<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MAY 31, 2000
Seeks long-term capital appreciation.
KEMPER-DREMAN
FINANCIAL SERVICES FUND
"... The valuations of most of the sector's leaders -- brokerage and investment
banking firms, on line traders and speculative finance companies -- were
exceedingly high. They therefore didn't fit our low price-to-earnings investment
criteria. But more important, we believed their businesses to be quite
vulnerable. As the market shifted, these issues declined, while the fund's more
conservative holdings began to gain ground. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
8
INDUSTRY SECTORS
9
LARGEST HOLDINGS
10
PORTFOLIO OF INVESTMENTS
12
FINANCIAL STATEMENTS
15
FINANCIAL HIGHLIGHTS
17
NOTES TO FINANCIAL STATEMENTS
AT A GLANCE
KEMPER-DREMAN FINANCIAL SERVICES
FUND TOTAL RETURNS
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 2000 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER-DREMAN FINANCIAL KEMPER-DREMAN FINANCIAL LIPPER FINANCIAL SERVICES
KEMPER-DREMAN FINANCIAL SERVICES FUND CLASS A SERVICES FUND CLASS B SERVICES FUND CLASS C FUNDS CATEGORY AVERAGE*
--------------------------------------------- ----------------------- ----------------------- -------------------------
<S> <C> <C> <C>
-2.58 -3.00 -2.99 -0.10
</TABLE>
RETURNS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS
AND PRINCIPAL VALUES WILL FLUCTUATE, SO THAT WHEN SHARES ARE REDEEMED, THEY MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST.
*LIPPER, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES IN NET ASSET VALUE
WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF SALES CHARGES. IF
SALES CHARGES HAD BEEN INCLUDED, RESULTS MAY HAVE BEEN LESS FAVORABLE.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
5/31/00 11/30/99
.........................................................
<S> <C> <C> <C> <C>
KEMPER-DREMAN FINANCIAL
SERVICES FUND CLASS A $9.37 $9.74
.........................................................
KEMPER-DREMAN FINANCIAL
SERVICES FUND CLASS B $9.30 $9.65
.........................................................
KEMPER-DREMAN FINANCIAL
SERVICES FUND CLASS C $9.32 $9.69
.........................................................
</TABLE>
KEMPER-DREMAN FINANCIAL SERVICES
FUND LIPPER RANKINGS AS OF 5/31/00
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER FINANCIAL SERVICES FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
.............................................................................................
<S> <C> <C> <C> <C> <C>
1-YEAR #36 of 67 funds #43 of 67 funds #41 of 67 funds
.............................................................................................
</TABLE>
DIVIDEND REVIEW
DURING THE SIX-MONTH PERIOD, KEMPER-DREMAN FINANCIAL SERVICES FUND PAID THE
FOLLOWING DIVIDENDS PER SHARE:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
...............................................................................................
<S> <C> <C> <C> <C> <C>
INCOME DIVIDEND $0.1150 $0.0770 $0.0780
...............................................................................................
</TABLE>
CONCENTRATION OF THE FUND'S ASSETS IN FINANCIAL SERVICES STOCKS MAY PRESENT A
GREATER RISK THAN INVESTMENT IN A MORE DIVERSIFIED FUND. IN ADDITION, THE FUND'S
ABILITY TO CONCENTRATE INVESTMENTS IN A PARTICULAR MARKET SECTOR PRESENTS
SPECIAL RISK CONSIDERATIONS.
TERMS TO KNOW
YOUR FUND'S STYLE
MORNINGSTAR EQUITY STYLE BOX(TM)
<TABLE>
<S> <C>
[MORNINGSTAR EQUITY STYLE Source: Morningstar, Inc. Chicago, IL. (312)
BOX] 696-6000. The 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.
THE STYLE BOX REPRESENTS A SNAPSHOT OF THE FUND'S
PORTFOLIO ON A SINGLE DAY. IT IS NOT AN EXACT
ASSESSMENT OF RISK AND DOES NOT REPRESENT FUTURE
PERFORMANCE. THE FUND'S PORTFOLIO CHANGES FROM
DAY TO DAY. A LONGER-TERM VIEW IS REPRESENTED BY
THE FUND'S MORNINGSTAR CATEGORY, WHICH IS BASED
ON ITS ACTUAL INVESTMENT STYLE AS MEASURED BY ITS
UNDERLYING PORTFOLIO HOLDINGS OVER THE PAST THREE
YEARS. MORNINGSTAR HAS PLACED KEMPER-DREMAN
FINANCIAL SERVICES FUND IN THE SPECIAL-FINANCIAL
CATEGORY. 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. This trailing 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 Stocks that are usually found in related industries, such as
financial services. The stocks within a market sector may be similarly affected
by financial, economic, business and other developments.
TWO-TIER MARKET A characteristic of a securities market in which most of the
gains are represented by only a small group of companies. In 1998's two-tier
market, only the largest growth-style stocks enjoyed particularly strong gains.
VOLATILITY The tendency of a security, commodity or market to rise or fall
sharply in price within a short period of time.
<PAGE> 3
ECONOMIC OVERVIEW
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER,
When an irresistible force such as the ebullient U.S. economy meets an immovable
object, such as a determined Federal Reserve Board, the old song is right:
Something's gotta give. One possibility -- the economy could slow down as the
Fed has ordered. Or, if market volatility becomes true distress, the Fed could
back off, as it has in the past. A third possibility is that neither the Fed nor
the economy will give way until it's too late, which could lead to a recession.
