sales charge) for the 12-month
period ended September 30, 2000. Despite a year of intense market volatility,
strong stock selection within the technology sector and a rally in biotechnology
stocks helped the fund deliver solid results.
The fund's return substantially outpaced its benchmark, the Russell 2000
Growth index, which rose 29.66 percent for the 12 months ended September 30. The
fund's yearly returns were less than the fund's Lipper peer-group average
return of 63.89 percent. While we did well relative to our peers for most of
calendar year 2000, during the autumn of 1999 we focused on repositioning the
portfolio to focus on stocks with higher growth potential, and performance
lagged that of the Lipper peer group average.
Overall, the small-cap growth segment of the stock market was an exceptionally
attractive place to be during fiscal year 2000. Many large multinational-company
stocks, particularly in technology, suffered during the past year as growth fell
short of expectations, the Federal Reserve Board raised interest rates and the
euro fell to new lows, negatively affecting large-cap companies' overseas
earnings.
The Rise And Fall Of IPOs Over The Past Two Years Bloomberg IPO Index
September 30, 1998, to September 30, 2000
[LINE CHART]
<TABLE>
<CAPTION>
BLOOMBERG IPO INDEX
-------------------
<S> <C>
9/98 367.09
390.31
442.06
476.26
514.62
478.53
610.60
720.13
713.38
763.32
722.74
739.10
9/99 790.05
1044.14
1370.68
1696.24
1629.99
2034.46
1809.57
1366.98
1088.95
1410.13
1464.94
1583.89
9/00 1422.31
</TABLE>
Source: Bloomberg Business News
Past performance is not a guarantee of future results. The Bloomberg IPO index
is a capitalization-weighted index that measures the performance of stocks
during their first publicly traded year. It includes all companies with a market
value of at least $50 million at the initial public offering. The index was
developed with a base value of 100 as of 8/22/94. It is not intended to
represent the performance of any mutual fund offered by Scudder Kemper
Investments, Inc.
[CABRERA PHOTO]
JESUS C. CABRERA IS LEAD PORTFOLIO MANAGER OF KEMPER SMALL CAPITALIZATION EQUITY
FUND. HE HAS MORE THAN A DECADE OF INVESTMENT INDUSTRY EXPERIENCE, MUCH OF IT
FOCUSED ON SMALL-CAP GROWTH INVESTING. HE IS SUPPORTED BY SCUDDER KEMPER
INVESTMENTS, INC.'S LARGE STAFF OF ANALYSTS, RESEARCHERS, TRADERS AND INVESTMENT
SPECIALISTS.
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 MANAGE'S
VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER CONDITIONS.
PERFORMANCE UPDATE
7
<PAGE> 8
PERFORMANCE UPDATE
Q
DID MARKET CONDITIONS CHANGE SUBSTANTIALLY THROUGHOUT THE YEAR?
A
Yes, we really had two different markets. Between the end of September
1999 and mid-March, no price seemed too high for certain technology stocks.
Stock prices relative to earnings, sales and growth rates reached unprecedented
heights. Small-cap stocks, especially initial public offerings and technology
stocks, enjoyed an ebullient environment.
Beginning in mid-March, many small-cap technology stocks, particularly those
tied to the Internet, began to struggle. As perceptions about U.S. interest
rates and inflation shifted, unprofitable technology firms with lofty ideas but
weak business plans lost support among investors. For many consumer-oriented
"dot-coms," their hour upon the market stage was over.
Q
HOW HAVE YOU REPOSITIONED THE FUND'S PORTFOLIO AND MODIFIED THE FUND'S
INVESTMENT STRATEGY SINCE BECOMING LEAD PORTFOLIO MANAGER IN MID-OCTOBER 1999?
A
We have tightened our focus on well-run companies with well-defined
business plans, organizations that we believe can generate significant earnings.
To meet the fund's investment criteria, we insist that a company have
sustainable and consistent earnings-growth potential for a two- to three-year
horizon. We favor firms with dominant or increasing market positions, niche
players and those with innovative products, services or distribution strategies.
After we analyze and project revenue and earnings growth along with the
company's cash flow requirements, we will seek opportunities to buy a stock at
the right price relative to its rate of earnings growth.
Q
INTEREST RATES HAVE RISEN SUBSTANTIALLY. HOW HAS THIS AFFECTED THE
PORTFOLIO?
A
Many stocks have been hurt by the Federal Reserve Board's efforts to raise
interest rates since last summer. Between September 1999 and September 2000, the
cumulative increase in short-term interest rates was 125 basis points.
Small-company stocks typically do better when rates are either stable or going
down. It is a particularly tough market when rates are on the rise.
Fortunately, we think we are at the end of the cycle for domestic
interest-rate increases. In our view, the market is looking ahead and sees
potential stability or even a decline in rates. That creates a positive
framework for small-company growth stocks, especially as the U.S. economy's
expansion rate slows.
Fund Performance Vs. Sector Performance
September 30, 1999, to September 30, 2000
[LINE CHART]
<TABLE>
<CAPTION>
KEMPER SMALL CAP EQUITY FUND RUSSELL 2000 GROWTH INDEX
---------------------------- -------------------------
<S> <C> <C>
Utilities 195.2 16.7
Technology 100.1 38.9
Capital goods 76.7 37.18
Energy 74.1 51.5
Health care 52.6 101.5
Financials 34.5 26.8
Unassigned 19.7 0
Communication services 4.2 -24.3
Consumer cyclicals -14.1 -11.4
Basic materials -37.8 -15.8
Consumer staples -60.8 8.8
Transportation -63.1 22.4
</TABLE>
8
<PAGE> 9
PERFORMANCE UPDATE
As of September 30, 2000, consumer cyclical and financial stocks accounted for
only a small portion of the portfolio. Should we get statistical evidence that
interest rates will decline and that the U.S. economy will not slip into
recession, we may seek to increase exposure to these sectors while maintaining
the fund's growth investment discipline.
Q
HOW DID TECHNOLOGY STOCKS WITHIN THE FUND FARE RELATIVE TO THE REST OF THE
MARKET SINCE SEPTEMBER 1999?
A
We found attractive opportunities in software, wireless telecommunications
and Internet infrastructure, notably Applied Micro Circuits, BEA Systems and
Mercury Interactive, all three of which were among the fund's top five holdings
as of September 30, 2000. Overall, the fund's positioning within the technology
area was broad-based, with a wide mix of computer hardware, software,
electronics and communications equipment firms. As shown in the Sector
Performance table, the fund's technology holdings outperformed technology stocks
in the Russell 2000 Growth index by a more than a two-to-one margin for the
12-month period ended September 30, 2000.
A year ago, a lot of financing and advertising dollars were available for
business-to-consumer (B-to-C) technology companies. This past spring, that came
to a screeching halt as tech stocks plummeted and lenders tightened credit.
