<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MAY 31, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[MORNINGSTAR RATINGS LOGO]
SEEKS LONG-TERM CAPITAL APPRECIATION
KEMPER
CONTRARIAN FUND
"... We were able to buy blue chip stocks at
prices near their 52-week lows while the market was at
all time highs. When these stocks turned around, it had a very
dramatic effect on the fund's performance. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
8
Terms to Know
9
Industry Sectors
10
Largest Holdings
11
Portfolio of Investments
13
Financial Statements
15
Notes to Financial Statements
18
Financial Highlights
21
Shareholders' Meeting
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER CONTRARIAN
FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 1999
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
<S> <C>
CLASS A 11.22
CLASS B 10.77
CLASS C 10.65
LIPPER GROWTH & INCOME FUNDS CATEGORY AVERAGE* 11.05
</TABLE>
RETURNS AND RANKINGS 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 ANALYTICAL SERVICES, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES IN
NET ASSET VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF
SALES CHARGES. IF THEY HAD, RESULTS MAY HAVE BEEN LESS FAVORABLE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
5/31/99 11/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER CONTRARIAN FUND CLASS A $23.29 $22.90
- --------------------------------------------------------------------------------
KEMPER CONTRARIAN FUND CLASS B $23.22 $22.82
- --------------------------------------------------------------------------------
KEMPER CONTRARIAN FUND CLASS C $23.20 $22.82
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER CONTRARIAN FUND
LIPPER RANKINGS AS OF 5/31/99
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER GROWTH & INCOME FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #191 OF 828 FUNDS #226 OF 828 FUNDS #227 OF 828 FUNDS
- --------------------------------------------------------------------------------
3-YEAR #160 OF 510 FUNDS #206 OF 510 FUNDS #215 OF 510 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #80 OF 320 FUNDS N/A N/A
- --------------------------------------------------------------------------------
10-YEAR #48 of 148 FUNDS N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND INFORMATION FOR THE FUND
AS OF MAY 31, 1999:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
INCOME DIVIDEND $.1600 $.0567 $.0509
- --------------------------------------------------------------------------------
SHORT-TERM CAPITAL GAIN $.81 $.81 $.81
- --------------------------------------------------------------------------------
LONG-TERM CAPITAL GAIN $.97 $.97 $.97
- --------------------------------------------------------------------------------
</TABLE>
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR EQUITY STYLE BOX
- --------------------------------------------------------------------------------
[MORNINGSTAR EQUITY STYLE BOX]
SOURCE: Morningstar, Inc. Chicago, IL. (312) 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 STYLEBOX 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. CATEGORY PLACEMENTS OF NEW FUNDS ARE ESTIMATED. MORNINGSTAR HAS PLACED
KEMPER CONTRARIAN FUND IN THE LARGE VALUE CATEGORY. PLEASE CONSULT THE
PROSPECTUS FOR A DESCRIPTION OF INVESTMENT POLICIES.
<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 PH.D. IN ECONOMICS FROM NORTHEASTERN UNIVERSITY IN BOSTON, MASS.
HE IS A MEMBER OF BOTH THE BLUE CHIP ECONOMIC AND FINANCIAL SURVEYS, AND SERVES
ON THE POLICY ADVISORY COMMITTEES OF THE FEDERAL RESERVE BOARDS OF CHICAGO AND
CLEVELAND.
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 $280 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:
As expected, the Federal Reserve Board raised its federal funds interest rate
(the rate at which banks lend to each other overnight) by one-fourth of a
percentage point in June. Although higher interest rates tend to have a
dampening effect on the market, investors rallied in response to this move. The
Dow Jones Industrial Average, which was down 50 points before the Fed's
statement on June 30, reversed course and ended the day at its highest closing
level in six weeks. The Dow went on to close at a record-setting high of 11,187
on July 7.
What led to the interest rate hike, and why does the market reaction suggest
that investors are happy about it?
It is generally recognized that a modest rate hike by the Fed may be effective
in slowing the economy sufficiently to suppress any simmering inflationary
pressures. Although the economy has been strong, there are concerns that it will
be unable to maintain its current rate of growth without prompting inflationary
pressures -- which is at the heart of the Fed's decision to raise interest
rates. The Fed is acting now to be proactive. In the past, Fed policy has been
reactive, which meant that the Fed tended to respond to inflation only when it
picked up. A rate hike now is intended to halt any future buildup in inflation.
Moreover, by hinting at an increase well in advance -- then by limiting the
increase to 25 basis points -- the Fed relieved worried investors and gave a
boost to the financial markets.
Despite the minor rate increase, the long-term economic situation appears to
be positive. The federal budget surplus continues to benefit from good revenue
gains (which are based on good income gains, especially for households), good
capital gains and continued restraint in federal spending. The surplus this year
is expected to approach $100 billion.
This positive environment is exactly what sometimes poses risk for investors,
and is key to understanding recent volatility in the market. A strong economy
has the potential to feed inflation fears and drive up interest rates. Indeed,
recent market events illustrate the domino effect of investors reacting to
positive economic news, which they consider troubling at this point, more than
eight years into the economic expansion. Prior to its strong close in the second
quarter, the steady stream of positive economic news led to a sell-off in the
financial markets based on fears that the strong pace of economic growth would
eventually lead to higher inflation. The benchmark 30-year Treasury bond yield
rose, which pulled stocks lower.
Where can we expect to go from here? The fundamentals by which we judge the
health of the economy suggest continued growth as we move into the second half
of 1999. For example, the gross domestic product (GDP), the value of all goods
and services produced in the U.S., is expected to rise at an annual rate of 4
percent in the first half of 1999, following a tremendous fourth-quarter surge
of 6 percent. This is very much in line with what we've grown accustomed to over
the past year -- over the four quarters of 1998, the U.S. economy expanded by
4.3 percent. Some people aren't surprised at all by strong GDP growth that once
would have alarmed them. That's partially because we've grown accustomed to a
strong economy. But it's also because we've been able to absorb growth without
driving up inflation. That's important for investors. If prices had been rising
as the economy was growing, the Fed would have most likely raised short-term
interest rates earlier and more drastically, and that would have changed the
financial market outlook.
