<PAGE> 1
Kemper Europe Fund
SEMIANNUAL REPORT TO SHAREHOLDERS
FOR THE PERIOD ENDED MAY 31, 1996
SEEKS TO PROVIDE LONG-TERM CAPITAL GROWTH
"...Corporate Europe today is about where the U.S. was in the late '80s..."
<PAGE> 2
Table of
Contents
2
Terms to Know
3
General
Economic Overview
5
Performance Update
7
Individual Holdings
8
Portfolio of Investments
11
Financial Statements
13
Notes to
Financial Statements
17
Financial Highlights
At A Glance
- ---------------------------------------------
KEMPER EUROPE FUND
TOTAL RETURNS
- ---------------------------------------------
FOR THE ONE MONTH ENDED MAY 31, 1996
(UNADJUSTED FOR ANY SALES CHARGE)
<TABLE>
<CAPTION>
- ---------------------------------------------
<S> <C>
KEMPER EUROPE FUND CLASS A 3.26%
- ---------------------------------------------
KEMPER EUROPE FUND CLASS B 3.16%
- ---------------------------------------------
KEMPER EUROPE FUND CLASS C 3.16%
- ---------------------------------------------
LIPPER EUROPEAN REGION FUNDS
CATEGORY AVERAGE* 2.53%
- ---------------------------------------------
</TABLE>
- ---------------------------------------------
NET ASSET VALUE
- ---------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
5/31/96 5/1/96
- ---------------------------------------------
<S> <C> <C>
KEMPER EUROPE FUND CLASS A $9.81 $ 9.50
- ---------------------------------------------
KEMPER EUROPE FUND CLASS B $9.80 $ 9.50
- ---------------------------------------------
KEMPER EUROPE FUND CLASS C $9.80 $ 9.50
- ---------------------------------------------
</TABLE>
Returns are historical and do not represent future results. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
*Lipper Analytical Services, Inc. returns are based upon changes in net asset
value with all dividends reinvested and do not include the effect of sales
charges and, if they had, results may have been less favorable.
TERMS TO KNOW
BOTTOMS-UP INVESTING One approach to investing in the stock market. A bottoms-up
stock picker analyzes investment opportunities "from the bottom up"--paying the
most attention to the performance of individual companies. This is in contrast
to a top-down approach, in which an investor places greater emphasis on the
overall economy, industry sectors and the market as a whole.
DEPOSITARY RECEIPTS For many foreign securities, there are U.S. Dollar
denominated American Depositary Receipts (ADRs), which are bought and sold in
the United States and are issued by domestic banks. ADRs represent the right to
receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. By investing in ADRs rather than directly in foreign
issuers' stock, the Fund avoids currency risks during the settlement period. In
general, there is a large, liquid market in the United States for most ADRs. The
Fund may also invest in securities of foreign issuers in the form of European
Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs), which are
receipts evidencing an arrangement with a bank similar to that for ADRs and are
designed for use in the European and other foreign securities markets. EDRs and
GDRs are not necessarily denominated in the currency of the underlying security.
EMERGING MARKETS A developing or emerging country can be considered to be a
country that is in the initial stages of its industrial cycle. Developing or
"emerging" countries involve exposure to economic structures that are generally
less diverse and mature than in the United States and to political systems that
may be less stable.
SMALL CAPITALIZATION Capitalization is a measure of the size of a publicly
traded company, as determined by multiplying the current market price by the
number of shares outstanding. In Europe, small cap companies generally have
market capitalizations of less than $500 million.
FT/S&P-ACTUARIES WORLD INDEX-EUROPE A managed index that is generally
representative of the European market.
<PAGE> 3
GENERAL ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF EXECUTIVE AND CHIEF INVESTMENT OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $78 BILLION IN ASSETS, INCLUDING $45 BILLION
IN RETAIL MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN
M.B.A. FROM HARVARD UNIVERSITY.
DEAR SHAREHOLDER,
The first six months of 1996 have provided a few surprises. As the year began,
most of us expected sluggish economic and corporate growth -- which the Federal
Reserve Board would address by reducing short-term interest rates. Yet, what we
experienced was stronger-than-anticipated economic growth, better corporate
earnings and rising interest rates. Although such surprises unsettled the bond
market, the stock market has followed a spectacular 1995 with strength so far
this year.
