<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED OCTOBER 31, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[MORNINGSTAR RATINGS LOGO]
Seeking the highest total return, a combination of income
and capital appreciation, consistent with reasonable risk
KEMPER
TOTAL RETURN FUND
"... Our conservative approach to growth served
the fund well during the market downturns, while
also providing good opportunities to
participate in the upswings. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
10
Industry Sectors
11
Largest Holdings
12
Portfolio of
Investments
18
Report of
Independent Auditors
19
Financial Statements
21
Notes to
Financial Statements
25
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER TOTAL RETURN FUND
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31, 1998
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 10.47%
CLASS B 9.30%
CLASS C 9.50%
LIPPER BALANCED FUNDS CATEGORY AVERAGE* 9.13%
- --------------------------------------------------------------------------------
</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
10/31/98 10/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER TOTAL RETURN FUND
CLASS A $10.54 $11.34
- --------------------------------------------------------------------------------
KEMPER TOTAL RETURN FUND
CLASS B $10.52 $11.33
- --------------------------------------------------------------------------------
KEMPER TOTAL RETURN FUND
CLASS C $10.54 $11.34
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER TOTAL RETURN FUND
RANKINGS AS OF 10/31/98
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER BALANCED FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #151 of 395 FUNDS #196 of 395 FUNDS #189 of 395 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #121 of 150 FUNDS N/A N/A
- --------------------------------------------------------------------------------
10-YEAR #16 of 56 FUNDS N/A N/A
- --------------------------------------------------------------------------------
15-YEAR #20 of 29 FUNDS N/A N/A
- --------------------------------------------------------------------------------
20-YEAR #6 of 28 FUNDS N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
DURING THE YEAR ENDED OCTOBER 31, 1998, KEMPER TOTAL RETURN FUND MADE THE
FOLLOWING DISTRIBUTIONS PER SHARE
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME DIVIDEND $0.3125 $0.2043 $0.2150
- --------------------------------------------------------------------------------
SHORT-TERM
CAPITAL GAIN $0.52 $0.52 $0.52
- --------------------------------------------------------------------------------
LONG-TERM
CAPITAL GAIN $1.03 $1.03 $1.03
- --------------------------------------------------------------------------------
</TABLE>
TERMS TO KNOW
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR FIXED-INCOME FUND STYLE BOX
- --------------------------------------------------------------------------------
[MATURITY QUALITY DIAGRAM]
Source: Data provided by Morningstar, Inc., Chicago, IL., 312-696-6000. The
Equity Style Box placement is based on a fund's price-to-earnings and
price-to-book ratios relative to the S&P 500, as well as the size of the
companies in which it invests, or median market capitalization.
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 Total Return
Fund in the Domestic Hybrid Category. Please consult the prospectus for a
description of investment policies.
DURATION A measure of the interest rate sensitivity of a bond or portfolio,
incorporating time to maturity and coupon size. The longer the duration, the
greater the interest rate risk.
HIGH-YIELD BOND Issued by companies, often without long track records of sales
and earnings, or by those with questionable credit strength. These bonds present
greater risk to principal and income than higher quality bonds. To compensate
for the greater potential risk, these bonds offer investors a higher yield.
MULTIPLE Synonym for price-to-earnings ratio. The price of a stock divided by
its earnings per share. The statistic is a measure of how much an investor is
paying for the company's earning power.
VOLATILITY Characteristic of a security, commodity or market to rise or fall
sharply in price within a short period of time. A stock may be volatile due to
uncertainty in a company, industry, market or economy.
<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 1998 comes to a close. 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 1100-point range, up nearly 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.
Although there was no good news to be garnered from the sensationalized
presidential scandal, as the shock of Kenneth Starr's report wore off, the
nation seemed to refocus its attention on other matters. In this sense, another
veil of despair was lifted.
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 has remained
fairly high, although not quite as high as last year. 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 between 2.5 percent and 3.5 percent for the second half of 1998 and is
anticipated to hover around 2 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.
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>
NOV 98 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1)* 4.53 5.64 6.03 6.53
PRIME RATE(2)* 8.12 8.50 8.50 8.25
INFLATION RATE(3)* 1.49 1.50 2.08 2.99
THE U.S. DOLLAR(4) 0.83 6.86 9.65 3.46
CAPITAL GOODS ORDERS(5)* 2.51 7.47 10.64 9.19
INDUSTRIAL PRODUCTION(5)* 2.12 4.97 6.72 4.93
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 OCTOBER 31, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
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.
If you're a long-term investor in today's short-term world, go ahead and
breathe that sigh of relief as 1998 comes to an end -- but get ready for 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. The threat of impeachment, new
acts of terrorism 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.