However, we do see some vulnerability on the economic front. Trade is a weak
spot in the economy right now. Exports of U.S. goods and services dropped in the
first half of 1999, while imports soared. This reflects the fact that the U.S.
is one of the few countries financially fit enough to buy goods produced
elsewhere in the world. But for as long as less vibrant international economies
are unable to buy U.S. goods, the profitability of U.S. companies trying to
export will be challenged.
When you think about it, vulnerability in regard to the international economy
is nothing new. Globally, the outlook is slightly more positive than it was a
few months ago. For example, the European markets are slowing down, which has
already led to the European Central Bank lowering interest rates in order to
boost domestic spending. In many countries in Europe there are no fixed-rate
mortgages, only adjustable-rate mortgages. When interest rates go down, mortgage
payments are reduced and homeowners can spend money elsewhere. This has a huge
impact on consumer spending, and will help European equities over time.
Additionally, the situation in Japan remains unchanged. And, problems in the
emerging markets haven't had the negative impact many people expected -- both
the Mexican and Brazilian stock markets have actually risen in the past two
months.
But don't forget that international crises have the potential to affect the
U.S. markets dramatically. Although the Kosovo crisis seems to be waning, past
increases in military spending on Kosovo by the 11 European Monetary Union (EMU)
countries could force them to spend less in other areas, which could have
economic implications, including higher interest rates. That's because many
European countries (especially Italy) have small economies and
3
<PAGE> 4
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND
SHAREHOLDER DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR
DEFLATION, CREDIT EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON
MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR
INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE
10-YEAR TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES. THE
OTHER DATA REPORT YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (6/30/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Ten Year Treasury Rate 5.90 4.81 5.65 6.69
Prime Rate 7.75 8.49 8.50 8.30
Inflation* 2.03 1.62 1.44 3.03
The U.S. Dollar* -2.4 4.31 4.88 8.58
Capital goods orders* 7.73 11.44 8.10 5.52
Industrial production * 1.72 3.58 5.05 5.86
Employment growth* 2.15 2.48 2.61 2.51
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION
OF THE LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
* DATA AS OF MAY 31, 1999.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
little leeway in their budgets. Consequently, those countries financed unplanned
military expenditures by selling government bonds -- which, in Europe's small
bond market, typically raises interest rates. As an example, consider Italy,
which recently asked for more leeway on its deficit targets. When leeway was
granted, this led to a further sell-off in the eurodollar.
The international situation alone, however, is by no means an indicator of a
U.S. slowdown -- and without any such indications, complacency may be our
greatest concern. It's easy to look at the current U.S. economic situation and
behave as if no risk exists. But when you see the market soaring and are tempted
to jump in, note that the bull market grew to records on the strength of just a
few dozen stocks, while most other stock prices were flat or actually declined.
In summary, there are concerns that the current economy is unsustainable and
we soon could see an abrupt end. In many cases, however, people are looking for
a slowdown because they are fearful growth will drive up inflation these are
particularly older investors who are accustomed to inflation accompanying
growth. But again, sustained inflation seems unlikely, so a sharp slowdown is
not necessary. In the short term, we expect a modest economic slowdown but no
recession. The best approach now, as in any market, is to diversify and invest
for the long term.
Thank you for your continued support. 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 SILVIA AS OF JUNE 9, 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.
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
[SASSI PHOTO]
TOM SASSI IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC. AND LEAD
PORTFOLIO MANAGER OF KEMPER CONTRARIAN FUND. SASSI RECEIVED A BACHELOR'S OF
BUSINESS ADMINISTRATION IN MANAGEMENT AND ECONOMICS AND A MASTER'S OF BUSINESS
ADMINISTRATION IN FINANCE FROM HOFSTRA UNIVERSITY. HE HAS MORE THAN 25 YEARS OF
EXPERIENCE IN INVESTMENT ANALYSIS AND MANAGEMENT.
[GASKIN PHOTO]
FREDERICK L. GASKIN IS A VICE PRESIDENT OF SCUDDER KEMPER INVESTMENTS AND A
PORTFOLIO MANAGER OF KEMPER CONTRARIAN FUND. GASKIN RECEIVED A BACHELOR'S DEGREE
IN FINANCE FROM APPALACHIAN STATE UNIVERSITY AND A MASTER'S OF BUSINESS
ADMINISTRATION FROM THE BABCOCK SCHOOL OF MANAGEMENT AT WAKE FOREST UNIVERSITY.
HE HAS NEARLY 15 YEARS OF INVESTMENT MANAGEMENT EXPERIENCE.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
IN A PERIOD DOMINATED BY GROWTH-STYLE STOCKS, KEMPER CONTRARIAN FUND TRACKED THE
STANDARD & POOR'S 500 STOCK INDEX CLOSELY. LEAD PORTFOLIO MANAGER TOM SASSI
DISCUSSES THE EVENTS THAT MOVED THE MARKET AND HOW AS A VALUE INVESTOR, HE WAS
ABLE TO STEER THE FUND TO KEEP PACE WITH THE REST OF THE MARKET DURING THE
FUND'S SEMIANNUAL PERIOD -- DECEMBER 1, 1998 THROUGH MAY 31, 1999.
Q HOW WOULD YOU CHARACTERIZE THE MARKET OVER THE LAST SIX MONTHS?
A The character of the market changed a couple of times over the six-month
period.
1. NARROW MARKET. In December and January the market was quite
narrow -- dominated by the largest growth stocks and by Internet fever.
Virtually all other types of stocks were left behind. This was a
continuation of the narrow market that had existed since late 1997.