B-to-C companies have not been doing well since then. We had no exposure to this
subsector.
When evaluating the different subsectors within technology, we typically ask
the following questions:
- Who's going to survive long term and who's not?
- Who has the best software to support whatever products and services are
required?
- How will the growing use of the Internet change the software and server
markets, and how will profitability be affected for existing market leaders?
- Who has the best financial backing?
- How will government antitrust actions and the political climate change
market conditions?
Q
HEALTH CARE STOCKS DID WELL THIS PAST YEAR. WHAT'S HAPPENING IN THIS AREA
OF THE MARKET?
A
During the past year, we shifted the fund's health care emphasis toward
the faster growing pharmaceuticals and biotech firms. We've sold health care
service providers that had been in the portfolio and focused on health-care
firms that have U.S. Food and Drug Administration approval for new products or
have finished Phase III clinical trials (tests on a group of patients to measure
drug effectiveness and side effects), and this helped boost returns.
In September 2000, the fund's biotech holdings rose 15.26 percent while the
biotech component of the Russell 2000 Growth index was down 0.20 percent. One
company that provided solid returns throughout the year was Biovail, the fund's
third-largest holding as of September 30 (2.35 percent of net assets).
Q
FOR MOST OF THE 1990S, ENERGY WAS NOT REGARDED AS A GROWTH SECTOR. HAS
THIS CHANGED, AND HOW HAVE YOU POSITIONED THE FUND TO CAPITALIZE ON TRENDS IN
THIS AREA?
A
Since the end of 1998, oil and natural gas prices have risen sharply. Our
portfolio positioning reflects a belief that relatively high prices are likely
to continue. Storage volume going into the winter 2000 heating season was down
substantially from year-ago levels. Last year was a fairly warm winter, so
Americans didn't use a lot of natural gas and heating oil compared with
historical averages. Consequently, we think the natural gas price increases
we've seen are going to stick for a couple of years. In our view, energy
companies that are in exploration and production with a focus on gas are going
to do well.
U.S. Natural Gas Prices
December 1998 To September 2000
[LINE CHART]
<TABLE>
<CAPTION>
U.S. NATURAL GAS PRICES
-----------------------
<S> <C>
12/98 1.99
1.90
1.72
2.08
2.37
2.26
2.37
2.64
2.98
2.61
2.90
2.27
12/99 2.33
2.73
2.78
3.02
3.27
4.61
4.39
3.95
5.00
9/00 5.34
</TABLE>
Source: Bloomberg Business News
9
<PAGE> 10
PERFORMANCE UPDATE
Q WHAT AREAS OF THE PORTFOLIO DID NOT PERFORM WELL?
A Retail and other consumer cyclical stocks generally did poorly in the 12
months ended September 30, as shown in the Sector Performance table. Basic
materials stocks also declined in value. Fortunately, we were underweighted in
all three areas. Within Kemper Small Capitalization Equity Fund, we were
disappointed by a longtime holding, Cinar, a company that makes animated
children's programs for PBS. In December, news surfaced that fiscal moves by top
management had been called into question. We sold off some of the stock
immediately. We believe that without confidence in upper management, there is no
reason to hold a stock -- no matter how strong its fundamentals.
Q WHAT'S YOUR OUTLOOK FOR THE YEAR AHEAD?
A We believe Federal Reserve monetary policy decisions made earlier in
calendar year 2000 have the potential to renew market enthusiasm for small-cap
investing. Investors will be searching for above-average growth potential as the
U.S. economy heads toward a soft landing, and we think they'll find it in
companies that are nimble and innovative enough to navigate both the financial
and market-share challenges that may come as competition increases and credit
markets tighten.
In our opinion, technology firms continue to offer the best growth prospects,
but investors need to be more selective than ever. For the five-year period
ended September 30, 2000, 282 of 632 technology stocks had negative average
annual returns -- 45 percent of the sector. Many of the ones that were down for
this period were small-cap companies. We believe that makes a powerful argument
for active management in this arena.
TERMS TO KNOW
BALANCE SHEET A condensed financial statement showing what a company owns, what
it owes and the ownership interest in the company of its stockholders, at a
certain time.
INITIAL PUBLIC OFFERING (IPO) An offer by owners of a private company to sell a
portion of their interest in the business to the general public. The owners must
register shares with securities regulators.
LIQUIDITY The ease with which a stock can be bought or sold. Due to higher
recognition and a greater quantity of shares, large-cap stocks are typically
more liquid than small-cap stocks. Reduced liquidity offers the potential of
greater risk and return: investors who wish to sell a less liquid stock may find
it difficult to find a buyer, but they may also be able to dictate a higher
price if the stock is in demand.
MARKET CAPITALIZATION A measure of the size of a company that offers publicly
traded stock, as determined by multiplying the current share price by the number
of shares outstanding.
VOLATILITY The characteristic of a security, commodity or market to rise or fall
sharply in price within a short period. A stock may be volatile due to
uncertainty in the company, industry, market or economy. Compared with many
other types of stocks, technology stocks are subject to a higher degree of
volatility.
10
<PAGE> 11
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED SEPTEMBER 30, 2000 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS A 47.05% 14.52% 18.58% 13.09% (since 2/20/69)
................................................................................................
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS B 50.95 14.47 N/A 16.41 (since 5/31/94)
................................................................................................
KEMPER SMALL CAPITALIZATION
EQUITY FUND CLASS C 55.38 15.00 N/A 16.72 (since 5/31/94)
................................................................................................
</TABLE>
KEMPER SMALL CAPITALIZATION EQUITY FUND CLASS A
Growth of an assumed $10,000 investment in Class A
shares from 12/31/78 to 9/30/00
[LINE GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL CAP EQUITY RUSSELL 2000 GROWTH STANDARD & POOR'S 500
FUND CLASS A1 INDEX+ STOCK INDEX++
----------------------- ------------------- ---------------------
<S> <C> <C> <C>
12/31/78 9423 10000 10000
13401 15083 11231
19536 22967 14125
19248 20846 12751
24545 25219 14633
30339 30297 17161
28059 25501 17401
12/31/85 35734 33399 21983
41021 34595 25197
41119 30971 25708
44308 37280 28896
55887 44798 36770
52969 36999 34359
89523 55937 43397
89634 60284 45335
12/31/93 104686 68338 48533
101220 66676 47786
132765 87372 64086
151474 97212 77072
182477 109804 100971
176816 111158 127898
236260 159064 152872
9/30/00 278909 154615 149466
</TABLE>
KEMPER SMALL CAPITALIZATION EQUITY FUND CLASS B
Growth of an assumed $10,000 investment in Class B
shares from 5/31/94 to 9/30/00
[LINE GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL CAP EQUITY RUSSELL 2000 GROWTH STANDARD & POOR'S 500
FUND CLASS B1 INDEX+ STOCK INDEX++
----------------------- ------------------- ---------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
10146 10388 10061
13179 13612 13492
12/31/96 14871 15145 16227
17676 17107 21258
12/31/98 16930 17318 26927
22373 24782 32185
9/30/00 26202 24089 31468
</TABLE>
KEMPER SMALL CAPITALIZATION EQUITY FUND CLASS C
Growth of an assumed $10,000 investment in Class C
shares from 5/31/94 to 9/30/00
[LINE GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL CAP EQUITY RUSSELL 2000 GROWTH STANDARD & POOR'S 500
FUND CLASS C1 INDEX+ STOCK INDEX++
----------------------- ------------------- ---------------------
<S> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00
10128.00 10388.00 10061.00
13162.00 13612.00 13492.00
12/31/96 14854.00 15145.00 16227.00
17661.00 17107.00 21258.00
12/31/98 17026.00 17318.00 26927.00
22560.00 24782.00 32185.00
9/30/00 26642.00 24089.00 31468.00
</TABLE>
PERFORMANCE IS HISTORICAL AND INCLUDES
REINVESTMENT OF DIVIDENDS AND CAPITAL
GAINS. INVESTMENT RETURN AND PRINCIPAL
VALUE FLUCTUATE WITH CHANGING MARKET
CONDITIONS, SO THAT WHEN REDEEMED,
SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST.