I would like to take this opportunity to 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
MANAGING DIRECTOR
SCUDDER KEMPER INVESTMENTS, INC
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF DR. JOHN SILVIA AS OF DECEMBER 2, 1998, 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
[LANGBAUM PHOTO]
GARY A. LANGBAUM HAS BEEN WITH SCUDDER KEMPER INVESTMENTS, INC. SINCE 1988 AND
IS A MANAGING DIRECTOR. HE IS ALSO A VICE PRESIDENT AND LEAD PORTFOLIO MANAGER
OF KEMPER TOTAL RETURN FUND. LANGBAUM IS A CHARTERED FINANCIAL ANALYST WITH 28
YEARS OF EXPERIENCE IN EQUITY RESEARCH AND PORTFOLIO MANAGEMENT. HE RECEIVED HIS
BACHELOR'S DEGREE AND COMPLETED HIS MASTER'S OF BUSINESS ADMINISTRATION
COURSEWORK FROM THE UNIVERSITY OF MARYLAND.
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.
DESPITE THE VOLATILE MARKET ENVIRONMENT, LEAD PORTFOLIO MANAGER GARY LANGBAUM
LED KEMPER TOTAL RETURN FUND TO A ONE-YEAR RETURN (UNADJUSTED FOR ANY SALES
CHARGE) THAT TOPPED THE CATEGORY AVERAGE. BELOW, HE DISCUSSES THE CHALLENGES OF
THE MARKET AND HOW HE POSITIONED THE FUND DURING THE ANNUAL PERIOD.
Q GARY, THE STOCK MARKET DOMINATED THE HEADLINES DURING THE PAST YEAR. COULD
YOU PROVIDE US WITH A BRIEF OVERVIEW OF WHAT WAS HAPPENING, STARTING WITH THE
CLIMATE AS WE ENTERED THE FISCAL YEAR?
A Certainly. While there were periods of brisk market activity during the
fiscal year, volatility was ever present. Investors grappled with uncertainty
and struggled to make sense of the potential impact of international and
domestic macro-economic events.
The fiscal year began last November in the wake of Gray Monday, October
27, 1997, when the U.S. markets slid seven percent. Concerns relating to the
economic strength of several Southeast Asian countries prompted this steep
decline. Uncertainty abroad cast a shadow close to home: investors began to
wonder if domestic growth would be sustainable, how the flagging Asian nations
would impact our markets and the magnitude of the negative effect that the
currency translation would have on the earnings of U.S. multinational companies.
Despite the steep one-day sell-off, investors returned to the market quite
quickly. The markets surged forward. The general perception was that the U.S.
economy was strong, and that corporate earnings would continue to grow, albeit
at a slower pace. Many companies posted strong fourth quarter earnings, boosting
confidence even further. From November through the first quarter of 1998, the
markets rallied briskly.
Not all stocks shared equally in this upswing, however. Investors bid up
the prices of a handful of stocks of large, domestic "household name" companies.
Even in the midst of the rally, the market couldn't shake the jitters. Stocks
that fell short of investors' perceptions were punished. By the second quarter,
the markets became very narrow, and upward momentum was confined to a very small
group of stocks. So, even during the rallies, volatility remained a key force.
During this time, U.S. Treasury bonds held up well.
In August, the Russian debt default triggered a frenetic global sell-off.
Now, investors were trying to unravel the consequences of international events
across the globe--in Asia and in Russia. Anxiety about Latin America was also in
the air. A broad-based correction cut a wide swath in the market. Financial
services stocks felt the greatest impact, but there was no safe haven. Even the
"household name" stocks suffered. High-yield bonds also struggled a great deal.
The only safe haven was in U.S. Treasury issues as the long bond yield moved to
new lows.
And, again, as we saw in the fourth quarter of last year, the market
rebounded briskly after its sharp decline. Representatives from leading nations
met to discuss international global policy, and the Federal Reserve lowered
interest rates. Investors responded with renewed
5
<PAGE> 6
PERFORMANCE UPDATE
confidence. As we concluded the fiscal year in October, the equity markets
rocketed upward again. The rally reflected broader participation, with small-cap
stocks and cyclical stocks beginning to perk up.
Q HOW DID THE FUND PERFORM IN SUCH A CHOPPY MARKET?
A The fund posted a very respectable return. For the one-year period ending
October 31, 1998, Kemper Total Return Fund gained 10.47 percent (Class A shares,
unadjusted for any sales charge). The fund surpassed the Lipper Balanced Fund
Category average of 9.13 percent.
In comparison, the S&P 500, often used as a gauge of the stock market,
rose 22.01 percent. The Lehman Brothers Aggregate Bond Index posted a more
modest return of 9.34 percent. Because Kemper Total Return Fund balances assets
between stocks and bonds, it makes sense that returns would fall in between
these indices.
Q LET'S ELABORATE ON ASSET ALLOCATION: COULD YOU COMMENT ON THE ROLE OF
BALANCED FUNDS IN VOLATILE MARKET CLIMATES?
A First, perhaps it would be helpful to briefly review the themes that
underlie the asset allocation approach. Historical market activity has
demonstrated that diversifying among asset classes is one strategy for reducing
potential overall volatility. Typically, asset classes respond differently to
market and economic conditions. If one asset class falters, other asset classes
can bolster returns. We believe this approach can be particularly beneficial
during periods of spiking short-term volatility. This balanced approach is
designed to pursue steady, consistent returns over the long-term.