Recent evidence suggests, however, that the economy probably will slow down as
ordered.
Before explaining why, perhaps it's best to start with a review of how
monetary policy works. Central bankers often sound like witch doctors reading
animal entrails, so it's understandable that many people are confused about
monetary policy. But monetary policy still works in the same way it always has.
First, it changes the price and availability of money. More subtly, it alters
people's perceptions about and confidence in the future, thereby adjusting their
willingness to take risks.
It's a bit early to tell how the Fed's monetary policy is working so far. The
policymakers only started raising interest rates about a year ago, and it takes
at least that long for higher rates to impact borrowers. There are two reasons.
First, interest rates on many existing loans are fixed. And, a family who has
just selected a dream house isn't going to walk away if mortgage rates rise a
notch. Similarly, a company that has just approved an expansion program won't
stop cold because the prime rate is higher. So it's foolish to think that
America's economy has become less interest-sensitive because the economy roared
through the first several months of this year. Americans are more in hock than
ever, so higher interest rates will hurt more than ever. The May dip in housing
starts and auto sales -- especially the higher priced, gas guzzling sport
utility vehicles -- is probably the first sign that higher rates are biting.
They will bite harder in coming months. We look for both housing starts and
vehicle sales to drop about 10 percent in 2001.
Confidence is harder to measure, but there are some early flutters of
weakness. It's true that consumers remain cheerily upbeat. But corporate bond
markets, the most sensitive barometer of business confidence and a vital source
of corporate funds, have been nervous. Investors are demanding a big premium
before they'll buy lower quality bonds, which means there's less new money for
companies to spend. Corporate bond issuance through mid-June was 35 percent
below the first five and a half months of 1999.
So far, companies have been able to get around the bond market stinginess by
turning to their bankers. Banks lent businesses 8 percent more from January
through May of this year than they did during the first five months of 1999. But
some banks are beginning to worry, too. Bank examiners have been questioning the
quality of loans and the level of reserves. In response, more bankers are
tightening lending standards and raising rates. This is a textbook case of how
tighter monetary policy eventually slows an economy.
Aren't bond market and banker concerns overdone? As long as the economy keeps
growing at 3 percent or so, won't that guarantee such good profits that paying
the bills will be a cinch? Not necessarily. Profits are far more cyclical than
economic growth. Earnings actually fell during 1998, even though the economy
continued to roll. That was a global crisis, when foreign earnings fell sharply.
But take a look at the last "soft landing" during 1995. Revenue growth dipped
and pricing power fell, squeezing profits. The same thing is likely to happen
again in the coming slowdown -- and this time, tight labor markets could make it
even tougher for companies to control costs quickly. Assuming growth is between
2.5 percent and 3 percent by the end of 2001, we believe year-over-year profit
comparisons will have turned slightly negative.
A profit slowdown when new lines of credit are hard to come by will take its
toll on capital spending. We expect growth in business outlays for buildings and
equipment to slip from over 12 percent this year to around 8 percent in 2001.
That's still quite robust, and the "high-tech imperative" is the reason why.
Executives believe that they have no option but to keep up with the
technological revolution that is transforming the world. The fact that high-tech
gear keeps getting cheaper year after year and also helps save on expensive
labor makes the decision to buy it easy. Indeed, unit sales of computers and
peripherals to businesses have sustained growth rates in excess of 40 percent
since 1995. And the rush is on to lay down the infrastructure for the next
generation of wireless communications. We estimate that the sector will see unit
growth of about 50 percent this year, double the growth in 1999. It's hard even
for superstars to sustain these stratospheric
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 (5/31/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.40 6.00 5.50 5.60
Prime rate (2) 9.50 8.50 7.75 8.50
Inflation rate (3)* 3.00 2.60 2.30 1.50
The U.S. dollar (4) 4.30 -0.70 -0.90 6.40
Capital goods orders (5)* 17.00 12.30 2.50 14.50
Industrial production (5)* 6.10 3.70 2.90 5.20
Employment growth (6) 2.60 2.20 2.30 2.60
</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 4/30/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
compound growth rates forever, and we do expect some moderation next year.
However, high-tech orders continue to ratchet upwards, and the shortage in
semiconductors and other components has persisted long enough to cause major
players to announce huge capacity additions.
Another battle the Fed must win before it succeeds in slowing the economy is
bringing consumers to heel. Most families still feel better off than they were
last year and much richer than they were five years ago. That's a powerful
incentive to spend and enjoy. Indeed, total real consumption has been galloping
at a 5 percent rate or better since early 1998. But consumers are so important
to the economy that if they don't start spending less freely, there won't be a
slowdown. We expect the Fed to be successful and slow down shoppers in the
months ahead -- but the victory won't be an easy one. We expect at least one
more rate hike and a few more financial fireworks before consumers and the
economy hoist the white flag.
So what will the slowdown look like? During the spring, retail sales, housing
starts and job creation slowed, but strength in high tech orders and capital
equipment production probably will help keep the slowdown from becoming too
abrupt. We expect about 3.5 percent growth in the second half. That would still
produce a hearty 5 percent growth for full year 2000. During 2001, the full
impact of the Fed's recent tightening will probably rein growth in to just 3
percent.
