<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MAY 31, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[LOGO]
SEEKS TO PROVIDE LONG-TERM CAPITAL GROWTH
KEMPER
EUROPE FUND
"...the most important aspect of European
economies has been the gradual pickup
of economic growth from near recessionary levels,
particularly in France and Germany. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
9
INDUSTRY SECTORS
10
LARGEST HOLDINGS
11
PORTFOLIO OF
INVESTMENTS
15
FINANCIAL STATEMENTS
17
NOTES TO
FINANCIAL STATEMENTS
21
FINANCIAL HIGHLIGHTS
24
SHAREHOLDERS' MEETING
At A GLANCE
- --------------------------------------------------------------------------------
KEMPER EUROPE FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 1998
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
CLASS A 28.69%
CLASS B 28.05%
CLASS C 28.19%
LIPPER EUROPEAN REGION FUNDS CATEGORY AVERAGE* 30.17%
- --------------------------------------------------------------------------------
Returns and rankings are historical and do not guarantee future performance.
Returns, rankings and net asset value fluctuate. Shares are redeemable at
current net asset value, which may be more or less than original cost.
Investment in foreign securities presents special risk considerations including
fluctuating currency exchange rates, government regulations and differences in
liquidity that may increase volatility of your investment.
*Lipper Analytical Services, Inc. returns and rankings are based upon changes in
net asset value with all dividends reinvested and do not include the effect of
sales charges and, if they had, results may have been less favorable.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
5/31/98 11/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER EUROPE FUND
CLASS A $15.74 $12.43
- --------------------------------------------------------------------------------
KEMPER EUROPE FUND
CLASS B $15.52 $12.27
- --------------------------------------------------------------------------------
KEMPER EUROPE FUND
CLASS C $15.55 $12.28
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER EUROPE FUND RANKINGS AS OF 5/31/98
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER
EUROPEAN REGION FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #65 OF 83 FUNDS #70 OF 83 FUNDS #68 OF 83 FUNDS
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
DURING THE PERIOD, KEMPER EUROPE FUND
MADE THE FOLLOWING DISTRIBUTIONS PER SHARE:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME DIVIDEND $0.50 -- --
- --------------------------------------------------------------------------------
SHORT-TERM
CAPITAL GAIN $0.06 $0.06 $0.06
- --------------------------------------------------------------------------------
LONG-TERM
CAPITAL GAIN $0.09 $0.09 $0.09
- --------------------------------------------------------------------------------
</TABLE>
TERMS TO KNOW
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR EQUITY STYLE BOX
- --------------------------------------------------------------------------------
[STYLE/SIZE DIAGRAM]
Source: Morningstar, Inc., Chicago, IL (312) 696-6000. (Morningstar's Style Box
is based on a portfolio date as of May 31, 1998.) The Equity Style Box
placement is based on a fund's price-to-earnings and price-to-book ratios
relative to the S&P 500, as well as the size of the companies in which it
invests, or median market capitalization.
PLEASE NOTE THAT STYLE BOXES DO NOT REPRESENT AN EXACT ASSESSMENT OF RISK AND
DO NOT REPRESENT FUTURE PERFORMANCE. PLEASE CONSULT THE PROSPECTUS FOR A
DESCRIPTION OF INVESTMENT POLICIES.
EUROPEAN MONETARY UNION An economic and monetary unification of European
countries to ultimately introduce a single currency and create a more
economically competitive region.
CYCLICAL STOCKS The stock of a company whose profits are heavily influenced by
cyclical changes in economic activity. As investors anticipate changes in
profits, cyclical stocks often reach their high and low levels before the
respective highs and lows in the economy.
LIQUIDITY A characteristic of an investment or an asset referring to the ease of
convertibility into cash within a reasonably short period of time.
<PAGE> 3
ECONOMIC OVERVIEW
[SILVIA PHOTO]
Dr. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS. HE IS ALSO A MEMBER OF THE INVESTMENT POLICY AND STRATEGY COMMITTEE
FOR KEMPER FUNDS.
SILVIA HOLDS BACHELOR OF ARTS AND PH.D. DEGREES IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND HAS A MASTER'S DEGREE IN ECONOMICS FROM BROWN
UNIVERSITY IN PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS
WITH THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT MANAGER FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $218 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS. IT IS ONE OF
THE 10 LARGEST MUTUAL FUND COMPLEXES IN THE UNITED STATES.
DEAR SHAREHOLDERS,
Stable economic growth, low interest rates and sustained low inflation continued
to produce a beneficial market environment for investors in the second quarter
of 1998. Despite heightened sensitivity to earnings estimates and announcements,
the economy continued to support financial assets. We expect this favorable
climate to continue -- in spite of the sensitivity -- at least over the shorter
term.
As always, expectations have been at the heart of the actions and reactions
that move the markets. Expectations appear to be high, as demonstrated by a
record flow of new cash into mutual funds. As of April 30, 1998, a record $5
trillion in mutual fund assets surpassed total assets of the nation's banks,
according to the Investment Company Institute, a trade organization that
monitors the mutual fund industry, and the Federal Reserve Bank in Washington.
Unfortunately, high expectations often combine with high anxiety -- today's
investors are attuned to even the smallest hint of economic change. The result
is volatility. Many who believe that our long-running bull market is too good to
be true or that stock prices are too high are wondering when the market will
reverse.
While a reversal may not be on the immediate horizon, investors are wise to
watch for several signs that change is underway: rising prices, indicating
higher inflation; repercussions of the Asian economic crisis on American
business, which could appear in the form of reduced earnings; and a continued
widening of our trade deficit, a serious imbalance caused by heightened American
demand for foreign goods and services.
But at its monetary policy meeting at the end of the second quarter, the
Federal Reserve Board (the Fed) again chose to leave interest rates alone. In
the coming months, the Fed could raise interest rates if inflation accelerates
or if growth appears to be too rapid compared to the Fed's expectations.
Our positive outlook for the short term is based primarily on the current
resiliency of our marketplace. The United States appears to be firmly planted in
the middle of an economic cycle, with no evidence of detrimental pressures that
might be associated with the market's phenomenal growth. We are not seeing
widespread price increases for goods and services or a downturn in the housing
market, both of which we might expect late in an economic cycle.