*CLASS A SHARES, ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE OF 5.75%, AND FOR
CLASS B SHARES, ADJUSTMENT FOR THE
APPLICABLE CONTINGENT DEFERRED SALES
CHARGE (CDSC) OF 3%. CLASS C SHARES
HAVE NO SALES CHARGE ADJUSTMENT. THE
MAXIMUM CDSC FOR CLASS B SHARES IS 4%.
FOR CLASS C SHARES, THERE IS A 1% CDSC
ON CERTAIN REDEMPTIONS WITHIN THE
FIRST YEAR OF PURCHASE. SHARE CLASSES
INVEST IN THE SAME UNDERLYING
PORTFOLIO. DURING THE PERIODS NOTED,
SECURITIES PRICES FLUCTUATED. FOR
ADDITIONAL INFORMATION, SEE THE
PROSPECTUS, STATEMENT OF ADDITIONAL
INFORMATION AND 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 with the
Russell 2000 index, Russell 2000
Growth index and 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 GROWTH INDEX MEASURES
THE PERFORMANCE OF THOSE RUSSELL 2000
COMPANIES WITH HIGHER PRICE-TO-BOOK
RATIOS AND HIGHER FORECASTED GROWTH
VALUES. THESE STOCKS ARE SELECTED FROM
THE 2,000 SMALLEST COMPANIES IN THE
RUSSELL 3000 INDEX, WHICH REPRESENTS
APPROXIMATELY 10% OF THE TOTAL MARKET
CAPITALIZATION OF THE RUSSELL 3000
INDEX. THE STOCKS REPRESENTED BY THIS
INDEX INVOLVE INVESTMENT RISKS, WHICH
MAY INCLUDE THE LOSS OF PRINCIPAL.
SOURCE: WIESENBERGER(R).
++THE STANDARD & POOR'S 500 STOCK INDEX
IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK
MARKET. SOURCE: WIESENBERGER(R).
11
<PAGE> 12
INDUSTRY SECTORS
A YEAR-TO-YEAR COMPARISON
Data shows the percentage of the common stocks in the portfolio that each sector
represented on September 30, 2000, and on September 30, 1999.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL CAPITALIZATION KEMPER SMALL CAPITALIZATION
EQUITY FUND ON 9/30/00 EQUITY FUND ON 9/30/99
--------------------------- ---------------------------
<S> <C> <C>
Technology 66.7 21.3
Health care 13.1 11.8
Energy 7.3 3.3
Consumer nondurable 4.6 36.2
Capital goods 3.6 9.3
Finance 2.3 5.7
Utilities 1.7 0
Communication services 0.6 7.7
Basic materials 0.1 2
Transportation 0 2.7
</TABLE>
A COMPARISON WITH THE RUSSELL 2000 GROWTH 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, 2000,
compared with the industry sectors that make up the fund's benchmark, the
Russell 2000 Growth index.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL CAPITALIZATION RUSSELL 2000 GROWTH INDEX ON
EQUITY FUND ON 9/30/00 9/30/00
--------------------------- ----------------------------
<S> <C> <C>
Technology 66.7 38.8
Health care 13.1 18.4
Energy 7.3 3.4
Consumer nondurables 4.6 18.4
Capital goods 3.6 7.9
Finance 2.3 5.9
Utilities 1.7 0.2
Communication services 0.6 3.1
Basic materials 0.1 2.8
Transportation 0 1.1
</TABLE>
* THE RUSSELL 2000 GROWTH INDEX MEASURES THE PERFORMANCE OF THOSE RUSSELL 2000
COMPANIES WITH HIGHER PRICE-TO-BOOK RATIOS AND HIGHER FORECASTED GROWTH
VALUES. THESE STOCKS ARE SELECTED FROM THE 2,000 SMALLEST COMPANIES IN THE
RUSSELL 3000 INDEX, WHICH REPRESENTS APPROXIMATELY 10% OF THE TOTAL MARKET
CAPITALIZATION OF THE RUSSELL 3000 INDEX. THE STOCKS REPRESENTED BY THIS INDEX
INVOLVE INVESTMENT RISKS, WHICH MAY INCLUDE THE LOSS OF PRINCIPAL. SOURCE:
WIESENBERGER(R).
12
<PAGE> 13
LARGEST HOLDINGS
THE FUND'S 15 LARGEST HOLDINGS+
Representing 30.7 percent of the fund's total net assets on September 30, 2000
<TABLE>
<CAPTION>
HOLDINGS PERCENT
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. BEA SYSTEMS Provides e-commerce 3.3%
infrastructure software. The
Company, along with its
e-commerce transaction platform,
provides consulting, education,
and support services that help
companies launce e-commerce
initiatives.
---------------------------------------------------------------------------------------
2. APPLIED MICRO CIRCUITS Designs, develops, manufactures, 2.9%
and markets high-performance,
high-bandwidth silicon solutions
for the world's communications
infrastructure.
---------------------------------------------------------------------------------------
3. BIOVAIL Pharmaceutical company that 2.4%
develops, tests, and manufactures
drugs.
---------------------------------------------------------------------------------------
4. BUSINESS OBJECTS Develops, markets and supports 2.3%
integrated enterprise decision
support software. The Company's
software allows users to access,
analyze and share information
derived from a variety of
sources.
---------------------------------------------------------------------------------------
5. MERCURY INTERACTIVE Develops, market and support a 2.3%
suite of automated software
testing solutions.
---------------------------------------------------------------------------------------
6. NETEGRITY Designs, develops, markets, and 1.9%
supports software for controlling
user access to electronic
applications.