2. A BREAK FOR VALUE. In February, a break occurred in the narrow market and
value stocks began to gain momentum. Value assumed a leadership role in the
market throughout the rest of the period, but could not eliminate the
foothold large growth stocks had on the market.
Q WHAT OCCURRED IN FEBRUARY TO SPARK THE SHIFT INTO VALUE STOCKS?
A In early February the disparity between the relative performance of growth
stocks and value stocks was the widest it's been in one quarter-century. In
other words, it had been more than 25 years since growth stocks had outperformed
value stocks by such a large margin. And it seemed at that exact point, a shift
to value began to occur.
Historically, at the end of each calendar year, levels of investment
typically increase. When this occurred in late 1998, the increased investment
flowed into large growth stocks or into index-style investments, driving their
already high valuations even higher. After the first of the year, however, the
heightened cash flow diminished, causing the valuations of these same top-tier
investments to falter a bit. With this pause in demand, investors became
concerned about the extreme valuations of the top-tier stocks and began turning
to more reasonably valued stocks.
Q DID ALL VALUE STOCKS BENEFIT?
A The primary benefactors were the economically sensitive cyclical-commodity
stocks (generally major manufacturers) that had performed so poorly since the
Southeast Asia crisis in 1997. During the Asia crisis, investors shunned these
stocks believing their strong ties to the economy and their large reliance on
exports would severely hurt them. The sustained flight from these quality
companies left some of the country's best known blue-chip companies trading at
multi-year lows in late 1998. As it became apparent that the global economy was
improving and the manufacturing sector had stabilized, investors began investing
in commodity-cyclical stocks again. As a result, this area made tremendous gains
in 1999.
5
<PAGE> 6
PERFORMANCE UPDATE
A good example is Georgia Pacific, a large manufacturer and distributor of
a wide range of building and paper products. In December 1998, the consensus by
Wall Street analysts put estimated earnings of the company at about $0.51 per
share. As actual earnings continued to surprise on the high side, analysts
continued to adjust their forecasts. By May, the consensus on Wall Street was
that Georgia Pacific's earnings would reach $2.67 per share. As these estimates
continued to be revised, the stock price jumped to about $45 from about $25. The
fund benefited from this run-up in price and we sold the stock before it reached
its high, but at the point where we believed it had reached fair market value.
These ever-changing estimates caused a wide rotation into cyclicals from
the top-tier technology-oriented stocks. Essentially, the market was late in
recognizing the Asia crisis was no longer a factor for cyclical-commodity
companies. As a result, we had quality companies selling on a worst-expectation
basis with near-record low valuations. When it became clear that actual earnings
were solid, analysts readjusted their earnings estimates, which in turn
initiated huge jumps in the prices of these stocks.
Q WHEN DID YOU BEGIN BUYING CYCLICAL STOCKS?
A We began buying some basic industry and capital goods stocks in mid-1998
and added to them throughout the latter part of the year and into 1999. Some of
our investments included Praxair, Air Products, Dupont, Mead, Georgia Pacific
and 3M among others. We bought them all at very attractive valuations.
Essentially, we were able to buy blue chip stocks at prices near their 52-week
lows while the market was at all time highs. When these stocks turned around, it
had a very dramatic effect on the fund's performance. We've since taken profits
in this area for a couple of reasons. We sold stocks that had reached our target
valuations. We also trimmed holdings as their level of appreciation created a
position we thought was too large for the portfolio. While we do like to back
each of our portfolio selections with conviction, we also try to keep the fund's
risk profile at a reasonable level. We're therefore careful to avoid
concentrating heavily in any one company or in any one sector (see Terms To Know
on page 8).
Q HOW DID KEMPER CONTRARIAN FUND PERFORM?
A We are extremely pleased with the fund's performance, especially given the
period's growth-oriented market. The fund's Class A shares gained 11.22 percent
(unadjusted for any sales charge), closely following the growth- and
technology-dominated S&P 500 gain of 12.6 percent. The fund outperformed its
Lipper Growth & Income Fund peer group average, which gained 11.05 percent. This
category includes 887 funds, split between growth-style funds and value-style
funds. Outperforming some of our growth counterparts in an environment that
didn't particularly favor value stocks pleases us greatly.
We're also heartened that this six-month period was not an aberration. The
fund handily outperformed its Lipper peer group average during its last fiscal
year as well -- also during a growth-oriented market. The fund has also
outperformed its Lipper peer group average on a long-term basis with returns
higher than the category average for the three and five- and 10-year periods
ended May 31, 1999. See the chart for more information.
When value comes back into vogue, we believe the fund has tremendous
potential to continue or improve upon its already strong performance.
Q HOW WAS THE PORTFOLIO ABLE TO PERFORM SO WELL IN THE GROWTH-ORIENTED
MARKET THAT YOU DESCRIBED?
A The strength of our investment discipline is that we don't actively look
for "value" stocks or "growth" stocks. We look for stocks that meet our
criteria, which historically has provided very high risk-adjusted and absolute
rates of return.
We buy companies that have above-average, long-term growth of earnings and
dividends. Because the fund is contrarian in its execution,
- --------------------------------------------------------------------------------
KEMPER CONTRARIAN FUND HAS OUTPERFORMED OVER THE LONG TERM
- --------------------------------------------------------------------------------
COMPARISONS TO LIPPER ANALYTICAL SERVICES GROWTH & INCOME FUNDS CATEGORY FOR
PERIODS ENDED MAY 31, 1999
<TABLE>
<CAPTION>
FUND RETURN VS.