Equities have continued to reward investors. The U.S. stock market, as
measured by the Standard & Poor's 500, gained nearly 18 percent in the first
half of 1998 but just 3.5 percent in the second quarter as profit concerns moved
front and center. Bonds in 1998 have also rewarded investors in terms of real
return, which is total return less the rate of inflation. The Treasury and high
yield debt markets have performed particularly well.
U.S. economic growth, as measured by the gross domestic product (GDP) growth
rate, was slightly above 5 percent for the first quarter. Our general
expectation for the year is that growth in all of 1998 will increase between 2.5
and 3 percent over last year. In other words, the economy will remain strong,
but will continue to slow down as the year progresses.
Consumer spending and corporate fixed investment have fueled the economy's
solid growth. Spending on both capital goods and high technology has been
strong. Corporate profit growth has continued to slow, which appears to be
acceptable to investors in an environment of stable interest rates. U.S.
employment growth has ranged from 2 to 2.25 percent, continuing to exceed
expectations. Consumer confidence has remained at all-time highs. The increase
in output prices, an indicator of inflation measured by the Consumer Price Index
(CPI), has stayed at 1.5 to 2 percent.
Adding to the good news, all seems to be quiet on the domestic policy front.
At the end of February, the U.S. federal budget deficit essentially vanished.
Recent efforts to reduce the deficit, combined with higher federal revenues due
to the robust economy, have left us with an expected budget surplus of $60
billion to $80 billion for fiscal 1998. To date, our Democratic president and
Republican Congress have not agreed on any significant legislation regarding tax
credits, spending cuts or health care that could threaten the newfound federal
budget surplus.
Can we expect a little more excitement from overseas? A full-scale global
recession from last year's Asian economic crisis seems unlikely at this point.
Although the crisis has impacted exporters in particular, it has yet to hurt
most U.S. businesses and investors. Quite the
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 (6/30/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <S> <C>
10-YEAR TREASURY RATE(1) 5.5 5.54 6.22 6.87
PRIME RATE(2) 8.5 8.5 8.5 8.25
INFLATION RATE(3)* 1.75 1.7 2.3 2.82
THE U.S. DOLLAR(4) 9.54 9.32 7.32 8.35
CAPITAL GOODS ORDERS(5)* 10.51 14.37 8.58 2.44
INDUSTRIAL PRODUCTION(5)* 4.42 5.74 3.91 3.99
EMPLOYMENT GROWTH(6) 2.62 2.88 2.56 2.23
</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 May 31, 1998.
contrary. While the mere threat of repercussions from the Asian crisis added to
the anxiety mentioned earlier, it has also had the effect of keeping U.S.
interest rates and prices in check, making the U.S. economy all the more
attractive to investors around the world.
In the global economy, the U.S. dollar continues to appreciate in value
compared to other currencies. In fact, more capital is flowing into U.S.
markets as investors generally avoid Asia. Europe also has been benefiting from
the crisis. Canada, which is a commodity-producing exporter, has been somewhat
negatively affected as commodity prices have fallen. Political unrest in
Indonesia, nuclear tests in India and Pakistan and economic turmoil in Russia
have been keeping international investors on the edges of their seats.
Other major developments abroad include the final selection of
countries to participate in Europe's single currency next year. Many European
countries are adopting more restrictive fiscal policy and reducing inflation in
anticipation of their momentous entry into the European Economic and Monetary
Union (EMU). But after the EMU is established in 1999, tensions may indeed
mount as countries work to adapt to the new structure.
As we approach the turn of the century, one caveat remains: Don't
underestimate the potential of the Year 2000 computer code problem. It appears
that a significant number of federal government agencies will not meet the
criteria necessary to avoid the problem. Many businesses are revealing that
billions of dollars are being spent on the situation. Some experts say a global
recession is in store. Others adamantly disagree. In any event, we may indeed
see a reduction in capital spending toward the of 1998 and the first half of
next year as companies focus on fixing existing computers rather than on
purchasing new equipment. We'll keep you posted!
Thank you for your continued support. We appreciate the opportunity to
serve your investment needs.
Sincerely,
/s/ John E. Silvia
JOHN E. SILVIA
July 10, 1998
4
<PAGE> 5
PERFORMANCE UPDATE
[SLENDEBROEK PHOTO]
MARC SLENDEBROEK JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1994 AND IS THE
PORTFOLIO MANAGER OF KEMPER EUROPE FUND. HE IS A VICE PRESIDENT OF INTERNATIONAL
EQUITIES FOR SCUDDER INVESTMENTS (U.k.) LIMITED, WHICH IS A LONDON BASED
SUBSIDIARY OF SCUDDER KEMPER SERVING AS SUB-ADVISER FOR THE FUND. HE HAS A
MASTER'S DEGREE IN CIVIL LAW FROM THE UNIVERSITY OF LEIDEN IN 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.
MARKETS ACROSS EUROPE SHOT SHARPLY UPWARD DURING THE SIX-MONTH PERIOD AS
COUNTRIES PREPARED FOR THE IMPLEMENTATION OF THE EUROPEAN MONETARY UNION (EMU)
NEXT JANUARY. KEMPER EUROPE FUND PROVIDED INVESTORS WITH A 28.69 PERCENT RETURN
(CLASS A SHARES, UNADJUSTED FOR ANY SALES CHARGE), 1.48 PERCENT BELOW THE LIPPER
EUROPEAN REGION FUNDS CATEGORY AVERAGE OF 30.17 PERCENT. PORTFOLIO MANAGER MARC
SLENDEBROEK DISCUSSES HOW FISCALLY CONSERVATIVE GOVERNMENTS AND RELAXED CENTRAL
BANKS HAVE HELPED TO CREATE THE IDEAL ECONOMIC ENVIRONMENT FOR STOCKS, AND HOW
HE POSITIONED THE FUND DURING THE RALLY.
Q FOR INVESTORS, EUROPE HAS BEEN THE PLACE TO BE DURING THE PAST SIX MONTHS.