Where is the economy headed now? Its direction is even less predictable as we
draw nearer to the November elections. Half of the country's leading economists
are forecasting 3 percent growth while an equal number are looking for no better
than 1 percent growth. At Kemper Funds, we suspect that the economy is growing
at a subpar rate of 2 percent. Although commodity prices may suggest otherwise,
we think inflation is holding at less than 3 percent. We see no reason to expect
the Fed to reduce rates to stimulate growth but neither is it likely to raise
rates significantly to control growth. In an environment of stable or gently
rising rates, we would expect corporate earnings to grow at a rate of about 7 to
8 percent -- that's somewhat higher than we believed likely at the start of the
year.
Our forecast calls for a generally comfortable environment for investors. But
both the economy and the general direction of the markets are due for a
reversal. In July, the U.S. economy entered its 64th month of consecutive
growth. This is the longest expansion without a single quarter of negative
output growth since George Washington was president. Today's bull market started
in October 1990, which makes it one of the longest running bull markets in
history. By virtue of its length alone, the stock market is vulnerable to a
correction.
As expected, volatility has returned to the market this year. For example: The
stock market's performance on March 8, the date that a surprisingly strong
employment report was released, betrayed some level of investor skittishness.
But while the Standard & Poor's lost 3.1 percent that day, it quickly regained
the ground and moved higher.
CONSUMERS AND JOB SECURITY
The restructuring of corporate America, which is generally credited for its
improved profitability, has been an important influence on the consumer.
Economic growth is heavily dependent upon consumer spending which, in turn, is
a function of inflation, pay raises and fear of job loss. While the first two
have not been a recent concern, fear of losing one's job has dampened consumer
confidence.
Such anxiety in the workplace was the subject of a recent study by the
Council of Economic Advisors. According to that report, more than two-thirds
of the new jobs created in the United States in 1994 and 1995 paid better than
the average job. The report found that the rate at which jobs were eliminated
has risen slightly despite strong economic growth of recent years -- however, it
reported that the length of time most workers spent unemployed has declined.
The graph below tracks Bureau of Labor Statistics data that show the
recent relationship between number of jobs created versus the number of jobs
lost.
[LINE GRAPH]
<TABLE>
<CAPTION>
Jobs Created Jobs Lost
<S> <C> <C>
12/31/91 (300,000) 40,000
12/31/92 120,000 (30,000)
12/31/93 300,000 70,000
12/31/94 180,000 70,000
12/31/95 (80,000) (40,000)
3/31/96 490,000 (10,000)
</TABLE>
SOURCE: BUREAU OF LABOR STATISTICS
3
<PAGE> 4
GENERAL ECONOMIC OVERVIEW
ECONOMIC GUIDEPOSTS
Economic activity is a key influence on investment performance and
shareholder decision-making. Periods of recession or boom, inflation or
deflation, credit expansion or credit crunch have a significant impact on
mutual fund performance.
The following are some significant economic guideposts and their investment
rationale that may help your investment decision-making. The 10-year Treasury
rate and the prime rate are prevailing interest rates. The other data report
year-to-year percentage changes.
<TABLE>
<CAPTION>
Now (5/31/96) 6 months ago 1 year ago 2 years ago
<S> <C> <C> <C> <C>
10-year Treasury rate(1) 6.74 5.71 6.17 7.10
Prime rate(2) 8.25 8.63 9.00 7.25
Inflation rate(3) 2.96 2.60 3.04 2.56
The U.S. dollar(4) 8.51 -2.58 -9.31 0.51
Capital
goods orders(5) 2.93 11.03 12.98 25.11
Industrial production(6) 3.26 1.08 2.80 6.61
Employment growth(7) 2.00 1.92 2.71 3.12
</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, infla-
tion has been as high as 6%. The low, moderate inflation of the last
few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters
and the value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on corporate profits and equity performance.
(7) An influence on family income and retail sales.
Source: Economics Department, Zurich Kemper Investments, Inc.
Such ebb and flow is to be expected in investing, especially at this point in
the cycle. Attempting to "prepare" for a correction is futile, we believe. Those
whose caution caused them to excuse themselves from the market early this year,
for example, would have forgone its significant gain year to date.
