<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED NOVEMBER 30, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[MORNINGSTAR RATINGS LOGO]
Seeks long-term capital appreciation
KEMPER
CONTRARIAN FUND
"... Our contrarian investment discipline led us to
a number of stocks that garnered robust returns,
despite the choppy market climate. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
AT A GLANCE
Contents
3
Economic Overview
5
Performance Update
9
Terms To Know
11
Industry Sectors
12
Largest Holdings
13
Portfolio Of
Investments
15
Report Of
Independent Auditors
16
Financial Statements
18
Notes To
Financial Statements
22
Financial Highlights
- --------------------------------------------------------------------------------
KEMPER CONTRARIAN FUND
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED NOVEMBER 30, 1998
(UNADJUSTED FOR ANY SALES CHARGE).
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C FUNDS CATEGORY AVERAGE*
- ----------------------- ---------------------- ---------------------- -----------------------
<S> <C> <C> <C>
19.51% 18.32% 18.25% 12.35%
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
* LIPPER ANALYTICAL SERVICES, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES
IN NET ASSET VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE
EFFECT OF SALES CHARGES AND, IF THEY HAD, RESULTS MAY HAVE BEEN LESS
FAVORABLE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE
- ------------------------------------------------------------------------------------------
AS OF AS OF
11/30/98 11/30/97
- ------------------------------------------------------------------------------------------
<S> <C> <C>
KEMPER CONTRARIAN FUND CLASS A $22.90 $21.13
- ------------------------------------------------------------------------------------------
KEMPER CONTRARIAN FUND CLASS B $22.82 $21.08
- ------------------------------------------------------------------------------------------
KEMPER CONTRARIAN FUND CLASS C $22.82 $21.06
- ------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER CONTRARIAN FUND
RANKINGS AS OF 11/30/98
- --------------------------------------------------------------------------------
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 #153 of #180 of #183 of
744 funds 744 funds 744 funds
- --------------------------------------------------------------------------------------------------
3-YEAR #170 of #222 of #228 of
459 funds 459 funds 459 funds
- --------------------------------------------------------------------------------------------------
5-YEAR #45 of N/A N/A
298 funds
- --------------------------------------------------------------------------------------------------
10-YEAR #65 of N/A N/A
146 funds
- --------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
DURING THE FISCAL YEAR, KEMPER CONTRARIAN FUND MADE THE FOLLOWING DISTRIBUTIONS
PER SHARE:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
DIVIDEND $0.2675 $0.0761 $0.0427
- ---------------------------------------------------------------------------------------------
SHORT-TERM CAPITAL GAIN $0.92 $0.92 $0.92
- ---------------------------------------------------------------------------------------------
LONG-TERM CAPITAL GAIN $0.80 $0.80 $0.80
- ---------------------------------------------------------------------------------------------
</TABLE>
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR EQUITY STYLE BOX
- --------------------------------------------------------------------------------
Source: Morningstar, Inc. Chicago, IL. 312-696-6000. The Morningstar Style Box
is based on a software release date of 11/30/98. The Equity Style Box placement
is based on two variables: a fund's market capitalization relative to the
movements of the market and a fund's valuation, which is calculated by comparing
the stocks in the fund's portfolio with the most relevant of the three
market-cap groups.
PLEASE NOTE THAT STYLE BOXES DO NOT REPRESENT AN EXACT ASSESSMENT OF RISK AND DO
NOT REPRESENT FUTURE PERFORMANCE. THE FUND'S PORTFOLIO CHANGES FROM DAY-TO-DAY.
A LONGER-TERM VIEW IS REPRESENTED BY THE FUND'S MORNINGSTAR CATEGORY, WHICH IS
BASED ON ITS ACTUAL INVESTMENT STYLE AS MEASURED BY ITS UNDERLYING PORTFOLIO
HOLDINGS OVER THE PAST THREE YEARS. 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 BACHELOR'S DEGREE AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND A MASTER'S DEGREE IN ECONOMICS FROM BROWN UNIVERSITY IN
PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS WITH THE HARRIS
BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT MANAGER FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $245 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES, AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS.
DEAR SHAREHOLDERS,
If you're like most investors, you may be wondering if you should allow yourself
to breathe a sigh of relief as 1999 begins. After several months of generally
declining stock prices and extreme volatility, the U.S. stock market seems to
have rediscovered its resiliency. In the fourth quarter, the Standard & Poor's
500, an unmanaged index generally representative of the U.S. stock market,
bounced back into the 1200-point range, up approximately 20 percent from its
third-quarter low of 957. The blue chip Dow Jones Industrial Average enjoyed a
comparable rise. Investor confidence suddenly overtook the investor uncertainty
that had plagued the markets at summer's end. While financial volatility appears
to be continuing, the mood for investors definitely has improved.
To what can we attribute the change? Simply this -- the cumulative effect of
some good news, not the least of which was a long-awaited series of interest
rate reductions by the Federal Reserve Board. In September, the Fed reduced the
federal funds rate a modest quarter of a percentage point, however, this first
cut disappointed some investors who were expecting a more dramatic gesture. Two
weeks later, the Fed came back with an additional quarter of a percentage point
reduction. This was an unexpected cut that seemed to have a positive effect on
Wall Street. In November, a third rate cut of a quarter of a percentage point
also boosted investor confidence. Investors were further surprised by
better-than-expected corporate earnings reports early in the fourth quarter.
Finally, economic data regarding retail sales, employment and home sales
suggested continued economic growth and very little prospect of recession.
In many ways, 1998's market activity provides a study in how investor
perceptions can upstage economic realities. Certainly, the tumultuous lessons of
Russia and Southeast Asia renewed investors' awareness of risk in 1998, which
was an important wake-up call. At all times, investors must understand and
consider risk. But over the course of 1998, U.S. economic fundamentals have
essentially remained strong. In fact, inflation has remained low for the entire
year. Economic growth has been solid. Our consumer confidence remained fairly
high, although not quite as high as in 1997. The nation's budget surplus for
1998 came in at $60 billion, with another budget surplus expected for fiscal
1999.
Growth in the nation's gross domestic product (GDP), which represents the
total value of all goods and services produced within the U.S. economy, has
remained remarkably steady. GDP is expected to have grown at an annualized rate
of 3 percent for the second half of 1998 and is anticipated to hover around 2
percent to 2.5 percent for the first half of 1999. The consumer price index
(CPI) remains in a range of 1.5 percent to 2 percent.
While employment growth has slowed a bit, the slowdown in wage gains may
provide the Fed with an incentive to reduce interest rates even further. U.S.
corporate profits have generally been flat, so we may see a decrease in capital
spending. Banks appear to be only a little less willing to lend, so the threat
of a general credit crunch is minimal.
Investors may take comfort in the fact that the U.S. markets and economy have
withstood the test of 1998's tumultuous third quarter. Similarly, while certain
countries, such as Malaysia, Indonesia, Brazil and Russia, are still suffering
from economic crises, others, including the Philippines, South Korea, Thailand
and China, appear to have survived. As long as the Fed and the Group of Seven
leading industrial nations (G7) are committed to avoiding recession on national
and global levels respectively, investors have a good chance of experiencing a
more stable economic environment.