WHAT ECONOMIC ISSUES ARE DRIVING THIS OUTSTANDING PERFORMANCE?
A I think the most important aspect of European economies has been the
gradual pickup of economic growth from near recessionary levels, particularly in
France and Germany. It was only about six months ago that we started to see
signs of life in those economies. A significant economic recovery has been
taking place in the fringe economies for some time, particularly in Spain, the
Netherlands, Ireland, and to some extent Italy, but what we're clearly seeing
now is an acceleration of that trend.
The main catalyst of all this has been the run-up to the start of the EMU,
which is scheduled to begin on January 1, 1999. For several years, most
governments have increased taxes and lowered expenditures to strengthen their
countries' fiscal positions in order to meet EMU criteria. That caused a fairly
significant economic slowdown. As EMU nears and most countries have brought
their government budgets under control, we are seeing a gradual relaxing of
government policies.
That, combined with the lax monetary policies that central banks put in
place to counter the effects of the tight fiscal policies, has led to a sharp
pickup of economic growth across the region. I think economic growth will
continue before anyone puts the brakes on. Since the level of unemployment in
Europe is still fairly high, there is no pricing pressure to raise interest
rates in the short term.
At the moment, short-term interest rates around Europe are moving into
convergence, meaning countries are bringing their rates in line with Germany and
France. We still have some interest rate cuts to go, especially in Ireland,
Italy and Spain.
Q THE ASIAN CRISIS RESURFACED AND WAS A DRAG ON U.S. MARKETS IN THE SECOND
QUARTER OF THIS YEAR. HOW DID IT AFFECT EUROPE DURING THIS SIX-MONTH PERIOD?
A Europe has largely escaped the damage seen elsewhere. The Asian impact was
still being felt in November when the market was trying to assess how the crisis
might affect Europe. In December, it became clear that Europe's exposure to Asia
was very low, so the market recovered. Asia accounts for only 1 or 2 percent of
European exports.
5
<PAGE> 6
PERFORMANCE UPDATE
Q HAVE YOU HAD TO CHANGE THE WAY YOU MANAGE THE PORTFOLIO IN LIGHT OF THIS
BOOMING MARKET?
A Our investment process hasn't changed. We follow a bottom-up philosophy
that focuses on quality companies operating in markets that are growing faster
than gross domestic product (GDP). In our decision-making process we analyze
cash flow and cash flow growth, we look at balance sheets and operating
environments and market share. This basic philosophy drives us to businesses
that are growing. Business services, wireless technology and financials are good
examples of that. Our growth philosophy is perfectly suited to this environment.
Q HOW ABOUT CURRENCY RISK IN THIS MARKET. CAN WE ASSUME YOU DID NOT NEED TO
HEDGE DURING THE PERIOD?
A We didn't need to hedge, and we aren't likely to do so going forward.
Given the pickup of economic growth in Europe, some countries may raise
short-term rates down the road. Some may do so to move toward convergence as EMU
approaches. If anything, the very strong dollar appreciation we've had relative
to the Euro dollar has probably come to an end and might even be reversing a
little. Because of this, I think U.S. investors might actually get some extra
returns out of the currency risk going forward. This is actually the first time
in over two years that we've felt this way.
Q WAS THE ECONOMIC STRENGTH EVENLY DISTRIBUTED ACROSS EUROPE OR WERE SOME
EUROPEAN COUNTRIES MORE ROBUST THAN OTHERS?
A The Mediterranean markets led the rally. Italy gained 52 percent, Portugal
47 percent and Spain 44 percent over the last six months (in U.S. dollars). This
was caused primarily by the convergence of interest rates that I mentioned
earlier. Short-term interest rates in these countries were relatively high. When
their central banks began reducing short-term rates, a positive impact was felt
on the financial liquidity in those markets, causing equity prices to soar.
In addition, these countries have benefited from the strict fiscal
policies implemented by their governments as they worked to become part of EMU.
They have all cut budget deficits and addressed inflation concerns. The
relative improvements in Italy and Spain have been larger than the relative
improvements we've seen in other areas, and the resulting impact on the local
economies has been greater.
On the other hand, the United Kingdom stands out once again as a sharply
underperforming market, returning 17.8 percent for the six-month period. The UK
continues to suffer from almost the reverse situation we see in the rest of
Europe. They have decided not to participate in the launching phase of EMU,
causing a significant currency risk to hang over the market.
We've seen the country's exchange rate go up fairly significantly in the
six-month period. In addition to that, it's quite far ahead of the rest of
Europe in its economic cycle. A boom in the domestic economy has led the Bank of
England to raise rates several times rather than reduce them as we've seen in
the rest of Europe.
I don't think the fiscal tightening trend will end soon. The inflationary
pressures they're facing -- fairly strong consumption and a very strong service
sector -- will take a long time to address. The exchange rate uncertainty will
remain until they join the EMU, and the worries about inflation are clearly more
urgent than similar worries in Germany or France. Our underweight position in
the United Kingdom reflects those worries.
Norway is another sharply underperforming market, primarily as a result of
lower oil prices. Norway is the Saudi Arabia of Europe, and with oil exploration
and production down 7 percent in the period, the country suffered.
Q YOU MENTIONED BUSINESS SERVICES, WIRELESS TECHNOLOGY AND FINANCIALS AS
SECTORS THAT ARE GROWING MORE QUICKLY THAN OTHER AREAS. WHAT MAKES THOSE THREE
SECTORS STANDOUTS, AND ARE THERE ANY SECTORS THAT ARE STRUGGLING?
A Financials were up 37.1 percent. This was primarily driven by very strong
insurance, up 44 percent, and a slightly less strong retail bank sector, up 35.1
percent. Insurance companies benefited from strong growth and banks are
increasingly benefiting from corporate restructuring, which has led to stronger
returns on their book values. They have been reducing their number of branches
and increasing their use of information technology. The consolidation trend in
the sector, which is very actively taking place in Europe, is another driver of
valuations in that sector. That is a global phenomenon also occurring in the
United States.
