<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED NOVEMBER 30, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[MORNINGSTAR RATINGS LOGO]
Seeks Long-term capital appreciation.
KEMPER-DREMAN FINANCIAL SERVICES FUND
"... In September, we began increasing our exposure
to . . . money-center banks at very discounted
prices . . . . This was very positive for the fund
because we missed much of the decline of the
money-center banks, but participated in
their sharp recovery. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
9
Industry Sectors
10
Largest Holdings
11
Portfolio of Investments
13
Report of
Independent Auditors
14
Financial Statements
16
Notes to Financial Statements
20
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER-DREMAN FINANCIAL SERVICES
FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE 9-MONTH PERIOD FROM MARCH 31, 1998,
THROUGH NOVEMBER 30, 1998
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIPPER FINANCIAL SERVICES
CLASS A CLASS B CLASS C FUNDS CATEGORY AVERAGE*
- ------- ------- ------- -------------------------
<S> <C> <C> <C>
- -1.33% -1.84% -1.64% -6.69%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
11/30/98 3/9/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER-DREMAN FINANCIAL
SERVICES FUND CLASS A $9.65 $9.50
- --------------------------------------------------------------------------------
KEMPER-DREMAN FINANCIAL
SERVICES FUND CLASS B $9.59 $9.50
- --------------------------------------------------------------------------------
KEMPER-DREMAN FINANCIAL
SERVICES FUND CLASS C $9.61 $9.50
- --------------------------------------------------------------------------------
</TABLE>
RETURNS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS
AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN ORIGINAL COST. THE FUND MAY CONCENTRATE ITS INVESTMENTS IN
SPECIFIC SECTORS WHICH CREATES SPECIAL RISK CONSIDERATIONS.
* 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
KEMPER FUND'S STYLE
- --------------------------------------------------------------------------------
EQUITY STYLE BOX
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
MORNINGSTAR EQUITY STYLE BOX
Source: Morningstar, Inc. Chicago, IL.
312-696-6000. The Morningstar Style Box is
based on a software release date of
11/30/98. The Equity Style Box placement
is based on two variables: a fund's market
capitalization relative to the movements
of the market and a fund's valuation,
which is calculated by comparing the
stocks in the fund's portfolio with the
most relevant of the three market-cap
groups.
Please note that style boxes do not
represent an exact assessment of risk and
do not represent future performance. The
fund's portfolio changes from day-to-day.
A longer-term view is represented by the
fund's Morningstar category, which is
based on its actual investment style as
measured by its underlying portfolio
holdings. Please consult the prospectus
for a description of investment policies.
</TABLE>
PRICE/EARNINGS RATIO A company's stock price divided by its earnings for the
past four quarters. The P/E ratio, also known as the multiple, is a measure of
how much an investor is paying for a company's earning power.
SECTOR Stocks usually found in related industries, such as financial services.
Stocks within a market sector may be similarly affected by financial, economic,
business and other developments.
VOLATILITY Characteristic of a security, commodity or market to rise or fall
sharply in price within a short period of time.
TWO-TIER MARKET Characteristic of a securities market in which most of the gains
are represented by only a small group of companies. In 1998, a two-tier market
existed in which only the largest growth-style stocks enjoyed particularly
strong gains.
<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.
SILVIA HOLDS A BACHELOR'S DEGREE AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND 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 $245 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES, AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS.
DEAR SHAREHOLDERS,
If you're like most investors, you may be wondering if you should allow yourself
to breathe a sigh of relief as 1999 begins. After several months of generally
declining stock prices and extreme volatility, the U.S. stock market seems to
have rediscovered its resiliency. In the fourth quarter, the Standard & Poor's
500, an unmanaged index generally representative of the U.S. stock market,
bounced back into the 1200-point range, up approximately 20 percent from its
third-quarter low of 957. The blue chip Dow Jones Industrial Average enjoyed a
comparable rise. Investor confidence suddenly overtook the investor uncertainty
that had plagued the markets at summer's end. While financial volatility appears
to be continuing, the mood for investors definitely has improved.
To what can we attribute the change? Simply this -- the cumulative effect of
some good news, not the least of which was a long-awaited series of interest
rate reductions by the Federal Reserve Board. In September, the Fed reduced the
federal funds rate a modest quarter of a percentage point, however, this first
cut disappointed some investors who were expecting a more dramatic gesture. Two
weeks later, the Fed came back with an additional quarter of a percentage point
reduction. This was an unexpected cut that seemed to have a positive effect on
Wall Street. In November, a third rate cut of a quarter of a percentage point
also boosted investor confidence. Investors were further surprised by
better-than-expected corporate earnings reports early in the fourth quarter.
Finally, economic data regarding retail sales, employment and home sales
suggested continued economic growth and very little prospect of recession.
In many ways, 1998's market activity provides a study in how investor
perceptions can upstage economic realities. Certainly, the tumultuous lessons of
Russia and Southeast Asia renewed investors' awareness of risk in 1998, which
was an important wake-up call. At all times, investors must understand and
consider risk. But over the course of 1998, U.S. economic fundamentals have
essentially remained strong. In fact, inflation has remained low for the entire
year. Economic growth has been solid. Our consumer confidence remained fairly
high, although not quite as high as in 1997. The nation's budget surplus for
1998 came in at $60 billion, with another budget surplus expected for fiscal
1999.
Growth in the nation's gross domestic product (GDP), which represents the
total value of all goods and services produced within the U.S. economy, has
remained remarkably steady. GDP is expected to have grown at an annualized rate
of 3 percent for the second half of 1998 and is anticipated to hover around 2
percent to 2.5 percent for the first half of 1999. The consumer price index
(CPI) remains in a range of 1.5 percent to 2 percent.