At home, there has been somewhat of a slowdown in manufacturing, as reduced
U.S. exports reflect foreign economic turmoil. But the global impact of the
Asian crisis still has not hit the U.S. as hard as was expected. Indeed, Asian
turmoil has not affected U.S. trade as much as it has lowered import prices and
helped reduce global interest rates.
In Europe, the much anticipated Economic and Monetary Union (EMU) is on the
move, with a focus on more flexibility and growth potential for the region.
European equities may be the beneficiaries of increased spending, as governments
seek to foster growth and reduce unemployment.
3
<PAGE> 4
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND SHAREHOLDER
DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR DEFLATION, CREDIT
EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR
INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE 10-YEAR
TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES. THE OTHER DATA
REPORT YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (12/31/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-year Treasury rate(1) 4.65 5.50 5.81 6.30
Prime rate(2) 7.75 8.50 8.50 8.25
Inflation rate(3)* 1.55 1.75 1.89 3.18
The U.S. dollar(4) -2.45 9.54 10.26 4.36
Capital goods orders(5)* 7.82 9.52 8.53 4.82
Industrial production(5)* 1.47 5.10 6.56 5.32
Employment growth(6)* 2.28 2.65 2.70 2.33
</TABLE>
(1) Falling interest rates in recent years have been a big plus for
financial assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6 percent. The low, moderate inflation of the
last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of November 30, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
If you're a long-term investor in today's short-term world, go ahead and
breathe that sigh of relief -- but be on your toes in 1999. It's going to be an
interesting year as the EMU emerges, the race for the next presidency heats up
and the year 2000 approaches. And, remember: Investors don't like uncertainty,
be it economic or political. More trauma in the White House, continuing disputes
with Iraq or any other hints of crisis could prompt a downward spike in our
markets in the short run. In the long run, the keys to investment performance
remain moderate growth, low inflation and limited taxation and regulation.
Thank you for choosing to invest with Kemper Funds. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ John E. Silvia
JOHN E. SILVIA
The information contained in this piece has been taken from sources believed to
be reliable, but the accuracy of the information is not guaranteed. The opinions
and forecasts expressed are those of Dr. John E. Silvia as of January 4, 1999,
and may not actually come to pass. This information is subject to change. No
part of this material is intended as an investment recommendation.
4
<PAGE> 5
PERFORMANCE UPDATE
[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, INC. 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.
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. THIS REPORT MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS WHEN
USED AS SALES LITERATURE.
AGAINST THE BACKDROP OF AN UNCERTAIN MARKET CLIMATE, TOM SASSI AND FRED GASKIN
STEERED KEMPER CONTRARIAN FUND TO A ONE-YEAR RETURN THAT HANDILY OUTPACED THE
PEER GROUP AVERAGE. BELOW, LEAD PORTFOLIO MANAGER TOM SASSI DISCUSSES RECENT
MARKET CONDITIONS AND PROVIDES AN OVERVIEW OF THE FUND'S PERFORMANCE AND
CONTRARIAN INVESTMENT DISCIPLINE.
Q DURING THE PAST YEAR, THE MARKETS HAVE BEEN UNUSUALLY VOLATILE. COULD YOU
GIVE US AN OVERVIEW OF THIS CONSTANTLY CHANGING TERRAIN?
A Volatility has certainly become par for the course. Throughout the year,
the stock market moved dramatically -- both up and down. Investors grappled with
the potential impact of a Southeast Asian economic meltdown, the Russian debt
default, Latin American economic weakness and Japan's recession.
As the fiscal year began in December 1997, investors were returning to the
market after the Gray Monday correction. The International Monetary Fund's (IMF)
bailout plans for the flagging Asian economies had been well received by
investors, and domestic corporate earnings were stronger than expected. As we
entered 1998, we were back in a "Goldilocks" environment: Investors saw the U.S.
economy as neither too hot nor too cold, but just right. The S&P 500 pushed
upward dramatically.
As the summer progressed, it became clear that the three bears returned.
By mid-summer, investors began to perceive that the Asian economic situation was
not resolved, and could exert a serious and negative impact on the U.S. markets.
In August, the Russian debt default led to a global market meltdown. The general
perception was that investing had become even more perilous. Concerns about
Latin America, Southeast Asia, Japan and Russia rippled across every sector of
the stock market.
Once again, though, the pendulum quickly swung back. Similar to the months
following Gray Monday, the markets rebounded briskly after the Russian crisis.
The Federal Reserve lowered interest rates, and more than 30 nations followed
suit. The IMF and the G7 nations (see Terms to Know) demonstrated a commitment
to shoring up the economy. These moves sparked renewed confidence on Wall
Street. But even during this more positive market climate, choppiness continued,
and spiking volatility drove market sectors and stocks.
Q BY AND LARGE, HOW DID INVESTORS RESPOND TO THE MARKET TURMOIL?
A A narrow, "two-tiered" market emerged. Let me elaborate. In the climate of
multi-faceted uncertainty, investors flocked to an elite group of stocks that
offered perceived stability. These stocks were those of extremely large,
domestic, growth-oriented, "household name" companies. Investors were willing to
pay dearly for these stocks, believing that these companies could withstand the
international turmoil. Investors pushed the stock prices of this exclusive group
to extraordinarily high levels.
Meanwhile, as investors ran toward mega-cap names, they fled from
smaller-cap stocks and from stocks with perceived or real exposure to
international markets. In the edgy market climate, stocks that fell
5
<PAGE> 6
PERFORMANCE UPDATE
short of earnings expectations suffered the market's severe disfavor.
The resulting effect was that the market had two distinct levels, or
tiers. A scant group of mega-cap stocks fell into the first tier, and drove the
market's performance. The vast majority of stocks landed into the second tier
and struggled.
This exaggerated split provides an essential framework for evaluating
general statistics about "the market." For instance, the Standard & Poor's 500
Index is often cited as a measure of the market. The S&P 500 is a
capitalization- weighted index. That means that the return of each stock is
weighted in proportion to the size of the company. This year, the index's
overall return hasn't been a true gauge of the overall market so much as it has
been a measure of the performance of an exclusive group of the world's largest
companies. For instance, for the year to date period through November 1998, the
capitalization- weighted return of the index exceeds the equally weighted return
by more than 12 percentage points.
Q DESPITE THIS TURMOIL, KEMPER CONTRARIAN FUND PERFORMED WELL, DIDN'T IT?
A We're pleased to report that Kemper Contrarian Fund wrapped up the fiscal
year in the top quartile of its peer group. (See page one for complete Lipper
rankings.) For the one-year period ended November 30, 1998, the fund gained
19.51 percent (Class A shares, unadjusted for any sales charges). In comparison,
the average return for the Lipper Growth & Income category was 12.35 percent.
In comparison, the S&P 500, a growth-oriented index which tracks the
largest 500 companies, was up 23.68 percent for the one-year period. The Russell
1000 Value Index*, a broader, value-oriented benchmark, earned 15.09 percent.
Over the long-term, we do set our sights on outperforming both indexes as well
as the fund's peers. Given the two-tier market and the fund's valuation
discipline, beating the S&P 500 would have been a very difficult feat in 1998.