Several opportunities exist today for the careful investor. First, having
settled down some from a raucous 1995, the technology sector continues to enjoy
the product and market demand that make it the dominant sector of the 1990s.
Second, equity investors willing to look overseas may find opportunities in
countries whose economies today are at a point where the U.S. economy was in
1995. Our forecast assumes that strength in foreign markets could boost those
countries' currencies, which would weaken the value of the dollar.
We expect the fixed-income markets to continue to be sensitive to interest
rate and inflation news. However, for as long as economic growth is positive and
earnings are growing, we believe the high-yield market is one market segment
that has significant potential.
Finally, we look for political activity to have less and less bearing on the
markets' performance. Although they may continue to debate tax reform,
federal budget deficit reduction and health care reform, the incumbent
legislators are running out of time to take action before the November
elections. If there is any suspense by November, it is likely to be in whether
the Republicans can retain control of Congress. Their success would make a
balanced budget and tax reform likely agenda topics for 1997.
With that as an economic backdrop, we encourage you to read the following
detailed report of your fund, including an interview with your fund's portfolio
management. Thank you for your continued support. We appreciate the opportunity
to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
ZURICH KEMPER INVESTMENTS, INC.
July 2, 1996
4
<PAGE> 5
ON MAY 1, 1996, KEMPER INTRODUCED KEMPER EUROPE FUND TO GIVE INVESTORS ACCESS
TO THE EUROPEAN MARKET THROUGH A FUND INVESTING PRIMARILY IN EQUITY SECURITIES
OF EUROPEAN COMPANIES. DURING ITS FIRST MONTH, PORTFOLIO MANAGER EDITH THOUIN
TOOK ADVANTAGE OF INCREASED CONSUMER CONFIDENCE IN EUROPE AND THE STRENGTH OF
SMALLER COMPANIES TO BUILD THIS PORTFOLIO.
Q. KEMPER EUROPE FUND'S FISCAL YEAR ENDS IN NOVEMBER, WHICH MEANS THAT WE ARE
REQUIRED TO SEND SHAREHOLDERS A SEMIANNUAL REPORT AS OF MAY 31. THAT BEING THE
CASE, THIS REPORT WILL COVER ONLY ONE MONTH OF PERFORMANCE. WHAT KIND OF MONTH
WAS MAY TO START BUILDING THE PORTFOLIO?
A. It was actually quite a good month. Small capitalization stocks, in
particular, were available at attractive valuations. Many of these stocks
posted 40% to 50% gains during the first quarter, which prompted a rout of
profit taking. Yet, while we were able to acquire them at attractive valuations
early in the month, many bounced back by the end. Some of our top-performing
small caps were Gucci Group in the Netherlands, WM-data in Sweden and Bulgari
SpA in Italy. The fund's 3.26% Class A gain in May (unadjusted for sales
charge), compared to the -0.29% of the FT/S&P-Actuaries World Index-Europe,*
was due in large part to the small caps. But we also enjoyed good performance
from the blue chip stocks we acquired, including British Airways in the United
Kingdom, Carrefour in France, Bayer in Germany and Ahold and ING in the
Netherlands. These companies represent some of our largest holdings.
*FT/S&P-Actuaries World Index-Europe is a managed index that is generally
representative of the European market.
Q. WAS THERE ANYTHING YOU HAD PLANNED TO DO IN THIS FIRST MONTH THAT YOU
COULDN'T?
A. I was diversify into GDRs/ADRs of Eastern European companies but that had
to be put on hold due to the exaggerated price moves so far this year.
Q. WHICH INVESTMENT THEMES ARE YOU DEVELOPING?
A. The European consumer is back, and we're looking for added strength from
retail stocks. Our focus has been to invest in companies that should benefit
from the resurgence we're seeing in consumer spending. We have invested in
luxury-goods producers like Gucci Group, Bulgari SpA and Christian Dior. We
also invested in retailers like Next and Burton Group in the United Kingdom and
in food retailers such as Ahold. Investments have also been made in the
pharmaceuticals, oil and oil services and media sectors. Overall, this should
be an excellent growth period for Europe.
PERFORMANCE UPDATE
[THOUIN PHOTO]
Edith Thouin joined Zurich Kemper Investments, Inc. (ZKI) at their London office
in 1992 as Director of European equities. She is a senior vice president of ZKI
and is a vice president and the portfolio manager of Kemper Europe Fund. Thouin
holds a master's degree in civil law at the University of Leiden, the
Netherlands.