---------------------------------------------------------------------------------------
7. EXTREME NETWORKS Provides switching solutions for 1.9%
local area networks (LAN). The
Company uses its custom ASICs and
a common hardware, software, and
management architecture to offer
customers LAN solutions.
---------------------------------------------------------------------------------------
8. FINISAR Provides fiber optic subsystems 1.9%
and network performance test
systems which enable high-speed
data communications over local
area network and storage area
networks.
---------------------------------------------------------------------------------------
9. WATCHGUARD TECHNOLOGIES Provides Internet security 1.8%
solutions designed to protect
small- to medium-sized
enterprises that use the Internet
for electronic commerce and
communications.
---------------------------------------------------------------------------------------
10. COHERENT Develops, manufactures, and 1.8%
markets voice quality enhancement
products for wireless,
satellite-based, cable
communication systems, and
wireless telecommunications
systems throughout the world.
---------------------------------------------------------------------------------------
11. TUMBLEWEED COMMUNICATIONS Provides secure Internet 1.7%
communication services for
businesses worldwide.
---------------------------------------------------------------------------------------
12. QLOGIC Designs and supplies 1.7%
semiconductor and board-level
input/output and enclosure
management products.
---------------------------------------------------------------------------------------
13. VARITY Manufactures automotive and truck 1.7%
components, including diesel
engines.
---------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
LARGEST HOLDINGS
<TABLE>
<CAPTION>
HOLDINGS PERCENT
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
14. INTRANET SOLUTIONS Provides Web-based data and 1.6%
content management solutions for
intranets, extranets, and the
Internet.
---------------------------------------------------------------------------------------
15. COR THERAPEUTICS Discovers, develops, and 1.5%
commercializes pharmaceutical
products for the treatment and
prevention of severe
cardiovascular diseases.
---------------------------------------------------------------------------------------
</TABLE>
+Portfolio composition and holdings are subject to change.
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
KEMPER SMALL CAPITALIZATION EQUITY FUND
Portfolio of Investments at September 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
REPURCHASE AGREEMENTS--0.1% AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
State Street Bank and Trust Company
6.480%, to be repurchased at $486,087
on 10/02/2000**
(Cost $486,000) 486,000 $ 486,000
--------------------------------------------------------------------------------
<CAPTION>
COMMERCIAL PAPER--2.3%
<S> <C> <C> <C> <C> <C>
FINANCIAL--0.6%
Ford Motor Credit Co., 6.470%, 10/02/2000 6,000,000 5,998,922
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
ENERGY--1.2%
Enron Corp., 6.850%, 10/03/2000 13,000,000 12,995,053
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS--0.5%
Conagra, Inc., 6.700%, 10/03/2000 5,500,000 5,497,944
--------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost $24,491,919) 24,491,919
--------------------------------------------------------------------------------
<CAPTION>
SHORT TERM NOTES--10.7%
<S> <C> <C> <C> <C> <C>
MISCELLANEOUS--10.7%
Federal Home Loan Bank, 6.20%, 10/02/2000
(Cost $114,980,194) 115,000,000 114,980,194
--------------------------------------------------------------------------------
<CAPTION>
CORPORATE BONDS--0.2%
<S> <C> <C> <C> <C> <C>
MISCELLANEOUS--0.2%
Cyras Systems Inc, 4.500%, 08/15/2005
(Cost $1,574,100) 1,500,000 1,800,000
--------------------------------------------------------------------------------
<CAPTION>
CONVERTIBLE PREFERRED STOCKS--2.0% SHARES
<S> <C> <C> <C> <C> <C>
HEALTH--1.1%
Biovail Corp. 160,000 12,000,000
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--0.0%
Cimlinc, Inc. "D"* 75,431 282,866
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS--0.2%
Applianceware L.P.* 655,977 2,250,000
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--0.5%
Convergent Networks, Inc.* 345,565 5,649,988
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--0.2%
Planetweb, Inc. "E"* 413,603 2,250,000
--------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $18,810,009) 22,432,854