* THE RUSSELL 1000 VALUE INDEX IS AN INDEX OF LARGE CAP VALUE STOCKS.
Q THE MARKET FAVORED GROWTH STOCKS FOR MOST OF THE YEAR, BUT KEMPER
CONTRARIAN FUND IS MANAGED ACCORDING TO A VALUE-ORIENTED DISCIPLINE. TO WHAT DO
YOU ATTRIBUTE THE FUND'S SUCCESS?
A Our contrarian investment discipline led us to a number of stocks that
garnered robust returns, despite the choppy market climate. The fund's top ten
performers for the fiscal year rose substantially. Meanwhile, the fund didn't
suffer very many serious casualties. Several of the fund's larger positions were
among those that reaped hearty returns. Also, from July through October, the
fund held up better than many of its peers.
In general terms, the fund's focus on large-cap, quality companies served
it in good stead, as the market had a large-cap, quality bias. The fund's
top-performing stocks were diversified across industries. The leaders included
Ford Motor Company (automobiles), American Home Products (pharmaceuticals), C.R.
Bard (medical products and supplies), McDonald's (restaurants), Xerox (imaging
technology), and Amoco (international oil operations).
Q YOU'VE MENTIONED THAT THE INVESTMENT STRATEGY WAS ESSENTIAL TO THE
FUND'S SUCCESS. COULD YOU SUMMARIZE THE PRINCIPLES OF THAT DISCIPLINE?
A In a nutshell, our approach to equity investing strives to be
conservative in nature on a relative basis, risk-averse, value-oriented, and
contrarian in execution. Our philosophy is to conserve principal when the
markets go down and to enhance returns when markets rise.
We evaluate a variety of factors to select those stocks that we believe
have the best potential to achieve our goal. We focus on value stocks -- those
that we believe are temporarily undervalued relative to a measure of their
worth. One of the most important measures we consider is a stock's
price-to-earnings (P/E) ratio. Historically lower-P/>E stocks have outperformed
the market over the long term. Because these stocks embody lower expectations,
low P/E stocks can appreciate markedly as fundamentals rise over the long-term.
Moreover, because their prices are already low, these stocks might fall less
significantly in declining markets. So, theoretically, the upside potential of
these stocks exceeds the downside.
Additionally, we look at a variety of other factors, seeking quality
companies with market capitalizations of $1 billion or more, strong financial
positions, low price-to-book value ratios, and high earnings and dividend growth
relative to the S&P 500.
6
<PAGE> 7
PERFORMANCE UPDATE
As contrarian investors, we don't run with the Wall Street herd. We take a
patient approach. We invest in stocks that are out-of-favor for what we believe
to be the wrong reasons, or for short-term, correctable reasons. We sell stocks
when they become popular and when we determine that their price has outstripped
their value, or when the fundamentals deteriorate. It's like getting to a party
early. Things may be quiet at first, but you get the choice appetizers, good
seats, and a chance to listen to the band. The contrarian investor will have
already had a nice night out before the crowd rushes in, and can leave without
getting stampeded by the folks with the lampshades on their heads.
Q COULD YOU HIGHLIGHT SOME STOCKS THAT MEET YOUR INVESTMENT CRITERIA?
A Certainly. We believe that Minnesota Mining and Manufacturing (3M) is an
attractive value-stock opportunity. 3M may be best known as the company that
makes Scotch Tape and Post-It Notes, but it is also diversified into many other
areas, including auto parts, electronics and health-care products. Hindered by
its global exposure and disappointing short-term earnings, the stock has seen
its price drop to $76 a share, down from $105 last year. However, we feel that
the general consensus of Wall Street neglects to fairly value 3M's true worth.
The company has good long-term fundamentals, and has paid a high dividend yield
to its shareholders. In fact, 3M has offered rising dividends for the last 40
years! Should the global market accelerate, 3M could do quite well. And, given
its low P/E ratio, we believe that the stock does not have substantial downside
risk.
Hewlett-Packard, one of the few technology stocks in the portfolio, also
has many attractive value characteristics. Hewlett-Packard is a premier
technology company trading at a below-market P/E. That makes it an uncommon
find. The company announced that there would be a decrease in short-term
earnings, and stock analysts lowered their expectations. That stock has dropped
considerably during the past year, to about $62 a share, down from $82. However,
Hewlett-Packard is managing costs well, and its PC product line, printers and
servers are as good as anyone else's in the business. Similar to 3M, an earnings
surprise could really help Hewlett-Packard's stock, and at its current price, we
believe there's not great downside potential.
Q THE FUND HAS ABOUT 60 HOLDINGS. THAT'S A MODEST AMOUNT, RELATIVE TO MANY
OTHER FUNDS. WHAT FACTORS DO YOU CONSIDER WHEN DECIDING ON THE NUMBER OF STOCKS
TO INCLUDE IN THE PORTFOLIO?
A Our goal is to create a portfolio that is diversified, but not diluted.
We want to make sure that we can carefully and thoroughly research each stock in
the portfolio. A portfolio of sixty or so stocks is manageable, while still
offering good diversification. Kemper Contrarian Fund has exposure to 10 broad
market sectors, including finance, consumer nondurables, basic industries and
technology. (See page 11.) Moreover, the fund is invested in stocks from more
than 30 industry subsectors, ranging from iron and steel and electrical
equipment to department stores and apparel.
Also, in a narrow market climate, we believe that it is especially
important to not fill a portfolio with too many stocks. Only a handful of stocks
have what it takes to thrive in this sort of challenging market climate. We
think that we serve shareholders best by targeting our resources on finding
those stocks that have the best potential to succeed, rather than over-hedging
our bets.
Q YOU'VE GIVEN US AN OVERVIEW OF WHAT YOU LOOK FOR WHEN YOU PURCHASE
STOCKS. WHAT FACTORS DO YOU CONSIDER WHEN YOU SELL A STOCK?
A We also use contrarian value principles to guide our "exit" from a
stock. As a stock's price begins to rise, we scrutinize a variety of factors,
including earnings growth, Wall Street interest and fundamentals. Because we
know that shareholders are concerned about tax efficiency, we also consider the
capital gains that an exit could generate. When these factors, as well as other
criteria, signal that the stock is no longer a bargain, we reduce and eventually
eliminate the stock from the portfolio.
Sometimes, the decision to sell a security can be particularly
challenging. For instance, based on its P/E ratio, General Electric is a stock
that you might be surprised to see in a value-oriented portfolio. We bought the
stock several years ago, when its P/E was considerably lower. Our analysis of
General Electric's long-term strength proved correct, and its stock price began
to rise. We decided to hold on to the stock because the fundamentals remained
impressive. We held tight because we felt that investor interest in the stock
could
7
<PAGE> 8
PERFORMANCE UPDATE
continue to increase, providing an improved opportunity to sell into momentum.
Recently, we began paring back the fund's position in this successful
investment.
Q PHILIP MORRIS IS THE FUND'S LARGEST HOLDING, AS IT WAS AT THE START OF
THE FISCAL YEAR AND AT THE SEMIANNUAL MARK. COULD YOU DISCUSS WHAT HAS MADE THE
STOCK AN ATTRACTIVE CHOICE FOR THE PORTFOLIO?
