<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MAY 31, 2000
Seeks to achieve a high rate of total return
KEMPER-DREMAN HIGH
RETURN EQUITY FUND
"... This shift in market sentiment favored the types of companies that this
fund holds -- companies with good long-term track records currently out of favor
with the market and trading at low price-to- earnings multiples. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
9
INDUSTRY SECTORS
10
LARGEST HOLDINGS
11
PORTFOLIO OF INVESTMENTS
13
FINANCIAL STATEMENTS
16
FINANCIAL HIGHLIGHTS
18
NOTES TO FINANCIAL STATEMENTS
AT A GLANCE
KEMPER-DREMAN HIGH RETURN EQUITY FUND TOTAL RETURNS
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 2000 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER-DREMAN HIGH KEMPER-DREMAN HIGH
RETURN EQUITY FUND CLASS RETURN EQUITY FUND CLASS LIPPER EQUITY INCOME
KEMPER-DREMAN HIGH RETURN EQUITY FUND CLASS A B C FUNDS CATEGORY AVERAGE*
--------------------------------------------- ------------------------ ------------------------ -----------------------
<S> <C> <C> <C>
0.76 0.34 0.34 1.33
</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 SALES CHARGES HAD BEEN INCLUDED, RESULTS MIGHT HAVE BEEN LESS
FAVORABLE.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
5/31/00 11/30/99
.........................................................
<S> <C> <C> <C> <C>
KEMPER-DREMAN HIGH RETURN
EQUITY FUND CLASS A $27.81 $30.45
.........................................................
KEMPER-DREMAN HIGH RETURN
EQUITY FUND CLASS B $27.67 $30.31
.........................................................
KEMPER-DREMAN HIGH RETURN
EQUITY FUND CLASS C $27.70 $30.34
.........................................................
</TABLE>
KEMPER-DREMAN HIGH RETURN EQUITY
FUND RANKINGS AS OF 5/31/00
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER EQUITY INCOME FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
..........................................................................................
<S> <C> <C> <C> <C> <C>
1-YEAR #210 of 221 funds #212 of 221 funds #211 of 221 funds
..........................................................................................
3-YEAR #140 of 176 funds #154 of 176 funds #151 of 176 funds
..........................................................................................
5-YEAR #18 of 116 funds n/a n/a
..........................................................................................
10-YEAR #2 of 42 funds n/a n/a
..........................................................................................
</TABLE>
DIVIDEND REVIEW
DURING THE SIX-MONTH PERIOD, KEMPER-DREMAN HIGH RETURN EQUITY FUND MADE THE
FOLLOWING DISTRIBUTIONS PER SHARE:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
.................................................................................................
<S> <C> <C> <C> <C> <C>
INCOME DIVIDEND $0.4040 $0.2924 $0.2953
.................................................................................................
SHORT-TERM CAPITAL GAIN $0.6000 $0.6000 $0.6000
.................................................................................................
LONG-TERM CAPITAL GAIN $1.65 $1.65 $1.65
.................................................................................................
</TABLE>
TERMS TO KNOW
YOUR FUND'S STYLE
MORNINGSTAR EQUITY STYLE BOX(TM)
<TABLE>
<S> <C>
[MORNINGSTAR EQUITY STYLE Source: Morningstar, Inc. Chicago, IL. (312)
BOX] 696-6000. The Equity Style Box placement is based
on two variables: a fund's market capitalization
relative to the movements of the market and a
fund's valuation, which is calculated by
comparing the stocks in the fund's portfolio with
the most relevant of the three market-cap groups.
THE STYLE BOX REPRESENTS A SNAPSHOT OF THE FUND'S
PORTFOLIO ON A SINGLE DAY. IT IS NOT AN EXACT
ASSESSMENT OF RISK AND DOES NOT REPRESENT FUTURE
PERFORMANCE. THE FUND'S PORTFOLIO CHANGES FROM
DAY TO DAY. A LONGER-TERM VIEW IS REPRESENTED BY
THE FUND'S MORNINGSTAR CATEGORY, WHICH IS BASED
ON ITS ACTUAL INVESTMENT STYLE AS MEASURED BY ITS
UNDERLYING PORTFOLIO HOLDINGS OVER THE PAST THREE
YEARS. MORNINGSTAR HAS PLACED KEMPER-DREMAN HIGH
RETURN EQUITY FUND IN THE LARGE VALUE CATEGORY.
PLEASE CONSULT THE PROSPECTUS FOR A DESCRIPTION
OF INVESTMENT POLICIES.
</TABLE>
NARROW MARKET A narrow market is a securities market in which most of the gains
are earned by only a small group of companies. In 1998 and most of 1999, a
narrow market existed in which only the largest growth-style stocks enjoyed
robust gains.
PRICE-TO-EARNINGS RATIO (P/E) A P/E is 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 STOCK Sector stocks are stocks usually found in related industries, such
as financial services. Financial, economic, business and other developments may
similarly affect stocks within a market sector.
<PAGE> 3
ECONOMIC OVERVIEW
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER,
When an irresistible force such as the ebullient U.S. economy meets an immovable
object, such as a determined Federal Reserve Board, the old song is right:
Something's gotta give. One possibility -- the economy could slow down as the
Fed has ordered. Or, if market volatility becomes true distress, the Fed could
back off, as it has in the past. A third possibility is that neither the Fed nor
the economy will give way until it's too late, which could lead to a recession.
Recent evidence suggests, however, that the economy probably will slow down as
ordered.
Before explaining why, perhaps it's best to start with a review of how
monetary policy works. Central bankers often sound like witch doctors reading
animal entrails, so it's understandable that many people are confused about
monetary policy. But monetary policy still works in the same way it always has.
First, it changes the price and availability of money. More subtly, it alters
people's perceptions about and confidence in the future, thereby adjusting their
willingness to take risks.
It's a bit early to tell how the Fed's monetary policy is working so far. The
policymakers only started raising interest rates about a year ago, and it takes
at least that long for higher rates to impact borrowers. There are two reasons.
First, interest rates on many existing loans are fixed. And, a family who has
just selected a dream house isn't going to walk away if mortgage rates rise a
notch. Similarly, a company that has just approved an expansion program won't
stop cold because the prime rate is higher. So it's foolish to think that
America's economy has become less interest-sensitive because the economy roared
through the first several months of this year. Americans are more in hock than
ever, so higher interest rates will hurt more than ever. The May dip in housing
starts and auto sales -- especially the higher priced, gas guzzling sport
utility vehicles -- is probably the first sign that higher rates are biting.
They will bite harder in coming months. We look for both housing starts and
vehicle sales to drop about 10 percent in 2001.