CATEGORY AVERAGE FUND RANKINGS
- --------------------------------------------------------------------------------
<S> <C> <C>
1-YEAR 17.72% VS. 11.50% #191 OF 828 FUNDS
- --------------------------------------------------------------------------------
3-YEAR 22.10 VS. 19.80 #160 OF 510 FUNDS
- --------------------------------------------------------------------------------
5-YEAR 22.42 VS. 20.12 #80 OF 320 FUNDS
- --------------------------------------------------------------------------------
10-YEAR 15.67 VS. 14.59 #48 OF 148 FUNDS
- --------------------------------------------------------------------------------
</TABLE>
PERFORMANCE IS HISTORICAL AND DOES NOT GUARANTEE FUTURE RESULTS.
6
<PAGE> 7
PERFORMANCE UPDATE
we buy these quality companies when they are temporarily depressed relative to a
measure of their true worth. By investing in a company when it's temporarily
depressed, there tends to be less risk, since the price of the stock is down
relative to its historical levels. As earnings revert back to the company's
historical profile, it can provide a high rate of return with less risk.
We don't, however, invest for short-term gains. Typically we'll hold a
stock anywhere from six months to two years. The key to our contrarian strategy
is that we want more upside potential than downside. When we buy a stock, we
don't expect it to decline very much, but over time we do expect it to
appreciate in value. At the time of purchase we establish target valuations that
trigger us to sell the stock. Of course, we constantly evaluate and reevaluate
our holdings relative to their industry and the broader market. We may also
adjust our sell triggers if the fundamentals of the company change for the
better or worse.
Q WHAT OTHER TYPES OF INDUSTRIES APPEALED TO YOU DURING THE PERIOD?
A We always begin our search for new stocks by identifying high-quality
companies that are trading at prices near their 52-week lows with dividend
yields higher than average yields in the S&P 500. This period a small group of
name-brand food companies stood out as potential buys for us. We bought Heinz
and Campbell's when they were trading within 10 percent of their 52-week lows.
We believe these are very strong companies that have recently suffered some
lackluster earnings and have been unfairly punished by the market. With the
shift to cyclical stocks, these food stocks were viewed as less stable. On a
relative basis, their P/Es (see Terms To Know on page 8) and the relative
dividend yields, however, make them cheaper today than anytime in the last 15
years. We aren't expecting an immediate uptick in their performance, but believe
they will be strong contributors to the fund over the next one to three years.
They're good defensive stocks that should do particularly well if we move into a
market downturn of any kind. That's because consumers continue to buy food even
when the economy is struggling.
Q WERE THERE ANY STOCKS THAT DISAPPOINTED YOU DURING THE PERIOD?
A First Union, a regional banking company, disappointed us. After several
years of strong performance, the stock declined during the period as it suffered
through two quarters of poor earnings. The disappointing earnings, we believe,
are a lingering result of last year's acquisitions of Corestate and The Money
Store by First Union. We've followed this stock for about 15 years and believe
that First Union is and has been a very well run bank. Its current low P/E and
still-attractive dividend yield makes it very positive for the fund on a
long-term basis. Given its current low valuation, we may even increase our
position in the bank.
Q FINANCIAL SERVICES REPRESENT A LARGE PORTION OF THE FUND. WHAT PARTS OF
THAT SECTOR INTEREST YOU MOST?
A Historically, the fund has always had a meaningful position in financial
stocks and we continue to find a great deal of value in this sector. Although
our weighting in the sector has not changed much, we have made some structural
changes. The primary change we made was to increase our position in Federal
National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp.
(Freddie Mac), which are involved in providing products and services associated
with the home loan mortgage industry. Both of these stocks had a huge run-up in
price in 1998. This year the stocks began to underperform somewhat -- probably
in response to the huge gains they made last year. There were also some concerns
that new governmental regulation may be introduced. In any event, the
fundamentals of these companies are good and we don't believe any of these are
long-term issues. We, therefore, have increased our commitment to these
companies.
We also continue to invest in the banking industry. Many quality companies
are trading at deep discounts that we don't believe are justified for the
long-term. Additionally, we've added some property and casualty insurers to the
portfolio as they, too, had strong fundamentals, but were trading at deep
discounts. We were able to purchase two
7
<PAGE> 8
PERFORMANCE UPDATE
quality companies, Chubb and Allstate near 52 week lows in price, at multi-year
valuation lows as a weak and competitive pricing environment had taken its toll
on earnings expectations and investor psychology.
Q GIVEN THE ROTATIONAL MARKET YOU DISCUSSED, WHAT WAS TURNOVER IN THE FUND
LIKE?
A The extreme rotation in the market did cause a higher-than-average
turnover rate in the first three months of 1999. We adhered strictly to our sell
criteria, and didn't alter it this period. Typically our criteria doesn't
trigger a sell for a year or two after we've purchased a stock, but for some
stocks this period it took just a couple of months. It just didn't make sense
for us to hold onto seasoned companies that shot up sometimes in excess of 40
percent in less than two months time. We do expect our turnover activity to
return to more normal levels.
Q WHAT'S YOUR OUTLOOK FOR THE MARKET? WILL VALUE CONTINUE TO GAIN GROUND?
A A tug of war between value and growth is likely to continue into the fall
as new economic and earnings statistics are reported. We think it will be late
fall until we have some idea of whether value has begun a longer period of
outperformance. In any case, we believe the fund is well positioned to perform
in the current environment.
TERMS TO KNOW
GROWTH STOCKS Growth stocks are shares in companies that are expected to
experience rapid growth resulting from strong sales, talented management and a
dominant market position. Because these stocks are in demand, you'll find that
they're generally more expensive. How long and how strong this demand is
expected to be determines the growth potential of the stock.
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.
Financial, economic, business and other developments may similarly affect stocks
within a market sector.
VALUE STOCKS Value stocks are considered to be "bargain stocks" because they are
perceived as undervalued and attractively priced relative to a measure of their
true worth, such as earnings potential, book value, cash flow or dividend yield.
Securities may be undervalued as a result of overreaction by investors to
unfavorable news about a company, industry or the stock market in general, or as
a result of a market decline, poor economic conditions, or actual or anticipated
unfavorable developments impacting the company.