The telecommunications area was even stronger than financials, up 41.6
percent. This area is particularly driven by very strong gains in wireless
networks. Wireless systems in Europe are in an advanced stage relative to the
United States. Market penetration in some areas is already above 30 percent. In
addition, the wireless networks have seen a pickup in revenues per
6
<PAGE> 7
PERFORMANCE UPDATE
subscriber, which is important because it implies that people are using wireless
for more than just conversation. Consumers are using their systems to send data
through mobile computers and are taking advantage of many other new
communication services.
Auto assembly was the top-performing sector, up 47.9 percent, due in part
to merger activity. Daimler-Benz and Chrysler merged and Volkswagen bought
Rolls Royce. We also are emerging from a period of extremely weak demand for
European cars, and have actually seen consumers come to life in this area.
That, in combination with significant cost cutting, has caused this sector to
jump up.
Some sectors that were not as profitable include retail chains, up only 4
percent; steel, up 7.8 percent; general retail, up 14.6 percent and
pharmaceuticals, up 15.7 percent. Retail stocks haven't moved because the
improvements we've seen in European economies have had very little effect as yet
on consumers. They've faced pressures from fiscally conservative governments,
uncertainty surrounding EMU and lack of job security. Unemployment also has
continued to rise. That trend has only recently begun to change and obviously it
will be some time before that filters through to consumers.
Of course, the energy sector has been depressed worldwide as a result of
lower oil prices.
Q HOW WELL WERE YOU POSITIONED IN EACH OF THESE SECTORS AND HOW HAVE YOU
ADJUSTED YOUR POSITION DURING THE PERIOD?
A We were well positioned to benefit from the strength of the financial and
telecommunication sectors. In financials we were slightly overweighted relative
to the index and in telecomms we were strongly overweighted. We were also well
positioned in the business services sector, where we have long been very
overweighted. That sector includes temporary employment, catering and
information technology companies. We have significantly increased business
services as a proportion of our holdings during this period, and hold close to
20 percent of the portfolio in this sector today.
Where I think we went wrong was in our over-exposure to the oil sector,
which was hurt by the tanking of oil prices, and the pharmaceutical sector. The
pharmaceutical sector stumbled very badly when the GlaxoWellcome-SmithKline
Beecham merger failed. Both companies are among the top 15 European companies
in terms of size, and this was supposed to be the largest merger in the sector
globally. When the deal fell through after a few weeks, it caused a major
fallout in the sector in February. Because we were overweight in this sector we
suffered. Also, we unfortunately had little exposure to the automotive sector
when it was peaking.
We have reduced our position in the pharmaceutical sector because we felt
the European valuations had been driven up by merger expectations to an
unsustainable level. Also, the failure of the merger meant that a lot of
cost-cutting assumptions factored in by the market were obviously wrong. We also
felt the sector was overpriced relative to the United States.
We also reduced our exposure to the oil sector, an area which, given
exposure to the Asian crisis, continues to be under pressure. World demand for
oil just hasn't grown as fast as oil companies had thought, and that's
been due to Asia. Our overweighting in oil (13 percent versus the index
weighting of 9 percent) hurt our performance a bit.
Q AS YOU LOOK AHEAD TO THE NEXT SIX MONTHS, WHAT AREAS DO YOU THINK HOLD
POTENTIAL AND WHAT AREAS WILL YOU AVOID?
A Business services look attractive. We continue to like wireless operators
because we see enormous potential for growth and we think that the concentration
in the financial services industry has just started.
I think the business services sector, particularly outsourcing firms,
should do well for many reasons. Today our business services holdings are at
nearly four times the index weighting. Companies in the early stages of
restructuring, which is what we're seeing now in Europe, reduce costs by
reducing personnel. During the next phase, which we are about to enter,
companies will try to improve efficiency in other ways.
Outsourcing is a fairly new concept in Europe. Through outsourcing,
companies can reduce costs and benefit from outside expertise. These new
outsourcing firms are creating an entire new industry. In addition,
European governments are just beginning to outsource jobs. In the United States
and the United Kingdom, it's quite prevalent. Since European governments' share
of their economy is almost twice that of the U.S. government's share, the
outsourcing market is potentially significantly larger.
A related area we have a substantial investment in is the temporary
employment sector, which is key to making the European workforce more
flexible. Restrictive labor laws are an ongoing problem in European markets.
Governments won't change those laws but temporary employment companies give
7
<PAGE> 8
PERFORMANCE UPDATE
companies the flexible labor they need. The temporary employment market
experienced growth above 20 percent in the first quarter alone.
We are underweighted in the auto assembly area because we think there are
structural problems there. There's a 20 percent overcapacity in the European car
industry. Which, given the announced investments in the area, implies any
short-term pick up in pricing or demand that companies benefit from now will be
eaten up by having too many car plants. That will put pressure on the earnings
people achieve until some plants are closed.
WHAT COUNTRIES WILL YOU FOCUS ON?
A Our underweight position in the UK will continue. That won't change until
we know when the UK will join EMU. We have a fairly overweight position in the
Netherlands, which is home to many strong business services companies that offer
good value. We also have an overweight in Italy, where there's a strong
telecommunications industry and room for consolidation in the financial services
industry. We have a significant position in Switzerland because of the
outstanding quality of companies domiciled there.
Q WHAT IS YOUR OUTLOOK FOR THE NEXT SIX MONTHS?
A The markets have been incredibly strong so far this year, so we think it
would be unreasonable to expect the current pace to continue. The FT/S&P World
Europe Index is up 25.28 percent year-to-date, and some countries like Italy and
Spain are up 40 percent.
But with that caution, the underlying trend of the economies in Europe
remains extremely positive and corporate profitability is on a strong upward
path. We're still looking at earnings growth in the double digit figures, a
good point to make because that's significantly more than we're getting in the
States at the moment.
In many areas of Europe, unemployment is still above 10 percent, so we
consider the inflation risk very modest. At that rate, wage pressures will not
balloon. And obviously we think consumption will pick up as unemployment starts
to fall across the region.
I think the ongoing deregulation of the European markets as we prepare
for EMU will have a positive impact on economic growth as well. When you cross
borders in Europe you still see trucks lined up waiting for regulatory
clearance. The market is still not totally competitive and that has to do with
currency differences.