Confidence is harder to measure, but there are some early flutters of
weakness. It's true that consumers remain cheerily upbeat. But corporate bond
markets, the most sensitive barometer of business confidence and a vital source
of corporate funds, have been nervous. Investors are demanding a big premium
before they'll buy lower quality bonds, which means there's less new money for
companies to spend. Corporate bond issuance through mid-June was 35 percent
below the first five and a half months of 1999.
So far, companies have been able to get around the bond market stinginess by
turning to their bankers. Banks lent businesses 8 percent more from January
through May of this year than they did during the first five months of 1999. But
some banks are beginning to worry, too. Bank examiners have been questioning the
quality of loans and the level of reserves. In response, more bankers are
tightening lending standards and raising rates. This is a textbook case of how
tighter monetary policy eventually slows an economy.
Aren't bond market and banker concerns overdone? As long as the economy keeps
growing at 3 percent or so, won't that guarantee such good profits that paying
the bills will be a cinch? Not necessarily. Profits are far more cyclical than
economic growth. Earnings actually fell during 1998, even though the economy
continued to roll. That was a global crisis, when foreign earnings fell sharply.
But take a look at the last "soft landing" during 1995. Revenue growth dipped
and pricing power fell, squeezing profits. The same thing is likely to happen
again in the coming slowdown -- and this time, tight labor markets could make it
even tougher for companies to control costs quickly. Assuming growth is between
2.5 percent and 3 percent by the end of 2001, we believe year-over-year profit
comparisons will have turned slightly negative.
A profit slowdown when new lines of credit are hard to come by will take its
toll on capital spending. We expect growth in business outlays for buildings and
equipment to slip from over 12 percent this year to around 8 percent in 2001.
That's still quite robust, and the "high-tech imperative" is the reason why.
Executives believe that they have no option but to keep up with the
technological revolution that is transforming the world. The fact that high-tech
gear keeps getting cheaper year after year and also helps save on expensive
labor makes the decision to buy it easy. Indeed, unit sales of computers and
peripherals to businesses have sustained growth rates in excess of 40 percent
since 1995. And the rush is on to lay down the infrastructure for the next
generation of wireless communications. We estimate that the sector will see unit
growth of about 50 percent this year, double the growth in 1999. It's hard even
for superstars to sustain these stratospheric
3
<PAGE> 4
ECONOMIC OVERVIEW
ECONOMIC GUIDEPOSTS
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND
SHAREHOLDER DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR
DEFLATION, CREDIT EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON
MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR
INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE
10-YEAR TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES.
THE OTHER DATA REPORT YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (5/31/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.40 6.00 5.50 5.60
Prime rate (2) 9.50 8.50 7.75 8.50
Inflation rate (3)* 3.00 2.60 2.30 1.50
The U.S. dollar (4) 4.30 -0.70 -0.90 6.40
Capital goods orders (5)* 17.00 12.30 2.50 14.50
Industrial production (5)* 6.10 3.70 2.90 5.20
Employment growth (6) 2.60 2.20 2.30 2.60
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
*DATA AS OF 4/30/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
compound growth rates forever, and we do expect some moderation next year.
However, high-tech orders continue to ratchet upwards, and the shortage in
semiconductors and other components has persisted long enough to cause major
players to announce huge capacity additions.
Another battle the Fed must win before it succeeds in slowing the economy is
bringing consumers to heel. Most families still feel better off than they were
last year and much richer than they were five years ago. That's a powerful
incentive to spend and enjoy. Indeed, total real consumption has been galloping
at a 5 percent rate or better since early 1998. But consumers are so important
to the economy that if they don't start spending less freely, there won't be a
slowdown. We expect the Fed to be successful and slow down shoppers in the
months ahead -- but the victory won't be an easy one. We expect at least one
more rate hike and a few more financial fireworks before consumers and the
economy hoist the white flag.
So what will the slowdown look like? During the spring, retail sales, housing
starts and job creation slowed, but strength in high tech orders and capital
equipment production probably will help keep the slowdown from becoming too
abrupt. We expect about 3.5 percent growth in the second half. That would still
produce a hearty 5 percent growth for full year 2000. During 2001, the full
impact of the Fed's recent tightening will probably rein growth in to just 3
percent.
Sincerely,
Scudder Kemper Investments Economics Group
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF SCUDDER KEMPER
INVESTMENTS, INC. AS OF JUNE 29, 2000, AND MAY NOT ACTUALLY COME TO PASS. THIS
INFORMATION IS SUBJECT TO CHANGE. NO PART OF THIS MATERIAL IS INTENDED AS AN
INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
PERFORMANCE UPDATE
[DREMAN PHOTO]
DAVID N. DREMAN IS CHAIRMAN OF DREMAN VALUE MANAGEMENT, L.L.C. (DVM), INC. AND
PORTFOLIO MANAGER OF KEMPER-DREMAN HIGH RETURN EQUITY FUND. HE HAS MORE THAN 35
YEARS OF EXPERIENCE AS AN INVESTMENT ANALYST, ADVISOR AND MANAGER. DREMAN HOLDS
A BACHELOR OF COMMERCE DEGREE AND A DOCTOR OF LAW DEGREE FROM THE UNIVERSITY OF
MANITOBA IN WINNIPEG, CANADA. DREMAN IS A REGULAR COLUMNIST IN FORBES AND ALSO
THE AUTHOR OF SEVERAL BOOKS ON CONTRARIAN INVESTING, INCLUDING CONTRARIAN
INVESTMENT STRATEGIES: THE NEXT GENERATION (SIMON & SCHUSTER 1998).
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS AND SHOULD NOT BE CONSIDERED AS A RECOMMENDATION OF ANY SPECIFIC
SECURITY.
AFTER A LONG PERIOD OF UNDERPERFORMANCE FOR VALUE
STOCKS, THE TIDE BEGAN TO SHIFT DURING
KEMPER-DREMAN HIGH RETURN EQUITY FUND'S SEMIANNUAL
PERIOD -- DECEMBER 1, 1999, THROUGH MAY 31, 2000.
BELOW LEAD PORTFOLIO MANAGER DAVID DREMAN EXPLAINS
WHAT CAUSED THE SHIFT IN MARKET SENTIMENT AND WHAT
IT MEANT FOR HIS FUND.
Q
THE MARKET WAS QUITE VOLATILE DURING THE PERIOD. WHAT DID THIS VOLATILITY
MEAN FOR KEMPER DREMAN HIGH RETURN EQUITY FUND'S PERFORMANCE?
A
Until the beginning of March, value stocks (and most other stocks) had
struggled, while technology and Internet-related stocks experienced unusually
robust returns. It seemed as if no price was too high to pay for any technology
stock or a company with a ".com" after its name. Many of these market leaders
were new, untested companies that had never made a profit or posted positive
earnings. In March, the lofty valuations of such companies began to spook the
market, and investors fled these high-priced technology stocks in search of
safety in more tried and true companies with experienced management, good
balance sheets and long-term records of strong earnings. In short, investors
once again began to consider company fundamentals as part of their investment
criteria.