A Philip Morris has been an excellent example of a contrarian value stock.
Litigation concerns made the stock unattractive to many Wall Street investors.
As I mentioned in the semiannual report, the stock did take a toll on the fund's
performance during the first half of the fiscal year. Because the firm offered
strong fundamentals, good longer-term growth prospects, a low P/E ratio and a
very high dividend yield, we believed that the right choice was to be patient
and remain invested. In fact, we even added to the stock on price weakness.
I'm pleased to report that our patience paid off. More recently, investors
have perceived that the worst of the regulatory problems have passed, and
they've returned to Philip Morris with renewed interest. This translated into a
tidy profit for the fund. Now the stock trades at more than $50 a share, making
it less attractive than it was when it was $35 a share. However, we continue to
hold Philip Morris because it remains a quality company, offering good dividend
growth at a low price.
Q THERE HAVE BEEN REPEATED BROAD-BASED MARKET CORRECTIONS. WHICH OF THE
FUND'S STOCKS FALTERED IN THIS TURMOIL?
A Despite the overall strong performance of the fund, some stocks did fall
short. Just as leading stocks were spread across sectors, laggards were also
from a variety of industries. In the wake of the Russian debt crisis, many
financial services stocks tumbled, with Bankers Trust the most notable example
in the portfolio. Decreased global demand hurt companies involved in basic
materials. For instance, paper producers (Louisiana-Pacific and Georgia-Pacific)
dampened the fund's returns, as did steel-product manufacturer Nucor. Atlantic
Richfield also suffered, as oil prices languished amid concerns about oversupply
and an unusually warm climate.
Q THE RUSSIAN DEBT DEFAULT TOOK A TOLL ON THE FINANCIAL SERVICES SECTOR.
HAS THIS CHANGED YOUR OUTLOOK FOR FINANCIAL SERVICES STOCKS?
A The Russian debt default did have a significant effect on the sector,
and global concerns remain. However, financial services stocks remain a central
theme in the fund. In fact, compared to the S&P 500, the fund holds a greater
percentage of its assets in financial services stocks.
After the Russian debt default, many investors punished financial services
stocks indiscriminately, fleeing from stocks that didn't have significant
international exposure. In contrast, we take a stock-by-stock approach. Our
analysis indicates that many financial services stocks offer strong fundamentals
and good value relative to their dividend yields and P/E ratios. That makes for
the risk/reward profile we require. For instance, we added to Bankers Trust when
its price dropped, and were well positioned to profit when Deutsche Bank
announced its acquisition proposal.
Q DURING THE PAST YEAR, ENERGY STOCKS HAVE BEEN POPULAR VALUE-STOCK FARE.
HOW ARE YOU USING ENERGY STOCKS IN THE PORTFOLIO?
A The fund had been overweighting energy relative to the S&P 500, but is
now underweighted in energy stocks. We've been reducing the fund's exposure to
large, integrated, energy providers such as Amoco. The stock has contributed
solid returns to the fund, rising from $40 to $50 a share in the wake of the
announced merger with British Petroleum. At the higher price, the stock's
forward rate of return no longer strikes us as a premium value.
Oil-service stocks, such as Schlumberger, could offer attractive
opportunities. The market has pummeled these stocks, and there are signs that
some oil-service stocks may have slid as far as they are going to. As contrarian
investors, we're keeping an eye out for quality companies among this group of
out-of-favor stocks.
8
<PAGE> 9
PERFORMANCE UPDATE
Q DO YOU THINK THAT THE MARKET TURBULENCE WILL LESSEN ANYTIME SOON?
A Investors should be prepared for volatility to continue. Global economic
uncertainty continues to weigh heavily in investors' minds, and we can't predict
when the market will broaden out into a more typical pattern. There are many
economic factors that have been received optimistically by investors, notably
low interest rates, low inflation and cohesive plans among nations to stave off
global recession.
As portfolio managers, we feel that we best serve shareholders by focusing
on stock selection, rather than by trying to guess the market's next move. We
continue to have a high degree of confidence that the fund's contrarian,
risk-averse strategy has the potential to generate compelling long-term
opportunities for shareholders.
TERMS TO KNOW
GRAY MONDAY On Monday, October 27, 1997, turmoil in Southeast Asian markets
triggered a one-day drop of seven percent in the U.S. equity market.
IMF AND G7 NATIONS Two international groups focusing on international economics
and monetary policy. The International Monetary Fund (IMF) is an agency of the
United Nations. The Group of Seven (G7) is an economic alliance of seven leading
nations, including the United States.
PRICE-TO-EARNINGS (P/E) RATIO A company's stock price divided by its earnings
per share for the past four quarters, also referred to as its multiple.
VALUE STOCK 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.
WALL STREET Wall Street in New York City is the location of a "complex of
financial institutions." It is the traditional center of stock market activity
in the United States. "Wall Street" is also used frequently to refer to investor
consensus or action in the U.S.
9
<PAGE> 10
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED NOVEMBER 30, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 3-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
KEMPER CONTRARIAN FUND CLASS A 12.63% 19.17% 19.22% 15.08% 14.61% (since 3/18/88)
..............................................................................................................
KEMPER CONTRARIAN FUND CLASS B 15.32 19.99 n/a n/a 21.69 (since 9/11/95)
..............................................................................................................
KEMPER CONTRARIAN FUND CLASS C 18.25 20.35 n/a n/a 21.99 (since 9/11/95)
..............................................................................................................