While employment growth has slowed a bit, the slowdown in wage gains may
provide the Fed with an incentive to reduce interest rates even further. U.S.
corporate profits have generally been flat, so we may see a decrease in capital
spending. Banks appear to be only a little less willing to lend, so the threat
of a general credit crunch is minimal.
Investors may take comfort in the fact that the U.S. markets and economy have
withstood the test of 1998's tumultuous third quarter. Similarly, while certain
countries, such as Malaysia, Indonesia, Brazil and Russia, are still suffering
from economic crises, others, including the Philippines, South Korea, Thailand
and China, appear to have survived. As long as the Fed and the Group of Seven
leading industrial nations (G7) are committed to avoiding recession on national
and global levels respectively, investors have a good chance of experiencing a
more stable economic environment.
At home, there has been somewhat of a slowdown in manufacturing, as reduced
U.S. exports reflect foreign economic turmoil. But the global impact of the
Asian crisis still has not hit the U.S. as hard as was expected. Indeed, Asian
turmoil has not affected U.S. trade as much as it has lowered import prices and
helped reduce global interest rates.
In Europe, the much anticipated Economic and Monetary Union (EMU) is on the
move, with a focus on more flexibility and growth potential for the region.
European equities may be the beneficiaries of increased spending, as governments
seek to foster growth and reduce unemployment.
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 (12/31/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-year Treasury rate(1) 4.65 5.50 5.81 6.30
Prime rate(2) 7.75 8.50 8.50 8.25
Inflation rate(3)* 1.55 1.75 1.89 3.18
The U.S. dollar(4) -2.45 9.54 10.26 4.36
Capital goods orders(5)* 7.82 9.52 8.53 4.82
Industrial production(5)* 1.47 5.10 6.56 5.32
Employment growth(6)* 2.28 2.65 2.70 2.33
</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 November 30, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
If you're a long-term investor in today's short-term world, go ahead and
breathe that sigh of relief -- but be on your toes in 1999. It's going to be an
interesting year as the EMU emerges, the race for the next presidency heats up
and the year 2000 approaches. And, remember: Investors don't like uncertainty,
be it economic or political. More trauma in the White House, continuing disputes
with Iraq or any other hints of crisis could prompt a downward spike in our
markets in the short run. In the long run, the keys to investment performance
remain moderate growth, low inflation and limited taxation and regulation.
Thank you for choosing to invest with Kemper Funds. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ John E. Silvia
JOHN E. SILVIA
The information contained in this piece has been taken from sources believed to
be reliable, but the accuracy of the information is not guaranteed. The opinions
and forecasts expressed are those of Dr. John E. Silvia as of January 4, 1999,
and may not actually come to pass. This information is subject to change. No
part of this material is intended as an investment recommendation.
4
<PAGE> 5
PERFORMANCE UPDATE
[DREMAN PHOTO]
DAVID N. DREMAN IS CHAIRMAN OF DREMAN VALUE MANAGEMENT, L.L.C. (DVM), INC. AND
PORTFOLIO MANAGER OF KEMPER-DREMAN FINANCIAL SERVICES FUND. HE HAS MORE THAN 35
YEARS OF EXPERIENCE AS AN INVESTMENT ANALYST, ADVISOR AND MANAGER. DREMAN HOLDS
A BACHELOR OF COMMERCE DEGREE FROM THE UNIVERSITY OF MANITOBA, WINNIPEG. DREMAN
IS A REGULAR COLUMNIST IN FORBES AND ALSO THE AUTHOR OF SEVERAL BOOKS ON
CONTRARIAN INVESTING, INCLUDING CONTRARIAN INVESTMENT STRATEGIES: THE NEXT
GENERATION (SIMON & SCHUSTER 1998).
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. THIS REPORT MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS WHEN
USED AS SALES LITERATURE.
IT WAS A DIFFICULT YEAR FOR THE FINANCIAL SERVICES SECTOR AND THE MARKET
OVERALL, BUT KEMPER-DREMAN FINANCIAL SERVICES FUND OUTPACED THE LIPPER FINANCIAL
SERVICES CATEGORY AVERAGE SINCE MARCH 31, 1998. LEAD PORTFOLIO MANAGER DAVID
DREMAN REMAINS OPTIMISTIC ABOUT THE LONG-TERM PROSPECTS FOR THE FINANCIAL
SERVICES SECTOR, AND MAINTAINS THAT PATIENCE, EXPERIENCE AND SOUND STOCK PICKING
HAVE BEEN THE KEYS TO THE FUND'S SUCCESS.
Q KEMPER-DREMAN FINANCIAL SERVICES FUND WAS LAUNCHED IN MARCH 1998, JUST
PRIOR TO THE DOWNTURN IN FINANCIAL SERVICES STOCKS. HOW DID THE FUND HOLD UP
DURING THIS TUMULTUOUS PERIOD?
A At the fund's inception, the market was rising steeply, and it was
difficult for us to find financial stocks that weren't overvalued. However,
financial services stocks began to underperform for the first time in a decade.
As the sector began to stumble and then fell this summer, we moved in and added
a lot of quality stocks that were trading at deep discounts. Since then, the
market has begun to climb back up and these investments have been very positive
for the fund.