8
<PAGE> 9
INDUSTRY SECTORS
A SIX-MONTH COMPARISON
DATA SHOWS THE PERCENTAGE OF THE COMMON STOCKS IN THE PORTFOLIO THAT EACH SECTOR
REPRESENTED ON MAY 31, 1999, AND ON NOVEMBER 30 1998.
[SIX-MONTH COMPARISON BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER CONTRARIAN FUND ON KEMPER CONTRARIAN FUND ON
5/31/99 11/30/98
<S> <C> <C>
Finance 28.6% 32.8%
Basic industries 27.1% 15.4%
Consumer nondurables 25.2% 15.3%
Energy 7.1% 11.3%
Capital goods 4.1% 11.2%
Technology 3.5% 6.8%
Consumer durables 2.6% 0.0%
Transportation 1.2% 1.3%
Utilities 0.6% 1.1%
Health care 0.0% 4.8%
</TABLE>
A COMPARISON WITH THE STANDARD & POOR'S 500 STOCK INDEX*
DATA SHOWS THE PERCENTAGE OF THE COMMON STOCKS IN THE PORTFOLIO THAT EACH SECTOR
OF THE KEMPER CONTRARIAN FUND REPRESENTED ON MAY 31, 1999, COMPARED TO THE
INDUSTRY SECTORS THAT MAKE UP THE FUND'S BENCHMARK, THE STANDARD & POOR'S 500
STOCK INDEX (S&P 500).
[STANDARD & POOR'S COMPARISON BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER CONTRARIAN FUND ON
5/31/99 S&P 500 INDEX ON 5/31/99
<S> <C> <C>
Finance 28.6% 16.2%
Basic industries 27.1% 3.5%
Consumer nondurables 25.2% 20.3%
Energy 7.1% 7.0%
Capital goods 4.1% 8.1%
Technology 3.5% 20.2%
Consumer durables 2.6% 1.8%
Transportation 1.2% 1.0%
Utilities 0.6% 11.0%
Health care 0.0% 10.9%
</TABLE>
* THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
9
<PAGE> 10
LARGEST HOLDINGS
THE FUND'S 10 LARGEST HOLDINGS*
Representing 37.9 percent of the fund's total common stock holdings on May 31,
1999.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
HOLDINGS DESCRIPTION PERCENT
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. MINNESOTA MINING & 3M is a worldwide manufacturer 5.5%
MANUFACTURING (3M) serving industrial, commercial,
health care and consumer markets.
- --------------------------------------------------------------------------------------
2. FHLMC Often referred to as "Freddie 5.1%
Mac," this corporation provides
for the transfer of capital
between mortgage lenders and
mortgage security investors,
enabling mortgage lenders to
provide a continuous flow of funds
to borrow.
- --------------------------------------------------------------------------------------
3. PHILIP MORRIS The largest cigarette maker in the 4.8%
U.S. Through its Miller Brewing
subsidiary, it is also the
country's second-largest brewer.
This company is also a major
branded food producer through its
Kraft Foods subsidiaries.
- --------------------------------------------------------------------------------------
4. FNMA Often referred to as "Fannie Mae," 4.4%
this is a private corporation
federally chartered to provide
financial products and services
that increase the availability and
affordability of housing to low,
moderate and middle-income
Americans.
- --------------------------------------------------------------------------------------
5. KEYCORP Engaged in commercial banking 3.4%
operations and related financial
activities.
- --------------------------------------------------------------------------------------
6. SONOCO PRODUCTS Engaged in the manufacture of 3.4%
paper and converted paper products
for sale principally to other
manufacturers.
- --------------------------------------------------------------------------------------
7. SEARS ROEBUCK A leading retailer of apparel, 3.0%
home and automotive products and
related services for families
throughout North America.
- --------------------------------------------------------------------------------------
8. ATLANTIC RICHFIELD Engaged in exploring, developing 2.8%
and producing petroleum, which
includes petroleum liquids and
natural gas. The company is also
involved in the refining and
marketing of petroleum products,
transportation, the mining and
sale of coal and interests in
intermediate, chemicals and
specialty products.
- --------------------------------------------------------------------------------------
9. J.C. PENNEY Engaged in providing merchandise 2.8%
and services to consumers through
stores, including catalog
operations.
- --------------------------------------------------------------------------------------
10. ALLSTATE One of the nation's largest 2.7%
publicly held personal lines
insurance company. It is a major
home, auto and life insurer
providing both traditional life
insurance products and annuities
to individuals.
- --------------------------------------------------------------------------------------
</TABLE>
*THE FUND'S HOLDINGS ARE SUBJECT TO CHANGE.