This shift in market sentiment favored the types of companies that this fund
holds -- companies with good long-term track records currently out-of-favor with
the market and trading at low price-to-earnings multiples (see Terms To Know, on
page 2). The volatility, therefore, was extremely positive for the fund, helping
it recover ground lost earlier in the technology-driven momentum market.
For the six months ended May 31, the fund's Class A shares gained 0.76
percent, while the fund's benchmark, the S&P 500 stock index, gained 2.90
percent. This relative underperformance was a carryover from the technology-
driven market that existed until March. Technology stocks represented close to
30 percent of the S&P 500 throughout the period, while the fund has had
virtually no technology exposure.
If we consider a more recent time period, you'll see how our lack of
technology exposure actually helped us outperform the benchmark during the
second half of the period. From March 1 through May 31, the fund's return jumped
22.05 percent, while the S&P 500 gained just 4.29 percent. If the market
continues to broaden beyond the technology sector, we believe the fund is
positioned to continue to gain.
Q
HOW DID THE FUND PERFORM RELATIVE TO ITS MUTUAL FUND PEERS?
A
The fund's performance was more closely in line with its Lipper Equity
Income Funds peer group than it was with the S&P 500. The category advanced 1.33
percent while the fund advanced 0.76 percent. Again, we attribute this
underperformance to our lack of exposure to the pricey and volatile technology
market in which many of our peers had been
5
<PAGE> 6
PERFORMANCE UPDATE
invested. When you consider just the last three months of the period, the story
is quite different. In March, April and May, the fund gained 22.05 percent while
our Lipper peer group advanced only 11.04 percent.
Q
DID YOU ADJUST THE FUND'S INVESTMENTS WHEN THE MARKET BEGAN TO CHANGE
DIRECTION IN MARCH?
A
We manage the fund according to a strict contrarian value discipline that
we don't alter to fit the latest fad. This discipline precluded us from owning
the high-priced growth stocks that had been driving the market, but it greatly
enhanced fund returns when the market shifted back to value stocks from
technology.
Instead of looking to boost returns by adding high-priced technology stocks,
we continued to look for financially sound companies with low price-to-
earnings, price-to-book, price-to-cash-flow and price-to-dividend ratios. As
contrarian investors, we don't pay a premium for any stocks, and we didn't
adjust our investment style to pursue what we believed to be short-term gains in
the technology and Internet areas of the market. Our focus remained on the
financial services, energy, health care and tobacco industries. Our positions in
these stocks came roaring back when the bottom fell out of the technology and
Internet sectors. We're of course very pleased that our patience is beginning to
be rewarded. At this point it appears that the market will continue to broaden
as technology continues to struggle, and that would be positive for value stocks
and Kemper-Dreman High Return Equity Fund.
Q
THE FEDERAL RESERVE BOARD HAS BEEN AGGRESSIVE IN RAISING INTEREST RATES.
HOW MUCH OF AN IMPACT DID THESE RATE HIKES HAVE ON THE FUND?
A
The fund's heaviest concentration is in the financial services sector, so
clearly these rate hikes had a profound effect on performance. Until March, the
fund's financial stocks, along with nearly the entire financial services
industry, declined dramatically. Although we were disappointed by this
performance, it did not alter our bullish long-term outlook for the sector.
We believed that the market's perception versus the true strength of these
stocks were at odds, and we still believe this to be the case. But many of the
large bank stocks that the fund holds were punished because investors feared
that higher rates would cause the companies' loan businesses to suffer and drag
down earnings. However, many investors did not consider that these companies
generate more of their revenue from fees on services than from their loan
businesses. Therefore, their earnings were not impacted by the rising rates as
much as the market had punished their stock prices. Additionally, diversified
companies such as Fannie Mae and Freddie Mac that are involved in the consumer
home loan mortgage business had been penalized despite their growing earnings.
Intuitively, though, this didn't make sense. As rates rise, the likelihood of
mortgage prepayments dwindles, which is positive for these stocks.
As money flew out of the technology market in March, financial services stocks
rallied. Investors poured into these stocks because of their strong fundamentals
and deeply discounted prices. They saw safety in a familiar name such as Bank of
America that has a strong franchise and solid long-term earnings track records.
Financial stock performance improved throughout the remainder of the period. We
expect the stocks to continue gaining, even in a higher interest-rate
environment.
Q
WE'VE SEEN OIL PRICES AND PRICES AT THE GAS PUMP RISE SHARPLY OVER THE
PAST COUPLE MONTHS. DID THESE INCREASES HELP THE FUND'S ENERGY HOLDINGS?
A
Our energy stocks have performed extremely well for the past year for a
number of reasons that include higher oil prices as well as consolidation in the
industry.
Oil and oil services stocks had been beaten up quite a bit as the price of
crude oil dipped below $10 a barrel in late 1998. We took advantage of the slump
in prices to vigorously add to our oil holdings. We were correct in our
assessment that oil prices would rebound, and we've enjoyed tremendous gains
from these holdings. Although oil prices will likely come down in the near
future, we expect them to be maintained at reasonable levels (about $25 per
barrel), and these prices should support these businesses. Consolidation within
the industry has also supported energy stock prices as newly merged companies
such as British Petroleum, which acquired Amoco and Atlantic Richfield,
continued to gain efficiencies in operations.
The dramatic appreciation in oil and oil service stocks over the last
6
<PAGE> 7
PERFORMANCE UPDATE
year caused the fund's energy position to grow substantially. Although we're
still positive on the sector, we cut the fund's exposure back to a more
reasonable position during the period.
Q THE TOBACCO INDUSTRY IS ENTANGLED IN LITIGATION AND HAS UNDERPERFORMED
OVER THE LAST COUPLE YEARS. WHY DO YOU MAINTAIN YOUR EXPOSURE TO THIS SECTOR?
A As of May 31, 2000, tobacco stocks represented just over 16 percent of the
portfolio. Although we're not in love with what these companies do, we are drawn
to them because of their compelling valuations, the tremendous success of their
business lines and their long-term growth potential.