8
<PAGE> 9
INDUSTRY SECTORS
KEMPER EUROPE FUND'S EXPOSURE COMPARED TO ITS INDEX*
Data shows the geographic composition of the FT/S&P Actuaries World Europe
Index(TM)and the corresponding percentage of total common stock holdings for
Kemper Europe Fund in these markets as of May 31, 1998. Differences in the
composition help explain the differences in the performance of each. Please
note, the fund and index may also invest in other countries not included in this
chart.
[EQUITY PORTION BAR GRAPH]
<TABLE>
<CAPTION>
FT/S&P ACTUARIES
KEMPER EUROPE FUND WORLD EUROLPE INDEX
AS OF 5/31/98 AS OF 5/31/98
<S> <C> <C>
NETHERLANDS 20.4% 8.1%
UNITED kINGDOM 19.9% 32.4%
SWITZERLAND 15.0% 10.1%
ITALY 11.7% 6.5%
FRANCE 10.6% 11.8%
GERMANY 9.8% 13.8%
SPAIN 4.7% 4.4%
SWEDEN 4.2% 4.6%
PORTUGAL 2.0% 0.67%
IRELAND 1.7% 0.75%
OTHER 0.0% 6.9%
</TABLE>
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
9
<PAGE> 10
LARGEST HOLDINGS
THE FUND'S 15 LARGEST HOLDINGS*
A comparison of the fund's top 15 holdings on May 31, 1998 with its top 15
holdings on November 30, 1997.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
ON 5/31/98 ON 11/30/97
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
1. NESTLE, S.A. 3.7% NOVARTIS 7.0%
- ----------------------------------------------------------------------------------------
2. UNION BANK OF 3.7% GLAXO WELLCOME 5.2%
SWITZERLAND
- ----------------------------------------------------------------------------------------
3. ING GROEP 3.3% KONINKLIJKE AHOLD 4.1%
- ----------------------------------------------------------------------------------------
4. TELECOM ITALIA MOBILE 3.1% BRITISH PETROLEUM 4.0%
- ----------------------------------------------------------------------------------------
5. SAP, A.G. 3.1% ROYAL DUTCH PETROLEUM 3.9%
- ----------------------------------------------------------------------------------------
6. TELECOM ITALIA, 3.0% ROCHE HOLDINGS 3.7%
S.P.A.
- ----------------------------------------------------------------------------------------
7. ABB AB 3.0% TOTAL, S.A. 3.5%
- ----------------------------------------------------------------------------------------
8. RENTOKIL INITIAL, PLC 2.9% REPSOL, S.A. 2.9%
- ----------------------------------------------------------------------------------------
9. RANDSTAD HOLDING 2.8% TELECOM ITALIA MOBILE 2.6%
- ----------------------------------------------------------------------------------------
10. BRITISH PETROLEUM 2.7% CIBA SPECIALTY 2.5%
CHEMICALS
- ----------------------------------------------------------------------------------------
11. ASSICURAZIONI 2.7% AEGON, N.V. 2.4%
GENERALI
- ----------------------------------------------------------------------------------------
12. VEDIOR, N.V. 2.7% ELF AQUITAINE 2.4%
- ----------------------------------------------------------------------------------------
13. VIAG, A.G. 2.5% ELECTRICIDADE 2.4%
- ----------------------------------------------------------------------------------------
14. UNIQUE INTERNATIONAL, 2.4% TELECOM ITALIA S.P.A. 2.3%
N.V.
- ----------------------------------------------------------------------------------------
15. UNILEVER, PLC 2.2% BAAN COMPANY, N.V. 2.2%
- ----------------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
KEMPER EUROPE FUND
PORTFOLIO OF INVESTMENTS AT MAY 31, 1998 (unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF
COMMON STOCKS SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NETHERLANDS--18.9%
ING Groep, N.V.
FINANCIAL SERVICES 22,039 $ 1,515
Randstad Holding
TEMPORARY EMPLOYMENT 23,000 1,280
Vedior, N.V.
TEMPORARY EMPLOYMENT 38,000 1,211
Unique International, N.V.
TEMPORARY EMPLOYMENT 32,990 1,105
Akzo Nobel, N.V.
HEALTHCARE, COATINGS AND CHEMICALS
PRODUCTS 3,000 627
Getronics, N.V.
INFORMATION AND COMMUNICATION SERVICES 11,600 577
Hagemeyer, N.V.
BRANDED CONSUMER AND CAPITAL GOODS 11,840 532
Aalberts Industries, N.V.
CAPITAL GOODS AND COMPONENTS 16,710 511
Koninklijke Ahold, N.V.
FOOD RETAILER 16,118 509
Aegon, N.V.
INSURANCE COMPANY 5,010 401
Nedcon Groep
RACKING SYSTEMS MANUFACTURER 7,604 286
--------------------------------------------------------------------------
8,554
- -----------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM--18.4%
Rentokil Initial, PLC
SERVICES COMPANY 190,500 1,327
British Petroleum
INTEGRATED OIL COMPANY 83,474 1,224
Unilever, PLC
CONSUMER GOODS PRODUCER 90,000 987
Compass Group, PLC
CONTRACT CATERER 47,000 973
(a)National Westminster Bank, PLC
BANKING 47,859 873
Shell Transport & Trading Co., PLC
CHEMICAL COMPANY 100,000 737
Glaxo Wellcome, PLC
PHARMACEUTICAL COMPANY 24,618 662
BBA Group, PLC
DIVERSIFIED ENGINEERING COMPANY 73,489 640
Vodafone Group, PLC
TELECOMMUNICATIONS PROVIDER 50,000 549
Marks & Spencer, PLC
CONSUMER GOODS AND FOODS RETAILER 38,235 340
(a)British Biotech, PLC
PHARMACEUTICAL COMPANY 49,910 40
HBSC Holdings
BANKING 307 8
--------------------------------------------------------------------------
8,360
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SWITZERLAND--13.9%
Nestle, S.A.
FOOD PROCESSOR 790 $ 1,695
Union Bank of Switzerland
BANKING 4,980 1,677
Adecco, S.A.