Sincerely,
Scudder Kemper Investments Economics Group
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF SCUDDER KEMPER
INVESTMENTS, INC. AS OF JUNE 29, 2000, AND MAY NOT ACTUALLY COME TO PASS. THIS
INFORMATION IS SUBJECT TO CHANGE. NO PART OF THIS MATERIAL IS INTENDED AS AN
INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
PERFORMANCE UPDATE
[DREMAN PHOTO]
DAVID N. DREMAN IS CHAIRMAN OF DREMAN VALUE MANAGEMENT, L.L.C. (DVM), INC. (DVA)
AND PORTFOLIO MANAGER OF KEMPER-DREMAN FINANCIAL SERVICES FUND. HE HAS MORE THAN
35 YEARS OF EXPERIENCE AS AN INVESTMENT ANALYST, ADVISOR AND MANAGER. HE HOLDS A
BACHELOR OF COMMERCE DEGREE AND A DOCTOR OF LAW DEGREE FROM THE UNIVERSITY OF
MANITOBA, WINNIPEG, CANADA. HE 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 AND SHOULD NOT BE CONSIDERED AS A RECOMMENDATION OF ANY SECURITY.
PERFORMANCE UPDATE
AFTER A LONG PERIOD OF UNDERPERFORMANCE, FINANCIAL
STOCKS BEGAN TO SHOW SOME SIGNS OF LIFE LATE IN THE
FUND'S SEMIANNUAL PERIOD -- DECEMBER 1, 1999,
THROUGH MAY 31, 2000. BELOW, KEMPER-DREMAN
FINANCIAL SERVICES FUND LEAD PORTFOLIO MANAGER
DAVID DREMAN EXPLAINS THE CATALYSTS FOR THE
SECTOR'S IMPROVED PERFORMANCE AND WHY HE BELIEVES
THE FUND IS POISED TO BENEFIT IF FINANCIAL STOCKS
CONTINUE TO GAIN.
Q BEFORE DISCUSSING KEMPER-DREMAN FINANCIAL SERVICES FUND'S PERFORMANCE,
WILL YOU PROVIDE AN OVERVIEW OF THE FINANCIAL SERVICES SECTOR FOR THE LAST SIX
MONTHS?
A The performance of financial services stocks varied dramatically during
the six-month period. During the first three months, financials as a whole
continued to struggle. Like the broader market, most financial stocks had been
shunned by investors seeking only the largest, growth-oriented technology and
Internet companies, creating a two-tier market in which only a small group of
stocks showed gains. A handful of financial stocks were among the gainers.
Speculative, highly valued companies that we don't own, such as Charles
Schwab, E-Trade and Ameritrade, performed quite well in terms of earnings and
market price during the period as millions of people traded stocks on line.
These firms, however, were the exception. Most financial stocks struggled.
Adding to the sector's difficulties were the successive rate hikes by the
Federal Reserve Board. That's because financial stocks tend to struggle in
higher-interest-rate environments as investors become concerned about a
potential fall off in revenues from loan businesses. Although revenues did not
fall off, investors were nonetheless concerned, and this concern brought down
the prices of financial stocks.
In March, we began to see some improved performance in the sector. The market,
which for the past two years had blindly bid up a small group of growth stocks,
seemed to debate whether the extreme valuations of the market leaders could be
sustained. Investors moved out of the technology market en masse and began to
look for quality companies with solid long-term earnings track records that were
priced more conservatively. The defensive characteristics of most financial
services stocks made them a logical alternative for investors looking for some
"security." Many financial stocks were trading at deep discounts, which meant
they would likely fall less than their highly valued counterparts if there was a
long-term shift in market psychology. However, not all financial stocks
benefited as the market shifted. Those that had been rallying -- the brokerage
stocks, on-line trading firms and speculative lenders -- declined on valuation
fears. Throughout the remainder of the period, the financial sector moved
forward slowly.
Q HOW DID KEMPER-DREMAN FINANCIAL SERVICES FUND PERFORM DURING THE PERIOD?
A The fund's Class A shares (unadjusted for any sales charge) declined 2.58
percent for the six months ended May 31. By comparison, the Lipper Financial
Services Funds category lost an
5
<PAGE> 6
PERFORMANCE UPDATE
average of 0.10 percent and the S&P Financial index gained 3.71 percent.
We attribute the fund's underperformance compared with its peers and the S&P
Financial index to our more conservative investment style. The financial
sector's largest gains during the period came early from the hottest but most
speculative area of the financial services sector -- brokerage, on-line trading
and speculative lending companies. As the valuations of these types of stocks
grew, the stocks comprised a larger portion of the financial services index.
Since we did not own these stocks, the fund underperformed. Most of these gains
occurred early in the period, but they were so spectacular that the fund could
not make up all of its disparity to the index.
While this hurt us over the last six months, our more conservative approach to
investing began to show its merit as the market shifted in March. We believe
that over time, our investment in more conservative companies with long-term
earnings records should help buoy the fund.
Q WHY DIDN'T YOU INVEST IN THE FINANCIAL SECTOR'S LEADERS?
A The valuations of most of the sector's leaders -- brokerage and investment
banking firms, on line traders and speculative finance companies -- were
exceedingly high. They therefore didn't fit our low price-to-earnings investment
criteria. But more important, we believed their businesses to be quite
vulnerable. As the market shifted, these issues declined, while the fund's more
conservative holdings began to gain ground. And our concern hasn't abated. These
are still risky investments, in our opinion.
Investment banks gained wildly as the market for initial public
offerings -- specifically new Internet start-up companies -- soared. However,
we've begun to see a falloff in new companies coming to market. If the level and
success of initial public offerings continue to decline, earnings by investment
banks and brokerage companies are at risk.