On the litigation front, it appears as if the tide may be turning for tobacco
stocks -- specifically with regard to the Engle case, a huge class-action suit
filed in Florida against the major tobacco companies. In April, the Florida
State Legislature passed and signed a bill that states that tobacco companies
will not be required to post bond for all of the potential damages that could be
awarded in the ongoing Engle suit. Early speculation was that the companies
would be forced to post a bond in the neighborhood of $300 billion, which would
have effectively bankrupted their businesses. The state of Florida removed that
threat, and it now seems that the upper limit to what companies may be required
to post would be about $100 million -- an easily absorbed and nonthreatening
sum. Additionally, the state reconfirmed that no payments would be made until
each separate lawsuit is tried and settled. The size of the class is still
unknown, but estimates have put the number of potential plaintiffs at between
125,000 and 250,000. That being the case, it is unlikely that the suit could be
settled within the next decade. This is extremely positive news because it
ensures that this litigation won't impact tobacco earnings for many years to
come.
Additionally, famous investor Carl Ichan, in his pursuit of acquiring Nabisco,
has helped bid up tobacco stock prices and set the stage for future spin-offs of
the large diversified tobacco companies. You may recall that in 1999, RJR
Reynolds split into two companies -- Nabisco Foods and Reynolds Tobacco -- to
help increase the value of their stock. The price of Nabisco, though, actually
fell after the spin-off because it was still tainted as being associated with a
tobacco company. A bidding war ensued among Ichan, the company's board of
directors, Philip Morris and some European companies, which caused the stock
price to nearly triple from its lows. The market is now looking at these events
and speculating that there may be opportunity for an eventual breakup of Philip
Morris. This speculation has helped drive up the stock price of Philip Morris,
the fund's largest holding. We reduced our position in the stock and will
continue to sell into strength, taking profits for the fund.
Q YOU MENTIONED THAT HEALTH CARE STOCKS WERE AN AREA OF CONCENTRATION. CAN
YOU TELL US HOW THIS SECTOR HAS PERFORMED?
A There seems to be renewed optimism for health care stocks after a period
of underperformance by the sector. The most compelling long-term catalyst for
this sector is the aging of the baby boomer population. As boomers age, their
spending on health care will increase. However, this alone wasn't enough to keep
the industry going strong.
Over the last couple of years, health care stocks declined as government
payments from Medicare and Medicaid were reduced and litigation against health
maintenance organizations (HMOs) grew. Recently, it was announced that
government payments will once again increase to cover the true cost of the care
being given. Additionally, many insurance companies are at a point where
contracts with large corporate clients are expiring, opening the door for
improved pricing in the new contracts. And finally, the judicial system has been
rejecting awards for lawsuits filed against HMOs by disgruntled consumers. We
believe, combined, these events suggest a strong long-term outlook for the
sector.
The fund's health care holdings represented about 12 percent of the portfolio
as of May 31, 2000. We hold Tenet Healthcare, an owner and operator of
hospitals, Humana, an HMO company, and McKesson HBOC, a health care supply
company and provider of software and management solutions for the industry. For
the reasons I just outlined, we've seen strong gains in each of these companies.
We plan to add to this sector as opportunities present themselves.
Q DO YOU BELIEVE THAT THE RETURN TO VALUE STOCKS WILL CONTINUE?
A I wish I had a crystal ball to tell you how the markets will perform, but
unfortunately I don't. However, we're extremely encouraged by the broadening in
the market that we've seen lately and
7
<PAGE> 8
PERFORMANCE UPDATE
the attention that investors are now paying to company fundamentals instead of
media hype. We fully expect that we'll see more market volatility and probably
more losses coming out of the technology sector. If this happens, investors will
likely continue their recent trend of investing based on strong company
fundamentals and reasonable valuations, which would be beneficial for the fund.
In the meantime, we'll continue to do what we do best -- look for good, strong
companies that are out of favor with the market but that have strong growth
potential.
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, 2000, AND ON NOVEMBER 30, 1999.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER-DREMAN HIGH RETURN KEMPER-DREMAN HIGH RETURN
EQUITY FUND ON 5/31/00 EQUITY FUND ON 11/30/99
------------------------- -------------------------
<S> <C> <C>
CONSUMER NON-DURABLES 35.60 28.40
FINANCE 30.40 36.80
ENERGY 16.90 19.50
HEALTH CARE 13.20 11.90
UTILITIES 3.90 3.40
</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 KEMPER-DREMAN HIGH RETURN EQUITY FUND REPRESENTED ON MAY 31, 2000, COMPARED
WITH THE INDUSTRY SECTORS THAT MAKE UP THE FUND'S BENCHMARK, THE STANDARD &
POOR'S 500 STOCK INDEX.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER-DREMAN HIGH RETURN
EQUITY FUND ON 5/31/00 S&P 500 INDEX ON 5/31/00
------------------------- ------------------------
<S> <C> <C>
CONSUMER NON-DURABLES 35.60 18.40
FINANCE 30.40 12.90
ENERGY 16.90 5.30
HEALTH CARE 13.20 10.20
UTILITIES 3.90 2.60
TECHNOLOGY 0.00 32.30
CAPITAL GOODS 0.00 8.10
COMMUNICATIONS SERVICES 0.00 7.30
BASIC MATERIALS 0.00 2.30
TRANSPORTATION 0.00 0.60
</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 54.3% percent of the fund's total investment portfolio on May 31,
2000.
<TABLE>
<CAPTION>
HOLDINGS DESCRIPTION PERCENT
<S> <C> <C> <C>
----------------------------------------------------------------------------------------
1. PHILIP MORRIS The largest cigarette maker in 8.4%
the United States. 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.
----------------------------------------------------------------------------------------
2. CONOCO An integrated, international 6.9%
energy company involved in the
discovery, development,
production and sale of crude oil,
natural gas and natural gas
liquids.
----------------------------------------------------------------------------------------
3. BANK ONE Provides data processing, venture 6.0%
capital, investment and merchant
banking, trust, brokerage,
investment management and
equipment leasing services.
----------------------------------------------------------------------------------------
4. NABISCO Nabisco is an international 5.8%
manufacturer of biscuits, snacks
and other premium food products.
Nabisco markets products in the
United States, Canada and more
than 85 other countries. Nabisco
has agreed to be acquired by
Philip Morris.
----------------------------------------------------------------------------------------
5. TENET HEALTHCARE Provides a broad range of health 5.6%
care services through the
ownership and management of
acute-care hospitals and related
businesses.
----------------------------------------------------------------------------------------
6. FNMA Often referred to as "Fannie 5.2%
Mae," this private corporation is
federally chartered to provide
financial products and services
that increase the availability
and affordability of housing for
low-, moderate- and middle-income
Americans.
----------------------------------------------------------------------------------------
7. FHLMC Often referred to as "Freddie 4.6%
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 borrowers.
----------------------------------------------------------------------------------------
8. TEXACO Engaged in exploring, developing 4.1%
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. MCKESSON HBOC McKesson HBOC, Inc. is a health 4.0%
care supply management company.
The company also provides
software solutions, technological
innovations and comprehensive
services to the health care
industry and processes and
markets pure drinking water.