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
KEMPER CONTRARIAN FUND
Portfolio of Investments at May 31, 1999 (unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
COMMON STOCKS NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--9.7%
J.C. Penney Co., Inc. 137,600 $ 7,112
Liz Claiborne Inc. 146,100 5,260
May Department Stores 99,750 4,320
Newell Rubbermaid Inc. 130,000 5,265
Sears, Roebuck & Co. 160,000 7,650
-----------------------------------------------------------------------------
29,607
- ------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--11.4%
Albertson's Inc. 60,000 3,210
Campbell Soup Co. 77,400 3,415
H.J. Heinz Co. 85,000 4,107
International Flavors & Fragrances, Inc. 161,500 6,642
Philip Morris Companies, Inc. 320,100 12,344
Unilever NV 40,178 2,624
VF Corporation 52,800 2,429
-----------------------------------------------------------------------------
34,771
- ------------------------------------------------------------------------------------------------------------
CONSTRUCTION--3.5%
Georgia Pacific Timber Group 194,000 5,202
Louisiana-Pacific Corp. 265,000 5,366
-----------------------------------------------------------------------------
10,568
- ------------------------------------------------------------------------------------------------------------
DURABLES--2.2%
Ford Motor Co. 115,000 6,562
-----------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
ENERGY--6.0%
Atlantic Richfield Co. 86,500 7,239
BP Amoco Plc 40,957 4,388
Exxon Corp. 81,000 6,470
-----------------------------------------------------------------------------
18,097
- ------------------------------------------------------------------------------------------------------------
FINANCE--24.0%
Allstate Corp. 190,600 6,945
Banc One Corp. 110,900 6,273
Bank of America Corp. 100,000 6,469
Chubb Corp. 64,300 4,505
Federal Home Loan Mortgage Corp. 222,000 12,945
Federal National Mortgage Association 167,000 11,356
First Union Corp. 143,900 6,628
KeyCorp 250,000 8,687
Post Properties Inc. 75,000 3,141
Washington Mutual, Inc. 117,320 4,480
Wells Fargo Co. 40,000 1,600
-----------------------------------------------------------------------------
73,029
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANUFACTURING--22.7%
Air Products & Chemicals, Inc. 93,600 $ 3,838
Crown Cork & Seal Co. Inc. 54,000 1,694
Dow Chemical Co. 18,900 2,296
E.I. du Pont de Nemours & Co. 46,500 3,043
Eastman Chemical Co. 57,000 2,886
Emerson Electric Co. 25,000 1,597
Lubrizol Corp. 155,000 4,263
Mead Corp. 74,300 2,777
Minnesota Mining & Manufacturing Co. 163,500 14,020
Pitney Bowes, Inc. 65,000 4,144
Praxair, Inc. 118,500 5,784
Sonoco Products Co. 346,900 8,673
Thomas & Betts Corp. 125,000 5,351
Tyco International Ltd. 26,536 2,318
Xerox Corp. 115,000 6,461
-----------------------------------------------------------------------------
69,145
- ------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--3.0%
Diebold, Inc. 202,000 5,681
Raytheon Co. "B" 51,000 3,471
-----------------------------------------------------------------------------
9,152
- ------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.0%
CSX Corp. 65,700 3,084
-----------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
UTILITIES--.5%
ONEOK, Inc. 50,000 1,500
-----------------------------------------------------------------------------
TOTAL COMMON STOCKS--84.0%
(Cost: $226,991) 255,515
-----------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
MONEY MARKET
INSTRUMENTS--16.0%
(a) Repurchase Agreement
State Street Bank and Trust Company
dated 5/28/99, 4.80%, 6/1/99 $ 32,901 32,901
-----------------------------------------------------------------------------
Yield--4.87%
Due--July 1999
Amsterdam Funding Corp 15,784 15,677
-----------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--16.0%
(Cost: $48,578) 48,578
-----------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $275,569) $304,093
-----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Repurchase agreements are fully collateralized by U.S. Treasury or
Government 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 $275,569,000 for federal income tax purposes
at May 31, 1999, the gross unrealized appreciation was $33,898,000, the gross
unrealized depreciation was $5,374,000 and the net unrealized appreciation on
investments was $28,524,000.
See accompanying Notes to Financial Statements.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1999 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value (including repurchase agreements of
$32,901) (Cost: $275,569) $304,093
- ------------------------------------------------------------------------
Receivable for:
Investments sold 13,021
- ------------------------------------------------------------------------
Fund shares sold 557
- ------------------------------------------------------------------------
Dividends and interest 1,109
- ------------------------------------------------------------------------
TOTAL ASSETS 318,780
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Payable for:
Investments purchased 877
- ------------------------------------------------------------------------
Fund shares redeemed 117
- ------------------------------------------------------------------------
Management fee 185
- ------------------------------------------------------------------------
Distribution services fee 77
- ------------------------------------------------------------------------
Administrative services fee 62
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 223
- ------------------------------------------------------------------------
Directors' fees 3
- ------------------------------------------------------------------------
Total liabilities 1,544
- ------------------------------------------------------------------------
NET ASSETS $317,236
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $253,967
- ------------------------------------------------------------------------
Undistributed net realized gain on investments 33,818
- ------------------------------------------------------------------------
Net unrealized appreciation on investments 28,524
- ------------------------------------------------------------------------
Undistributed net investment income 927
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $317,236
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share ($180,599 /
7,754 shares outstanding) $23.29
- ------------------------------------------------------------------------
Maximum offering price per share (net asset value, plus
6.10% of net asset value or 5.75% of offering price) $24.71
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($120,489 /
5,189 shares outstanding) $23.22
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($16,148 / 696
shares outstanding) $23.20
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended May 31, 1999 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
NET INVESTMENT INCOME
Dividends $ 3,355
- -----------------------------------------------------------------------
Interest 933
- -----------------------------------------------------------------------
Total investment income 4,288
- -----------------------------------------------------------------------
Expenses:
Management fee 1,044
- -----------------------------------------------------------------------
Distribution services fee 450
- -----------------------------------------------------------------------
Administrative services fee 328
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 619
- -----------------------------------------------------------------------
Reports to shareholders 72
- -----------------------------------------------------------------------
Registration fee 18
- -----------------------------------------------------------------------
Professional fees 28
- -----------------------------------------------------------------------
Directors' fees and other 10
- -----------------------------------------------------------------------
Total expenses 2,569
- -----------------------------------------------------------------------
NET INVESTMENT INCOME 1,719
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized gain on sales of investments 33,886
- -----------------------------------------------------------------------
Change in net unrealized appreciation on investments (5,401)
- -----------------------------------------------------------------------
Net gain on investments 28,485
- -----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $30,204
- -----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the six months ended May 31, 1999 (unaudited) and for the year ended
November 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 1,719 2,094
- -------------------------------------------------------------------------------------------
Net realized gain 33,886 20,814
- -------------------------------------------------------------------------------------------
Changes in net unrealized appreciation (5,401) 14,228
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 30,204 37,136
- -------------------------------------------------------------------------------------------
Distribution from net investment income (1,456) (1,851)
- -------------------------------------------------------------------------------------------
Distribution from net realized gain (20,809) (14,639)
- -------------------------------------------------------------------------------------------
Total dividends to shareholders (22,265) (16,490)
- -------------------------------------------------------------------------------------------
Net increase from capital share transactions 45,584 64,952
- -------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 53,523 85,598
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------
Beginning of period 263,713 178,115
- -------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment income
of $927 and $664, respectively) $317,236 263,713
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Contrarian Fund (the fund) is a separate
series of Kemper Value Series, Inc. (KVS), an
open-end management investment company organized as
a corporation in the state of Maryland. KVS is
authorized to issue three billion shares of $.01
par value common stock.