Q HOW DO YOU DETERMINE THE MIX BETWEEN STOCKS AND BONDS?
A We look at a variety of factors to determine the weightings of stocks and
bonds in the fund. To determine a potentially opportune mix between stocks,
bonds and money market instruments, we analyze fiscal policy, economic issues,
inflation and interest-rate trends. In addition, we are constantly assessing the
attractiveness of individual equity issues. Finally, we believe in maintaining a
relatively stable mix of 60-65 percent stocks and 35-40 percent bonds.
Q THE BOND STAKE INCLUDES DIFFERENT TYPES OF FIXED-INCOME SECURITIES. WHAT
GOALS DO YOU SEEK TO ADDRESS WITHIN THE BOND ALLOCATION?
A In keeping with our total return approach, we strive to pursue stability
and income potential. We favor U.S. Treasuries for their stability, adding
income potential through a mix of high-grade and high-yield securities.
During the course of this year, we opted to move the fund in a more
conservative direction. In the volatile market climate we've seen, we believed
it was wise to shift a greater amount into government bonds. We started off the
fiscal year with a mix of 61 percent stocks, 21 percent government bonds, 14
percent corporate bonds and 4 percent cash. At the close of the fiscal year, the
fund held 60 percent in stocks, 27 percent in government bonds, and 12 percent
in corporate bonds, with the remainder in cash. As a technique to mitigate
interest-rate risk, we also trimmed the duration (see Terms to Know) of the bond
portfolio.
Q NOW THAT WE'VE COVERED THE BOND ALLOCATION, LET'S FOCUS ON THE EQUITY
SEGMENT OF THE FUND. HOW DID YOU SELECT STOCKS IN THIS ENVIRONMENT? DID YOU
ALTER THE STRATEGY IN RESPONSE TO THE CHOPPY MARKET CLIMATE?
A We'd describe our approach to equities as conservative and
growth-oriented. We've historically targeted large-cap, domestically oriented,
quality companies trading at good prices.
Since taking over the management of the fund in January, 1995, regardless
of the market climate, we have followed a consistent
growth-at-a-reasonable-price (GARP) stock selection strategy. In fact, our
discipline seeks to translate volatility into opportunity. For instance, when
the consumer staples and leading retail stocks began to correct in mid-summer,
we saw these price declines as opportunities to step up to the plate. We added
companies like Wal-Mart, Home Depot, Coca Cola and Colgate-Palmolive to the
fund. Similarly, when valuations became more reasonable, we added quality health
care names such as Pfizer.
We also take a disciplined approach when selling stocks. If a stock's
price approaches the target levels we've set for it, we'll begin to pare back
our position.
Q HOW DID THIS CONSERVATIVE APPROACH TO GROWTH IMPACT THE FUND'S
PERFORMANCE?
A On an asset-class level, our conservative approach to growth served the
fund well during the market downturns, while also providing good opportunities
to participate in the upswings. During the equity market's turmoil, our fixed-
income stake performed as we had anticipated, and provided a degree of
stability.
6
<PAGE> 7
PERFORMANCE UPDATE
Our stock-selection discipline also helped returns, with many of our large
holdings turning in nice gains. The fund enjoyed good performance from
telecommunication and technology stocks, such as MCI WorldCom and Ameritech.
Quality technology companies, including Cisco Systems, IBM and SunMicrosystems
also bolstered gains. Health care was another area where our GARP strategy paid
off, with Schering-Plough and Abbott Laboratories among the ranks of solid
performers.
Q WHAT DIDN'T TURN OUT AS WELL AS YOU WOULD HAVE LIKED?
A During much of the fiscal year, the fund's progress was impeded by the
flight to perceived quality. In an uncertain market climate, investors pushed up
the prices of many large-cap stocks beyond the range of what we felt was
sustainable, and we took profits. As a result, we did not fully participate in
the rally that occurred through the middle of the year.
In retrospect, energy exposure, which we use to diversify risk and
increase the yield of the fund, also dampened returns. Throughout the year,
energy stocks have responded to declining oil prices, and have underperformed
the markets. These stocks should rebound as the price of oil stabilizes and if
the companies have any positive developments. We have eliminated some energy
stocks from the portfolio, such as Schlumberger and Baker-Hughes. However, we
continue to feel that major energy stocks do have a place in the portfolio.
Overall, basic industries and capital goods were not vigorous performers,
though General Electric was a notable exception in the latter category. The fund
also felt a downward pull from retailers such as Consolidated Stores, Federated
Department Stores and Dollar General.
Due in part to our more conservative strategy, our pace relative to the
market slowed during the rally that followed the August correction. Because we
don't focus on small-cap or value-oriented stocks, we did not participate when
these rallied in autumn. Some of our more defensive stocks, such as energy and
utilities, were hurt as the market began to favor more aggressive cyclical
stocks.
While bonds served as a stabilizing factor in the equity market turmoil,
the trade-off was that we did not participate fully in the equity market rebound
during September and October. As Kemper Total Return Fund is a balanced fund,
this trade-off is one that we feel comfortable with. We understand that our
shareholders place a high premium on steady, consistent performance.