----------------------------------------------------------------------------------------
10. COLUMBIA ENERGY GROUP Columbia Energy Group runs one of 3.7%
the largest natural gas
transmission and underground
storage systems in the United
States. Columbia has agreed to be
acquired by NiSource.
----------------------------------------------------------------------------------------
</TABLE>
*THE FUND'S HOLDINGS ARE SUBJECT TO CHANGE.
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
KEMPER-DREMAN HIGH RETURN EQUITY FUND
Portfolio of Investments at May 31, 2000 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
REPURCHASE AGREEMENTS--5.7%
State Street Bank and Trust
Company, 6.37%, to be
repurchased at $164,084,029 on
06/01/2000 ** (Cost
$164,055,000) $164,055,000 $ 164,055,000
-------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER--1.4%
Ciesco LP, 6.54%, 07/27/2000 20,000,000 19,796,533
Salomon Smith Barney, 6.50%,
07/03/2000 20,000,000 19,884,444
-------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost $39,680,977) 39,680,977
-------------------------------------------------------------------------
<CAPTION>
COMMON STOCKS--92.9% NUMBER OF SHARES
<S> <C> <C> <C> <C> <C>
CONSUMER DISCRETIONARY--6.4%
APPAREL & SHOES--0.0%
Fruit of the Loom, Inc.* 2,585,700 956,709
-------------------------------------------------------------------------
DEPARTMENT &
CHAIN STORES--1.0%
Rite Aid Corp.* 4,051,600 28,107,975
-------------------------------------------------------------------------
SPECIALTY RETAIL--5.4%
Borders Group, Inc.* 6,302,625 88,630,664
Toys "R" Us, Inc.* 4,241,300 66,800,475
-------------------------------------------------------------------------
155,431,139
----------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--22.5%
ALCOHOL & TOBACCO--16.7%
Imperial Tobacco Group (ADR) 711,750 12,277,688
Philip Morris Companies, Inc. 9,287,800 242,643,775
R.J. Reynolds Tobacco Holdings,
Inc. 2,852,866 79,167,032
UST, Inc. 5,907,500 98,212,188
Universal Corp. 2,164,050 50,178,909
-------------------------------------------------------------------------
482,479,592
FOOD & BEVERAGE--5.8%
Nabisco Group Holdings 7,709,000 168,152,563
-------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
HEALTH--12.3%
HEALTH INDUSTRY SERVICES--6.7%
Humana Inc.* 13,511,070 75,999,769
McKesson HBOC, Inc. 7,065,420 116,137,841
-------------------------------------------------------------------------
192,137,610
HOSPITAL MANAGEMENT--5.6%
Tenet Healthcare Corp.* 6,329,800 162,201,125
-------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE
<S> <C> <C> <C> <C> <C>
FINANCIAL--28.2%
BANKS--16.3%
Bank One Corp. 5,272,279 $ 174,314,724
Bank of America Corp. 1,301,681 72,324,651
First Union Corp. 1,430,320 50,329,385
FleetBoston Financial Corp. 2,054,249 77,676,290
KeyCorp 2,369,900 49,767,900
PNC Bank Corp. 931,035 46,900,888
-------------------------------------------------------------------------
471,313,838
INSURANCE--1.6%
Ohio Casualty Corp. 291,600 3,480,975
Safeco Corp. 630,400 15,484,200
St. Paul Companies, Inc. 684,010 25,650,375
-------------------------------------------------------------------------
44,615,550
OTHER FINANCIAL COMPANIES--10.3%
Federal Home Loan Mortgage Corp. 3,006,800 133,802,600
Federal National Mortgage
Association 2,495,200 150,023,900
Prison Realty Trust, Inc.(REIT)* 6,321,740 15,804,350
-------------------------------------------------------------------------
299,630,850
----------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--4.1%
ENVIRONMENTAL SERVICES
Transocean Sedo Forex, Inc. 1,217,600 59,890,700
Waste Management, Inc.* 2,812,800 57,310,800
-------------------------------------------------------------------------
117,201,500
----------------------------------------------------------------------------------------------------------------------
ENERGY--15.7%
OIL & GAS PRODUCTION--13.0%
BP Amoco PLC 850,308 46,235,495
Conoco, Inc. "A" 7,083,458 189,482,502
Conoco, Inc. "B" 312,500 8,906,250
Nabors Industries, Inc.* 228,700 9,834,100
Texaco, Inc. 2,083,700 119,682,519
-------------------------------------------------------------------------
374,140,866
OILFIELD SERVICES/EQUIPMENT--2.7%
Diamond Offshore Drilling, Inc. 407,300 16,648,388
ENSCO International, Inc. 564,600 19,725,713
Global Marine Inc.* 457,600 12,955,800
Noble Drilling Corp.* 302,900 13,138,288
Santa Fe International Corp. 409,600 15,897,600
-------------------------------------------------------------------------
78,365,789
----------------------------------------------------------------------------------------------------------------------
UTILITIES--3.7%
NATURAL GAS DISTRIBUTION
Columbia Energy Group 1,632,900 105,628,219
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $3,066,885,423) 2,680,363,325
-------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost $3,270,621,400)(a) $2,884,099,302
-------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
* Non-income producing security.
** Repurchase agreements are fully collateralized by U.S. Treasury or Government
agency securities.
(a) The cost for federal income tax purposes was $3,270,621,400. At May 31,
2000, the net unrealized depreciation for all securities based on tax cost
was $386,522,098. This consists of aggregate gross unrealized appreciation
for all securities in which there was an excess of value over tax cost of
$384,738,757 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value of $771,260,855.