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER CONTRARIAN FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000
investment in Class A shares from
3/18/88 to 11/30/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER CONTRARIAN FUND STANDARD & POOR'S 500
CLASS A(1) STOCK INDEX+ CONSUMER PRICE INDEX++
---------------------- --------------------- ----------------------
<S> <C> <C> <C>
3/18/88 10000.00 10000.00 10000.00
9444.00 10697.00 10129.00
9557.00 10732.00 10283.00
10081.00 11060.00 10343.00
10598.00 11843.00 10498.00
11139.00 12887.00 10652.00
12074.00 14266.00 10730.00
11925.00 14559.00 10824.00
11768.00 14121.00 11047.00
12539.00 15009.00 11150.00
9957.00 12948.00 11391.00
11201.00 14108.00 11485.00
13317.00 16155.00 11588.00
12745.00 16117.00 11674.00
13579.00 16978.00 11777.00
12/31/91 14172.00 18399.00 11837.00
14298.00 17935.00 11957.00
14392.00 18275.00 12034.00
14808.00 18851.00 12129.00
15777.00 19798.00 12180.00
16379.00 20663.00 12326.00
16416.00 20762.00 12395.00
16636.00 21298.00 12455.00
17209.00 21791.00 12515.00
16802.00 20966.00 12635.00
17145.00 21054.00 12704.00
17899.00 22082.00 12824.00
12/31/94 17203.00 22078.00 12850.00
18917.00 24226.00 12996.00
20710.00 26536.00 13090.00
22426.00 28644.00 13150.00
24871.00 30367.00 13176.00
25592.00 31997.00 13365.00
25375.00 33432.00 13451.00
26350.00 34466.00 13545.00
28458.00 37337.00 13614.00
29296.00 38340.00 13734.00
33323.00 45029.00 13760.00
36397.00 48400.00 13837.00
36636.00 49790.00 13845.00
41479.00 56732.00 13923.00
40788.00 58604.00 13991.00
37504.00 52784.00 14043.00
11/30/98 43049.00 60545.00 14077.00
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER CONTRARIAN FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000
investment in Class B shares from
9/11/95 to 11/30/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER CONTRARIAN FUND STANDARD & POOR'S 500
CLASS B(1) STOCK INDEX+ CONSUMER PRICE INDEX++
---------------------- --------------------- ----------------------
<S> <C> <C> <C>
9/11/95 10000.00 10000.00 10000.00
10193.90 10422.00 10020.00
11283.50 11049.00 10039.00
11604.00 11642.00 10183.00
11478.30 12164.00 10249.00
11883.20 12540.00 10320.00
12/31/96 12819.60 13585.00 10373.00
13153.80 13950.00 10464.00
14927.60 16383.00 10484.00
16263.30 17610.00 10543.00
12/31/97 16331.90 18116.00 10549.00
18457.10 20641.00 10608.00
18109.80 21323.00 10661.00
16599.90 19205.00 10700.00
11/30/98 18826.00 22029.00 10726.00
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER CONTRARIAN FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000
investment in Class C shares from
9/11/95 to 11/30/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER CONTRARIAN FUND STANDARD & POOR'S 500
CLASS C(1) STOCK INDEX+ CONSUMER PRICE INDEX++
---------------------- --------------------- ----------------------
<S> <C> <C> <C>
9/11/95 10000.00 10000.00 10000.00
10194.00 10422.00 10020.00
11285.00 11049.00 10039.00
11599.00 11642.00 10183.00
11474.00 12164.00 10249.00
11874.00 12540.00 10320.00
12/31/96 12810.00 13585.00 10373.00
13136.00 13950.00 10464.00
14896.00 16383.00 10484.00
16222.00 17610.00 10543.00
12/31/97 16306.00 18116.00 10549.00
18405.00 20641.00 10608.00
18056.00 21323.00 10661.00
16547.00 19205.00 10700.00
11/30/98 18975.00 22029.00 10726.00
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE
RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUES
WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST.
*AVERAGE ANNUAL TOTAL RETURN AND TOTAL RETURN
MEASURE NET INVESTMENT INCOME AND CAPITAL GAIN
OR LOSS FROM PORTFOLIO INVESTMENTS OVER THE
PERIODS SPECIFIED, ASSUMING REINVESTMENT OF ALL
DIVIDENDS AND, WHERE INDICATED, ADJUSTMENT FOR
THE MAXIMUM SALES CHARGE. THE MAXIMUM SALES
CHARGE FOR CLASS A SHARES IS 5.75%. FOR CLASS B
SHARES THE MAXIMUM CONTINGENT DEFERRED SALES
CHARGE (CDSC) IS 4%. CLASS C SHARES HAVE NO
SALES CHARGE ADJUSTMENT, BUT REDEMPTIONS WITHIN
ONE YEAR OF PURCHASE MAY BE SUBJECT TO A
CONTINGENT DEFERRED SALES CHARGE OF 1%. SHARE
CLASSES INVEST IN THE SAME UNDERLYING PORTFOLIO.
AVERAGE ANNUAL TOTAL RETURN REFLECTS ANNUALIZED
CHANGE WHILE TOTAL RETURN REFLECTS AGGREGATE
CHANGE. DURING THE PERIODS NOTED, SECURITIES
PRICES FLUCTUATED. FOR ADDITIONAL INFORMATION,
SEE THE PROSPECTUS AND STATEMENT OF ADDITIONAL
INFORMATION AND THE FINANCIAL HIGHLIGHTS AT THE
END OF THIS REPORT.
(1)PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS
AND ADJUSTMENT FOR THE MAXIMUM SALES CHARGE
FOR CLASS A SHARES AND THE CDSC IN EFFECT AT
THE END OF THE PERIOD FOR CLASS B SHARES. IN
COMPARING KEMPER CONTRARIAN FUND TO THE
STANDARD & POOR'S 500 STOCK INDEX+ AND THE
CONSUMER PRICE INDEX++, YOU SHOULD NOTE THAT
THE FUND'S PERFORMANCE REFLECTS THE DEDUCTION
OF MAXIMUM SALES CHARGE, WHILE NO SUCH CHARGES
ARE REFLECTED IN THE PERFORMANCE OF THE
INDICES.
+THE STANDARD & POOR'S 500 STOCK INDEX IS AN
UNMANAGED INDEX GENERALLY REPRESENTATIVE OF THE
U.S. STOCK MARKET. SOURCE IS TOWERSDATA.
INVESTORS CANNOT ACTUALLY MAKE INVESTMENTS IN
THIS INDEX.
++THE CONSUMER PRICE INDEX IS A STATISTICAL
MEASURE OF CHANGE, OVER TIME, IN THE PRICES OF
GOODS AND SERVICES IN MAJOR EXPENDITURE GROUPS
FOR ALL URBAN CONSUMERS. SOURCE IS TOWERSDATA.
10
<PAGE> 11
INDUSTRY SECTORS
A YEAR-TO-YEAR COMPARISON
DATA SHOW THE PERCENTAGE OF THE COMMON STOCKS IN THE PORTFOLIO THAT EACH SECTOR
REPRESENTED ON NOVEMBER 30, 1998, AND ON NOVEMBER 30, 1997.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER CONTRARIAN FUND AS OF KEMPER CONTRARIAN FUND AS OF
11/30/98 11/30/97
---------------------------- ----------------------------
<S> <C> <C>
Finance 32.80% 28.50%
Basic industries 15.40% 8.60%
Consumer non-durables 15.30% 20.90%
Energy 11.30% 14.30%
Capital goods 11.20% 9.80%
Technology 6.80% 4.30%
Health care 4.80% 7.20%
Transportation 1.30% 2.10%
Utilities 1.10% 4.30%
</TABLE>
A COMPARISON WITH THE STANDARD & POOR'S 500 STOCK INDEX*
DATA SHOW THE PERCENTAGE OF THE COMMON STOCKS IN THE PORTFOLIO THAT EACH SECTOR
OF THE KEMPER CONTRARIAN FUND REPRESENTED ON NOVEMBER 30, 1998, COMPARED TO THE
INDUSTRY SECTORS THAT MAKE UP THE FUND'S BENCHMARK, THE STANDARD & POOR'S 500
STOCK INDEX.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER CONTRARIAN FUND AS OF STANDARD & POOR'S 500 INDEX AS
11/30/98 OF 11/30/98
---------------------------- ------------------------------
<S> <C> <C>
Finance 32.80% 15.20%
Basic industries 15.40% 3.60%
Consumer non-durables 15.30% 22.30%
Energy 11.30% 7.50%
Capital goods 11.20% 8.20%
Technology 6.80% 17.30%
Health care 4.80% 12.60%
Transportation 1.30% 1.00%
Utilities 1.10% 10.30%
Consumer durables 0.00% 2.00%
</TABLE>
* THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET. SOURCE IS TOWERSDATA.