The market's volatility and a reduction in trading volume by individuals could
also seriously hurt the on-line trading firms. The concept of on-line trading is
appealing to the mass public. It's a new and exciting tool. As trading on-line
has gained popularity, novices are finding out that it's easy to gain and lose
money extremely fast. Over the past couple years, it seemed as if all new
Internet-related stocks made tremendous gains, but now many of these stocks are
losing market value just as quickly. This was exacerbated by the move out of
technology stocks last March, April and May. As a result, many novice investors
have cut their losses and suspended their on-line trading activity, contributing
to a precipitous decline in overall trading on the Nasdaq. This is beginning to
hurt the earnings of the on-line trading companies.
We also stayed away from what we call "second-tier" lenders -- those who loan
money to lower-quality borrowers. These speculative lenders enjoyed strong
gains, pushing their valuations to levels we couldn't justify -- particularly in
light of their riskier loan portfolios. However, in the higher-interest-rate
environment, more pressure is being applied to their credit portfolios. If the
economy slows significantly, we would expect the rate of loan defaults for these
lenders to rise swiftly, causing their values to drop.
Q YOU MENTIONED THAT THE SECTOR'S LEADERS DID NOT FIT YOUR INVESTMENT
CRITERIA. WILL YOU FURTHER EXPLAIN YOUR INVESTMENT PROCESS?
A We're contrarian investors. We look for temporarily undervalued stocks of
fundamentally strong financial services companies with good balance sheets. We
screen stocks for price-to-earnings, price-to-book, price-to-cash-flow and
price-to-dividend ratios that are low relative to the overall market and to the
financial services sector.
We've structured a relatively conservative portfolio that we believe should
perform favorably when the tide shifts and value stocks come back into favor.
But we're also opportunistic: if something comes crumbling down, 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.
Q HAS THE HIGHER-INTEREST-RATE ENVIRONMENT HURT THE FUND'S BANK STOCKS?
A The higher-interest-rate environment hurt nearly all banks stocks -- ours
included. Although we're disappointed in the short-term performance declines,
our strong long-term outlook for this area has not changed. We believe that the
perception of the market and the reality of the strength of these stocks are at
odds. Many of the bank stocks that the fund holds depend more on revenue driven
6
<PAGE> 7
PERFORMANCE UPDATE
from fees or services than from their loan businesses. Therefore, their earnings
have not been impacted by rising rates as much as the market has punished their
stock prices. Additionally, many of the companies are trading at extremely deep
discounts, making them prime candidates for takeovers, which could benefit the
fund.
Q THE FUND OWNS SUBSTANTIAL POSITIONS IN FANNIE MAE AND FREDDIE MAC. WHAT
DRAWS YOU TO THESE STOCKS?
A We think these are two of the best holdings in the portfolio, and they
have been trading at extreme discounts that we believe are completely
unwarranted. Federal National Mortgage Association (Fannie Mae) and Federal Home
Loan Mortgage Corp. (Freddie Mac) provide products and services associated with
the home loan mortgage industry. Both of these stocks have long track records of
strong earnings growth, and both of these stocks had a huge run-up in price in
1998. In 1999 and early 2000, the stocks underperformed. Some of the
underperformance was likely in response to the huge gains they made previously
and concerns that new governmental regulation may be introduced. As with the
rest of the financial sector, the higher-interest-rate environment also hurt
Fannie Mae and Freddie Mac. Intuitively, this doesn't make sense. As rates rise,
the likelihood of mortgage prepayments dwindles, which is a positive for these
stocks. We've begun to see some strength in the share prices of these stocks and
are optimistic that as their earnings continue to grow, the market will see
these stocks in a better light.
Q WHERE ELSE ARE YOU FINDING VALUE?
A We're finding good value in insurance. One of our top holdings, American
International Group (AIG), has been one of the best companies in the financial
sector and represents a large portion of the financial index. On an absolute
basis, the stock is not cheap, but we feel that it's a real blue-chip holding
and that its long track record of consistent earnings warrants its somewhat
higher valuation. AIG has also not had the disappointments of some of the other
large, financial firms such as Citigroup or American Express, and it has
weathered the recent rise in rates better than most other financial companies.
We're also looking for more opportunities to invest in property and casualty
insurers. Many such stocks are trading at extremely low prices, and we believe
they have a great deal of improvement ahead of them. These insurers have been
held back because of intense competition in pricing. However, it looks as though
that is beginning to change, and that insurers should have more room to raise
prices, which would increase their earnings potential.
These companies have also benefited from the prospect of more merger and
acquisition activity in the sector. The recent passage of the new financial
services reform act (the Gramm-Leach-Bliley Act of 1999) opens the door for more
consolidation, which could be positive for insurers and the rest of the
financial services industry.
Q WHAT'S YOUR OUTLOOK FOR THE FINANCIAL SERVICES SECTOR AND KEMPER-DREMAN
FINANCIAL SERVICES FUND?
A As I mentioned, we are very optimistic about the financial services
sector. Many fundamentally solid companies out there are trading at depressed
prices. We've seen some improvement as the market has broadened, and we expect
to see more. We're expecting improving performance from regional banks, property
and casualty insurance companies specifically. All in all, we believe we have
constructed a good defensive all-weather portfolio.