12 The accompanying notes are an integral part of the financial statements.
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF ASSETS & LIABILITIES
as of May 31, 2000
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $3,270,621,400) $2,884,099,302
------------------------------------------------------------------------------
Cash 390
------------------------------------------------------------------------------
Dividends receivable 8,775,809
------------------------------------------------------------------------------
Interest receivable 29,029
------------------------------------------------------------------------------
Receivable for Fund shares sold 4,754,206
------------------------------------------------------------------------------
TOTAL ASSETS 2,897,658,736
------------------------------------------------------------------------------
LIABILITIES
Payable for Fund shares redeemed 10,036,580
------------------------------------------------------------------------------
Accrued management fee 1,660,036
------------------------------------------------------------------------------
Other accrued expenses and payables 2,501,744
------------------------------------------------------------------------------
Total liabilities 14,198,360
------------------------------------------------------------------------------
NET ASSETS, AT VALUE $2,883,460,376
------------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income (loss) $ 307,981
------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (386,522,098)
------------------------------------------------------------------------------
Accumulated net realized gain (loss) (173,959,954)
------------------------------------------------------------------------------
Paid-in capital 3,443,634,447
------------------------------------------------------------------------------
NET ASSETS, AT VALUE $2,883,460,376
------------------------------------------------------------------------------
NET ASSET VALUE AND OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($1,388,770,764 / 49,944,763 shares of capital stock
outstanding, $.01 par value, 560,000,000 shares
authorized) $27.81
------------------------------------------------------------------------------
Maximum offering price per share (100/94.25 of $27.81) $29.51
------------------------------------------------------------------------------
CLASS B SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share
($1,218,784,354 / 44,051,250 shares of capital stock
outstanding, $.01 par value, 560,000,000 shares
authorized) $27.67
------------------------------------------------------------------------------
CLASS C SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($256,653,346
/ 9,264,782 shares of capital stock outstanding, $.01 par
value, 80,000,000 shares authorized) $27.70
------------------------------------------------------------------------------
CLASS I SHARES
Net asset value, offering and redemption price per share
($19,251,912 / 692,247 shares of capital stock
outstanding, $.01 par value, 80,000,000 shares authorized) $27.81
------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended May 31, 2000
(UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME
Income:
Dividends--Unaffiliated issuers (net of foreign taxes
withheld of $105,155) $ 54,028,535
-----------------------------------------------------------------------------
Dividends--Affiliated issuers 785,804
-----------------------------------------------------------------------------
Interest 5,195,190
-----------------------------------------------------------------------------
Total income 60,009,529
-----------------------------------------------------------------------------
Expenses: Management fee 11,117,303
-----------------------------------------------------------------------------
Services to shareholders 5,303,505
-----------------------------------------------------------------------------
Custodian fees 54,972
-----------------------------------------------------------------------------
Distribution services fees 6,153,840
-----------------------------------------------------------------------------
Administrative services fees 3,690,269
-----------------------------------------------------------------------------
Auditing 35,868
-----------------------------------------------------------------------------
Legal 64,352
-----------------------------------------------------------------------------
Directors' fees and expenses 53,018
-----------------------------------------------------------------------------
Reports to shareholders 564,493
-----------------------------------------------------------------------------
Registration fees 53,850
-----------------------------------------------------------------------------
Other 47,013
-----------------------------------------------------------------------------
Total expenses, before expense reductions 27,138,483
-----------------------------------------------------------------------------
Expense reductions (133,600)
-----------------------------------------------------------------------------
Total expenses, after expense reductions 27,004,883
-----------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 33,004,646
-----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments (165,926,203)
-----------------------------------------------------------------------------
Futures 18,261,264
-----------------------------------------------------------------------------
Foreign currency related transactions (554)
-----------------------------------------------------------------------------
(147,665,493)
-----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period on:
Investments 6,201,902
-----------------------------------------------------------------------------
Futures (11,136,000)
-----------------------------------------------------------------------------
(4,934,098)
-----------------------------------------------------------------------------
Net gain (loss) on investment transactions (152,599,591)
-----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $(119,594,945)
-----------------------------------------------------------------------------
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MAY 31, 2000 NOVEMBER 30,
(UNAUDITED) 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ 33,004,646 88,390,523
---------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (147,665,493) 344,762,359
---------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period (4,934,098) (915,897,407)
---------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (119,594,945) (482,744,525)
---------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A (23,847,916) (51,924,514)
---------------------------------------------------------------------------------------------------------
Class B (15,840,940) (26,883,876)
---------------------------------------------------------------------------------------------------------
Class C (3,434,543) (5,944,501)
---------------------------------------------------------------------------------------------------------
Class I (298,759) (674,142)
---------------------------------------------------------------------------------------------------------
From net realized gains
Class A (140,729,901) (107,299,526)
---------------------------------------------------------------------------------------------------------
Class B (129,557,876) (100,702,505)
---------------------------------------------------------------------------------------------------------
Class C (28,159,067) (20,538,004)
---------------------------------------------------------------------------------------------------------
Class I (1,475,168) (1,303,809)
---------------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 507,944,427 1,903,103,348
---------------------------------------------------------------------------------------------------------
Reinvestment of distributions 312,090,291 287,242,985
---------------------------------------------------------------------------------------------------------
Cost of shares redeemed (1,817,364,208) (2,237,222,950)
---------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions (997,329,490) (46,876,617)
---------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets (1,460,268,605) (844,892,019)
---------------------------------------------------------------------------------------------------------
Net assets at beginning of period 4,343,728,981 5,188,621,000
---------------------------------------------------------------------------------------------------------
Net assets at end of period (including undistributed net
investment income of $307,981 and $10,725,492, respectively) $ 2,883,460,376 4,343,728,981
---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 15
<PAGE> 16
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLES INCLUDE SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
CLASS A
SIX MONTHS YEAR ENDED ELEVEN MONTHS YEAR ENDED
ENDED NOVEMBER 30, ENDED DECEMBER 31,
MAY 31, 2000 ----------------- NOVEMBER 30, ---------------------------
(UNAUDITED) 1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $30.45 35.69 33.52 26.52 21.49 15.11 15.50
------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .33(a) 0.71(a) 0.73 0.54 0.39 0.26 0.25
------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment transactions (.32) (3.69) 3.80 6.89 5.75 6.76 (0.39)
------------------------------------------------------------------------------------------------------------------------
Total from investment operations .01 (2.98) 4.53 7.43 6.14 7.02 (0.14)
------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.40) (0.70) (0.86) (0.37) (0.38) (0.24) (0.25)
------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment
transactions (2.25) (1.56) (1.50) (0.06) (0.73) (0.40) --
------------------------------------------------------------------------------------------------------------------------
Total distributions (2.65) (2.26) (2.36) (0.43) (1.11) (0.64) (0.25)