PERSONNEL SERVICES 1,840 759
(a)Alusuisse-Lonza Holding, A.G.
ALUMINUM, CHEMICALS AND PACKAGING 535 720
Ciba Specialty Chemicals
CHEMICAL PRODUCER 4,265 609
Novartis
PHARMACEUTICAL COMPANY 298 506
Roche Holdings, A.G.
PHARMACEUTICAL COMPANY 34 350
--------------------------------------------------------------------------
6,316
- -----------------------------------------------------------------------------------------------------------------------
ITALY--10.8%
Telecom Italia Mobile
MOBILE TELECOMMUNICATIONS PROVIDER 235,500 1,394
Telecom Italia, S.p.A.
MOBILE TELECOMMUNICATIONS PROVIDER 182,000 1,376
(a)Assicurazioni Generali
INSURANCE COMPANY 37,750 1,214
Istituto Mobiliare Italiano, S.P.A.
BANKING 52,932 907
--------------------------------------------------------------------------
4,891
- -----------------------------------------------------------------------------------------------------------------------
FRANCE--9.8%
Groupe Danone, S.A.
FOOD PRODUCER 3,270 880
AXA-UAP
INSURANCE COMPANY 7,500 854
Societe Generale
BANKING 3,676 728
Elf Aquitaine
OIL AND GAS COMPANY 4,300 597
Banque Nationale de Paris
BANKING 6,855 585
Carrefour, S.A.
FOOD RETAILER 770 471
Technip, S.A.
ENGINEERING COMPANY 2,188 314
--------------------------------------------------------------------------
4,429
- -----------------------------------------------------------------------------------------------------------------------
GERMANY--9.1%
SAP, A.G.
SOFTWARE DEVELOPER 2,680 1,386
VIAG, A.G.
FINANCIAL SERVICES 2,000 1,122
Mannesmann, A.G.
CAPITAL GOODS PRODUCER 700 685
SKW Trostberg, A.G.
CHEMICAL COMPANY 12,600 513
Bayerische Vereinsbank
FINANCIAL SERVICES 5,000 419
--------------------------------------------------------------------------
4,125
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SPAIN--4.4%
Telefonica de Espana, S.A.
TELECOMMUNICATIONS SERVICES 16,363 $ 729
Bankinter, S.A
BANKING 6,200 408
Banco Bilbao Vizcaya, S.A.
BANKING 6,526 328
Banco Santander, S.A.
BANKING 6,382 322
Banco Popular Espanol, S.A.
BANKING 2,593 206
--------------------------------------------------------------------------
1,993
- -----------------------------------------------------------------------------------------------------------------------
SWEDEN--3.9%
ABB AB
ENGINEERING COMPANY 83,800 1,343
(a)Industri Matematik
INFORMATION TECHNOLOGY SERVICES 26,500 426
--------------------------------------------------------------------------
1,769
- -----------------------------------------------------------------------------------------------------------------------
PORTUGAL--1.8%
Electricidade
ELECTRICITY PROVIDER 32,000 838
--------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
IRELAND--1.6%
Bank of Ireland
BANKING 37,380 706
--------------------------------------------------------------------------
TOTAL COMMON STOCKS--92.6%
(Cost: $36,571) 41,981
--------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
MONEY MARKET
INSTRUMENTS--6.6%
Yield--5.56%
Due--June and July 1998
Finova Capital Corp. $1,000 997
Other 2,000 1,991
--------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--6.6%
(Cost: $2,988) 2,988
--------------------------------------------------------------------------
TOTAL INVESTMENTS--99.2%
(Cost: $39,559) 44,969
--------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--.8% 355
--------------------------------------------------------------------------
NET ASSETS--100% $45,324
--------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
At May 31, 1998, the Fund's portfolio of investments had the following industry
diversification (dollars in thousands):
<TABLE>
<CAPTION>
VALUE %
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Finance $13,616 30.0
- ----------------------------------------------------------------------------------------
Consumer Cyclicals 10,900 24.1
- ----------------------------------------------------------------------------------------
Utilities 3,608 8.0
- ----------------------------------------------------------------------------------------
Consumer Staples 3,187 7.0
- ----------------------------------------------------------------------------------------
Energy 2,558 5.6
- ----------------------------------------------------------------------------------------
Health Care 2,185 4.8
- ----------------------------------------------------------------------------------------
Capital Goods 2,150 4.7
- ----------------------------------------------------------------------------------------
Technology 1,935 4.3
- ----------------------------------------------------------------------------------------
Basic Industries 1,842 4.1
- ----------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 41,981 92.6
- ----------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS, CASH AND OTHER NET ASSETS 3,343 7.4
- ----------------------------------------------------------------------------------------
NET ASSETS $45,324 100.0
- ----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security.
Based on the cost of investments of $39,559,000 for federal income tax purposes
at May 31, 1998, the gross unrealized appreciation was $6,274,000, the gross
unrealized depreciation was $864,000 and the net unrealized appreciation on
investments was $5,410,000.
See accompanying Notes to Financial Statements.