11
<PAGE> 12
LARGEST HOLDINGS
THE FUND'S 10 LARGEST HOLDINGS*
Representing 27.3 percent of the fund's total net assets on November 30, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Holdings Percent
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
1. FEDERAL HOME LOAN MORTGAGE Often referred to as "Freddie Mac", 4.2%
CORP. 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
borrowers.
- --------------------------------------------------------------------------------------
2. PHILIP MORRIS The largest cigarette maker in the 4.1%
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.
- --------------------------------------------------------------------------------------
3. FEDERAL NATIONAL MORTGAGE Often referred to as "Fannie Mae," 3.6%
ASSOCIATION 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.
- --------------------------------------------------------------------------------------
4. MINNESOTA MINING & Engaged in the manufacturing and 2.4%
MANUFACTURING marketing of electrical and
telecommunications products,
medical devices, chemicals,
automotive parts and adhesives.
- --------------------------------------------------------------------------------------
5. AMP A leading manufacturer of 2.4%
electrical and electronic
connection devices; also engaged in
producing connectivity devices such
as sensors, switches, printed
wiring boards and wireless
communications components and
systems.
- --------------------------------------------------------------------------------------
6. AMOCO Engaged in the exploration, 2.3%
development and production of crude
oil and natural gas, and in the
refining and marketing of petroleum
products and petrochemicals.
- --------------------------------------------------------------------------------------
7. FIRST UNION Engaged in commercial, investment 2.3%
and mortgage banking. First Union
provides retail and commercial
banking, retail investment,
mortgage, home equity, leasing,
insurance, capital markets, cash
management and securities brokerage
services to 12 million customers on
the east coast.
- --------------------------------------------------------------------------------------
8. XEROX Develops, manufactures, markets, 2.0%
services and finances a broad range
of document processing equipment.
- --------------------------------------------------------------------------------------
9. C.R. BARD A leading multinational producer of 2.0%
vascular, urological, oncological,
and surgical products.
Approximately one-third of Bard's
sales occur outside the U.S.
- --------------------------------------------------------------------------------------
10. PNC BANK Engaged in the operation of a 2.0%
variety of financial services,
including mortgage, community,
consumer, private and corporate
banking, secured lending and asset
management.
- --------------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
KEMPER CONTRARIAN FUND
Portfolio of Investments at November 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Number
of
Common stocks shares Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BANKING--15.6% Banc One Corp. 90,900 $ 4,664
BankAmerica Corp. 70,000 4,563
Bankers Trust New York Corp. 57,000 4,959
Chase Manhattan Corp. 60,000 3,806
First Union Corp. 97,800 5,941
J.P. Morgan & Co. 17,000 1,817
KeyCorp 125,000 3,836
PNC Bank Corp., N.A. 100,000 5,156
Washington Mutual, Inc. 97,320 3,771
Wells Fargo & Co. 70,000 2,520
----------------------------------------------------------------------
41,033
- -----------------------------------------------------------------------------------------------------
BASIC INDUSTRIES--13.5% Dow Chemical Co. 38,000 3,700
E.I. du Pont de Nemours & Co. 65,000 3,819
Eastman Chemical Co. 40,000 2,317
Georgia-Pacific Corp. 40,000 2,270
International Flavors and Fragrances 30,000 1,256
Louisiana-Pacific Corp. 230,000 3,910
Lubrizol Corp. 125,000 3,391
Nucor Corp. 45,000 1,890
Praxair, Inc. 90,000 3,437
Sonoco Products Co. 100,900 3,021
Timber Group 141,800 3,261
Union Camp Corp. 50,000 3,234
----------------------------------------------------------------------
35,506
- -----------------------------------------------------------------------------------------------------
CAPITAL GOODS--9.8% AMP, Inc. 132,000 6,386
Crown Cork & Seal Co. 54,000 1,823
Diebold 115,000 3,953
General Electric Co. 39,000 3,530
Minnesota Mining & Manufacturing 80,000 6,425
Pitney Bowes, Inc. 65,000 3,640
----------------------------------------------------------------------
25,757
- -----------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS--6.0% Ford Motor Co. 45,000 2,486
J.C. Penney Co. 70,000 3,850
May Department Stores Co. 66,500 4,011
Sears, Roebuck & Co. 50,000 2,372
V.F. Corp. 62,800 3,081
----------------------------------------------------------------------
15,800
- -----------------------------------------------------------------------------------------------------
CONSUMER STAPLES--7.3% Kimberly-Clark Corp. 65,000 3,421
McDonald's Corp. 35,000 2,452
Philip Morris Cos. 192,900 10,790
Wendy's International 130,100 2,602
----------------------------------------------------------------------
19,265
- -----------------------------------------------------------------------------------------------------
ENERGY--9.9% AMOCO Corp. 101,900 6,006
Atlantic Richfield Co. 71,500 4,755
Chevron Corp. 21,000 1,756
Exxon Corp. 61,000 4,579
Mobil Corp. 28,000 2,413
Royal Dutch Petroleum Co. 45,000 2,115
Schlumberger, Ltd. 40,000 1,788
Texaco, Inc. 45,000 2,590
----------------------------------------------------------------------
26,002
</TABLE>
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Number
of
shares Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCE--13.0% Allstate Corp. 60,000 $ 2,445
American International Group, Inc. 40,000 3,760
Associates First Capital Corp. 40,443 3,149
Federal Home Loan Mortgage Corp. 182,000 11,011
Federal National Mortgage Association 132,000 9,603
Golden West Financial Corp. 25,000 2,367
Post Properties 50,000 1,913
----------------------------------------------------------------------
34,248
- -----------------------------------------------------------------------------------------------------
HEALTH CARE--4.2% American Home Products Corp. 60,000 3,195
Bristol-Myers Squibb Co. 21,000 2,574
C.R. Bard 116,000 5,314
----------------------------------------------------------------------
11,083
- -----------------------------------------------------------------------------------------------------
TECHNOLOGY--5.9% Hewlett-Packard Co. 65,000 4,079
Raytheon Co. 61,000 3,378
Tektronix, Inc. 103,700 2,780
Xerox Corp. 50,000 5,375
----------------------------------------------------------------------
15,612
- -----------------------------------------------------------------------------------------------------
TRANSPORTATION--1.1% (a)FDX Corp. 46,500 3,017
----------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
UTILITIES--.9% GTE Corp. 40,000 2,480
----------------------------------------------------------------------
TOTAL COMMON STOCKS--87.2%
(Cost: $195,878) 229,803
----------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Money market Principal
instruments--10.2% amount Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Yield--5.09% to 5.30%
Due--December 1998
Bell Atlantic Network Funding Corp. $12,000 11,986
UBS Finance, Inc. 9,000 8,979
Other 6,000 5,999
----------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--10.2%
(Cost: $26,964) 26,964
----------------------------------------------------------------------
TOTAL INVESTMENTS--97.4%
(Cost: $222,842) 256,767
----------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--2.6% 6,946
----------------------------------------------------------------------
NET ASSETS--100% $263,713
----------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security.