------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $27.81 30.45 35.69 33.52 26.52 21.49 15.11
------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (C) .76** (8.88) 14.25 28.15** 28.79 46.86(B) (0.99)(B)
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) 1,389 2,043 2,420 1,383 386 76 35
------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) 1.28* 1.20 1.19 1.22* 1.21 1.57 1.39
------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) 1.27* 1.20 1.19 1.22* 1.21 1.25 1.25
------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
(%) 2.51* 2.09 2.28 2.38* 2.12 1.55 1.58
------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 4* 33 7 5* 10 18 12
------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
SIX MONTHS YEAR ENDED ELEVEN MONTHS
ENDED NOVEMBER 30, ENDED YEAR ENDED SEPTEMBER 11
MAY 31, 2000 ----------------- NOVEMBER 30, DECEMBER 31, TO DECEMBER 31,
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $30.31 35.51 33.37 26.44 21.47 19.45
---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .22(a) 0.42(a) 0.45 0.31 0.19 0.07
---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment transactions (.32) (3.66) 3.75 6.84 5.72 2.41
---------------------------------------------------------------------------------------------------------------------
Total from investment operations (.10) (3.24) 4.20 7.15 5.91 2.48
---------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.29) (0.40) (0.56) (0.16) (0.21) (0.06)
---------------------------------------------------------------------------------------------------------------------
Net realized gains on investment
transactions (2.25) (1.56) (1.50) (0.06) (0.73) (0.40)
---------------------------------------------------------------------------------------------------------------------
Total distributions (2.54) (1.96) (2.06) (0.22) (0.94) (0.46)
---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $27.67 30.31 35.51 33.37 26.44 21.47
---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (C) .34** (9.62) 13.22 27.10** 27.63(B) 12.88(B)**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($
millions) 1,219 1,865 2,276 1,300 295 17
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) 2.13* 2.03 2.06 2.12* 2.31 2.35*
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) 2.12* 2.03 2.06 2.12* 2.20 2.00*
---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
(loss) (%) 1.66* 1.26 1.41 1.48* 1.13 0.61*
---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 4* 33 7 5* 10 18*
---------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
SIX MONTHS YEAR ENDED ELEVEN MONTHS
ENDED NOVEMBER 30, ENDED YEAR ENDED SEPTEMBER 11
MAY 31, 2000 ----------------- NOVEMBER 30, DECEMBER 31, TO DECEMBER 31,
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $30.34 35.54 33.38 26.45 21.48 19.45
------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .22(a) 0.43(a) 0.45 0.32 0.20 0.09
------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment transactions (.31) (3.66) 3.79 6.83 5.72 2.41
------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.09) (3.23) 4.24 7.15 5.92 2.50
------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.30) (0.41) (0.58) (0.16) (0.22) (0.07)
------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment
transactions (2.25) (1.56) (1.50) (0.06) (0.73) (0.40)
------------------------------------------------------------------------------------------------------------------------
Total distributions (2.55) (1.97) (2.08) (0.22) (0.95) (0.47)
------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $27.70 30.34 35.54 33.38 26.45 21.48
------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%)(C) .34** (9.60) 13.32 27.10** 27.66(B) 12.94(b)**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) 257 414 462 221 44 2
------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) 2.08* 2.00 2.01 2.10* 2.33 2.30*
------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) 2.07* 2.00 2.01 2.10* 2.22 1.95*
------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
(%) 1.71* 1.29 1.46 1.50* 1.11 0.66*
------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 4* 33 7 5* 10 18*
------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS I
SIX MONTHS YEAR ENDED ELEVEN MONTHS
ENDED NOVEMBER 30, ENDED YEAR ENDED NOVEMBER 1
MAY 31, 2000 ----------------- NOVEMBER 30, DECEMBER 31, TO DECEMBER 31,
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $30.45 35.71 33.51 26.49 21.51 19.90
------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .38(a) 0.84(a) 0.95 0.75 0.54 0.04
------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment transactions (.31) (3.70) 3.76 6.81 5.70 2.03
------------------------------------------------------------------------------------------------------------------------
Total from investment operations .07 (2.86) 4.71 7.56 6.24 2.07
------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.46) (0.84) (1.01) (0.48) (0.53) (0.06)
------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment
transactions (2.25) (1.56) (1.50) (0.06) (0.73) (0.40)
------------------------------------------------------------------------------------------------------------------------
Total distributions (2.71) (2.40) (2.51) (0.54) (1.26) (0.46)
------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $27.81 30.45 35.71 33.51 26.49 21.51
------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) .96** (8.54) 14.83 28.71** 29.36 10.47(B)**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) 19 22 31 28 12 3
------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) .87* 0.82 0.76 0.83* 0.88 0.85*
------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) .86* 0.82 0.76 0.83* 0.88 0.47*
------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
(%) 2.92* 2.47 2.71 2.77* 2.45 1.99*
------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 4* 33 7 5* 10 18*
------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Total return does not reflect the effect of sales charges.
** Not annualized
* Annualized
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1
SIGNIFICANT
ACCOUNTING POLICIES Kemper-Dreman High Return Equity Fund ("the Fund")
is a diversified series of Kemper Value Series,
Inc. (the "Corporation") which is registered under
the Investment Company Act of 1940, as amended (the
"1940 Act"), as an open-end, management investment
company organized as a Maryland Corporation.
The Fund offers multiple classes of shares. Class A
shares are offered to investors subject to an
initial sales charge. Class B shares are offered
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are offered without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares 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.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of the Fund have
equal rights with respect to voting subject to
class specific arrangements.
The Fund's financial statements are prepared in
accordance with generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Investments are stated at value
determined as of the close of regular trading on
the New York Stock Exchange. Securities which are
traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on
the exchange on which the security is traded most
extensively. If no sale occurred, the security is
then valued at the calculated mean between the most
recent bid and asked quotations. If there are no
such bid and asked quotations, the most recent bid
quotation is used. Securities quoted on the Nasdaq
Stock Market ("Nasdaq"), for which there have been
sales, are valued at the most recent sale price
reported. If there are no such sales, the value is
the most recent bid quotation. Securities which are
not quoted on Nasdaq but are traded in another
over-the-counter market are valued at the most
recent sale price, or if no sale occurred, at the
calculated mean between the most recent bid and
asked quotations on such market. If there are no
such bid and asked quotations, the most recent bid
quotation shall be used. Money market instruments
purchased with an original maturity of sixty days
or less are valued at amortized cost. All other
securities are valued at their fair value as
determined in good faith by the Valuation Committee
of the Board of Directors.
REPURCHASE AGREEMENTS. The Fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
which at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
FUTURES CONTRACTS. A futures contract is an
agreement between a buyer or seller and an
established futures exchange or its clearinghouse
in which the buyer or seller agrees to take or make
a delivery of a specific amount of a financial
instrument at a specified price on a specific date
(settlement date). During the period, the Fund
purchased securities index futures as a temporary
substitute for purchasing selected investments.
Upon entering into a futures contract, the Fund is
required to deposit with a financial intermediary
an amount ("initial margin") equal to a certain
percentage of the face value indicated in the
futures contract. Subsequent payments ("variation
margin") are made or received by the Fund dependent
upon the daily fluctuations in the value of the
underlying security and are recorded for financial
reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction,
the Fund will realize a gain or loss equal to the
difference between the value of the futures
contract to sell and the futures contract to buy.
Futures contracts are valued at the most recent
settlement price.
Certain risks may arise upon entering into futures
contracts, including the risk that an illiquid
secondary market will limit the Fund's ability to
close out a futures contract prior to the
settlement date and that a change in the value of a
futures contract may not correlate exactly with the
changes in the value of the securities or
currencies hedged. When utilizing futures contracts
to hedge, the Fund gives up the opportunity to
profit from favorable price movements in the hedged
positions during the term of the contract.