The views expressed in this report reflect those of the portfolio manager only
through the end of the period of the report, as stated on the cover. The
manager's views are subject to change at any time, based
on market and other conditions.
5
<PAGE> 6
PERFORMANCE UPDATE
Q. WHAT ABOUT TECHNOLOGY, WHICH IS A CONTINUING DOMINANT THEME IN THE U.S.?
A. I suppose that is one of the important differences between investing in
the U.S. right now and investing in Europe. Europe just doesn't have the
concentration of technical companies that you'd find in the U.S. or Japan.
WM-data in Sweden, Getronics and Baan Company in the Netherlands are three
technology companies that the fund has positions in, but it is not likely to be
a dominant sector in the portfolio.
Q. IN ONE MONTH, THE FUND'S PERFORMANCE CANNOT BE EXPECTED TO COMPARE WITH
THE INDEX, BUT HOW DO YOU EXPECT THE COMPOSITION OF THE FUND TO EVENTUALLY
COMPARE TO THE FT/S&P-ACTUARIES WORLD INDEX-EUROPE?
A. There are several differences already. Most significantly, the fund has
about half the exposure to the U.K. that the index has. The U.K. is more
advanced in its economic cycle and we are now starting to have concerns about
the level of interest rates and even inflation there. We'll also have a lesser
investment in Germany. On the other hand, we've an overweighted position in the
Netherlands, Sweden and France where we believe growth is just emerging and
inflation is not a problem.
Q. WHAT ARE THE IMPLICATIONS OF FAVORING CERTAIN SMALLER COUNTRIES OVER THE
LARGE MARKETS OF THE U.K. AND GERMANY?
A. We believe there's greater upside potential because many companies based
in the smaller countries benefit from trading with the U.K. and Germany, but
they may represent more value because they tend to be underresearched. Our
approach tends to be bottoms up -- by that I mean that we have the research
resources to be able to focus on the fundamentals of specific companies. The
Swedish economy, for example, is still depressed, yet it has strong small- and
mid-cap performers like the medical technology company Getinge Industrier and
the network services group, WM-data.
Q. EDITH, YOU HAVEN'T MENTIONED OPPORTUNITIES IN EMERGING MARKETS, YET THE
FUND HAS THE AUTHORITY TO INVEST UP TO 25% OF ITS TOTAL ASSETS IN THESE
DEVELOPING COUNTRIES. WHAT ARE YOUR THOUGHTS THERE?
A. The Eastern European emerging markets have been strong and are a leveraged
investment on growth in Europe. As we further diversify the portfolio, we will
continue to research investment opportunities in these areas. I am quite keen on
Poland and Hungary at the moment due to their improving fundamentals and the
political stability, but valuations have gotten ahead of themselves a bit in
these countries, so I am looking to buy into any weakness.
Q. THE JAPANESE ECONOMY HAS BEEN WEAK FOR MORE THAN A YEAR, BUT THERE HAVE
BEEN INDICATIONS THAT IT IS ON ITS WAY BACK. WHAT WILL A RESURGENCE IN THAT
ECONOMY MEAN TO EUROPEAN COMPANIES?
A. Growth in Japan should only help growth in Europe. Countries like France,
Germany and the Netherlands have strong exporting businesses to Japan and Asia.
Japan is a different kind of market and its strength does not necessarily pull
international investor's support from Europe. Valuations of Japanese companies
tend to be much higher, and it's not always easy to understand their accounting
procedures. Even when conditions are positive in Japan, international investors
have a much higher confidence level in Europe.
Q. GOING FORWARD, WHAT'S YOUR OUTLOOK?
A. We are still very positive about our ability to broaden the fund's base.
Valuations of mid- and small-cap stocks continue to be quite low and these
stocks have underperformed for the last two and a half years. In addition to
being at an excellent point in the economic cycle where growth is starting to
pick up, there's a wider-reaching story going on in Europe right now that should
boost corporate profitability.
Many European companies are just now following American companies in
restructuring their operations and focusing on shareholder value. Some
restructuring will lead to heightened merger and acquisition activity. In fact,
news of a merger significantly increased the value of one of our Swiss holdings,
Ciba-Geigy. Ultimately, this trend should result in fewer, more efficient
organizations. Corporate Europe today is about where the U.S. was in the late
'80s and a lot of value is still to be unlocked. With this in mind, we believe
European markets should do well.