7
<PAGE> 8
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 May 31, 2000, and on November 30, 1999.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER-DREMAN FINANCIAL KEMPER-DREMAN FINANCIAL
SERVICES FUND ON 5/31/00 SERVICES FUND ON 11/30/99
------------------------ -------------------------
<S> <C> <C>
Banks 44.10 48.40
Insurance 20.80 18.20
Consumer finance 18.80 15.70
Other finance 16.30 17.70
</TABLE>
*PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
8
<PAGE> 9
LARGEST HOLDINGS
THE FUND'S 10 LARGEST COMMON STOCK HOLDINGS*
Representing 56.3 percent of the fund's total portfolio on May 31, 2000.
<TABLE>
<CAPTION>
HOLDINGS PERCENT
<S> <C> <C> <C>
-------------------------------------------------------------------------------------
1. CITIGROUP A worldwide bank holding company 11.0%
that provides a broad array of
financial services.
-------------------------------------------------------------------------------------
2. AMERICAN INTERNATIONAL GROUP American International Group is a 9.3%
holding company engaged in
insurance and insurance-related
activities in the U.S. and abroad.
AIG's primary activities are
general and life insurance
operations.
-------------------------------------------------------------------------------------
3. BANK OF AMERICA Holding company with subsidiaries 6.2%
engaged in full-service retail and
corporate banking, corporate
finance, capital markets,
investment advisory and trust, and
other financial service
activities.
-------------------------------------------------------------------------------------
4. FNMA A private corporation often 5.4%
referred to as "Fannie Mae,"
federally chartered to provide
financial products and services
that increase the availability and
affordability of housing to low-,
moderate- and middle-income
Americans.
-------------------------------------------------------------------------------------
5. WELLS FARGO Holding company whose subsidiaries 4.9%
are engaged in banking and related
businesses.
-------------------------------------------------------------------------------------
6. BANK ONE Provides data processing, venture 4.4%
capital investment and merchant
banking, trust services,
brokerage, investment management
and equipment leasing.
-------------------------------------------------------------------------------------
7. FLEET BOSTON Fleet Boston provides asset 4.2%
management, insurance, investment
banking and mortgage banking as
well as retail services such as
checking, savings, loans, credit
cards and money market accounts.
-------------------------------------------------------------------------------------
8. AMERICAN EXPRESS A diversified financial services 3.9%
firm which has three units: Travel
Related Services, American Express
Financial Advisors, and American
Express Bank.
-------------------------------------------------------------------------------------
9. CHASE MANHATTAN Chase Manhattan is one of the 3.5%
largest banks in the U.S. Chase
offers commercial, consumer, and
investment banking services to
clients through offices in some 50
countries worldwide.
-------------------------------------------------------------------------------------
10. PNC BANK Engaged in the operation of a 3.5%
variety of financial services,
including mortgage, community,
consumer, private and corporate
banking, secured lending and asset
management.
-------------------------------------------------------------------------------------
</TABLE>
*THE FUND'S HOLDINGS ARE SUBJECT TO CHANGE.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER-DREMAN FINANCIAL SERVICES FUND
Portfolio of Investments at May 31, 2000 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
REPURCHASE AGREEMENTS--4.8% AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