On a relative basis, we're extremely proud of the fund's performance. The fund
is up 1.58 percent (Class A shares, unadjusted for any sales charge) since its
inception on March 9, 1998. Although that figure is disappointing, it's
important to compare the fund's performance with the returns of funds with
similar objectives. To measure the fund against the Lipper Financial Services
Funds Category, we need to compare the time period March 31, 1998 through the
fund's fiscal year end on November 30, 1998. The fund had a loss of 1.33
percent, versus a 6.69 average loss by the category. For the most recent three-
month period, the news is even better. The fund jumped 23.72 percent since
August 31, 1998, compared to the category's average return of 16.71 percent.
The fund is still new and needs to prove itself over a longer period of time.
But we're confident that we can remain competitive and that the structure of the
portfolio is one that we believe can stand the test of time.
Q CAN YOU EXPLAIN THE REASONS THAT FINANCIAL SERVICES STOCKS STRUGGLED SO
MUCH DURING THE YEAR? IS IT A TREND WE CAN EXPECT TO CONTINUE?
A There were indeed some problems in the financial services sector this year
that caused trouble. However, I don't believe the true underlying problem was
specific to financial stocks. The culprit, rather, was the two-tier market that
existed this year, in which the stocks of very large growth-oriented technology,
Internet and pharmaceutical companies made strong gains, while nearly every
other industry sector suffered. It was a very narrow market, but one that we
believe can't continue forever.
Q THE S&P HAS HAD A PRETTY GOOD RUN THIS YEAR, HASN'T IT?
A It's true that the Standard & Poor's 500 Stock Index (S&P 500) is up, but
that's not necessarily the case for all of the companies in the index. Sometimes
it's difficult to understand this when the press reports the S&P 500 is up more
than 21 percent for the 11-month period ended Novem-
5
<PAGE> 6
PERFORMANCE UPDATE
ber 30. But it's important to realize that the S&P 500 is a capitalization-
weighted index, meaning the largest companies represent a larger portion of the
performance figures that are commonly reported.
When we look at the S&P 500 on an equal-weighted basis, meaning we average the
returns of all 500 companies on an equal basis, the return for the index
plummets to just 9.7 percent for the same 11-month period. The same is true of
the NASDAQ, an exchange for many over-the-counter stocks. There, the 11-month
return was 25 percent on a cap-weighted basis, but dropped to a negative 6.4
percent on an equal-weighted basis.
In short, what we faced this year was a market in which only a very small
number of the largest growth companies made strong gains. Nearly every other
company and industry, including financial services, either suffered declines or
achieved only lackluster returns.
Q WHAT WAS THE APPEAL OF THE LARGE GROWTH STOCKS? AND HOW DID THE INTERNET
STOCKS FIT INTO THE PATTERN?
A Investors were looking for security and liquidity in the market. There was
still a great deal of concern about the Southeast Asia crisis that erupted in
October 1997. Investors, for the most part, wanted to remain invested in the
market, but only in those stocks that they perceived to be safe havens -- very
large growth companies with a history of consistent earnings. The turmoil caused
by the Russian currency devaluation and the economic weakness in Latin American
countries, as well as other factors, reinforced this pattern.
The huge appeal of Internet stocks is a very difficult thing for me to
understand. Many of these companies haven't made any money yet, but are trading
at ridiculously high prices. The speculation surrounding these stocks is
amazing, and much of it seems to be fueled by individual investors, rather than
institutional investors. This speculation has driven the market capitalization
of some Internet stocks, like Amazon.com, to levels many times of those of some
of the big established banks. This ebullience is not likely to continue. In my
estimation, the P/Es of these stocks make it impossible for earnings to ever
reach the level that would sustain these prices.
Q WHAT DID THIS ALL MEAN FOR THE FUND?
A Well, the narrow market made it challenging for value investors. As I
said, only a handful of the very largest growth stocks from the technology,
Internet and pharmaceutical industries led the market. The financial services
sector, along with almost every other, was overlooked, and that made it
difficult to make major strides this year. Nevertheless, we won't compromise our
investment strategy in order to ride the market's latest trend. We firmly
believe that the financial services sector includes many fundamentally sound
companies that have years of growth ahead of them.
We've seen narrow markets in the past, which were followed by strong periods
of outperformance by value stocks. Of course, past performance cannot predict
future events, but generally no one style of stock can stay in favor forever.
And we firmly believe that in the long run it is impossible for these growth
companies to sustain their momentum. We don't know when the growth rally is
going to end, but we do believe that it will end some day, and the fund is well
positioned if financial stocks come back into favor.
Q CAN YOU EXPLAIN YOUR INVESTMENT STRATEGY FOR THE FUND?
A We're contrarian investors. We look for stocks from fundamentally strong
financial services companies with good balance sheets that are temporarily
undervalued by the market. We screen stocks by looking for those with
price-to-earnings, price-to-book, price-to-cash flow and price-to-dividend
ratios that are low relative to the overall market and the financial services
sector.
We're also very risk conscious. We don't invest in real estate investment
trusts (REITs) or in secondary lenders because we perceive them as high risk.
Although the fund may invest in foreign companies, the portfolio is almost
entirely domestic at this point. The exception is one major Canadian bank that
we own, and that has performed reasonably well. If we were to invest in foreign
markets, we'd look to the Western European markets like Germany or the United
Kingdom, where there's an established track record in place. But today we
believe there's terrific value in the United States, and therefore really no
need to look abroad.
We've structured a relatively conservative portfolio that we believe should
take off when the tide shifts and value stocks come back into favor. But we're
also opportunistic. If something comes crumbling down, like the big money-center
banks did this past summer, we invest quickly to add value. We're always looking
for breaks in the market that will allow us to add quality companies to the
portfolio when their stock prices have reached or are on their way to reaching
unsustainably low points.