Treasury bonds had been good performers throughout most of the fiscal
year, but they did slow their pace during the final months. As liquidity became
a concern for more-nervous investors, high-yield bonds began to dip in
midsummer. High-yield bonds were also put under extreme pressure during the
Russian debt default.
Q WHERE HAVE YOU BEEN FINDING APPEALING STOCKS?
A We've found attractively valued stocks in a variety of sectors. To
preface, however, I'd like to highlight that when we discuss sector weightings,
it's important to think of those numbers as an end result. A high sector
weighting indicates that we found many attractive stocks within a given industry
group, not that we chose specific sectors to focus on and then selected stocks
within those sectors.
That said, the fund's largest stakes are in consumer nondurable, finance
and technology stocks. These are areas that have received the lion's share of
assets throughout the year. Here are some details on each.
CONSUMER NONDURABLE STOCKS: Many consumer nondurable stocks fall into the
"household names" camp. For much of the year, the prices of these names were
beyond our reach. Jittery investors had flocked to the sector, driving prices to
a point that we didn't think were in keeping with our GARP approach. When these
stocks began to correct in the summer and fall, our discipline was borne out. We
added a wide variety of stocks, including Coca Cola and Wal-Mart.
The fund holds positions in capital goods, health care, energy and
utilities. Stocks from the latter two sectors do offer diversification,
consistent with our conservative approach to growth. For instance, the fund
invests in energy stocks such as Exxon and Mobil, and telecommunication
utilities such as BellSouth, Ameritech and AT&T. These aren't necessarily pure
growth stocks, but they do offer income potential, in keeping with the fund's
total-return focus.
FINANCIAL SERVICES STOCKS: In the wake of the Russian debt crisis, many
financial services stocks were beaten down by investor emotion. We're using our
GARP approach to take advantage of the discrepancies between investor perception
and fundamental value. We've been selectively adding exposure to money-center
banks, such as Chase Manhattan Corp. and Citigroup.
TECHNOLOGY STOCKS: We've recently added semiconductor and
component-oriented stocks such as Xilinx, Applied Materials and Seagate
Technology. Our analysis suggests
7
<PAGE> 8
PERFORMANCE UPDATE
that the earnings outlook for these companies will improve during 1999, and that
their valuations are reasonable.
Q DO YOU THINK THAT THE MARKETS SHOULD SMOOTH OUT OVER THE NEXT YEAR?
A We believe that short-term volatility will continue. The uncertainty that
has driven the markets during the past year has not yet abated. Questions
surrounding Japan, Southeast Asia, and Brazil still cloud the horizon.
Nonetheless, we remain cautiously optimistic about the stock market. The
Federal Reserve has demonstrated its willingness to be proactive and to make
concerted efforts to stave off a recession. The inflationary environment is
benign, and interest rates remain at low levels. These are among the positive
signs that suggest that domestic corporate profits will be steady, though
perhaps not robust. At the end of October the Dow Jones Industrial Average is at
8,592. I would not be surprised if the Dow Jones Industrial Average once again
topped 9,000 by the end of 1998, and we could approach a high of 9,300. Our
initial forecast for 1999 is for another positive year, with equity gains of
10-15 percent likely.
Q THANKS, GARY. AS WE ENTER THE NEXT FISCAL YEAR, WHAT SORT OF PERSPECTIVE
DO YOU FEEL INVESTORS MAY FIND HELPFUL?
A We understand that shareholders can find market volatility unsettling. We
believe that a disciplined, diversified approach to investing still offers
strong potential for long-term investors. As we enter the next fiscal year, we
look forward to using our balanced, conservative growth approach to help our
shareholders address their objectives. We encourage investors to hold the
course.