--------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
COMMON STOCKS--84.7% SHARES VALUE
<S> <C> <C> <C> <C> <C>
CONSUMER DISCRETIONARY--1.4%
DEPARTMENT & CHAIN STORES--0.5%
AnnTaylor Stores Corp.* 130,600 $ 5,019,938
--------------------------------------------------------------------------------
RECREATIONAL PRODUCTS--0.2%
The 3DO Company* 394,800 2,640,225
--------------------------------------------------------------------------------
RESTAURANTS--0.3%
CEC Entertainment, Inc.* 102,000 3,264,000
--------------------------------------------------------------------------------
SPECIALTY RETAIL--0.4%
Cost Plus, Inc.* 138,600 4,175,325
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--0.5%
CONSUMER SPECIALTIES--0.0%
Valence Technology Inc.* 11,800 203,550
--------------------------------------------------------------------------------
MISCELLANEOUS--0.5%
Hain Celestial Group Inc.* 140,200 4,924,525
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
HEALTH--14.1%
BIOTECHNOLOGY--4.3%
Enzon, Inc.* 150,400 9,926,400
IDEC Pharmaceuticals Corp.* 30,900 5,418,605
Invitrogen Corp.* 227,800 16,202,275
QLT, Inc.* 196,400 14,224,410
--------------------------------------------------------------------------------
45,771,690
MEDICAL SUPPLY & SPECIALTY--0.4%
Novoste Corp.* 106,300 4,517,750
--------------------------------------------------------------------------------
PHARMACEUTICALS--8.8%
Biovail Corp.* 304,200 24,773,288
COR Therapeutics, Inc.* 260,800 16,251,100
CV Therapeutics, Inc.* 168,100 13,075,028
Cubist Pharmaceuticals, Inc.* 179,100 9,324,394
Intermune Pharmaceuticals, Inc.* 160,300 8,696,275
Medicines Company* 185,700 6,348,619
NPS Pharmaceuticals, Inc.* 285,200 16,131,625
Oxford GlycoSciences PLC* 797 26,841
--------------------------------------------------------------------------------
94,627,170
MISCELLANEOUS--0.6%
Genecor International, Inc.* 200,400 5,936,850
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--2.6%
CELLULAR TELEPHONE--0.9%
OmniSky Corp.* 47,700 968,906
Research in Motion Ltd.* 88,900 8,805,491
--------------------------------------------------------------------------------
9,774,397
TELEPHONE/ COMMUNICATIONS--1.3%
Covad Communications Group, Inc.* 256,000 3,424,000
Efficient Networks, Inc.* 89,850 3,352,528
Pinnacle Holdings, Inc.* 116,300 3,096,487
Time Warner Telecom, Inc. "A"* 89,900 4,343,294
Westell Technologies, Inc.* 3,000 38,625
--------------------------------------------------------------------------------
14,254,934
MISCELLANEOUS--0.4%
MCK Communications, Inc.* 179,000 4,049,875
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
FINANCIAL--1.6%
BANKS--0.8%
Bank United Corp. 97,100 4,921,756
Texas Regional Bancshares, Inc. 121,150 3,437,631
--------------------------------------------------------------------------------
8,359,387
BUSINESS FINANCE--0.8%
Heller Financial, Inc. 304,100 8,685,856
--------------------------------------------------------------------------------
</TABLE>
16 The accompanying notes are an integral part of the financial statements.
<PAGE> 17
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C> <C> <C> <C>
MEDIA--1.3%
BROADCASTING & ENTERTAINMENT--0.3%
Regent Communications, Inc.* 539,000 $ 2,998,188
StarMedia Network, Inc.* 63,900 479,250
--------------------------------------------------------------------------------
3,477,438
MISCELLANEOUS--1.0%
About.com, Inc.* 109,900 3,558,013
Entravision Communications Class A* 384,000 6,672,000
--------------------------------------------------------------------------------
10,230,013
-----------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--3.5%
EDP SERVICES--1.9%
ChoicePoint, Inc.* 132,000 6,055,500
Micromuse, Inc.* 73,200 14,708,625
--------------------------------------------------------------------------------
20,764,125
MISCELLANEOUS COMMERCIAL--0.5%
AnswerThink, Inc.* 334,800 5,440,500
--------------------------------------------------------------------------------
MISCELLANEOUS CONSUMER--0.6%
Exult, Inc.* 452,800 6,254,300
--------------------------------------------------------------------------------
MISCELLANEOUS--0.5%
Ogden Corporation* 398,600 5,406,012
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
DURABLES--0.5%
TELECOMMUNICATIONS EQUIPMENT
Celeritek, Inc.* 150,000 5,653,125
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--2.2%
ELECTRICAL PRODUCTS--0.8%
Nanometrics, Inc.* 163,500 8,737,031
--------------------------------------------------------------------------------
INDUSTRIAL SPECIALTY--0.4%
Electro Scientific Industries, Inc.* 116,800 4,102,600
--------------------------------------------------------------------------------
MACHINERY/COMPONENTS--0.5%
Brooks Automation, Inc.* 163,000 5,399,375
--------------------------------------------------------------------------------
MISCELLANEOUS--0.5%
Dril-Quip, Inc.* 123,200 4,912,600
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--47.6%
COMPUTER SOFTWARE--27.7%
BEA Systems, Inc.* 441,000 34,342,875
Blue Martini Software, Inc.* 151,000 5,115,125
Business Objects, S.A. (ADR)* 218,000 24,647,625
Centillium Communications* 136,400 13,094,400
Clarent Corp.* 51,800 2,039,625
Comverse Technology, Inc.* 116,800 12,614,400
Corillian Corp.* 382,300 3,679,638
Descartes Systems Group, Inc.* 305,800 15,137,100
Extreme Networks, Inc.* 174,200 19,945,900
Globix Corp.* 247,300 5,765,181
Hyperion Solutions Corp.* 326,000 8,435,250
IONA Technologies PLC (ADR)* 151,500 10,529,250
IntraNet Solutions, Inc.* 341,600 17,080,000
MatrixOne, Inc.* 148,700 5,948,000
NetIQ Corp.* 134,400 8,828,400
Netegrity, Inc.* 285,800 20,006,000
Packeteer, Inc.* 333,529 12,653,256
Preview Systems, Inc.* 126,700 1,199,691
Resonate, Inc.* 144,000 5,688,000
Software Technologies Corp.* 179,400 4,106,578
Sanchez Computer Associates, Inc.* 49,500 767,250
Software.com, Inc.* 36,900 6,695,044
</TABLE>
The accompanying notes are an integral part of the financial statements. 17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C> <C> <C> <C>
SynQuest, Inc.* 369,800 $ 4,853,625
Tumbleweed Communications* 347,800 17,737,800
Verity, Inc.* 487,500 17,397,656
Watchguard Technologies, Inc.* 323,800 19,428,000
--------------------------------------------------------------------------------
297,735,669
DIVERSE ELECTRONIC PRODUCTS--0.4%
Aether Systems, Inc.* 45,200 4,768,600
--------------------------------------------------------------------------------
EDP PERIPHERALS--2.8%
Mercury Interactive Corp.* 154,800 24,264,900
Symbol Technologies, Inc. 155,300 5,581,094
--------------------------------------------------------------------------------
29,845,994
ELECTRONIC COMPONENTS--3.9%
Applied Micro Circuits Corp.* 145,900 30,210,419
Bookham Technology PLC (ADR)* 142,700 6,118,263
Jabil Circuit* 88,541 5,024,702
--------------------------------------------------------------------------------
41,353,384
ELECTRONIC DATA PROCESSING--0.4%
Webtrends Corp.* 119,882 4,480,590
--------------------------------------------------------------------------------
PRECISION INSTRUMENTS--4.8%
Coherent, Inc.* 273,800 18,618,400
Finisar Corp.* 406,500 19,664,437
Lam Research Corp.* 175,200 3,668,250
Molecular Devices Corp.* 98,600 9,687,450
--------------------------------------------------------------------------------
51,638,537
SEMICONDUCTORS--7.2%
Conexant Systems, Inc.* 135,000 5,653,125
DuPont Photomasks, Inc.* 109,300 6,421,375
Emcore Corp.* 233,600 9,712,650
Fairchild Semiconductor Corp.* 237,500 6,679,688
Ltx Corporation* 343,900 6,512,606
Mattson Technology, Inc.* 234,800 3,492,650
Pericom Semiconductor Corp.* 302,200 11,181,400
QLogic Corp.* 199,000 17,512,000
Transwitch Corp.* 163,750 10,439,062
--------------------------------------------------------------------------------
77,604,556
MISCELLANEOUS--0.4%
DMC Stratex Networks, Inc.* 241,767 3,883,382
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
ENERGY--8.3%
OIL & GAS PRODUCTION--5.0%
3TEC Energy Corporation* 354,700 5,143,150
Cabot Oil & Gas Corp. "A" 294,100 5,992,288
Cross Timbers Oil Company 425,782 8,169,692
Devon Energy Corp. 106,300 6,393,945
Ocean Energy, Inc.* 412,700 6,371,056
Patina Oil & Gas Corporation 378,800 7,576,000
Plains Resources, Inc.* 393,200 7,421,650
Talisman Energy, Inc.* 192,500 6,750,233
--------------------------------------------------------------------------------
53,818,014
OIL COMPANIES--0.8%
Louis Dreyfus Natural Gas Corp.* 225,100 8,919,587
--------------------------------------------------------------------------------
OIL/GAS TRANSMISSION--1.0%
Western Gas Resources, Inc. 404,100 10,127,756
--------------------------------------------------------------------------------
OILFIELD SERVICES--1.5%
Cal Dive International, Inc.* 144,100 8,240,719
Newpark Resources, Inc.* 858,400 7,940,200
--------------------------------------------------------------------------------
16,180,919
</TABLE>
18 The accompanying notes are an integral part of the financial statements.
<PAGE> 19
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C> <C> <C> <C>
METALS & MINERALS--0.6%
STEEL & METALS
Precision Castparts Corp. 180,600 $ 6,930,525
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS--0.5%
MISCELLANEOUS
RenaissanceRe Holdings Ltd. 89,000 5,690,436
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $619,825,980) 909,560,540
--------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost $780,168,202) (a) $1,073,751,507
--------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
* Non-income producing security.