14
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1998 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------
Investments, at value
(Cost: $39,559) $44,969
- -----------------------------------------------------------------------
Cash 1,162
- -----------------------------------------------------------------------
Receivable for:
Fund shares sold 281
- -----------------------------------------------------------------------
Dividends 299
- -----------------------------------------------------------------------
Reimbursement from advisor 94
- -----------------------------------------------------------------------
TOTAL ASSETS 46,805
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -----------------------------------------------------------------------
Payable for:
Investments purchased 1,293
- -----------------------------------------------------------------------
Fund shares redeemed 12
- -----------------------------------------------------------------------
Distribution services fee 13
- -----------------------------------------------------------------------
Administrative services fee 6
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 137
- -----------------------------------------------------------------------
Trustees' fees and other 20
- -----------------------------------------------------------------------
Total liabilities 1,481
- -----------------------------------------------------------------------
NET ASSETS $45,324
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -----------------------------------------------------------------------
Paid-in capital $36,784
- -----------------------------------------------------------------------
Undistributed net realized gain on investments and foreign
currency transactions 3,054
- -----------------------------------------------------------------------
Net unrealized appreciation on investments and assets and
liabilities in foreign currencies 5,406
- -----------------------------------------------------------------------
Undistributed net investment income 80
- -----------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $45,324
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
THE PRICING OF SHARES
- -----------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($22,423 / 1,425 shares outstanding) $15.74
- -----------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering price) $16.70
- -----------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($20,937 / 1,349 shares outstanding) $15.52
- -----------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($1,964 / 126 shares outstanding) $15.55
- -----------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MAY 31, 1998 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
NET INVESTMENT INCOME
- ----------------------------------------------------------------------
Dividends (less foreign taxes withheld of $65) $ 381
- ----------------------------------------------------------------------
Interest 79
- ----------------------------------------------------------------------
Total investment income 460
- ----------------------------------------------------------------------
Expenses:
Management fee 121
- ----------------------------------------------------------------------
Distribution services fee 62
- ----------------------------------------------------------------------
Administrative services fee 38
- ----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 217
- ----------------------------------------------------------------------
Professional fees 8
- ----------------------------------------------------------------------
Reports to shareholders 17
- ----------------------------------------------------------------------
Trustees' fees and other 29
- ----------------------------------------------------------------------
Total expenses before expense waiver 492
- ----------------------------------------------------------------------
Less expenses waived and absorbed by investment manager 141
- ----------------------------------------------------------------------
Total expenses after expense waiver 351
- ----------------------------------------------------------------------
NET INVESTMENT INCOME 109
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- ----------------------------------------------------------------------
Net realized gain on sales of investments and foreign
currency transactions 3,073
- ----------------------------------------------------------------------
Change in net unrealized appreciation on investments and
assets and liabilities in foreign currencies 4,607
- ----------------------------------------------------------------------
Net gain on investments 7,680
- ----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $7,789
- ----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
MAY 31, ENDED
1998 NOVEMBER 30,
(UNAUDITED) 1997
<S> <C> <C>
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
Net investment gain (loss) $ 109 (12)
- ---------------------------------------------------------------------------------------------------
Net realized gain 3,073 321
- ---------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 4,607 517
- ---------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 7,789 826
- ---------------------------------------------------------------------------------------------------
Net equalization credits -- 35
- ---------------------------------------------------------------------------------------------------
Distribution from net investment income (49) --
- ---------------------------------------------------------------------------------------------------
Distribution from net realized gain (304) (51)
- ---------------------------------------------------------------------------------------------------
Total dividends to shareholders (353) (51)
- ---------------------------------------------------------------------------------------------------
Net increase from capital share transactions 13,978 19,244
- ---------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 21,414 20,054
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------
Beginning of period 23,910 3,856
- ---------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed
net investment income of $80 and $55, respectively) $45,324 23,910
- ---------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
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, 1998) 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. All shares of
the Fund have equal rights with respect to voting,
dividends and assets, subject to class specific
preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Portfolio securities that are traded on a
domestic securities exchange are valued at the last
sale price on the exchange or, if there is no
recent 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. 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.
FOREIGN CURRENCY TRANSLATION. 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
rates of exchange. 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. 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
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
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 for the six
months ended May 31, 1998.
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. Prior to December 1, 1997, the Fund
used equalization accounting to keep a continuing
shareholder's per share interest in undistributed
net investment income unaffected by shareholder
activity. This was accomplished by allocating a per
share portion of the proceeds from sales and the
cost of redemptions of Fund shares to undistributed
net investment income. As of December 1, 1997, the
Fund discontinued using equalization. This change
has no effect on the Fund's net assets, net asset
value per share or distributions to shareholders.
Discontinuing the use of book equalization will
result in simpler financial statements. The
cumulative effect of the change was to decrease
undistributed net investment income and increase
paid-in-capital previously reported through
November 30, 1997 by $45,000.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a management fee at an
annual rate of .75% of the first $250 million of
average daily net assets declining to .62% of
average daily net assets in excess of $12.5
billion. However, the Fund incurred no management
fees for the period ended May 31, 1998, after a fee
waiver of $121,000 by Scudder Kemper.
In addition, Scudder Kemper has agreed to
temporarily absorb certain operating expenses of
the Fund. Under this arrangement, Scudder Kemper
absorbed operating expenses of $20,000 for the
period ended May 31, 1998.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI).
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Underwriting commissions paid in connection with
the distribution of Class A shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS ALLOWED BY
RETAINED BY KDI KDI TO FIRMS
--------------- ----------------------
<S> <C> <C>
Six months ended May 31, 1998 $9,900 101,000
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, KDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees, CDSC
and commissions related to Class B and Class C
shares are as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES
RECEIVED BY KDI PAID BY KDI TO FIRMS
----------------- --------------------
<S> <C> <C>
Six months ended May 31, 1998 $76,000 173,000
</TABLE>
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 of each class. KDI in turn has various
agreements with financial services firms that
provide these services and pays these firms based
on assets of Fund accounts the firms service.
Administrative services fees (ASF) paid are as
follows:
<TABLE>
<CAPTION>
ASF (AFTER
EXPENSE WAIVER)
PAID BY ASF PAID BY KDI
THE FUND TO KDI TO FIRMS
--------------- ---------------
<S> <C> <C>
Six months ended May 31, 1998 $18,000 40,000
</TABLE>
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 $101,000
for the six months ended May 31, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the six months ended May 31,
1998, the Fund made no payments to its officers and
incurred trustees' fees of $5,000 to independent
trustees.