The fund currently offers four classes of shares.
Class A shares are sold to investors subject to an
initial sales charge. Class B shares are sold
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares (none sold
through May 31, 1999) are offered to a limited
group of investors, are not subject to initial or
contingent deferred sales charges and have lower
ongoing expenses than other classes. Differences in
class expenses will result in the payment of
different per share income dividends by class. All
shares of the fund have equal rights with respect
to voting, dividends and assets, subject to class
specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Portfolio securities 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 fair market value as determined in good
faith by the Valuation Committee of the Board of
Directors.
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 and includes discount
amortization on money market instruments. Realized
gains and losses from investment transactions are
reported on an identified cost basis.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the close of the Exchange. The net
asset value per
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 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 quarterly
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.
- --------------------------------------------------------------------------------
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 $1,044,000 for the six
months ended May 31, 1999.
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,
1999 are $38,000.
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, 1999 are $580,000.
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 paid by the fund to
KDI for the six months ended May 31, 1999 are
$328,000.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the fund. Under the agreement,
KSvC received shareholder services fees of $442,000
for the six months ended May 31, 1999.
OFFICERS AND DIRECTORS. Certain officers or
directors of the fund are also officers or
directors of Scudder Kemper. For the six months
ended May 31, 1999, the fund made no payments to
its officers and incurred directors' fees of $4,000
to independent directors.
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended May 31, 1999, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $160,331
Proceeds from sales 163,104
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MAY 31, 1999 NOVEMBER 30, 1998
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 2,424 $ 53,937 2,870 $ 60,856
---------------------------------------------------------------------------------
Class B 1,239 27,276 1,698 36,004
---------------------------------------------------------------------------------
Class C 253 5,517 435 9,096
---------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDEND
Class A 584 12,202 475 9,293
---------------------------------------------------------------------------------
Class B 383 7,998 307 5,943
---------------------------------------------------------------------------------
Class C 46 958 24 470
---------------------------------------------------------------------------------
SHARES REDEEMED
Class A (2,041) (45,294) (1,776) (37,255)
---------------------------------------------------------------------------------
Class B (639) (13,912) (737) (15,339)
---------------------------------------------------------------------------------
Class C (141) (3,098) (202) (4,116)
---------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 166 3,691 247 5,225
---------------------------------------------------------------------------------
Class B (166) (3,691) (248) (5,225)
---------------------------------------------------------------------------------
NET INCREASE FROM CAPITAL
SHARE TRANSACTIONS $ 45,584 $ 64,952
---------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------------------------
CLASS A
---------------------------------------------------------
SIX MONTHS ELEVEN MONTHS YEAR ENDED
ENDED YEAR ENDED ENDED DECEMBER 31,
MAY 31, NOVEMBER 30, NOVEMBER 30, -------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------
Net asset value, beginning of period $22.90 21.13 16.93 16.20 12.18
- ----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .17 .28 .23 .23 .26
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain 2.16 3.48 4.25 2.07 5.05
- ----------------------------------------------------------------------------------------------------
Total from investment operations 2.33 3.76 4.48 2.30 5.31
- ----------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .16 .27 .20 .22 .24
- ----------------------------------------------------------------------------------------------------
Distribution from net realized gain 1.78 1.72 .08 1.35 1.05
- ----------------------------------------------------------------------------------------------------
Total dividends 1.94 1.99 .28 1.57 1.29
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $23.29 22.90 21.13 16.93 16.20
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 11.22% 19.51 26.58 14.42 44.57
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------
Expenses 1.42% 1.37 1.35 1.23 1.25
- ----------------------------------------------------------------------------------------------------
Net investment income 1.56% 1.36 1.47 1.56 1.85
- ----------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------
Expenses 1.42% 1.37 1.35 1.25 1.66
- ----------------------------------------------------------------------------------------------------
Net investment income 1.56% 1.36 1.47 1.54 1.44
- ----------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------------------------
CLASS B
----------------------------------------------------------------
SIX MONTHS YEAR ELEVEN MONTHS YEAR SEPT. 11
ENDED ENDED ENDED ENDED TO
MAY 31, NOV. 30, NOV. 30, DEC. 31, DEC. 31,
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $22.82 21.08 16.92 16.20 15.26
- -----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .08 .08 .08 .11 .07
- -----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain 2.16 3.46 4.22 2.07 1.85
- -----------------------------------------------------------------------------------------------------------
Total from investment operations 2.24 3.54 4.30 2.18 1.92
- -----------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .06 .08 .06 .11 .07
- -----------------------------------------------------------------------------------------------------------
Distribution from net realized gain 1.78 1.72 .08 1.35 .91
- -----------------------------------------------------------------------------------------------------------
Total dividends 1.84 1.80 .14 1.46 .98
- -----------------------------------------------------------------------------------------------------------