6
<PAGE> 7
INDIVIDUAL HOLDINGS
THE FUND'S 5 LARGEST HOLDINGS*
REPRESENTING 25.5% OF THE FUND'S TOTAL ASSETS ON MAY 31, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Holdings Percent
- ---------------------------------------------------------
<S> <C> <C>
BRITISH AIRWAYS PLC 5.7%
1.
- --------------------------------------------------------
CARREFOUR S.A. 5.4%
2.
- --------------------------------------------------------
KONINKLIJKE AHOLD N.V. 5.3%
3.
- --------------------------------------------------------
INDEPENDENT NEWSPAPERS PLC 4.8%
4.
- --------------------------------------------------------
BAAN COMPANY N.V. 4.3%
5.
- --------------------------------------------------------
</TABLE>
*THE FUND'S PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
7
<PAGE> 8
PORTFOLIO OF INVESTMENTS
KEMPER EUROPE FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
COMMON STOCKS NUMBER OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DENMARK--2.1%
Copenhagen Airports
AIRPORT OPERATOR 87 $ 9,000
- -----------------------------------------------------------------------------------------------------------
FRANCE--10.5%
Carrefour S.A.
FOOD RETAILER 60 33,000
Christian Dior S.A.
LUXURY GOODS MANUFACTURER 38 5,000
Technip S.A.
ENGINEERING COMPANY 86 8,000
--------------------------------------------------------------------------
46,000
- -----------------------------------------------------------------------------------------------------------
GERMANY--9.4%
Bayer A.G.
CHEMICAL COMPANY 75 25,000
Veba, A.G.
ELECTRIC UTILITY 300 16,000
--------------------------------------------------------------------------
41,000
- -----------------------------------------------------------------------------------------------------------
IRELAND--8.5%
Independant Newspapers PLC
PUBLISHER 3,600 29,000
Kerry Group PLC
FOOD PROCESSING 835 8,000
--------------------------------------------------------------------------
37,000
- -----------------------------------------------------------------------------------------------------------
ITALY--1.4%
(a)Bulgari SpA
LUXURY GOODS MANUFACTURER 360 6,000
- -----------------------------------------------------------------------------------------------------------
NETHERLANDS--28.2%
Aalberts Industries N.V.
CAPITAL GOODS AND COMPONENTS 60 5,000
Baan Company N.V.
SOFTWARE SERVICING 700 26,000
GTI Holding
ENGINEERING SERVICES 50 5,000
Getronics N.V.
SYSTEMS INTEGRATION SERVICES 107 9,000
(a)Gucci Group N.V.
LUXURY GOODS MANUFACTURER 130 9,000
IHC Caland N.V.
MARINE TECHNOLOGY HOLDING COMPANY 122 6,000
Internationale Nederlanden Groep
BANKING AND INSURANCE 310 26,000
Koninklijke Ahold N.V.
FOOD RETAILER 600 32,000
Schuttersveld Holding N.V.
CONGLOMERATE 140 5,000
--------------------------------------------------------------------------
123,000
- -----------------------------------------------------------------------------------------------------------
SPAIN--6.0%
Iberdrola, S.A.
ELECTRIC UTILITY 1,200 12,000
Pryca Cuntros
FOOD RETAILER 600 14,000
--------------------------------------------------------------------------
26,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SWEDEN--6.9%
Dahl International
TECHNICAL WHOLESALER 830 $ 10,000
LM Ericsson Telephone Co. "B"
TELECOMMUNICATIONS EQUIPMENT MANUFACTURER 250 6,000
Getinge Industrier AB
MEDICAL SUPPLY COMPANY 465 8,000
(a)WM-data AB
COMPUTER CONSULTING COMPANY 100 6,000
--------------------------------------------------------------------------
30,000
- -----------------------------------------------------------------------------------------------------------
SWITZERLAND--3.0%
Ciba-Geigy Limited
PHARMACEUTICAL COMPANY 12 13,000
- -----------------------------------------------------------------------------------------------------------
UNITED KINGDOM--22.2%
British Airways PLC
AIRLINE 4,000 35,000
(a)British Bio-Technology Group
PHARMACEUTICAL COMPANY 110 5,000
Burton Group PLC
RETAILER 11,000 25,000
Next PLC
RETAILER 880 8,000
Reed International PLC
PUBLISHER 1,400 24,000
--------------------------------------------------------------------------
97,000
--------------------------------------------------------------------------
TOTAL COMMON STOCKS--98.2%
(Cost: $417,000) 428,000
--------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET
INSTRUMENTS--22.9%
Federal Home Loan Mortgage Corp.