8
<PAGE> 9
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
KEMPER TOTAL RETURN FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED OCTOBER 31, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER TOTAL RETURN FUND CLASS A 4.14% 9.45% 12.31% 11.78% (since 3/2/64)
- ------------------------------------------------------------------------------------------------------
KEMPER TOTAL RETURN FUND CLASS B 6.52 N/A N/A 12.82 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------
KEMPER TOTAL RETURN FUND CLASS C 9.50 N/A N/A 13.26 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND CLASS A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER
TOTAL RETURN RUSSELL LEHMAN BROTHERS
FUND 1000 GROWTH GOVERNMENT/CORPORATE
CLASS A(1) INDEX(+) BOND INDEX(++)
<S> <C> <C> <C>
1/1/79 9421.00 10000.00 10000.00
10146.00 10647.00 10259.00
10620.00 10949.00 10662.00
12057.00 11849.00 10548.00
12395.00 12389.00 10230.00
11675.00 11737.00 9376.00
13189.00 13432.00 11071.00
15483.00 15530.00 10384.00
17541.00 17292.00 10543.00
17697.00 16831.00 10616.00
17928.00 16050.00 10617.00
16034.00 14077.00 10254.00
17582.00 15333.00 11308.00
16187.00 13688.00 11710.00
16605.00 13577.00 12034.00
18338.00 15228.00 13690.00
21600.00 18470.00 14825.00
23971.00 20218.00 15291.00
27347.00 22816.00 15539.00
26271.00 22018.00 15779.00
25949.00 22063.00 16010.00
24415.00 20287.00 16092.00
23608.00 20050.00 15818.00
25641.00 21596.00 17139.00
25661.00 21853.00 18415.00
27903.00 24047.00 18809.00
29820.00 25592.00 20359.00
29014.00 24359.00 20766.00
12/31/85 32967.00 29031.00 22337.00
37378.00 33564.00 24243.00
39602.00 36315.00 24563.00
37456.00 31877.00 25058.00
38774.00 33496.00 25827.00
46418.00 41562.00 26208.00
47238.00 43153.00 25713.00
49297.00 46066.00 24962.00
37855.00 35270.00 26419.00
38831.00 36363.00 27365.00
39889.00 38318.00 27635.00
39848.00 38155.00 28150.00
41172.00 39244.00 28422.00
43183.00 41973.00 28736.00
46648.00 46199.00 31046.00
50275.00 51947.00 31337.00
49339.00 53344.00 32468.00
48560.00 51369.00 32096.00
53178.00 56367.00 33252.00
47957.00 47949.00 33453.00
51364.00 53205.00 35157.00
60136.00 62748.00 36104.00
59233.00 62146.00 36650.00
64440.00 66487.00 38758.00
12/31/91 71990.00 75100.00 40826.00
70143.00 71389.00 40214.00
67818.00 70610.00 41842.00
68572.00 73718.00 43887.00
73784.00 78860.00 43921.00
75466.00 78202.00 45964.00
76868.00 76987.00 47344.00
82336.00 78126.00 48910.00
82334.00 81148.00 48767.00
78052.00 77575.00 47240.00
73798.00 76790.00 46652.00
76209.00 82691.00 46883.00
74780.00 83310.00 47056.00
79911.00 91238.00 49400.00
86219.00 100215.00 52606.00
90682.00 109316.00 53613.00
94074.00 114296.00 56110.00
96005.00 120431.00 54798.00
99055.00 128091.00 55055.00
103905.00 132701.00 56027.00
109357.00 140710.00 57739.00
108577.00 141459.00 57241.00
122767.00 168213.00 59324.00
130025.00 180854.00 61403.00
130290.00 183598.00 63373.00
142410.00 177641.00 64334.00
144432.00 185687.00 66016.00
134798.00 168814.00 69286.00
10/31/98 138747.00 182386.00 68797.00
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND CLASS B
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Total Return Lehman Brothers
Fund Russell 1000 Government/Corporate
Class B(1) Growth Index(+) Bond Index(++)
<S> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00
9556.28 9705.00 9977.00
9850.22 10451.00 10026.00
9644.44 10529.00 10063.00
10281.90 15730.00 10564.00
11059.60 17278.00 11250.00
11606.00 18847.00 11465.00
12/31/95 12010.70 19705.00 11999.00
12240.70 20783.00 11718.00
12600.40 22084.00 11774.00
13187.80 22879.00 11981.00
12/31/96 13847.00 24259.00 12347.00
13714.70 24389.00 12241.00
15460.20 29001.00 12686.00
16338.40 31181.00 13131.00
16332.70 31654.00 13552.00
17814.10 30627.00 13758.00
18020.50 32014.00 14118.00
16773.70 29105.00 14817.00
10/31/98 17049.30 31445.00 14712.00
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND CLASS C
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Total Lehman Brothers
Return Fund Russell 1000 Government/Corporate
Class C(1) Growth Index(+) Bond Index(++)
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9567 9705 9977
9851 10451 10026
9646 10529 10063
10286 15730 10564
11079 17278 11250
11640 18847 11465
12/31/95 12052 19705 11999
12274 20783 11718
12638 22084 11774
13230 22879 11981
12/31/96 13894 24259 12347
13763 24389 12241
15515 29001 12686
16398 31181 13131
16394 31654 13552
17882 30627 13758
18096 32014 14118
16867 29105 14817
10/31/98 17344 31445 14712
</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 contingent deferred sales
charge in effect at the end of the period for Class B Shares. When
reviewing the performance chart, please note that the inception date for
the Russell 1000 Growth Index is January 1, 1979. As a result, we are
unable to illustrate the life of fund performance (since March 2, 1964) for
Kemper Total Return Fund Class A Shares. In comparing the Kemper Total
Return Fund to the indices, you should also note that the fund's
performance reflects the maximum sales charge, while no such charges are
reflected in the performance of the indices.
+ The Russell 1000 Growth Index is an unmanaged index comprised of common
stocks of larger U.S. Companies with greater than average growth
orientation and represents the universe of stocks from which "earnings/
growth" money managers typically select.
++ The Lehman Brothers Government/ Corporate Bond Index is an unmanaged index
comprised of intermediate and long-term government and investment grade
corporate debt securities. Source is TowersData.