State Street Bank and Trust Company,
6.370%, to be repurchased at $8,233,457
on 06/01/2000** (Cost $8,232,000) $8,232,000 $ 8,232,000
--------------------------------------------------------------------------
<CAPTION>
NUMBER OF
COMMON STOCKS--95.2% SHARES
<S> <C> <C> <C> <C> <C>
FINANCIAL--90.6%
BANKS--42.0%
BancWest Corp. 108,280 2,023,483
Bank One Corp. 227,077 7,507,733
Bank of America Corp. 191,576 10,644,442
Banknorth Group, Inc. 42,615 593,947
Chase Manhattan Corp. 81,575 6,092,633
Colonial BancGroup, Inc. 81,965 783,790
Corus Bankshares, Inc. 34,620 852,518
First Union Corp. 105,193 3,701,479
FleetBoston Financial Corp. 191,359 7,235,762
Golden West Financial Corp. 18,865 787,614
J.P. Morgan & Co., Inc. 21,005 2,704,394
KeyCorp 188,590 3,960,390
National Bank of Canada 209,650 3,082,058
North Fork Bancorporation, Inc. 41,360 685,025
PNC Bank Corp. 118,720 5,980,520
Popular, Inc. 57,240 1,309,365
Provident Financial Group 23,865 665,237
Summit Bancorp. 35,820 1,027,586
SunTrust Banks, Inc. 37,630 2,248,393
Washington Mutual, Inc. 68,594 1,972,078
Wells Fargo & Co. 184,925 8,367,856
--------------------------------------------------------------------------
72,226,303
INSURANCE--19.8%
Aegon NV (ADR) 21,748 785,647
Allstate Corp. 51,140 1,355,210
American International Group, Inc. 142,645 16,056,478
Chubb Corp. 22,230 1,556,100
Cigna Corp. 22,965 2,039,579
Jefferson Pilot Corp. 10,565 725,023
Lincoln National Corp. 27,375 1,060,781
Ohio Casualty Corp. 223,850 2,672,209
Safeco Corp. 171,195 4,204,977
St. Paul Companies, Inc. 82,590 3,097,125
Torchmark Corp. 21,730 590,784
--------------------------------------------------------------------------
34,143,913
CONSUMER FINANCE--17.8%
American Express Co. 123,540 6,647,996
Citigroup, Inc. 303,975 18,903,445
Household International, Inc. 35,600 1,673,200
Mellon Financial Corp. 66,895 2,579,638
SLM Holding Corp. 27,845 938,028
--------------------------------------------------------------------------
30,742,307
</TABLE>
10 The accompanying notes are an integral part of the financial statements.
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL COMPANIES--11.0%
Federal Home Loan Mortgage Corp. 74,360 $ 3,309,020
Federal National Mortgage Association 153,000 9,199,125
Lehman Brothers Holdings, Inc. 12,615 973,720
Marsh & McLennan Companies, Inc. 25,345 2,789,534
Morgan Stanley Dean Witter & Co. 2,000 143,875
Prison Realty Trust, Inc.(REIT) 984,600 2,461,500
--------------------------------------------------------------------------
18,876,774
-----------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--4.6%
INVESTMENT
Bear Stearns Companies, Inc. 24,585 968,034
Charles Schwab Corp. 22,650 651,188
Franklin Resources, Inc. 29,375 881,250
Goldman Sachs Group, Inc. 6,350 467,122
Merrill Lynch & Co., Inc. 49,840 4,915,470
--------------------------------------------------------------------------
7,883,064
--------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $170,991,723) 163,872,361
--------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100.0%
(Cost $179,223,723)(a) $172,104,361
--------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost for federal income tax purposes was $179,223,723. At May 31, 2000,
the net unrealized depreciation for all securities based on tax cost was
$7,119,362. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess market value over tax cost of
$27,826,863, and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over market value of $34,946,225.
** Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
The accompanying notes are an integral part of the financial statements. 11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF ASSETS & LIABILITIES
As of May 31, 2000
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value
(cost $179,223,723) $172,104,361
----------------------------------------------------------------------------
Receivable for investments sold 529,637
----------------------------------------------------------------------------
Dividends receivable 381,129
----------------------------------------------------------------------------
Receivable for Fund shares sold 426,902
----------------------------------------------------------------------------
Foreign taxes recoverable 1,460
----------------------------------------------------------------------------
Deferred organization expenses 6,115
----------------------------------------------------------------------------
TOTAL ASSETS 173,449,604
----------------------------------------------------------------------------
LIABILITIES
Due to custodian bank 2,470
----------------------------------------------------------------------------
Payable for Fund shares redeemed 1,097,309
----------------------------------------------------------------------------
Accrued management fee 114,141
----------------------------------------------------------------------------
Other accrued expenses and payables 587,531
----------------------------------------------------------------------------
TOTAL LIABILITIES 1,801,451
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $171,648,153
----------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income (loss) $ (75,462)
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (7,119,362)
----------------------------------------------------------------------------
Accumulated net realized gain (loss) (4,070,286)
----------------------------------------------------------------------------
Paid-in capital 182,913,263
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $171,648,153
----------------------------------------------------------------------------
NET ASSET VALUE AND OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($76,958,752 / 8,212,099 outstanding shares of beneficial
interest,
$.01 par value, unlimited number of shares authorized) $9.37
----------------------------------------------------------------------------
Maximum offering price per share
(100/94.25 of $9.37) $9.94
----------------------------------------------------------------------------
CLASS B SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share
($77,917,011 / 8,378,592 outstanding shares of beneficial
interest,
$.01 par value, unlimited number of shares authorized) $9.30
----------------------------------------------------------------------------
CLASS C SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share
($16,772,390 / 1,799,287 outstanding shares of beneficial
interest,
$.01 par value, unlimited number of shares authorized) $9.32
----------------------------------------------------------------------------
</TABLE>
12 The accompanying notes are an integral part of the financial statements.
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended May 31, 2000
(UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME
Income:
Dividends (net of foreign taxes withheld of $11,158) $ 2,184,794
---------------------------------------------------------------------------
Interest 79,495
---------------------------------------------------------------------------
Total income 2,264,289
---------------------------------------------------------------------------
Expenses:
Management fee 616,472
---------------------------------------------------------------------------
Services to shareholders 279,103
---------------------------------------------------------------------------
Custodian and accounting fees 54,766
---------------------------------------------------------------------------
Distribution services fees 340,950
---------------------------------------------------------------------------
Administrative services fees 205,491
---------------------------------------------------------------------------
Auditing 11,712
---------------------------------------------------------------------------
Legal 12,444
---------------------------------------------------------------------------
Trustees' fees and expenses 8,418
---------------------------------------------------------------------------
Reports to shareholders 47,016
---------------------------------------------------------------------------
Registration fees 10,050
---------------------------------------------------------------------------
Amortization of organization expenses 1,098
---------------------------------------------------------------------------
Other 1,502
---------------------------------------------------------------------------
Total expenses, before expense reductions 1,589,022
---------------------------------------------------------------------------
Expense reductions (31,947)
---------------------------------------------------------------------------
Total expenses, after expense reductions 1,557,075
---------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 707,214
---------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments (3,146,973)
---------------------------------------------------------------------------
Foreign currency related transactions (233)
---------------------------------------------------------------------------
(3,147,206)
---------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on investments (3,874,362)
---------------------------------------------------------------------------