5.16%, June 1996
(Cost: $100,000) $ 100,000 100,000
--------------------------------------------------------------------------
TOTAL INVESTMENTS--121.1%
(Cost: $517,000) 528,000
--------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER
ASSETS--(21.1)% (92,000)
--------------------------------------------------------------------------
NET ASSETS--100% $436,000
--------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
At May 31, 1996, the Fund's portfolio of investments had the following industry
diversification:
-------------------------------------------------------------------------------
<S> <C> <C>
VALUE %
-------------------------------------------------------------------------------
Consumer Cyclicals $106,000 24.3
-------------------------------------------------------------------------------
Consumer Staples 87,000 20.0
-------------------------------------------------------------------------------
Technology 62,000 14.2
-------------------------------------------------------------------------------
Transportation 44,000 10.1
-------------------------------------------------------------------------------
Utilities 28,000 6.4
-------------------------------------------------------------------------------
Finance 26,000 6.0
-------------------------------------------------------------------------------
Health Care 26,000 6.0
-------------------------------------------------------------------------------
Basic Industries 25,000 5.7
-------------------------------------------------------------------------------
Capital Goods 24,000 5.5
-------------------------------------------------------------------------------
TOTAL COMMON STOCKS 428,000 98.2
-------------------------------------------------------------------------------
OTHER NET ASSETS 8,000 1.8
-------------------------------------------------------------------------------
NET ASSETS $436,000 100.0
-------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
(a) Non-income producing security.
Based on the cost of investments of $517,000 for federal income tax
purposes at May 31, 1996, the gross unrealized appreciation was $14,000,
the gross unrealized depreciation was $3,000 and the net unrealized
appreciation on investments was $11,000.
See accompanying Notes to Financial Statements.
10
<PAGE> 11
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------
<S> <C>
Investments, at value
(Cost: $517,000) $528,000
- -------------------------------------------------------------------------------------------------------
Cash 57,000
- -------------------------------------------------------------------------------------------------------
Receivable for fund shares sold 22,000
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS 607,000
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------------------------------------
Payable for investments purchased 171,000
- -------------------------------------------------------------------------------------------------------
NET ASSETS $436,000
- -------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------------------------------------
Paid-in capital $425,000
- -------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments and assets and liabilities in foreign currencies 10,000
- -------------------------------------------------------------------------------------------------------
Undistributed net investment income 1,000
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $436,000
- -------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- -------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($269,800 divided by 27,500 shares outstanding) $9.81
- -------------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering price) $10.41
- -------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($131,500 divided by 13,400 shares outstanding) $9.80
- -------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($35,000 divided by 3,600 shares outstanding) $9.80
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
11
<PAGE> 12
FINANCIAL STATEMENTS
For the period from May 1, 1996 (commencement of operations) to May 31, 1996
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------
Dividends and interest income $ 2,000
- -------------------------------------------------------------------------------------------------------
Management fee and other expenses 1,000
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,000
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
NET UNREALIZED GAIN ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments and assets and liabilities in foreign
currencies 10,000
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $11,000
- -------------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------
OPERATIONS AND CAPITAL SHARE ACTIVITY
- -------------------------------------------------------------------------------------------------------
Net investment income $ 1,000
- -------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 10,000
- -------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 11,000
- -------------------------------------------------------------------------------------------------------
Net increase from capital share transactions 325,000
- -------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 336,000
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------------------
Beginning of period 100,000
- -------------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed
net investment income of $1,000) $436,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE FUND Kemper Europe Fund is an open-end management
investment company organized as a business trust
under the laws of Massachusetts. The Fund currently
offers four classes of shares. Class A shares are
sold to investors subject to an initial sales
charge. Class B shares are sold without an initial
sales charge but are subject to higher ongoing
expenses than Class A shares and a contingent
deferred sales charge payable upon certain
redemptions. Class B shares automatically convert
to Class A shares six years after issuance. Class C
shares are sold without an initial sales charge but
are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge
payable upon certain redemptions within one year of
purchase. Class C shares do not convert into
another class. Class I shares (none sold through
May 31, 1996) 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. Differences in class
expenses will result in the payment of different
per share income dividends by class. Each share
represents an identical interest in the investments
of the Fund and has the same rights.