9
<PAGE> 10
INDUSTRY SECTORS
A LOOK AT THE EQUITY PORTION OF KEMPER TOTAL RETURN FUND
The graph below provides a look at how the composition of the common stock
portion of the portfolio has changed in a year, by presenting the fund's sectors
represented on October 31, 1998, and on October 31, 1997.
[YEAR-TO-YEAR COMPARISON BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN FUND KEMPER TOTAL RETURN FUND
ON 10/31/98 ON 10/31/97
<S> <C> <C>
CONSUMER NON-DURABLES 23.6% 22.0%
FINANCE 18.2% 20.6%
TECHNOLOGY 16.1% 15.8%
HEALTH CARE 11.6% 9.9%
UTILITIES 9.5% 5.7%
ENERGY 9.0% 9.1%
CAPITAL GOODS 8.0% 8.8%
CONSUMER DURABLES 2.7% 4.4%
TRANSPORTATION 1.3% 1.8%
BASIC INDUSTRIES 0.0% 1.9%
</TABLE>
A COMPARISON WITH THE RUSSELL 1000 GROWTH INDEX*, THE FUND'S BENCHMARK FOR THE
EQUITY PORTION OF THE FUND
The equity portion of Kemper Total Return Fund can be compared to the Russell
1000 Growth Index as a benchmark. The graph below shows the percentage of the
common stocks in the portfolio that each sector of the Kemper Total Return Fund
represented on October 31, 1998, compared to the industry sectors of the Russell
1000 Growth Index.
[YEAR-TO-YEAR COMPARISON BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN FUND KEMPER TOTAL RETURN FUND
ON 10/31/98 ON 10/31/97
<S> <C> <C>
CONSUMER NON-DURABLES 23.6% 29.9%
FINANCE 18.2% 7.2%
TECHNOLOGY 16.1% 25.3%
HEALTH CARE 11.6% 22.2%
UTILITIES 9.5% 2.9%
ENERGY 9.0% 1.1%
CAPITAL GOODS 8.0% 9.2%
CONSUMER DURABLES 2.7% 0.6%
TRANSPORTATION 1.3% 0.1%
BASIC INDUSTRIES 0.0% 1.6%
</TABLE>
* The Russell 1000 Growth Index is an unmanaged index comprised of common stocks
of larger U.S. companies with greater than average growth orientation and
represents the universe of stocks from which "earnings/growth" money managers
typically select.
10
<PAGE> 11
LARGEST HOLDINGS
THE FUND'S LARGEST EQUITY HOLDINGS*
REPRESENTING 10.6 PERCENT OF THE FUND'S TOTAL COMMON STOCK HOLDINGS ON
OCTOBER 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Holdings Percent
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. General Electric Co. Operates in major businesses including power 3.3%
generators, appliances, lighting, plastics, medical
systems, aircraft engines, financial services and
broadcasting.
2. International Manufactures data processing equipment and systems, 2.2%
Business including information handling systems, equipment
Machines (IBM) and services.
3. MCI Worldcom Provides intrastate, interstate and international 1.7%
long distance services, along with operator,
billing and collection services.
4. Federal National Mortgage Often referred to as "Fannie Mae," this is a 1.7%
Association private corporation federally chartered to provide
financial products and services that increase the
availability and affordability of housing to low,
moderate and middle-income Americans.
5. Sun Microsystems A provider of high performance workstations, 1.7%
servers and networking software for the
engineering, scientific, commercial and technical
industries.
</TABLE>
THE FUND'S LARGEST CORPORATE BOND HOLDINGS*
REPRESENTING 14.4 PERCENT OF THE FUND'S TOTAL CORPORATE BOND HOLDINGS ON
OCTOBER 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Holdings Percent
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Telewest Communications Owns and operates 16 cable franchises and has 3.6%
minority interests in seven others.
- -------------------------------------------------------------------------------------------
2. Dillard's Operates a regional chain of department stores that 2.9%
focus on home furnishings and fashion apparel.
- -------------------------------------------------------------------------------------------
3. Comcast Cable Operates, develops and manages cable communication 2.8%
systems. The company is also prominent in the
cellular telephone industry in the Mid-Atlantic
region.
- -------------------------------------------------------------------------------------------
4. Viacom International Operates multiple business units encompassing 2.6%
entertainment, networking and broadcasting,
publishing, video and music industries.
- -------------------------------------------------------------------------------------------
5. Big Flower Press A leading advertising and marketing services 2.5%
company with expertise in high-impact advertising
circulars, circulation building, newspaper
products, highly customized direct mail, fragrance
samples, commercial games and digital premedia.
- -------------------------------------------------------------------------------------------
</TABLE>
*Portfolio Composition and Holdings are subject to change.