Net gain (loss) on investment transactions (7,021,568)
---------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $(6,314,354)
---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
MAY 31, 2000 NOVEMBER 30,
(UNAUDITED) 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ 707,214 $ 1,666,927
------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (3,147,206) (221,644)
------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period (3,874,362) 2,249,117
------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (6,314,354) 3,694,400
------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A (957,439) (792,369)
------------------------------------------------------------------------------------------------------
Class B (712,931) (37,445)
------------------------------------------------------------------------------------------------------
Class C (126,444) (8,257)
------------------------------------------------------------------------------------------------------
From net realized gains
Class A -- (216,135)
------------------------------------------------------------------------------------------------------
Class B -- (206,734)
------------------------------------------------------------------------------------------------------
Class C -- (34,275)
------------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 77,679,868 98,331,667
------------------------------------------------------------------------------------------------------
Reinvestment of distributions 1,598,069 1,181,270
------------------------------------------------------------------------------------------------------
Cost of shares redeemed (87,170,554) (138,421,184)
------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions (7,892,617) (38,908,247)
------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets (16,003,785) (36,509,062)
------------------------------------------------------------------------------------------------------
Net assets at beginning of period 187,651,938 224,161,000
------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income (loss) of ($75,462) and $1,014,137,
respectively) $171,648,153 $ 187,651,938
------------------------------------------------------------------------------------------------------
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLES INCLUDE SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
CLASS A
SIX MONTHS
ENDED YEAR FOR THE PERIOD
MAY 31, ENDED FROM MARCH 9, 1998
2000 NOVEMBER 30, (COMMENCEMENT OF OPERATIONS)
(UNAUDITED) 1999 TO NOVEMBER 30, 1998
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $9.74 9.65 9.50
--------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (a) .06 .13 .03
--------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.31) .06 .12
--------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.25) .19 .15
--------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.12) (.08) --
--------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions -- (.02) --
--------------------------------------------------------------------------------------------------------------------------
Total distributions (.12) (.10) --
--------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.37 9.74 9.65
--------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (B)(C) (2.58)** 1.95 1.58**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ thousands) 76,959 82,203 108,206
--------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.50* 1.44 1.55*
--------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.44* 1.31 1.36*
--------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 1.30* 1.27 .55*
--------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 16* 14 5*
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
SIX MONTHS
ENDED YEAR FOR THE PERIOD
MAY 31, ENDED FROM MARCH 9, 1998
2000 NOVEMBER 30, (COMMENCEMENT OF OPERATIONS)
(UNAUDITED) 1999 TO NOVEMBER 30, 1998
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $9.65 9.59 9.50
--------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (a) .02 .04 (.01)
--------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.29) .05 .10
--------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.27) .09 .09
--------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.08) (.01) --
--------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions -- (.02) --
--------------------------------------------------------------------------------------------------------------------------
Total distributions (.08) (.03) --
--------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.30 9.65 9.59
--------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (B)(C) (3.00)** 1.08 .95**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ thousands) 77,917 89,859 99,631
--------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 2.28* 2.22 2.29*
--------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 2.27* 2.20 2.14*
--------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .47* .38 (.23)*
--------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 16* 14 5*
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
SIX MONTHS FOR THE PERIOD FROM
ENDED MAY YEAR ENDED MARCH 9, 1998
31, 2000 NOVEMBER 30, (COMMENCEMENT OF OPERATIONS)
(UNAUDITED) 1999 TO NOVEMBER 30, 1998
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.69 9.61 9.50
-------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (a) .02 .04 (.01)
-------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.31) .07 .12
-------------------------------------------------------------------------------------------------------------------
Total from investment operations (.29) .11 .11
-------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.08) (.01) --
-------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions -- (.02) --
-------------------------------------------------------------------------------------------------------------------
Total distributions (.08) (.03) --
-------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.32 9.69 9.61
-------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (B)(C) (2.99)** 1.09 1.16**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ thousands) 16,772 15,590 16,324
-------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 2.22* 2.16 2.26*
-------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 2.22* 2.14 2.11*
-------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .52* .44 (.20)*
-------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 16* 14 5*
-------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Not Annualized
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Total return does not reflect the effect of sales charges.
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES Kemper-Dreman Financial Services Fund (the "Fund")
is a non-diversified series of Kemper Equity Trust
(the "Trust") which is registered under the
Investment Company Act of 1940, as amended (the
"1940 Act"), as an open-end management investment
company organized as a Massachusetts business
trust.
Effective July 29, 1999, based on a vote by the
Fund's shareholders, the Fund's sub-classification
under the 1940 Act was changed from a diversified
company to a non-diversified company.
The Fund offers multiple classes of shares. Class A
shares are offered to investors subject to an
initial sales charge. Class B shares are offered
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are offered without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of the Fund have
equal rights with respect to voting subject to
class specific arrangements.
The Fund's financial statements are prepared in
accordance with generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Investments are stated at value
determined as of the close of regular trading on
the New York Stock Exchange. Securities which are
traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on
the exchange on which the security is traded most
extensively. If no sale occurred, the security is
then valued at the calculated mean between the most
recent bid and asked quotations. If there are no
such bid and asked quotations, the most recent bid
quotation is used. Securities quoted on the Nasdaq
Stock Market ("Nasdaq"), for which there have been
sales, are valued at the most recent sale price
reported. If there are no such sales, the value is
the most recent bid quotation. Securities which are
not quoted on Nasdaq but are traded in another
over-the-counter market are valued at the most
recent sale price, or if no sale occurred, at the
calculated mean between the most recent bid and
asked quotations on such market. If there are no
such bid and asked quotations, the most recent bid
quotation shall be used.
Money market instruments purchased with an original
maturity of sixty days or less are valued at
amortized cost.
All other securities are valued at their fair value
as determined in good faith by the Valuation
Committee of the Board of Trustees.
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
REPURCHASE AGREEMENTS. The Fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
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 shareholders.