Based on the cost of investments of $222,842,000 for federal income tax purposes
at November 30, 1998, the gross unrealized appreciation was $40,077,000 the
gross unrealized depreciation was $6,152,000 and the net unrealized appreciation
on investments was $33,925,000.
See accompanying Notes to Financial Statements.
<PAGE> 15
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
KEMPER CONTRARIAN FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Contrarian Fund as of November
30, 1998, and the related statements of operations for the year then ended and
changes in net assets for the year then ended and the eleven months ended
November 30, 1997 and the financial highlights for each of the fiscal periods
since 1995. These financial statements and financial highlights are the
responsibility of the fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the year ended December 31, 1994 were
audited by other auditors whose report dated January 19, 1995 expressed an
unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
November 30, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Contrarian Fund at November 30, 1998, the results of its operations for the year
then ended, the changes in its net assets for the year then ended and the eleven
months ended November 30, 1997 and the financial highlights for each of the
fiscal periods since 1995, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 19, 1999
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------
ASSETS
- --------------------------------------------------
<S> <C>
Investments, at value
(Cost: $222,842) $256,767
- --------------------------------------------------
Cash 421
- --------------------------------------------------
Receivable for:
Investments sold 6,974
- --------------------------------------------------
Fund shares sold 541
- --------------------------------------------------
Dividends 549
- --------------------------------------------------
TOTAL ASSETS 265,252
- --------------------------------------------------
- --------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------
Payable for:
Investments purchased 839
- --------------------------------------------------
Fund shares redeemed 278
- --------------------------------------------------
Management fee 161
- --------------------------------------------------
Distribution services fee 68
- --------------------------------------------------
Administrative services fee 50
- --------------------------------------------------
Custodian and transfer agent fees and
related expenses 141
- --------------------------------------------------
Directors' fees 2
- --------------------------------------------------
Total liabilities 1,539
- --------------------------------------------------
NET ASSETS $263,713
- --------------------------------------------------
- --------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------
Paid-in capital $208,383
- --------------------------------------------------
Undistributed net realized gain on
investments 20,741
- --------------------------------------------------
Net unrealized appreciation on
investments 33,925
- --------------------------------------------------
Undistributed net investment income 664
- --------------------------------------------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING $263,713
- --------------------------------------------------
- --------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------
CLASS A SHARES
Net asset value and redemption price
per share
($151,640 DIVIDED BY 6,621 shares
outstanding) $22.90
- --------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering
price) $24.30
- --------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales
charge) per share
($99,796 DIVIDED BY 4,372 shares
outstanding) $22.82
- --------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales
charge) per share
($12,277 DIVIDED BY 538 shares
outstanding) $22.82
- --------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended November 30, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------
Dividends $ 4,418
- -------------------------------------------------
Interest 1,630
- -------------------------------------------------
Total investment income 6,048
- -------------------------------------------------
Expenses:
Management fee 1,660
- -------------------------------------------------
Distribution services fee 718
- -------------------------------------------------
Administrative services fee 500
- -------------------------------------------------
Custodian and transfer agent fees and
related expenses 936
- -------------------------------------------------
Reports to shareholders 103
- -------------------------------------------------
Registration fees 19
- -------------------------------------------------
Professional fees 6
- -------------------------------------------------
Directors' fees and other 12
- -------------------------------------------------
Total expenses 3,954
- -------------------------------------------------
NET INVESTMENT INCOME 2,094
- -------------------------------------------------
- -------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- -------------------------------------------------
Net realized gain on sales of
investments 20,538
- -------------------------------------------------
Net realized gain from futures
transactions 276
- -------------------------------------------------
Net realized gain 20,814
- -------------------------------------------------
Change in net unrealized appreciation
on investments 14,228
- -------------------------------------------------
Net gain on investments 35,042
- -------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $37,136
- -------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
1998 1997
- --------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 2,094 1,298
- --------------------------------------------------------------------
Net realized gain 20,814 14,815
- --------------------------------------------------------------------
Change in net unrealized appreciation 14,228 11,557
- --------------------------------------------------------------------
Net increase in net assets resulting
from operations 37,136 27,670
- --------------------------------------------------------------------
Distribution from net investment
income (1,851) (963)
- --------------------------------------------------------------------
Distribution from net realized gain (14,639) (533)
- --------------------------------------------------------------------
Total dividends to shareholders (16,490) (1,496)
- --------------------------------------------------------------------
Net increase from capital share
transactions 64,952 74,349
- --------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 85,598 100,523
- --------------------------------------------------------------------
- --------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------
Beginning of period 178,115 77,592
- --------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment
income
of $664 and $421, respectively) $ 263,713 178,115
- --------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE Kemper Contrarian Fund (the fund) is a separate
FUND 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 November 30, 1998) are offered to a limited
group of investors, are not subject to initial or
contingent deferred sales charges and have lower
ongoing expenses than other classes. Differences in
class expenses will result in the payment of
different per share income dividends by class. All
shares of the fund have equal rights with respect
to voting, dividends and assets, subject to class
specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT INVESTMENT VALUATION. Investments are stated at
ACCOUNTING POLICIES 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. Futures contracts are valued at the
most recent settlement price. All other securities
are valued at their 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
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
net asset value per share is determined separately
for each class by dividing the fund's net assets
attributable to that class by the number of shares
of the class outstanding.
FEDERAL INCOME TAXES. The fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies, and to distribute
all of its taxable income to its 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 MANAGEMENT AGREEMENT. The fund has a management
AFFILIATES agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper). The fund 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 $1,660,000 for the
year ended November 30, 1998.
ZURICH/B.A.T MERGER. On September 7, 1998, Zurich
Insurance Company (Zurich), majority owner of
Scudder Kemper, entered into an agreement with
B.A.T Industries p.l.c. (B.A.T) pursuant to which
the financial services businesses of B.A.T were
combined with Zurichs businesses to form a new
global insurance and financial services company
known as Zurich Financial Services. Upon
consummation of the transaction, the funds
investment management agreement with Scudder Kemper
was deemed to have been assigned and, therefore,
terminated. The Board of Directors of the fund has
approved a new investment management agreement with
Scudder Kemper, which is substantially identical to
the former investment management agreement, except
for the dates of execution and termination.
Shareholders approved the new investment management
agreement through a proxy solicitation that
concluded in mid-December.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS
RETAINED COMMISSIONS ALLOWED
BY KDI BY KDI TO FIRMS
----------- -------------------
<S> <C> <C>
Year ended November 30, 1998 $ 52,000 581,000
</TABLE>
For services under the distribution services
agreement, the fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares pursuant to separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
fees, CDSC and commissions related to Class B and
Class C shares are as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES PAID
RECEIVED BY KDI BY KDI TO FIRMS
----------------- ----------------------
<S> <C> <C>
Year ended November 30, 1998 $ 838,000 979,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The fund has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, the fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets. KDI in turn has various agreements with
financial services firms that provide these
services and pays these firms based on assets of
fund accounts the firms service. Administrative
services fees (ASF) paid by the fund are as
follows:
<TABLE>
<CAPTION>
ASF PAID BY ASF PAID
THE FUND TO KDI BY KDI TO FIRMS
--------------- ---------------
<S> <C> <C>
Year ended November 30, 1998 $ 500,000 497,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the fund. Under the agreement,
KSvC received shareholder services fees of $766,000
for the year ended November 30, 1998.