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
KEMPER TOTAL RETURN FUND
PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL
GOVERNMENT OBLIGATIONS AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. TREASURY BONDS 11.875%, 2003 $ 48,640 $ 64,585
10.75%, 2003 20,945 26,169
10.375%, 2009 24,405 31,639
9.125%, 2009 21,610 26,266
12.75%, 2010 64,515 94,908
13.875%, 2011 87,765 137,613
12.00%, 2013 88,540 136,587
13.25%, 2014 22,355 37,410
8.75%, 2020 14,000 19,954
7.125%, 2023 36,000 44,421
6.50%, 2026 7,310 8,508
6.00%, 2026 5,110 5,579
6.625%, 2027 8,650 10,242
---------------------------------------------------------------------------
643,881
- --------------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES
8.75%, 2000 56,300 60,531
6.375%, 2000 4,500 4,600
7.75%, 2001 77,500 83,191
6.625%, 2002 16,550 17,732
5.50%, 2003 30,000 31,373
5.25%, 2003 3,050 3,182
7.25%, 2004 8,000 9,090
5.875%, 2004 700 749
7.50%, 2005 18,575 21,588
6.625%, 2007 1,725 1,959
6.125%, 2007 8,900 9,826
5.625%, 2008 50 54
---------------------------------------------------------------------------
243,875
- --------------------------------------------------------------------------------------------------------------------
PROVINCE OF QUEBEC, CANADA
8.625%, 2005 8,250 9,449
---------------------------------------------------------------------------
TOTAL GOVERNMENT OBLIGATIONS--27.0%
(Cost: $867,593) 897,205
---------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF
COMMON STOCKS SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CAPITAL GOODS--4.8%
Emerson Electric Co. 350,200shs. 23,113
General Electric Co. 736,000 64,400
Parker Hannifin Corp. 590,000 21,093
Raytheon Co., "B" 375,000 21,773
Sundstrand Corp. 194,800 9,143
Xerox Corp. 200,000 19,375
---------------------------------------------------------------------------
158,897
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER CYCLICALS--8.0% (a)CBS Corp. 794,000 $ 22,182
CVS Corp. 364,600 16,658
Carnival Corp. 610,000 19,749
Clear Channel Communications 313,200 14,270
(a)Consolidated Stores Corp. 449,850 7,394
Dollar General Corp. 583,244 13,925
(a)Federated Department Stores 550,000 21,141
(a)Liberty Media Group 500,000 19,031
May Department Stores Co. 401,900 24,516
Omnicom Group 460,000 22,741
R.R. Donnelley & Sons Co. 509,000 21,951
Time Warner, Inc. 216,200 20,066
(a)Univision Communications, Inc. 588,800 17,370
Wal-Mart Stores, Inc. 375,000 25,875
---------------------------------------------------------------------------
266,869
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER DURABLES--1.6% Federal-Mogul Corp. 360,000 19,508
Leggett & Platt, Inc. 869,200 20,318
Stanley Works 459,100 13,773
Tyco International, Ltd. 110 7
---------------------------------------------------------------------------
53,606
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--6.0% Albertson's, Inc. 400,000 22,225
Coca Cola Co. 295,000 19,949
Colgate-Palmolive Co. 100,000 8,837
ConAgra, Inc. 625,000 19,024
Gillette Co. 265,000 11,908
H.J. Heinz Co. 300,000 17,438
Home Depot, Inc. 375,000 16,313
McCormick & Co., Inc. 74,500 2,302
Mirage Resorts 875,000 14,820
Newell Co. 452,200 19,897
PepsiCo 450,000 15,188
Procter & Gamble Co. 244,800 21,757
Tribune Co. 166,200 9,550
---------------------------------------------------------------------------
199,208
- ------------------------------------------------------------------------------------------------------------------------
ENERGY--5.4% Anadarko Petroleum Corp. 375,000 12,703
Atlantic Richfield Co. 275,000 18,941
Chevron Corp. 275,000 22,412
(a)Conoco, Inc. 272,000 6,766
Exxon Corp. 436,800 31,122
Mobil Corp. 304,000 23,009
Royal Dutch Petroleum 480,000 23,640
Texaco 350,000 20,759
Unocal Corp. 545,000 18,496
---------------------------------------------------------------------------
177,848
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCE--10.8% Allstate Corp. 480,000 $ 20,670
American Express Co. 150,000 13,256
American General Corp. 255,000 17,467
American International Group, Inc. 225,000 19,181
AmSouth Bancorporation 337,500 13,521
Associates First Capital 310,000 21,855
Banc One Corp. 539,500 26,368
BankAmerica Corp. 351,793 20,206
CIGNA Corp. 318,200 23,209
Chase Manhattan Corp. 200,000 11,363
Citigroup, Inc. 447,499 21,060
Federal Home Loan Mortgage Corp. 375,000 21,563
Federal National Mortgage Association 475,000 33,636
First Tennessee National Corp. 450,000 14,259
Household International, Inc. 573,022 20,951
Jefferson-Pilot Corp. 435,500 26,457