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended May 31, 1998, investment
transactions (excluding short term instruments) are
as follows (in thousands):
Purchases $32,389
Proceeds from sales 20,522
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MAY-31,-1998 NOVEMBER-30,-1997
-------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 1,334 $19,827 1,001 $12,178
-----------------------------------------------------------------------------
Class B 1,525 21,526 1,144 14,017
-----------------------------------------------------------------------------
Class C 61 883 53 637
-----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 15 187 2 24
-----------------------------------------------------------------------------
Class B 12 141 4 43
-----------------------------------------------------------------------------
Class C 1 11 -- --
-----------------------------------------------------------------------------
SHARES REDEEMED
Class A (887) (13,151) (243) (2,992)
-----------------------------------------------------------------------------
Class B (1,081) (15,227) (372) (4,615)
-----------------------------------------------------------------------------
Class C (16) (219) (4) (48)
-----------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 15 219 13 161
-----------------------------------------------------------------------------
Class B (15) (219) (13) (161)
-----------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS $ 13,978 $19,244
-----------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------------------
CLASS A
----------------------------------------------------------
SIX MONTHS YEAR ENDED MAY 1 TO
ENDED NOVEMBER 30, NOVEMBER 30,
MAY 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $12.43 11.02 9.50
- ------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .07 .03 .01
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain 3.44 1.51 1.51
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.51 1.54 1.52
- ------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .05 -- --
- ------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain .15 .13 --
- ------------------------------------------------------------------------------------------------------------------
Total dividends .20 .13 --
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $15.74 12.43 11.02
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 28.69% 14.18 16.00
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.66% 1.52 1.49
- ------------------------------------------------------------------------------------------------------------------
Net investment income 1.18% .34 .46
- ------------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------
Expenses 2.41% 1.75 4.74
- ------------------------------------------------------------------------------------------------------------------
Net investment income (loss) .43% .11 (2.79)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------------------
CLASS B
----------------------------------------------------------
SIX MONTHS YEAR ENDED MAY 1 TO
ENDED NOVEMBER 30, NOVEMBER 30,
MAY 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.27 10.97 9.50
- ------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .02 (.05) (.02)
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain 3.38 1.48 1.49
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.40 1.43 1.47
- ------------------------------------------------------------------------------------------------------------------
Less distribution from net realized gain .15 .13 --
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $15.52 12.27 10.97
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 28.05% 13.23 15.47
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 2.63% 2.45 2.44
- ------------------------------------------------------------------------------------------------------------------
Net investment income (loss) .21% (.59) (.49)
- ------------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------
Expenses 3.64% 2.66 5.63
- ------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (.80)% (.80 ) (3.68 )
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------------------------
CLASS C
---------------------------------------------------------
SIX MONTHS YEAR ENDED MAY 1 TO
ENDED NOVEMBER 30, NOVEMBER 30,
MAY 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.28 10.97 9.50
- ------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .05 (.05) (.01)
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain 3.37 1.49 1.48
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.42 1.44 1.47
- ------------------------------------------------------------------------------------------------------------------
Less distribution from net realized gain .15 .13 --
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $15.55 12.28 10.97
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 28.19% 13.32 15.47
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 2.27% 2.38 2.34
- ------------------------------------------------------------------------------------------------------------------
Net investment income (loss) .57% (.52) (.39)
- ------------------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------
Expenses 3.02% 2.59 5.50
- ------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (.18)% (.73) (3.55)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ------------------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR ENDED MAY 1 TO
ENDED NOVEMBER 30, NOVEMBER 30,
MAY 31, 1998 1997 1996
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $45,324 23,910 3,856
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 71% 101 96
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES: Total return does not reflect the effect of any sales charges. Scudder
Kemper has agreed to temporarily waive a portion of its management fee and
absorb certain operating expenses of the Fund. The Other Ratios to Average Net
assets are computed without this expense waiver or absorption. Data for the
period ended May 31, 1998 is unaudited.
23
<PAGE> 24
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 3, 1997, a special shareholders' meeting was held and adjourned as
necessary. Kemper Europe Fund shareholders were asked to vote on six separate
issues: election of the eight members to the Board of Trustees, ratification of
Ernst & Young LLP as independent auditors, approval of a new investment
management agreement with Scudder Kemper Investments, Inc., approval of changes
in the fund's fundamental investment policies to permit a master/feeder fund
structure, approval of a new sub-advisory agreement with Zurich Investment
Management Limited and approval of a new rule 12b-1 distribution plan with
Kemper Distributors, Inc. for Class B shares and Class C shares. The following
are the results for each issue:
1) Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
James E. Atkins 769,482 9,911
Arthur R. Gottschalk 770,196 9,197
Frederick T. Kelsey 769,882 9,511
Daniel Pierce 770,245 9,149
Fred B. Renwick 770,245 9,146
John B. Tingleff 770,245 9,149
Edmond D. Villani 769,882 9,511
John B. Weithers 770,245 9,149
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the current fiscal year.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
745,242 11,980 22,171
</TABLE>
3) Approval of a new investment management agreement with Scudder Kemper
Investments, Inc.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
728,051 5,965 24,099
</TABLE>
4) Approval of changes in the fund's fundamental investment policies to permit a
master/feeder fund structure.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
727,209 15,971 37,379
</TABLE>
5) Approval of a new sub-advisory agreement with Zurich Investment Management
Limited
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
723,776 9,390 24,949
</TABLE>
6) Approval of a new rule 12b-1 distribution plan with Kemper Distributors, Inc.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
Class B 384,320 5,315 14,063
Class C 43,121 0 522
</TABLE>
24
<PAGE> 25
25
NOTES
<PAGE> 26
NOTES
26
<PAGE> 27
27
NOTES
<PAGE> 28
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY STEVEN H. REYNOLDS
Chairman and Trustee President Vice President
JAMES E. AKINS PHILIP COLLORA LINDA J. WONDRACK
Trustee Vice President and Vice President
Secretary
ARTHUR R. GOTTSCHALK MAUREEN E. KANE
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
FREDERICK T. KELSEY CAROLINE PEARSON
Trustee JERARD K. HARTMAN Assistant Secretary
Vice President
FRED B. RENWICK ELIZABETH C. WERTH
Trustee THOMAS W. LITTAUER Assistant Secretary
Vice President
JOHN B. TINGLEFF
Trustee ANN M. MCCREARY
Vice President
EDMOND D. VILLANI
Trustee KATHRYN L. QUIRK
Vice President
JOHN G. WEITHERS
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania
Kansas City, MO 64105
- --------------------------------------------------------------------------------
FOREIGN CUSTODIAN THE CHASE MANHATTAN BANK
Chase Metro Center
Brooklyn, NY 11245
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
- --------------------------------------------------------------------------------
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LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Europe Fund prospectus.
KEUF - 3 (7/98) 1050230