6
<PAGE> 7
PERFORMANCE UPDATE
Q CAN YOU TELL US MORE ABOUT WHAT HAPPENED WITH MONEY-CENTER BANKS THIS
YEAR?
A Money-center banks are those very large institutions with foreign
operations like Chase Manhattan, Bankers Trust and Citigroup. The fund opened
just prior to some major mergers and acquisitions among the money-center banks.
Bank of America merged with NationsBank and First Chicago/NBD merged with Banc
One. Initially, we underweighted the fund's positions in those money-center
banks.
The reason for that was two-fold. First, the prices of these stocks were too
high to fit our value criteria. We also didn't see a lot of upside potential in
such large mergers in terms of gaining economies of scale that would help the
underlying businesses.
Secondly, we stayed away from large positions in money-center banks because we
were concerned about their exposure to foreign debt. We felt that the full
impact of the Southeast Asia crisis had not yet been felt. A great deal of money
had been lent to countries, like Russia. We believed it would be extremely
difficult, if not impossible, for many of these countries to service their debt.
In August, it became clear that there was indeed a problem. Many of the major
money-center banks began to announce a portion of their foreign loans were in
default. Several large institutions like Citigroup, Chase Manhattan and
BankAmerica announced write-offs of the debt. Prices of these stocks then
plummeted, taking the entire financial services sector down with them.
In September, we began adding these money-center banks back into the portfolio
at very discounted prices. We were confident in our decision because the banks
were still fundamentally sound. The loan defaults were one-time, one-quarter
hits for those banks. We believed that all the bad news had already been
communicated. The market supported that assumption, and the prices of these
stocks rose dramatically in September and October. This was very positive for
the fund because we missed the decline of the money-center banks, but
participated in their sharp recovery.
Q WHERE ELSE DID YOU FIND VALUE?
A Regional banks provided good value this year, and we focused much of our
investment there. Banks like First Union, Keycorp and PNC were added to the
portfolio and performed soundly. The upside with the regional banks is that they
don't have any foreign exposure, unlike the larger money-center institutions.
Additionally, we think the consolidation in the banking industry still has a way
to go. Many of the regional banks are strong takeover candidates.
Q WILL MORE CONSOLIDATION IN THE INDUSTRY BE FAVORABLE?
A We think the ongoing trend of consolidation is positive overall. The
consolidation of the smaller regional banks probably makes more sense than some
of the mega-mergers that have taken place. The mergers of regionals seem to be
more symbiotic -- for example, each bank may be able to quickly gain services or
outlets they previously lacked. So their mergers provide more long-lasting
return potential. On the other hand, some of the mega-mergers don't seem to have
the potential of gaining any new products or services that would have a profound
impact on the companies' bottom lines. But for better or worse, consolidation
will likely continue. I think we'll also see some of the smaller insurance
companies being acquired by larger ones in the coming year, which would be
positive for the fund.
Q WHAT'S YOUR OUTLOOK FOR THE FINANCIAL SERVICES SECTOR, AND DO YOU THINK
THE FUND CAN CONTINUE TO STAY AHEAD OF THE PACK?
A First, I'd like to say that the financial services sector is a dynamic
area with a great deal of potential. I fully expect that the growth in financial
services will continue at a rate of about 10 percent. Banks, specifically,
appear to have a lot more growth ahead. They're learning to expand their revenue
streams through fee-based services. These fees are not what we like to see as
consumers, but for shareholders, fees are a positive thing. With interest rates
so low, banks are making less from their loan operations, so finding new fee-
based revenue streams through fees has become very important to the bottom line.
And we believe there are still plenty of ways for banks to continue to grow
their fee revenues.
We've been pleased with our performance, and hope that it will improve with
time. Our performance relative to our peers, I believe, is a reflection of our
relatively conservative, contrarian investment approach. We invest only in
companies that we deem to be of high quality. We're not looking to add sub-
standard holdings in order to make a quick buck. That's market timing, and we
don't believe anyone can successfully time the market in the long run. We will
stay true to our investment strategy, which has proven itself over time.
7
<PAGE> 8
PERFORMANCE UPDATE
TOTAL RETURNS*
FOR THE PERIOD ENDED NOVEMBER 30, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF
CLASS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
KEMPER-DREMAN FINANCIAL SERVICES FUND CLASS A -4.27% (since 3/9/98)
......................................................................................................
KEMPER-DREMAN FINANCIAL SERVICES FUND CLASS B -3.05 (since 3/9/98)
......................................................................................................
KEMPER-DREMAN FINANCIAL SERVICES FUND CLASS C 0.16 (since 3/9/98)
......................................................................................................