- --------------------------------------------------------------------------------
2 SIGNIFICANT ACCOUNTING
POLICIES INVESTMENT VALUATION. Investments are stated at
value. Portfolio securities that are traded on a
domestic securities exchange are valued at the last
sale price on that exchange or, if there is no
recent last sale price available, at the last
current bid quotation. Portfolio securities that
are primarily traded on foreign securities
exchanges are generally valued at the preceding
closing values of such securities on their
respective exchanges where primarily traded. A
security that is listed or traded on more than one
exchange is valued at the quotation on the exchange
determined to be the primary market for such
security by the Board of Trustees or its delegates.
All other securities not so traded are valued at
the last current bid quotation if market quotations
are available. Fixed income securities are valued
by using market quotations, or independent pricing
services that use prices provided by market makers
or estimates of market values obtained from yield
data relating to instruments or securities with
similar characteristics. Equity options are valued
at the last sale price unless the bid price is
higher or the asked price is lower, in which event
such bid or asked price is used. Exchange traded
fixed income options are valued at the last sale
price unless there is no sale price, in which event
prices provided by market makers are used.
Financial futures and options thereon are valued at
the settlement price established each day by the
board of trade or exchange on which they are
traded. Forward foreign currency contracts and
foreign currencies are valued at the forward and
current exchange rates, respectively, prevailing on
the day of valuation. Other securities and assets
are valued at fair value as determined in good
faith by the Board of Trustees.
CURRENCY TRANSLATION. The books and records of the
Fund are maintained in U.S. dollars. All assets and
liabilities initially expressed in foreign currency
values are converted into U.S. dollar values at the
mean between the bid and offered quotations of such
currencies against U.S. dollars as last quoted by a
recognized dealer. If such quotations are not
readily
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
available, the rate of exchange is determined in
good faith by the Board of Trustees. Income and
expenses and purchases and sales of investments are
translated into U.S. dollars at the rate of
exchange prevailing on the respective dates of such
transactions. The Fund includes that portion of the
results of operations resulting from changes in
foreign exchange rates with net realized and
unrealized gain (loss) on investments, as
appropriate.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Dividend income is recorded on the
ex-dividend date, except that certain dividends
from foreign securities are recorded as soon as the
information is available to the Fund. Interest
income is recorded on the accrual basis and
includes discount amortization on money market
instruments. Realized gains and losses from
investment transactions are reported on an
identified cost basis.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class by dividing the Fund's net assets
attributable to that class by the number of shares
of the class outstanding. Because of the need to
obtain prices as of the close of trading on various
exchanges throughout the world, the calculation of
net asset value does not take place
contemporaneously with the determination of the
prices of the majority of the portfolio securities.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies during the period
ended May 31, 1996.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income and net
realized capital gains annually, which are recorded
on the ex-dividend date. Dividends are determined
in accordance with income tax principles which may
treat certain transactions differently from
generally accepted accounting principles. These
differences are primarily due to differing
treatments for certain transactions such as foreign
currency transactions.
EQUALIZATION ACCOUNTING. A portion of proceeds from
sales and cost of redemptions of Fund shares is
credited or charged to undistributed net investment
income so that income per share available for
distribution is not affected by sales or
redemptions of shares.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI) (formerly known as Kemper Financial Services,
Inc.) and pays a management fee at an annual rate
of .75% of the first $250 million of average daily
net assets declining to
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
.62% of average daily net assets in excess of $12.5
billion. However, ZKI has agreed to a reduction of
its management fee to .50% until the earlier of May
1, 1997 or the date when the Fund's net assets
reach $100 million.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS ---------------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------- -------------
<S> <C> <C> <C>
Period ended
May 31, 1996 $ 1,000 4,000 --
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, KDI receives any contingent
deferred sales charges from redemptions of Class B
and Class C shares.