** Repurchase agreement is fully collateralized by U.S. Treasury or Government
agency securities.
(a) The cost for federal income tax purposes was $793,492,747. At September 30,
2000, net unrealized appreciation for all securities based on tax cost was
$280,258,760. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess market value over tax cost of
$339,815,992 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over market value of $59,557,232.
The accompanying notes are an integral part of the financial statements. 19
<PAGE> 20
FINANCIAL STATEMENTS
STATEMENT OF ASSETS & LIABILITIES
As of September 30, 2000
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value, (cost $780,168,202) $1,073,751,507
------------------------------------------------------------------------------
Cash 6,142
------------------------------------------------------------------------------
Receivable for investments sold 5,803,143
------------------------------------------------------------------------------
Dividends receivable 156,174
------------------------------------------------------------------------------
Interest receivable 8,237
------------------------------------------------------------------------------
Receivable for Fund shares sold 1,015,346
------------------------------------------------------------------------------
TOTAL ASSETS 1,080,740,549
------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased 21,974,017
------------------------------------------------------------------------------
Payable for Fund shares redeemed 8,733,345
------------------------------------------------------------------------------
Accrued management fee 389,337
------------------------------------------------------------------------------
Other payables and accrued expenses 1,287,278
------------------------------------------------------------------------------
Total liabilities 32,383,977
------------------------------------------------------------------------------
NET ASSETS, AT VALUE $1,048,356,572
------------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Accumulated distributions in excess of net investment income $ (19,813)
------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investment securities 293,583,305
------------------------------------------------------------------------------
Foreign currency related transactions 1,391
------------------------------------------------------------------------------
Accumulated net realized gain (loss) 135,368,737
------------------------------------------------------------------------------
Paid-in capital 619,422,952
------------------------------------------------------------------------------
NET ASSETS, AT VALUE $1,048,356,572
------------------------------------------------------------------------------
NET ASSETS VALUE
CLASS A SHARES
Net asset value and redemption price per share
($821,470,690 / 90,261,322 shares outstanding of
beneficial interest, $.01 par value, unlimited number of
shares authorized) $9.10
------------------------------------------------------------------------------
Maximum offering price per share (100/94.25 of $9.10) $9.66
------------------------------------------------------------------------------
CLASS B SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($186,006,992
/ 22,435,106 shares outstanding of beneficial interest,
$.01 par value, unlimited number of shares authorized) $8.29
------------------------------------------------------------------------------
CLASS C SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($21,326,710 /
2,543,182 shares outstanding of beneficial interest, $.01
par value, unlimited number of shares authorized) $8.39
------------------------------------------------------------------------------
CLASS I SHARES
Net asset value, offering and redemption price
($19,552,180 / 2,084,072 shares outstanding of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $9.38
------------------------------------------------------------------------------
</TABLE>
20 The accompanying notes are an integral part of the financial statements.
<PAGE> 21
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended September 30, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $20,250) $ 1,131,084
----------------------------------------------------------------------------
Interest 1,776,882
----------------------------------------------------------------------------
Total Income 2,907,966
----------------------------------------------------------------------------
Expenses:
Management fee 7,708,338
----------------------------------------------------------------------------
Services to shareholders 2,550,028
----------------------------------------------------------------------------
Custodian fees 62,576
----------------------------------------------------------------------------
Distribution services fees 1,402,917
----------------------------------------------------------------------------
Administrative service fees 2,135,085
----------------------------------------------------------------------------
Auditing 58,687
----------------------------------------------------------------------------
Legal 9,882
----------------------------------------------------------------------------
Trustees' fees and expenses 31,842
----------------------------------------------------------------------------
Reports to shareholders 460,891
----------------------------------------------------------------------------
Registration fees 74,868
----------------------------------------------------------------------------
Other 148,130
----------------------------------------------------------------------------
Total expenses, before expense reductions 14,643,244
----------------------------------------------------------------------------
Expense reductions (86,484)
----------------------------------------------------------------------------
Total expenses, after expense reductions 14,556,760
----------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (11,648,794)
----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments 277,483,984
----------------------------------------------------------------------------
Foreign currency related transactions (114,855)
----------------------------------------------------------------------------
277,369,129
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on:
Investments 108,541,832
----------------------------------------------------------------------------
Foreign currency related transactions 1,391
----------------------------------------------------------------------------
108,543,223
----------------------------------------------------------------------------
Net gain (loss) on investment transactions 385,912,352
----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $374,263,558
----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 21
<PAGE> 22
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
-------------------------------------------------------------------------------------------------------
Net investment income (loss) $ (11,648,794) $ (6,926,237)
-------------------------------------------------------------------------------------------------------
Net realized gain (loss) 277,369,129 30,251,323
-------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period 108,543,223 146,803,473
-------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 374,263,558 170,128,559
-------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net realized gains
Class A (31,469,946) (41,243,057)
-------------------------------------------------------------------------------------------------------
Class B (8,024,389) (14,397,816)
-------------------------------------------------------------------------------------------------------
Class C (662,529) (1,081,302)
-------------------------------------------------------------------------------------------------------
Class I (612,508) (916,990)
-------------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 1,674,850,575 1,937,963,742
-------------------------------------------------------------------------------------------------------
Reinvestment of distributions 38,358,498 53,893,196
-------------------------------------------------------------------------------------------------------
Cost of shares redeemed (1,720,272,385) (2,100,769,888)
-------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions (7,063,312) (108,912,950)
-------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets 326,430,874 3,576,434
-------------------------------------------------------------------------------------------------------
Net assets at beginning of period 721,925,698 718,349,264
-------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD (including accumulated net
investment loss of ($19,813) at September 30, 2000.) $ 1,048,356,572 $ 721,925,698
-------------------------------------------------------------------------------------------------------