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER-DREMAN FINANCIAL SERVICES FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class A shares from 3/31/98 to
11/30/98
<TABLE>
<CAPTION>
KEMPER-DREMAN FINANCIAL STANDARD & POOR'S FINANCIAL
SERVICES FUND CLASS A1 SERVICES INDEX+
----------------------- --------------------------
<S> <C> <C>
3/31/98 9422.00 10000.00
9682.00 10166.00
9412.00 9921.00
6/30/98 9644.00 10337.00
9634.00 11515.00
7514.00 8862.00
9/30/98 7803.00 9040.00
8738.00 10135.00
11/30/98 9297.00 10826.00
</TABLE>
[LINE GRAPH]
- -------------------------------------------------------------------------------
KEMPER-DREMAN FINANCIAL SERVICES FUND CLASS B
- -------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class B shares from 3/31/98 to
11/30/98
<TABLE>
<CAPTION>
KEMPER-DREMAN FINANCIAL STANDARD & POOR'S FINANCIAL
SERVICES FUND CLASS B1 SERVICES INDEX+
----------------------- --------------------------
<S> <C> <C>
3/31/98 10000.00 10000.00
10266.00 10166.00
9969.00 9921.00
6/30/98 10215.00 10337.00
10194.00 11515.00
7943.00 8862.00
9/30/98 8250.00 9040.00
9222.00 10135.00
11/30/98 9416.00 10826.00
</TABLE>
[LINE GRAPH]
- -------------------------------------------------------------------------------
KEMPER-DREMAN FINANCIAL SERVICES FUND CLASS C
- -------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class C shares from 3/31/98 to
11/30/98
<TABLE>
<CAPTION>
KEMPER-DREMAN FINANCIAL STANDARD & POOR'S FINANCIAL
SERVICES FUND CLASS C1 SERVICES INDEX+
----------------------- --------------------------
<S> <C> <C>
3/31/98 10000.00 10000.00
10276.00 10166.00
9990.00 9921.00
6/30/98 10225.00 10337.00
10205.00 11515.00
7963.00 8862.00
9/30/98 8260.00 9040.00
9232.00 10135.00
11/30/98 9736.00 10826.00
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURNS AND
PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN ORIGINAL COST.
*Total return measures net investment income and capital gain or loss from
portfolio investments over the periods specified, assuming reinvestment of
all dividends and, where indicated, adjustment for the maximum sales charge.
The maximum sales charge for Class A shares is 5.75%. For Class B shares the
maximum contingent deferred sales charge (CDSC) is 4%. Class C shares have no
sales charge adjustment, but redemptions within one year of purchase may be
subject to a contingent deferred sales charge of 1%. Share classes invest in
the same underlying portfolio. Total return reflects aggregate change. During
the periods noted, securities prices fluctuated. For additional information,
see the Prospectus and Statement of Additional Information and the Financial
Highlights at the end of this report.
(1)PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS AND ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE FOR CLASS A SHARES AND THE CDSC IN EFFECT AT THE END OF
THE PERIOD FOR CLASS B AND CLASS C SHARES. PLEASE NOTE, IN ORDER TO COMPARE
THE FUND WITH THE INDEX, THE GRAPH BEGINS ON MARCH 31, 1998. IN COMPARING
KEMPER-DREMAN FINANCIAL SERVICES FUND TO THE STANDARD & POOR'S FINANCIAL
SERVICES INDEX+, YOU SHOULD NOTE THAT THE FUND'S PERFORMANCE REFLECTS THE
MAXIMUM SALES CHARGE, WHILE NO SUCH CHARGES ARE REFLECTED IN THE PERFORMANCE
OF THE INDEX.
+The Standard & Poor's Financial Services Index is a capitalization weighted
price only index representing 9 financial groups and 53 financial companies.
Source is Lipper Analytical Services, Inc. Investors cannot actually make
investments in this index.
8
<PAGE> 9
INDUSTRY SECTORS
KEMPER-DREMAN FINANCIAL SERVICES FUND'S
COMPOSITION BY SECTOR*
DATA SHOWS THE PERCENTAGE OF THE COMMON STOCKS IN THE PORTFOLIO THAT EACH SECTOR
REPRESENTED ON NOVEMBER 30, 1998.
[BAR GRAPH]
<TABLE>
<S> <C>
BANKS 60.6%
INSURANCE 18.5%
OTHER FINANCE 11.9%
CONSUMER FINANCE 4.8%
SERVICE 4.2%
</TABLE>
* PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
9
<PAGE> 10
LARGEST HOLDINGS
THE FUND'S 10 LARGEST COMMON STOCK HOLDINGS*
REPRESENTING 54.9 PERCENT OF THE FUND'S TOTAL PORTFOLIO ON NOVEMBER 30, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
HOLDINGS PERCENT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. CITIGROUP A worldwide bank holding company that provides a broad 8.0%
array of financial services.
- --------------------------------------------------------------------------------------------------------
2. BANKAMERICA A multi-bank holding company engaged in consumer 7.2%
banking, commercial banking, trust and investment
services, investment management, real estate
operations, lease financing and international banking.
- --------------------------------------------------------------------------------------------------------
3. FEDERAL NATIONAL MORTGAGE Often referred to as "Fannie Mae," this is a private 6.9%
ASSOCIATION corporation federally chartered to provide financial
products and services that increase the availability
and affordability of housing to low, moderate and
middle-income Americans.
- --------------------------------------------------------------------------------------------------------
4. AMERICAN INTERNATIONAL GROUP The leading U.S.-based international insurance 6.6%
organization and among the largest underwriters of
commercial and industrial coverages in the U.S.
- --------------------------------------------------------------------------------------------------------
5. BANK ONE A multi-bank holding company engaged in consumer 6.0%
banking, commercial banking, trust and investment
services, investment management, real estate
operations, lease financing and international banking.
- --------------------------------------------------------------------------------------------------------
6. FIRST UNION Engaged in commercial, investment and mortgage banking. 5.3%
First Union provides retail and commercial banking,
retail investment, mortgage, home equity, leasing,
insurance, capital markets, cash management and
securities brokerage services to 12 million customers
on the east coast.
- --------------------------------------------------------------------------------------------------------
7. FEDERAL HOME LOAN MORTGAGE Often referred to as "Freddie Mac", this corporation 4.4%
CORP. provides for the transfer of capital between mortgage
lenders and mortgage security investors, enabling
mortgage lenders to provide a continuous flow of funds
to borrowers.
- --------------------------------------------------------------------------------------------------------
8. CHASE MANHATTAN A bank holding company that conducts domestic and 3.8%
international financial services through various bank
and non-bank subsidiaries.