Net asset value, end of period $23.22 22.82 21.08 16.92 16.20
- -----------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 10.77% 18.32 25.44 13.61 12.83
- -----------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------------------------
Expenses 2.25% 2.31 2.26 2.11 2.00
- -----------------------------------------------------------------------------------------------------------
Net investment income .73% .42 .56 .68 .88
- -----------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------------------------
Expenses 2.25% 2.31 2.26 2.34 2.36
- -----------------------------------------------------------------------------------------------------------
Net investment income .73% .42 .56 .45 .52
- -----------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------------------
CLASS C
-------------------------------------------------------------
SIX MONTHS YEAR ELEVEN MONTHS YEAR SEPT. 11
ENDED ENDED ENDED ENDED TO
MAY 31, NOV. 30, NOV. 30, DEC. 31, DEC. 31,
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $22.82 21.06 16.90 16.20 15.26
- --------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .05 .05 .06 .11 .08
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized gain 2.16 3.47 4.20 2.05 1.85
- --------------------------------------------------------------------------------------------------------
Total from investment operations 2.21 3.52 4.26 2.16 1.93
- --------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .05 .04 .02 .11 .08
- --------------------------------------------------------------------------------------------------------
Distribution from net realized gain 1.78 1.72 .08 1.35 .91
- --------------------------------------------------------------------------------------------------------
Total dividends 1.83 1.76 .10 1.46 .99
- --------------------------------------------------------------------------------------------------------
Net asset value, end of period $23.20 22.82 21.06 16.90 16.20
- --------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 10.65% 18.25 25.26 13.51 12.85
- --------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------
Expenses 2.42% 2.40 2.47 2.12 1.95
- --------------------------------------------------------------------------------------------------------
Net investment income .56% .33 .35 .67 .93
- --------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------
Expenses 2.42% 2.40 2.47 2.80 2.31
- --------------------------------------------------------------------------------------------------------
Net investment income (loss) .56% .33 .35 (.01) .57
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS YEAR ELEVEN MONTHS YEAR ENDED
ENDED ENDED ENDED DECEMBER 31,
MAY 31, NOVEMBER 30, NOVEMBER 30, ---------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in
thousands) $317,236 263,713 178,115 77,592 25,482
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 127% 64 77 95 30
- ----------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
Total return does not reflect the effect of any sales charges. Scudder Kemper
Investments, Inc. waived a portion of its management fee and absorbed certain
operating expenses of the fund through the period ended December 31, 1996. The
Other ratios to average net assets are computed without this expense waiver or
absorption. Data for the six months ended May 31, 1999 is unaudited.
20
<PAGE> 21
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 17, 1998, a special shareholders' meeting was held and adjourned to
January 15, 1999. Kemper Contrarian Fund shareholders were asked to vote on two
separate issues: approval of the new Investment Management Agreement between the
fund and Scudder Kemper Investments, Inc., and to modify or eliminate certain
policies and to eliminate the shareholder approval requirements as to certain
other matters. The following are the results.
1) Approval of the new Investment Management Agreement between the fund and
Scudder Kemper Investments, Inc. This item was approved.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
6,214,538 119,544 259,743
</TABLE>
2) To modify or eliminate certain policies and to eliminate the shareholder
approval requirements as to certain other matters. These items were approved.
<TABLE>
<CAPTION>
Diversification
For Against Abstain
<S> <C> <C>
5,229,798 295,370 555,199
</TABLE>
<TABLE>
<CAPTION>
Borrowing
For Against Abstain
<S> <C> <C>
5,224,996 300,172 555,199
</TABLE>
<TABLE>
<CAPTION>
Senior securities
For Against Abstain
<S> <C> <C>
5,230,903 294,265 555,199
</TABLE>
<TABLE>
<CAPTION>
Concentration
For Against Abstain
<S> <C> <C>
5,229,251 295,917 555,199
</TABLE>
<TABLE>
<CAPTION>
Underwriting of securities
For Against Abstain
<S> <C> <C>
5,225,299 299,869 555,199
</TABLE>
<TABLE>
<CAPTION>
Investment in real estate
For Against Abstain
<S> <C> <C>
5,224,310 300,858 555,199
</TABLE>
<TABLE>
<CAPTION>
Purchase of commodities
For Against Abstain
<S> <C> <C>
5,225,685 299,483 555,199
</TABLE>
<TABLE>
<CAPTION>
Lending
For Against Abstain
<S> <C> <C>
5,227,205 297,963 555,199
</TABLE>
<TABLE>
<CAPTION>
Margin purchases and short sales
For Against Abstain
<S> <C> <C>
5,216,688 308,480 555,199
</TABLE>
<TABLE>
<CAPTION>
Pledging of assets
For Against Abstain
<S> <C> <C>
5,219,195 305,973 555,199
</TABLE>
<TABLE>
<CAPTION>
Restricted and illiquid securities
For Against Abstain
<S> <C> <C>
5,210,868 314,300 555,199
</TABLE>
<TABLE>
<CAPTION>
Investment in mineral exploration
For Against Abstain
<S> <C> <C>
5,214,922 310,246 555,199
</TABLE>
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
DIRECTORS&OFFICERS
DIRECTORS OFFICERS
JAMES E. AKINS MARK CASADY STEVEN T. STOKES
Director President Vice President
JAMES R. EDGAR PHILIP J. COLLORA LINDA J. WONDRACK
Director Vice President and Vice President
Secretary
ARTHUR R. GOTTSCHALK MAUREEN E. KANE
Director JOHN R. HEBBLE Assistant Secretary
Treasurer
FREDERICK T. KELSEY CAROLINE PEARSON
Director ANN M. MCCREARY Assistant Secretary
Vice President
THOMAS W. LITTAUER ELIZABETH C. WERTH
Director and Vice President KATHRYN L. QUIRK Assistant Secretary
Vice President
FRED B. RENWICK BRENDA LYONS
Director THOMAS F. SASSI Assistant Treasurer
Vice President
JOHN G. WEITHERS
Director CORNELIA SMALL
Vice President
- ------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- ------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- ------------------------------------------------------------------------------
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
- ------------------------------------------------------------------------------
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02109
- ------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[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.
KCF - 3 (7/27/99) 1080120