</TABLE>
22 The accompanying notes are an integral part of the financial statements.
<PAGE> 23
FINANCIAL HIGHLIGHTS
The following tables include selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $6.12 5.30 7.98 7.01 7.14
-------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.08)(a) (.04)(a) (.03) (.01) (.02)(a)
-------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions 3.42 1.27 (1.84) 1.55 .94
-------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.34 1.23 (1.87) 1.54 .92
-------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net realized gains on investment transactions (.36) (.41) (.81) (.57) (1.05)
-------------------------------------------------------------------------------------------------------------------
Total distributions (.36) (.41) (.81) (.57) (1.05)
-------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.10 6.12 5.30 7.98 7.01
-------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) 55.94(C) 23.91 (25.13) 24.29 16.33
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 821 565 512 760 680
-------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.34 1.01 .90 .90 1.08
-------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.33 1.01 .90 .90 1.08
-------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (1.02) (.64) (.38) (.20) (.26)
-------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 156 133 86 102 85
-------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $5.67 4.98 7.64 6.81 7.03
-------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.16)(a) (.10)(a) (.11) (.10) (.09)(a)
-------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions 3.14 1.20 (1.74) 1.50 .92
-------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.98 1.10 (1.85) 1.40 .83
-------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net realized gains on investment transactions (.36) (.41) (.81) (.57) (1.05)
-------------------------------------------------------------------------------------------------------------------
Total distributions (.36) (.41) (.81) (.57) (1.05)
-------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.29 5.67 4.98 7.64 6.81
-------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) 53.95(C) 22.78 (26.06) 22.83 15.13
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 186 136 186 302 258
-------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 2.51 2.28 2.14 2.14 2.15
-------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 2.50 2.28 2.14 2.14 2.15
-------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (2.19) (1.91) (1.62) (1.44) (1.33)
-------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 156 133 86 102 85
-------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $5.71 5.00 7.63 6.80 7.02
-------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.13)(a) (.08)(a) (.14) (.09) (.09)(a)
-------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions 3.17 1.20 (1.68) 1.49 .92
-------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.04 1.12 (1.82) 1.40 .83
-------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net realized gains on investment transactions (.36) (.41) (.81) (.57) (1.05)
-------------------------------------------------------------------------------------------------------------------
Total distributions (.36) (.41) (.81) (.57) (1.05)
-------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.39 5.71 5.00 7.63 6.80
-------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) 55.38(C) 23.10 (25.65) 22.87 15.16
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 21 10 8 11 6
-------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 2.10 1.93 2.06 1.95 2.15
-------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 2.10 1.93 2.06 1.95 2.15
-------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (1.79) (1.56) (1.54) (1.25) (1.33)
-------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 156 133 86 102 85
-------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS I
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $6.27 5.39 8.07 7.05 7.15
-------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.05)(a) (.01)(a) -- .01 .01(a)
-------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions 3.52 1.30 (1.87) 1.58 .94
-------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.47 1.29 (1.87) 1.59 .95
-------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net realized gains on investment transactions (.36) (.41) (.81) (.57) (1.05)
-------------------------------------------------------------------------------------------------------------------
Total distributions (.36) (.41) (.81) (.57) (1.05)
-------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.38 6.27 5.39 8.07 7.05
-------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) 56.87(C) 24.66 (24.82) 24.89 16.76
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 20 12 12 21 20
-------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .97 .58 .48 .53 .66
-------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .96 .58 .48 .53 .66
-------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.65) (.21) .04 .17 .16
-------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 156 133 86 102 85
-------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of any sales charges.
(c) Total return would have been lower had certain expenses not been reduced.
24
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES Kemper Small Capitalization Equity Fund (the
"Fund") is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an
open-end, diversified management investment company
organized as a Massachusetts business trust.
The Fund offers multiple classes of shares. Class A
shares are offered to investors subject to an
initial sales charge. Class B shares are offered
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are offered without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares are offered to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of the Fund have
equal rights with respect to voting subject to
class specific arrangements.
The Fund's financial statements are prepared in
accordance with accounting principles generally
accepted in the United States which require the use
of management estimates. The policies described
below are followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Investments are stated at value
determined as of the close of regular trading on
the New York Stock Exchange. Securities which are
traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on
the exchange on which the security is traded most
extensively. If no sale occurred, the security is
then valued at the calculated mean between the most
recent bid and asked quotations. If there are no
such bid and asked quotations, the most recent bid
quotation is used. Securities quoted on the Nasdaq
Stock Market ("Nasdaq"), for which there have been
sales, are valued at the most recent sale price
reported. If there are no such sales, the value is
the most recent bid quotation. Securities which are
not quoted on Nasdaq but are traded in another
over-the-counter market are valued at the most
recent sale price, or if no sale occurred, at the
calculated mean between the most recent bid and
asked quotations on such market. If there are no
such bid and asked quotations, the most recent bid
quotation shall be used. Money market instruments
purchased with an original maturity of sixty days
or less are valued at amortized cost.
All other securities are valued at their fair value
as determined in good faith by the Valuation
Committee of the Board of Trustees.
25
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
REPURCHASE AGREEMENTS. The Fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
OPTIONS. An option contract is a contract in which
the writer of the option grants the buyer of the
option the right to purchase from (call option), or
sell to (put option), the writer a designated
instrument at a specified price within a specified
period of time. Certain options, including options
on indices, will require cash settlement by the
Fund if the option is exercised. During the period,
the Fund purchased put options on securities as a
hedge against potential adverse price movements in
the value of portfolio assets and/or as a temporary
substitute for selling selected investments.
The liability representing the Fund's obligation
under an exchange traded written option or
investment in a purchased option is valued at the
last sale price or, in the absence of a sale, the
mean between the closing bid and asked prices or at
the most recent asked price (bid for purchased
options) if no bid and asked price are available.
Over-the-counter written or purchased options are
valued using dealer supplied quotations. Gain or
loss is recognized when the option contract expires
or is closed.
Over-the-counter options have the risk of the
potential inability of counterparties to meet the
terms of their contracts. The Fund's maximum
exposure to purchased options is limited to the
premium initially paid. In addition, certain risks
may arise upon entering into option contracts
including the risk that an illiquid secondary
market will limit the Fund's ability to close out
an option contract prior to the expiration date and
that a change in the value of the option contract
may not correlate exactly with changes in the value
of the securities or currencies hedged.
FOREIGN CURRENCY TRANSLATIONS. The books and
records of the Fund are maintained in U.S. dollars.
Investment securities and other assets and
liabilities denominated in a foreign currency are
translated into U.S. dollars at the prevailing
exchange rates at period end. Purchases and sales
of investment securities, income and expenses are
translated into U.S. dollars at the prevailing
exchange rates on the respective dates of the
transactions.
Net realized and unrealized gains and losses on
foreign currency transactions represent net gains
and losses between trade and settlement dates on
securities transactions, the disposition of forward
foreign currency exchange contracts and foreign
currencies, and the difference between the amount
of net investment income accrued and the U.S.
dollar amount actually received. That portion of
both realized and unrealized gains and losses on
investments that results from fluctuations in
foreign currency exchange rates is not separately
disclosed but is included with net realized and
unrealized gains and losses on investment
securities.