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with 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 provide these
services and pays these firms based on assets of
Fund accounts the firms service.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company is the shareholder service
agent of the Fund.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the period ended May 31, 1996, the Fund made
no payments to its officers or trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the period ended May 31, 1996, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $417,000
Proceeds from sales --
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
MAY 1, 1996 TO
MAY 31, 1996
----------------------
SHARES AMOUNT
<S> <C> <C>
SHARES SOLD
Class A 24,000 $230,000
---------------------------------------------------------------------------
Class B 11,000 103,000
---------------------------------------------------------------------------
SHARES REDEEMED
Class B (1,000) (8,000)
---------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS $325,000
---------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 FORWARD FOREIGN
CURRENCY CONTRACTS In order to protect itself against a decline in the
value of particular foreign currencies against the
U.S. Dollar, the Fund has entered into forward
contracts to deliver foreign currency in exchange
for U.S. Dollars as described below. The Fund bears
the market risk that arises from changes in foreign
exchange rates, and accordingly, the net unrealized
loss on these contracts is reflected in the
accompanying financial statements. The Fund also
bears the credit risk if the counterparty fails to
perform under the contract. At May 31, 1996, the
Fund had the following forward foreign currency
contracts outstanding with settlement dates in July
1996:
<TABLE>
<CAPTION>
CONTRACT UNREALIZED
FOREIGN CURRENCY AMOUNT IN LOSS
TO BE DELIVERED U.S. DOLLARS AT 5/31/96
------------------------------------------------------------
<C> <S> <C> <C>
45,000 Dutch Guilders $ 26,000 $ (300)
------------------------------------------------------------
96,000 French Francs 18,000 (300)
------------------------------------------------------------
12,000 German Marks 8,000 (200)
------------------------------------------------------------
9,000 Swiss Francs 7,000 (200)
------------------------------------------------------------
Net unrealized loss $(1,000)
------------------------------------------------------------
</TABLE>
16
<PAGE> 17
FINANCIAL HIGHLIGHTS
For the period from May 1, 1996 (commencement of operations) to May 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $9.50 9.50 9.50
- --------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .02 .01 .01
- --------------------------------------------------------------------------------------------------------
Net unrealized gain .29 .29 .29
- --------------------------------------------------------------------------------------------------------
Total from investment operations .31 .30 .30
- --------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.81 9.80 9.80
- --------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.26% 3.16 3.16
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.38% 2.29 2.25
- --------------------------------------------------------------------------------------------------------
Net investment income 1.30% .39 .43
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
Net assets at end of period $436,000
- --------------------------------------------------------------------------------------------------------
Portfolio turnover rate --
- --------------------------------------------------------------------------------------------------------
Average commission rate paid per share on stock transactions for the period ended May 31, 1996 was
$.0160. Foreign commissions usually are lower than U.S. commissions when expressed as cents per share
due to the lower per share prices of many non-U.S. securities.
- --------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
17
<PAGE> 18
NOTES
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS DENNIS H. FERRO JEROME L. DUFFY
President and Trustee Vice President Treasurer
JAMES E. AKINS JOHN E. NEAL ELIZABETH C. WERTH
Trustee Vice President Assistant Secretary
ARTHUR R. GOTTSCHALK JOHN E. PETERS
Trustee Vice President
FREDERICK T. KELSEY STEVEN H. REYNOLDS
Trustee Vice President
DOMINIQUE P. MORAX EDITH A. THOUIN
Trustee Vice President
FRED B. RENWICK PHILIP J. COLLORA
Trustee Vice President and
Secretary
JOHN B. TINGLEFF
Trustee CHARLES F. CUSTER
Vice President and
JOHN G. WEITHERS Assistant Secretary
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
FOREIGN CUSTODIAN THE CHASE MANHATTAN BANK, N.A.
Chase Metro Center
Brooklyn, NY 11245
- --------------------------------------------------------------------------------
INVESTMENT MANAGERS ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
120 South LaSalle Street Chicago, IL 60603
http://www.kemper.com
(RECYCLE LOGO)
Printed on recycled paper.
This report is not to be distributed unless
preceded or accompanied by a Kemper Europe
Fund prospectus.
KEURF - 3 (7/96) KEMPER LOGO
1018290
Printed in the U.S.A.