- --------------------------------------------------------------------------------------------------------
9. WELLS FARGO A bank holding company with subsidiaries engaged in 3.4%
commercial banking.
- --------------------------------------------------------------------------------------------------------
10. PNC BANK Engaged in the operation of a variety of financial 3.3%
services, including mortgage, community, consumer,
private and corporate banking, secured lending and
asset management.
- --------------------------------------------------------------------------------------------------------
</TABLE>
*The fund's holdings are subject to change.
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
KEMPER-DREMAN FINANCIAL SERVICES FUND
PORTFOLIO OF INVESTMENTS AT NOVEMBER 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
NUMBER OF
COMMON STOCKS--95.4% SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BANKS--57.8% Bancwest Corporation 63,400 $ 2,742
Bank One Corporation 261,772 13,432
(a)Bank Rhode Island 12,500 147
BankAmerica Corp. 249,356 16,255
BancBoston Corp. 42,500 1,769
Bankers Trust New York Corp. 23,500 2,044
Chase Manhattan Corp. 134,100 8,507
Citigroup, Inc. 360,150 18,075
Colonial BancGroup, Inc. 16,400 203
Corus Bankshares, Inc. 42,800 1,554
First Citizens BancShares, Inc. "A" 2,500 214
First Union Corp. 197,298 11,986
Fleet Financial Group, Inc. 165,800 6,912
Golden West Financial Corp. 8,500 805
J.P. Morgan & Co., Inc. 26,400 2,821
KeyCorp 206,300 6,331
Mellon Bank Corp. 37,800 2,379
National Bank of Canada 242,100 3,788
North Fork Bancorporation, Inc. 12,495 263
PNC Bank Corp. 145,200 7,487
People's Heritage Financial Group, Inc. 45,000 922
Popular, Inc. 65,900 1,961
Provident Financial Group 8,500 344
Republic New York Corp. 85,300 3,988
Summit Bancorp 40,000 1,672
SunTrust Banks, Inc. 44,900 3,135
Valley National Bank 6,400 186
Washington Federal, Inc. 908,425 908
Washington Mutual, Inc. 42,174 1,634
Wells Fargo Co. 211,200 7,603
---------------------------------------------------------------------------
130,067
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE--4.6% American Express Company 63,200 6,324
Associates First Capital Corp. 1,500 117
Household International, Inc. 42,200 1,651
SLM Holding Corp. 51,100 2,248
--------------------------------------------------------------------------
10,340
- --------------------------------------------------------------------------------------------------------------------------
INSURANCE--17.6% Allstate Corp. 120,000 4,890
American International Group, Inc. 157,200 14,777
Chubb Corp. 24,800 1,738
Cigna Corp. 29,300 2,280
General Re Corp. 10,900 2,545
Jefferson-Pilot Corp. 14,350 979
Lincoln National Corp. 16,900 1,414
(a)MONY Group, Inc. 800 25
Marsh & McLennan Companies, Inc. 33,550 1,952
Ohio Casualty Corp. 69,500 2,815
Safeco Corp. 34,000 1,460
St. Paul Companies, Inc. 77,700 2,739
Torchmark Corp. 25,500 969
Transamerica Corp. 10,000 1,062
--------------------------------------------------------------------------
39,645
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SERVICE INDUSTRIES--4.0% Bear Stearns Companies, Inc. 27,100 $ 1,138
Lehman Brothers Holdings, Inc. 24,400 1,218
Merrill Lynch & Co., Inc. 62,100 4,658
Raymond James Financial, Inc. 17,450 432
T. Rowe Price & Associates, Inc. 40,000 1,430
Waddell & Reed Financial, Inc. "A" 1,450 35
(a)Waddell & Reed Financial, Inc. 6,244 146
-----------------------------------------------------------------------
9,057
- --------------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL Federal Home Loan Mortgage Corp. 165,300 10,001
COMPANIES--11.4% Federal National Mortgage Association 213,800 15,554
-----------------------------------------------------------------------
25,555
-----------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $220,158) 214,664
-----------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(B)REPURCHASE AGREEMENTS--4.6% PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
State Street Bank and Trust Company,
dated 11/30/98, 5.15%, due 12/1/98
(Cost $10,346) $10,346 10,346
-----------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost $230,504) $225,010
-----------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security.
(b) Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities. The collateral is monitored daily by the fund so
that its market value exceeds the carrying value of the repurchase agreement.
Based on the cost of investments of $231,190,000 for federal income tax purposes
at November 30, 1998, the gross unrealized appreciation was $8,823,000, the
gross unrealized depreciation was $15,003,000 and the net unrealized
depreciation on investments was $6,180,000.
See accompanying Notes to Financial Statements.