FEDERAL INCOME TAXES. The Fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies and to distribute
all of its taxable income to its
26
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
shareholders. Accordingly, the Fund paid no federal
income taxes and no federal income tax provision
was required.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made annually.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the Fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. These differences relate primarily to
certain securities sold at a loss. As a result, net
investment income (loss) and net realized gain
(loss) on investment transactions for a reporting
period may differ significantly from distributions
during such period. Accordingly, the Fund may
periodically make reclassifications among certain
of its capital accounts without impacting the net
asset value of the Fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Dividend income is recorded on
the ex-dividend date. Realized gains and losses
from investment transactions are recorded on an
identified cost basis. All discounts and premiums
are amortized for both tax and financial reporting
purposes.
--------------------------------------------------------------------------------
2 PURCHASES AND SALES
OF SECURITIES For the year ended September 30, 2000, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $1,396,164,168
Proceeds from sales 1,517,478,003
--------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper). The Fund pays a monthly
investment management fee of 1/12 of the annual
rate of .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). This was equivalent to an annual effective
rate of .82% for the year ended September 30, 2000.
During the year ended September 30, 2000, the Fund
incurred management fees as follows:
Base Fee $5,407,098
Performance adjustment 2,301,240
----------
Total fees $7,708,338
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the year ended September 30,
2000 are $105,216.
27
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares pursuant to separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the year ended September 30, 2000 are
$1,851,145, of which $125,913 is unpaid as of
September 30, 2000.
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with Kemper
Distributors, Inc. (KDI). For providing information
and administrative services to shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets. KDI in turn has
various agreements with financial services firms
that provided these services and pays these firms
based on assets of fund accounts the firms service.
Administrative services fees paid by the Fund to
KDI for the year ended September 30, 2000 are
$2,135,085, of which $192,717 is unpaid.
Additionally, $2,026 was paid by KDI to affiliates.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of
$2,086,764, of which $500,268 is unpaid as of
September 30, 2000.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the year ended September 30,
2000, the Fund made no payments to its officers and
incurred trustees' fees of $31,842 to independent
trustees.
28
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
2000 1999
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 174,955,646 $ 1,450,423,439 277,575,668 $ 1,639,199,124
-------------------------------------------------------------------------------------------
Class B 17,446,192 134,133,986 16,918,037 89,082,010
-------------------------------------------------------------------------------------------
Class C 5,473,691 39,711,661 29,841,652 158,279,084
-------------------------------------------------------------------------------------------
Class I 2,006,106 17,934,128 479,380 2,826,106
-------------------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 4,066,289 29,358,540 6,780,470 38,038,448
-------------------------------------------------------------------------------------------
Class B 1,168,320 7,757,839 2,662,259 13,924,092
-------------------------------------------------------------------------------------------
Class C 93,981 629,613 193,290 1,016,706
-------------------------------------------------------------------------------------------
Class I 82,659 612,506 159,781 913,950
-------------------------------------------------------------------------------------------
SHARES REDEEMED
Class A (184,965,959) (1,522,208,176) (297,259,222) (1,711,845,183)
-------------------------------------------------------------------------------------------
Class B (15,769,891) (115,378,499) (23,821,773) (173,960,754)
-------------------------------------------------------------------------------------------
Class C (4,782,470) (33,895,200) (29,904,772) (159,942,510)
-------------------------------------------------------------------------------------------
Class I (1,843,606) (16,143,149) (1,089,997) (6,444,023)
-------------------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 3,998,805 32,647,361 8,560,944 48,577,418
-------------------------------------------------------------------------------------------
Class B (4,358,318) (32,647,361) (9,160,719) (48,577,418)
-------------------------------------------------------------------------------------------
NET DECREASE FROM CAPITAL SHARE
TRANSACTIONS $ (7,063,312) $ (108,912,950)
-------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
5 LINE OF CREDIT The Fund and several Kemper Funds (the
"Participants") share in a $750 million revolving
credit facility with Chase Manhattan for temporary
or emergency purposes, including the meeting of
redemption requests that otherwise might require
the untimely disposition of securities. The
Participants are charged an annual commitment fee
which is allocated, pro rata based on net assets,
amount each of the Participants. Interest is
calculated based on the market rates at the time of
the borrowing. The Fund may borrow up to a maximum
of 33 percent of its net assets under the
agreement.
--------------------------------------------------------------------------------
6 EXPENSE OFF-SET
ARRANGEMENTS The Fund has entered into arrangements with its
custodian whereby credits realized as a result of
uninvested cash balances were used to reduce a
portion of the Fund's expenses. During the period,
the Fund's custodian fees and transfer agent fees
were reduced by $24,862 and $61,622, respectively,
under these arrangements.
29
<PAGE> 30
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, 2000, and the related statements of operations for the
year then ended, 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
1996. 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 auditing standards generally
accepted in the United States. 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, 2000, by correspondence with the custodian. 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, 2000, 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 1996, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Chicago, Illinois
November 16, 2000
30
<PAGE> 31
TAX INFORMATION
TAX INFORMATION (UNAUDITED)
Kemper Small Capitalization Equity Fund paid distributions of $0.36 per share,
respectively, from net long-term capital gains during the year ended September
30, 2000, of which 100% represent 20% rate gains.
Pursuant to Section 852 of the Internal Revenue Code, Kemper Small
Capitalization Equity Fund designates $231,612,000 as capital gain dividends for
the year ended September 30, 2000.
Please contact a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your account, please call 1-800-Scudder.
31
<PAGE> 32
TRUSTEES&OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
JOHN W. BALLANTINE MARK S. CASADY CAROLINE PEARSON
Trustee President Assistant Secretary
LEWIS A. BURNHAM PHILIP J. COLLORA BRENDA LYONS
Trustee Vice President and Secretary Assistant Treasurer
LINDA C. COUGHLIN JOHN R. HEBBLE
Trustee Treasurer
DONALD L. DUNAWAY J.C. CABRERA
Trustee Vice President
ROBERT B. HOFFMAN ANN M. MCCREARY
Trustee Vice President
DONALD R. JONES KATHRYN L. QUIRK
Trustee Vice President
THOMAS W. LITTAUER WILLIAM F. TRUSCOTT
Chairman, Trustee and Vice President
Vice President
LINDA J. WONDRACK
SHIRLEY D. PETERSON Vice President
Trustee
MAUREEN E. KANE
WILLIAM P. SOMMERS Assistant Secretary
Trustee
</TABLE>
<TABLE>
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.............................................................................................
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
.............................................................................................
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 219557
Kansas City, MO 64121
.............................................................................................
CUSTODIAN AND TRANSFER AGENT STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02109
.............................................................................................
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
.............................................................................................
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
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[KEMPER FUNDS LOGO] Long-term investing in a short-term world(SM)
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KSCF - 2 (11/25/00) 1124100
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