Accordingly, the Fund paid no federal income taxes
and no federal income tax provision was required.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made
semiannually. Net realized gains from investment
transactions, in excess of available capital loss
carryforwards, would be taxable to the Fund if not
distributed, and, therefore, will be distributed to
shareholders at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital
accounts without impacting the net asset value of
the Fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Dividend income is recorded on
the ex-dividend date. Realized gains and losses
from investment transactions are recorded on an
identified cost basis.
All discounts are accreted for both tax and
financial reporting purposes.
EXPENSES. Expenses arising in connection with a
specific fund are allocated to that fund. Other
Trust expenses are allocated between the funds in
proportion to their relative net assets.
ORGANIZATION COSTS. Costs incurred by the Fund in
connection with its organization have been deferred
and are being amortized on a straight-line basis
over a five-year period.
--------------------------------------------------------------------------------
2 PURCHASES AND SALES
OF SECURITIES For the six months ended May 31, 2000, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $13,389,889
Proceeds from sales 29,590,725
--------------------------------------------------------------------------------
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. For the six
months ended May 31, 2000, the Fund incurred a
management fee of $616,472, which was equivalent to
an
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
annualized effective rate of .75% of average daily
net assets. 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.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the six months ended May 31,
2000 are $35,686.
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares pursuant to separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the six months ended May 31, 2000 are $622,206,
of which $75,565 is unpaid at May 31, 2000.
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C 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 paid by the
Fund to KDI for the six months ended May 31, 2000
are $179,707 after an expense waiver of $25,784, of
which $436,640 is unpaid at May 31, 2000.
SHAREHOLDER SERVICE 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 $207,755
for the six months ended May 31, 2000 of which
$7,229 is unpaid at May 31, 2000.
FUND ACCOUNTING FEES. Scudder Fund Accounting
Corporation ("SFAC"), a subsidiary of the Adviser,
is responsible for determining the daily net asset
value per share and maintaining the portfolio and
general accounting records of the Fund. For the six
months ended May 31, 2000, the amount charged to
the Fund by SFAC aggregated $45,538, of which
$4,058 is unpaid at May 31, 2000.
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,
2000, the Fund made no payments to its officers and
incurred trustees fees of $8,418 to independent
trustees.
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MAY 31, 1999 NOVEMBER 30, 1999
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 5,889,119 $ 51,464,560 6,579,140 $ 66,142,443
------------------------------------------------------------------------------------
Class B 2,160,742 18,969,839 2,532,603 25,244,733
------------------------------------------------------------------------------------
Class C 774,141 6,806,434 691,519 6,944,491
------------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 95,796 866,945 93,864 932,233
------------------------------------------------------------------------------------
Class B 69,344 624,792 22,008 214,109
------------------------------------------------------------------------------------
Class C 11,775 106,332 3,574 34,928
------------------------------------------------------------------------------------
SHARES REDEEMED
Class A (6,262,723) (54,794,148) (9,444,059) (94,509,788)
------------------------------------------------------------------------------------
Class B (3,098,217) (26,738,775) (3,647,236) (35,989,956)
------------------------------------------------------------------------------------
Class C (595,929) (5,198,596) (785,006) (7,921,440)
------------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 49,955 439,035 -- --
------------------------------------------------------------------------------------
Class B (50,277) (439,035) -- --
------------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $ (7,892,617) $(38,908,247)
------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
5 EXPENSE OFF-SET
ARRANGEMENTS The Fund has entered into arrangements with its
custodian and transfer agent whereby credits
realized as a result of uninvested cash balances
were used to reduce a portion of the Fund's
expenses. During the period, the Fund's custodian
and transfer agent fees were reduced by $2,077 and
$4,086, respectively, under these arrangements.
--------------------------------------------------------------------------------
6 LINE OF CREDIT The Fund and several Kemper funds (the
"Participants") share in a $750 million revolving
credit facility for temporary or emergency
purposes, including the meeting of redemption
requests that otherwise might require the untimely
disposition of securities. The Participants are
charged an annual commitment fee which is allocated
pro rata among each of the Participants. Interest
is calculated based on the market rates at the time
of the borrowing. The Fund may borrow up to a
maximum of 33 percent of its net assets under the
agreement.
20
<PAGE> 21
NOTES
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
JAMES E. AKINS MARK S. CASADY MAUREEN E. KANE
Trustee President Assistant Secretary
JAMES R. EDGAR PHILIP J. COLLORA CAROLINE PEARSON
Trustee Vice President and Assistant Secretary
Secretary
ARTHUR R. GOTTSCHALK BRENDA LYONS
Trustee THOMAS W. LITTAUER Assistant Treasurer
Vice President
FREDERICK T. KELSEY
Trustee ANN M. MCCREARY
Vice President
KATHRYN L. QUIRK
Trustee and Vice President WILLIAM F. TRUSCOTT
Vice President
FRED B. RENWICK
Trustee LINDA J. WONDRACK
Vice President
JOHN G. WEITHERS
Trustee JOHN R. HEBBLE
Treasurer
</TABLE>
<TABLE>
<S> <C>
.............................................................................................
LEGAL COUNSEL DECHERT PRICE & RHOADS
Ten Post Office Square South
Boston, MA 02109
.............................................................................................
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 219557
Kansas City, MO 64121
.............................................................................................
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02110
.............................................................................................
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
.............................................................................................
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
.............................................................................................
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
</TABLE>
TRUSTEES&OFFICERS
[KEMPER FUNDS LOGO] 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 - 3 (7/19/00) 1116590
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