12
<PAGE> 13
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER-DREMAN FINANCIAL SERVICES FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper-Dreman Financial Services
Fund, as of November 30, 1998, and the related statements of operations and
changes in net assets and the financial highlights for the period from March 9,
1998 (commencement of operations) to November 30, 1998. These financial
statements and financial highlights are the responsibility of the fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
investments owned as of November 30, 1998, by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Kemper-Dreman Financial Services Fund at November 30, 1998, the results of its
operations, the changes in its net assets and the financial highlights for the
period referred to above, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 19, 1999
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost $230,504) $225,010
- ------------------------------------------------------------------------
Receivable for:
Fund shares sold 1,424
- ------------------------------------------------------------------------
Dividends and interest 237
- ------------------------------------------------------------------------
Deferred organization expense 9
- ------------------------------------------------------------------------
TOTAL ASSETS 226,680
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Payable for:
Fund shares redeemed 1,164
- ------------------------------------------------------------------------
Management fee 204
- ------------------------------------------------------------------------
Distribution services fee 397
- ------------------------------------------------------------------------
Administrative services fee 273
- ------------------------------------------------------------------------
Custodian, accounting and transfer agent fees and related
expenses 338
- ------------------------------------------------------------------------
Trustees' fees and other 143
- ------------------------------------------------------------------------
Total liabilities 2,519
- ------------------------------------------------------------------------
NET ASSETS $224,161
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $229,717
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (244)
- ------------------------------------------------------------------------
Net unrealized depreciation on investments (5,494)
- ------------------------------------------------------------------------
Undistributed net investment income 182
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $224,161
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($108,206 / 11,211 shares outstanding) $9.65
- ------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering price) $10.24
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($99,631 / 10,389 shares outstanding) $9.59
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($16,324 / 1,699 shares outstanding) $9.61
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 15
FINANCIAL STATEMENTS
For the period from March 9, 1998 (commencement of operations) to
November 30, 1998
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
NET INVESTMENT INCOME
- -----------------------------------------------------------------------
Dividends (net of foreign taxes withheld of $7) $ 2,151
- -----------------------------------------------------------------------
Interest 141
- -----------------------------------------------------------------------
Total investment income 2,292
- -----------------------------------------------------------------------
Expenses:
Management fee 901
- -----------------------------------------------------------------------
Distribution services fee 457
- -----------------------------------------------------------------------
Administrative services fee 300
- -----------------------------------------------------------------------
Custodian, accounting and transfer agent fees and related
expenses 415
- -----------------------------------------------------------------------
Professional fees 16
- -----------------------------------------------------------------------
Reports to shareholders 92
- -----------------------------------------------------------------------
Registration fees 62
- -----------------------------------------------------------------------
Amortization of organization expenses 2
- -----------------------------------------------------------------------
Trustees' fees and other 66
- -----------------------------------------------------------------------
Total expenses before expense waiver 2,311
- -----------------------------------------------------------------------
Less expense waived and absorbed by investment manager (205)
- -----------------------------------------------------------------------
Total expenses after expense waiver 2,106
- -----------------------------------------------------------------------
NET INVESTMENT INCOME 186
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized loss on sales of investments (248)
- -----------------------------------------------------------------------
Change in net unrealized depreciation on investments (5,494)
- -----------------------------------------------------------------------
Net loss on investments (5,742)
- -----------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(5,556)
- -----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
OPERATIONS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------
Net investment income $ 186
- --------------------------------------------------------------------------------
Net realized loss (248)
- --------------------------------------------------------------------------------
Change in net unrealized depreciation (5,494)
- --------------------------------------------------------------------------------
Net decrease in net assets resulting from operations (5,556)
- --------------------------------------------------------------------------------
Net increase from capital share transactions 229,617
- --------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 224,061
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------
Beginning of period 100
- --------------------------------------------------------------------------------
END OF PERIOD (including undistributed
net investment income of $182) $224,161
- --------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF
THE FUND Kemper-Dreman Financial Services Fund (the fund) is
a diversified series of Kemper Equity Trust (the
Trust), an open-end management investment company
organized as a business trust under the laws of
Massachusetts. The fund commenced operations on
March 9, 1998. The fund currently offers three
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.
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 SECURITY VALUATION. Investments are stated at
value. Portfolio securities which are traded on
U.S. or foreign stock exchanges are valued at the
most recent sale price reported on the exchange on
which the security is traded most extensively. If
no sale occurred, the security is then valued at
the calculated mean between the most recent bid and
asked quotations. If there are no such bid and
asked quotations, the most recent bid quotation is
used. Securities quoted on the Nasdaq Stock Market
(Nasdaq) for which there have been sales, are
valued at the most recent sale price reported. If
there are no such sales, the value is the most
recent bid quotation. Securities which are not
quoted on Nasdaq but are traded in another
over-the-counter market are valued at the most
recent sale price on such market. If no sale
occurred, the security is then valued at the
calculated mean between the most recent bid and
asked quotations. If there are no such bid and
asked quotations, the most recent bid quotation
shall be used. Money market instruments purchased
with an original maturity of sixty days or less are
valued at amortized cost. All other securities are
valued at their fair market value as determined in
good faith by the Valuation Committee of the Board
of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date. Dividend income is recorded on the
ex-dividend date, and interest income is recorded
on the accrual basis. 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 close of the Exchange. The net
asset value per share is determined separately for
each class by dividing the fund's net assets
attributable to that class by the number of shares
of the class outstanding.
FEDERAL INCOME TAXES. The fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies, and to distribute
all of its taxable income to its
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
shareholders. Accordingly, the fund paid no federal
income taxes and no federal income tax provision
was required.
DIVIDENDS TO SHAREHOLDERS. The fund declares and
pays dividends of net investment income
semi-annually 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.
ORGANIZATIONAL COSTS. Costs incurred by the fund in
connection with its organization and initial
registration of shares have been deferred and are
being amortized on a straight-line basis over a
five-year period.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a monthly investment
management fee of 1/12 of the 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. The fund
incurred a management fee of $721,000 for the
period ended November 30, 1998, after a fee waiver
of $180,000 by Scudder Kemper. In addition, Scudder
Kemper has agreed to temporarily absorb certain
operating expenses of the fund. Under this
arrangement, Scudder Kemper absorbed expenses of
$25,000 for the period ended November 30, 1998.