FEDERAL INCOME TAXES. The Fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies and to distribute
all of its taxable income to its shareholders.
Accordingly, the Fund paid no federal income taxes
and no federal income tax provision was required.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made quarterly.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the Fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, the Fund must periodically
make reclassifications among certain of its capital
accounts without impacting the net asset value of
the Fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Dividend income is recorded on
the ex-dividend date. Realized gains and losses
from investment transactions are recorded on an
identified cost basis. All discounts are accreted
for both tax and financial reporting purposes.
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2
PURCHASES AND SALES
OF SECURITIES For the six months ended May 31, 2000, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $ 66,369,212
Proceeds from sales 1,072,148,734
The aggregate face value of futures contracts
opened and closed for the six months ended May 31,
2000 was $343,366,695 and $814,035,741,
respectively.
--------------------------------------------------------------------------------
3
TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a monthly investment
management fee of 1/12 of the annual rate of .75%
of the first $250 million of average daily net
assets declining to .62% of average daily net
assets in excess of $12.5 billion. For the six
months ended May 31, 2000, the Fund incurred a
management fee of $11,117,303, which is equivalent
to an annualized effective rate of .70% of average
daily net assets. Dreman Value Management, L.L.C.
serves as sub-adviser with respect to the
investment and reinvestment of assets in the Fund,
and is paid by Scudder Kemper for its services.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the six months ended May 31,
2000 are $128,106.
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares pursuant to separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the six months ended May 31, 2000 are
$11,129,323, of which $655,310 is unpaid at May 31,
2000.
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of Fund accounts the firms
service. Administrative services fees paid by the
Fund to KDI for the six months ended May 31, 2000
are $3,690,269 of which $406,675 is unpaid at May
31, 2000. Additionally, $12,286 was paid by KDI to
affiliates.
SHAREHOLDER SERVICE AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of
$3,778,132 for the six months ended May 31, 2000 of
which $1,297,453 is unpaid at May 31, 2000.
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, 2000, the
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
Fund made no payments to its officers and incurred
directors fees of $53,018 to independent directors.
--------------------------------------------------------------------------------
4
CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MAY 31, 2000 NOVEMBER 30, 1999
--------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 14,050,308 $ 364,137,825 32,688,681 $ 1,096,148,426
-----------------------------------------------------------------------------------
Class B 3,621,733 93,835,898 15,739,091 530,959,317
-----------------------------------------------------------------------------------
Class C 1,570,946 40,684,602 6,083,792 205,292,020
-----------------------------------------------------------------------------------
Class I 339,854 8,933,734 536,355 18,059,086
-----------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 5,936,822 154,217,252 4,447,453 149,554,834
-----------------------------------------------------------------------------------
Class B 5,030,377 130,300,914 3,414,866 114,610,098
-----------------------------------------------------------------------------------
Class C 994,892 25,802,941 628,415 21,100,107
-----------------------------------------------------------------------------------
Class I 68,228 1,769,184 58,817 1,977,946
-----------------------------------------------------------------------------------
SHARES REDEEMED
Class A (37,191,242) (959,232,465) (39,387,626) (1,298,880,643)
-----------------------------------------------------------------------------------
Class B (26,066,153) (668,115,906) (20,168,633) (661,431,231)
-----------------------------------------------------------------------------------
Class C (6,945,003) (178,534,385) (6,057,301) (198,289,294)
-----------------------------------------------------------------------------------
Class I (426,631) (11,129,084) (758,245) (25,977,283)
-----------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 44,241 352,368 1,547,907 52,644,499
-----------------------------------------------------------------------------------
Class B (44,106) (352,368) (1,555,082) (52,644,499)
-----------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $(997,329,490) $ (46,876,617)
-----------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
5
TRANSACTIONS IN
SECURITIES OF
AFFILIATED ISSUERS An affiliated issuer is a company in which the Fund
has ownership of at least 5% of the voting
securities. A summary of the Fund's transactions
with a company which was an affiliate during the
six months ended May 31, 2000 is as follows:
<TABLE>
<CAPTION>
PURCHASES SALES DIVIDEND
AFFILIATE COST ($) COST ($) INCOME ($) VALUE ($)
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------
Borders Group, Inc. -- 17,422,421 -- 88,630,664
-------------------------------------------------------------------------------
Humana Inc. -- -- -- 75,999,769
-------------------------------------------------------------------------------
Universal Corp. -- 12,057,067 785,804 50,178,909
-------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
6
EXPENSE OFF-SET
ARRANGEMENTS The Fund has entered into arrangements with its
custodian and transfer agent whereby credits
realized as a result of uninvested cash balances
were used to reduce a portion of the Fund's
expenses. During the period, the Fund's custodian
and transfer agent fees were reduced by $29,660 and
$103,940, respectively, under these arrangements.
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7
LINE OF CREDIT The Fund and several Kemper funds (the
"Participants") share in a $750 million revolving
credit facility for temporary or emergency
purposes, including the meeting of redemption
requests that otherwise might require the untimely
disposition of securities. The Participants are
charged an annual commitment fee which is allocated
pro rata among each of the Participants. Interest
is calculated based on the market rates at the time
of the borrowing. The Fund may borrow up to a
maximum of 33 percent of its net assets under the
agreement.
22
<PAGE> 23
NOTES
23
<PAGE> 24
DIRECTORS & OFFICERS
<TABLE>
<S> <C> <C>
DIRECTORS OFFICERS
JAMES E. AKINS MARK S. CASADY WILLIAM F. TRUSCOTT
Director President Vice President
JAMES R. EDGAR PHILLIP J. COLLORA LINDA J. WONDRACK
Director Vice President and Vice President
Secretary
ARTHUR R. GOTTSCHALK MAUREEN E. KANE
Director JAMES M. EYSENBACH Assistant Secretary
Vice President
FREDERICK T. KELSEY CAROLINE PEARSON
Director JOHN R. HEBBLE Assistant Secretary
Treasurer
THOMAS W. LITTAUER BRENDA LYONS
Director and Vice President ANN M. MCCREARY Assistant Treasurer
Vice President
FRED B. RENWICK
Director KATHRYN L. QUIRK
Vice President
JOHN G. WEITHERS
Director LOIS R. ROMAN
Vice President
THOMAS F. SASSI
Vice President
</TABLE>
<TABLE>
<S> <C>
.............................................................................................
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
.............................................................................................
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 219557
Kansas City, MO 64121
.............................................................................................
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 02110
.............................................................................................
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
.............................................................................................
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
</TABLE>
[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 Fund/Value Style prospectus.
KDHRF - 3 (7/25/00) 1116580
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