OFFICERS AND DIRECTORS. Certain officers or
directors of the fund are also officers or
directors of Scudder Kemper. For the year ended
November 30, 1998, the fund made no payments to its
officers and incurred directors' fees of $10,000 to
independent directors.
- --------------------------------------------------------------------------------
4 INVESTMENT For the year ended November 30, 1998, investment
TRANSACTIONS transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $171,130
Proceeds from sales 122,272
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE The following table summarizes the activity in
TRANSACTIONS capital shares of the fund (in thousands):
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
1998 1997
---------------- ----------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 2,870 $60,856 2,547 $49,549
- ---------------------------------------------------------------------------
Class B 1,698 36,004 2,064 39,824
- ---------------------------------------------------------------------------
Class C 435 9,096 212 4,085
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF
DIVIDENDS
- ---------------------------------------------------------------------------
Class A 475 9,293 52 1,044
- ---------------------------------------------------------------------------
Class B 307 5,943 19 372
- ---------------------------------------------------------------------------
Class C 24 470 1 19
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
SHARES REDEEMED
Class A (1,776) (37,255) (623) (12,321)
- ---------------------------------------------------------------------------
Class B (737) (15,339) (361) (7,133)
- ---------------------------------------------------------------------------
Class C (202) (4,116) (55) (1,090)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 247 5,225 58 1,143
- ---------------------------------------------------------------------------
Class B (248) (5,225) (58) (1,143)
- ---------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL
SHARE TRANSACTIONS $64,952 $74,349
- ---------------------------------------------------------------------------
</TABLE>
<PAGE> 22
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------
CLASS A
----------------------------------------------------
ELEVEN MONTHS YEAR ENDED DECEMBER
YEAR ENDED ENDED 31,
NOVEMBER 30, NOVEMBER 30, ----------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 21.13 16.93 16.20 12.18 13.62
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .28 .23 .23 .26 .28
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) 3.48 4.25 2.07 5.05 (.28)
- ---------------------------------------------------------------------------------------------
Total from investment operations 3.76 4.48 2.30 5.31 --
- ---------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .27 .20 .22 .24 .28
- ---------------------------------------------------------------------------------------------
Distribution from net realized gain 1.72 .08 1.35 1.05 1.16
- ---------------------------------------------------------------------------------------------
Total dividends 1.99 .28 1.57 1.29 1.44
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $ 22.90 21.13 16.93 16.20 12.18
- ---------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 19.51% 26.58 14.42 44.57 (.03)
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED)
- ---------------------------------------------------------------------------------------------
Expenses 1.37% 1.35 1.23 1.25 1.25
- ---------------------------------------------------------------------------------------------
Net investment income 1.36% 1.47 1.56 1.85 1.89
- ---------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED)
- ---------------------------------------------------------------------------------------------
Expenses 1.37% 1.35 1.25 1.66 1.42
- ---------------------------------------------------------------------------------------------
Net investment income 1.36% 1.47 1.54 1.44 1.71
- ---------------------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------------
CLASS B
--------------------------------------------------------
YEAR ELEVEN MONTHS YEAR SEPTEMBER 11
ENDED ENDED ENDED TO
NOVEMBER 30, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 21.08 16.92 16.20 15.26
- -------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .08 .08 .11 .07
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain 3.46 4.22 2.07 1.85
- -------------------------------------------------------------------------------------------------
Total from investment operations 3.54 4.30 2.18 1.92
- -------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .08 .06 .11 .07
- -------------------------------------------------------------------------------------------------
Distribution from net realized gain 1.72 .08 1.35 .91
- -------------------------------------------------------------------------------------------------
Total dividends 1.80 .14 1.46 .98
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $ 22.82 21.08 16.92 16.20
- -------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 18.32% 25.44 13.61 12.83
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED)
- -------------------------------------------------------------------------------------------------
Expenses 2.31% 2.26 2.11 2.00
- -------------------------------------------------------------------------------------------------
Net investment income .42% .56 .68 .88
- -------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED)
- -------------------------------------------------------------------------------------------------
Expenses 2.31% 2.26 2.34 2.36
- -------------------------------------------------------------------------------------------------
Net investment income .42% .56 .45 .52
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 23
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------------------
CLASS C
--------------------------------------------------------
YEAR ELEVEN MONTHS YEAR SEPTEMBER 11
ENDED ENDED ENDED TO
NOVEMBER 30, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 21.06 16.90 16.20 15.26
- -------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .05 .06 .11 .08
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain 3.47 4.20 2.05 1.85
- -------------------------------------------------------------------------------------------------
Total from investment operations 3.52 4.26 2.16 1.93
- -------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .04 .02 .11 .08
- -------------------------------------------------------------------------------------------------
Distribution from net realized gain 1.72 .08 1.35 .91
- -------------------------------------------------------------------------------------------------
Total dividends 1.76 .10 1.46 .99
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $ 22.82 21.06 16.90 16.20
- -------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 18.25% 25.26 13.51 12.85
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED)
- -------------------------------------------------------------------------------------------------
Expenses 2.40% 2.47 2.12 1.95
- -------------------------------------------------------------------------------------------------
Net investment income .33% .35 .67 .93
- -------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED)
- -------------------------------------------------------------------------------------------------
Expenses 2.40% 2.47 2.80 2.31
- -------------------------------------------------------------------------------------------------
Net investment income (loss) .33% .35 (.01) .57
- -------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -------------------------------------------------------------------------------------------------
YEAR ELEVEN MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
NOVEMBER 30, NOVEMBER 30, -------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in
thousands) $ 263,713 178,115 77,592 25,482 12,983
- ------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 64% 77 95 30 16
- ------------------------------------------------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
TAX INFORMATION
- --------------------------------------------------------------------------------
The fund paid a distribution of $.80 per share from net long-term capital gains
during the year ended November 30, 1998, of which 26% represents 20% rate gains.
Pursuant to Section 852 of the Internal Revenue Code, the fund designates
$11,345,000 as capital gain dividends for the year ended November 30, 1998, of
which 100% represents 20% rate gains.
For corporate shareholders, 37% of the income dividends paid during the year
ended November 30, 1998 qualified for the dividends received deduction.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Kemper Fund account, please call 1-800-621-1048.
<PAGE> 24
DIRECTORS AND OFFICERS
DIRECTORS OFFICERS
DANIEL PIERCE MARK CASADY STEVEN T. STOKES
Chairman and Director President Vice President
JAMES E. AKINS 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 THOMAS H. FORESTER Assistant Secretary
Vice President
THOMAS W. LITTAUER ELIZABETH C. WERTH
Director and Vice President ANN M. MCCREARY Assistant Secretary
Vice President
FRED B. RENWICK BRENDA LYONS
Director KATHRYN L. QUIRK Assistant Treasurer
Vice President
JOHN B. TINGLEFF
Director THOMAS F. SASSI
Vice President
JOHN G. WEITHERS
Director
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania 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
[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-2 (1/26/99) 1064420