Dreman Value Management, L.L.C. serves as
sub-adviser with respect to the investment and
reinvestment of assets in the fund, and is paid by
Scudder Kemper for its services.
ZURICH/B.A.T MERGER. On September 7, 1998, Zurich
Insurance Company (Zurich), majority owner of
Scudder Kemper, entered into an agreement with
B.A.T Industries p.l.c. (B.A.T) pursuant to which
the financial services businesses of B.A.T were
combined with Zurich's businesses to form a new
global insurance and financial services company
known as Zurich Financial Services. Upon
consummation of the transaction, the fund's
investment management agreement with Scudder Kemper
was deemed to have been assigned and, therefore,
terminated. The Board of Trustees of the fund has
approved a new investment management agreement with
Scudder Kemper, which is substantially identical to
the former investment management agreement, except
for the dates of execution and termination.
Shareholders approved the new investment management
agreement through a proxy solicitation that
concluded in mid-December.
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
RETAINED BY COMMISSIONS ALLOWED BY
KDI KDI TO FIRMS
----------- ---------------------------
<S> <C> <C>
Period ended November 30, 1998 $86,000 3,035,000
</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 separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
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 AND COMMISSIONS AND
CDSC RECEIVED DISTRIBUTION FEES PAID
BY KDI BY KDI TO FIRMS
--------------------- ----------------------
<S> <C> <C>
Period ended November 30, 1998 $586,000 4,071,000
</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 PAID BY ASF PAID
THE FUND TO KDI BY KDI
(AFTER EXPENSE WAIVER) TO FIRMS
---------------------- ------------
<S> <C> <C>
Period ended November 30, 1998 $275,000 344,000
</TABLE>
TRANSFER AGENT/SHAREHOLDER SERVICES AGREEMENT.
Kemper Service Company, a subsidiary of the Scudder
Kemper, is the transfer, dividend paying and
shareholder service agent for the fund. The fund
incurred transfer agent fees of $237,000 for the
period ended November 30, 1998, of which $135,000
is unpaid.
FUND ACCOUNTING AGENT. Scudder Fund Accounting
Corporation is responsible for determining the
daily net asset value per share and maintaining the
portfolio and general accounting records of the
fund. The fund incurred accounting fees of $88,000
for the period ended November 30, 1998, of which
$19,000 is unpaid.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. For the period ended November 30,
1998, the fund made no payments to its officers and
incurred trustees' fees of $4,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the period ended November 30, 1998, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $226,268
Proceeds from sales 5,866
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the fund (in thousands):
<TABLE>
<CAPTION>
PERIOD ENDED
NOVEMBER 30, 1998
---------------------
SHARES AMOUNT
<S> <C> <C>
---------------------------------------------------------------------------
SHARES SOLD
Class A 14,095 $137,426
---------------------------------------------------------------------------
Class B 11,393 111,288
---------------------------------------------------------------------------
Class C 1,951 19,033
---------------------------------------------------------------------------
---------------------------------------------------------------------------
SHARES REDEEMED
---------------------------------------------------------------------------
Class A (2,888) (26,782)
---------------------------------------------------------------------------
Class B (1,008) (9,043)
---------------------------------------------------------------------------
Class C (255) (2,305)
---------------------------------------------------------------------------
NET INCREASE FROM CAPITAL SHARE TRANSACTIONS $229,617
---------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
FINANCIAL HIGHLIGHTS
For the period from March 9, 1998 (commencement of operations) to November 30,
1998
<TABLE>
<CAPTION>
---------------------------------------------------------
CLASS A CLASS B CLASS C
- -----------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.50 9.50 9.50
- ----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .03 (.01) (.01)
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain .12 .10 .12
- ----------------------------------------------------------------------------------------------------------
Total from investment operations .15 .09 .11
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.65 9.59 9.61
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.58% .95 1.16
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Expenses absorbed by the fund 1.36% 2.14 2.11
- ----------------------------------------------------------------------------------------------------------
Net investment income (loss) .55% (.23) (.20)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Expenses 1.55% 2.29 2.26
- ----------------------------------------------------------------------------------------------------------
Net investment income (loss) .36% (.38) (.35)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $224,161
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 5%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. 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.
- --------------------------------------------------------------------------------
TAX INFORMATION
- --------------------------------------------------------------------------------
For corporate shareholders, 100% of the income dividends paid during the period
ended November 30, 1998 qualified for the dividends received deduction.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Kemper Fund account, please call 1-800-621-1048.
20
<PAGE> 21
NOTES
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY MAUREEN E. KANE
Chairman and Trustee President Assistant Secretary
JAMES E. AKINS PHILIP J. COLLORA CAROLINE PEARSON
Trustee Vice President and Assistant Secretary
Secretary
ARTHUR R. GOTTSCHALK ELIZABETH C. WERTH
Trustee THOMAS W. LITTAUER Assistant Secretary
Vice President
FREDERICK T. KELSEY BRENDA LYONS
Trustee ANN M. MCCREARY Assistant Treasurer
Vice President
KATHRYN L. QUIRK
Trustee and Vice President LINDA J. WONDRACK
Vice President
FRED B. RENWICK
Trustee JOHN R. HEBBLE
Treasurer
JOHN B. TINGLEFF
Trustee
JOHN G. WEITHERS
Trustee
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LEGAL COUNSEL DECHERT PRICE & RHOADS
Ten Post Office Square South
Boston, MA 02109
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SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
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CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02110
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INDEPENDENT ERNST & YOUNG LLP
AUDITORS 233 South Wacker Drive
Chicago, IL 60606
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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 Equity Funds/Value Style prospectus.
KDFSF - 2 (1/26/99) 1064450