Merrill Lynch & Co. 160,000 9,480
Morgan Stanley Dean Witter & Co. 200,000 12,950
Wells Fargo & Co. 35,000 12,950
---------------------------------------------------------------------------
360,402
- ------------------------------------------------------------------------------------------------------------------------
HEALTH CARE--6.9% (a)ALZA Corp. 275,000 13,166
Abbott Laboratories 650,000 30,509
American Home Products Corp. 616,900 30,074
Baxter International, Inc. 300,000 17,981
Bristol-Myers Squibb Co. 220,000 24,324
Glaxo Wellcome, PLC 225,000 14,006
Eli Lilly & Co. 325,000 26,305
Merck & Co. 184,500 24,954
Pfizer, Inc. 250,000 26,828
Schering-Plough Corp. 200,000 20,575
---------------------------------------------------------------------------
228,722
- ------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--9.6% AMP, Inc. 327,094 13,431
Applied Materials 300,000 10,406
(a)Cimlinc, Inc., convertible preferred 37,716 141
(a)Cisco Systems 350,000 22,050
Compaq Computer Corp. 500,000 15,798
Computer Sciences Corp. 240,000 12,660
(a)EMC Corp. 325,000 20,922
Hewlett-Packard Co. 345,000 20,765
Intel Corp. 235,000 20,959
International Business Machines Corp. 290,000 43,047
Lucent Technologies, Inc. 12,000 962
(a)Microsoft Corp. 200,000 21,175
Motorola 225,000 11,700
(a)Oracle Corp. 750,000 22,172
(a)Seagate Technology, Inc. 600,000 15,825
(a)Solectron Corp. 375,000 21,469
(a)Sun Microsystems 575,000 33,494
(a)Xilinx, Inc. 250,000 11,164
---------------------------------------------------------------------------
318,140
- ------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--.8% CSX Corp. 290,000 11,382
Canadian National Railway Co. 275,000 13,870
---------------------------------------------------------------------------
25,252
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UTILITIES--5.6% AT&T 485,000 $ 30,191
(a)AirTouch Communications 375,000 21,000
Ameritech Corp. 510,000 27,508
BellSouth Corp. 300,000 23,944
Frontier Corp. 495,000 14,881
MCI WorldCom, Inc. 615,600 34,012
SBC Communications, Inc. 490,000 22,693
Sprint Corp. 175,000 13,431
---------------------------------------------------------------------------
187,660
---------------------------------------------------------------------------
TOTAL COMMON STOCKS--59.5%
(Cost: $1,607,438) 1,976,604
---------------------------------------------------------------------------
CORPORATE OBLIGATIONS PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
BASIC INDUSTRIES--.6% Euramax International, 11.25%, 2006 $ 8,400 7,728
Kevco, Inc., 10.375%, 2007 2,765 2,336
MMI Products, Inc., 11.25%, 2007 1,600 1,664
Plainwell, Inc., 11.00%, 2008 4,230 3,215
Stone Container Corp., 12.58%, 2016 3,500 3,448
Stone Container Finance Corp., 11.50%,
2006 2,500 2,313
---------------------------------------------------------------------------
20,704
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--.5% Lockheed Corp., 6.75%, 2003 4,600 4,840
Neenah Corp., 11.125%, 2007 4,000 4,090
Nortek, 9.875%, 2004 5,220 5,168
Raytheon Co., 6.75%, 2007 3,100 3,250
---------------------------------------------------------------------------
17,348
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS--5.7% AFC Enterprises, Inc., 10.25%, 2007 2,840 2,868
AMF Group
10.875%, 2006 3,500 2,660
(b) 12.25%, 2006 921 442
American Cellular Corp., 10.50%, 2008 3,920 3,704
American Radio Systems, 9.00%, 2006 3,680 3,947
Big Flower Press, Inc., 8.875%, 2007 9,500 9,405
CSC Holdings, Inc., 9.25%, 2005 8,290 8,746
Chancellor Media Corp., 9.00%, 2008 5,640 5,696
Cinemark USA, Inc., 9.625%, 2008 7,000 7,140
Cole National Group, 9.875%, 2006 3,360 3,478
Comcast Cable Communications, Inc.,
8.50%, 2027 1,400 1,716
Comcast Corp., 9.375%, 2005 8,500 8,925
Dayton Hudson Corp., 7.50%, 2006 2,400 2,617
Delco Remy International, 10.625%, 2006 8,620 8,491
(b)Diamond Cable Communications, PLC
11.75%, 2005 1,660 1,253
10.75%, 2007 4,840 3,073
Dillard's, Inc.
6.17%, 2001 9,000 9,055
6.43, 2004 2,000 2,014
Federated Department Stores, Inc.,
6.125%, 2001 4,500 4,569
Frontiervision, 11.00%, 2006 5,000 5,525
General Electric Co.
8.75%, 2007 4,350 5,225
8.625%, 2008 2,350 2,840
K-III Communications Corp., 8.50%, 2006 4,250 4,314
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kinder-Care Learning Centers, 9.50%,
2009 $ 8,500 $ 8,203
News American Holdings, Inc., 9.25%,
2013 1,950 2,292
Pathmark Stores, Inc., 9.625%, 2003 4,140 3,974
Rogers Cantel Mobile, Inc., 8.80%, 2007 7,900 7,406
Royal Caribbean Cruises, Ltd., 8.25%,
2005 4,250 4,577
Sinclair Broadcasting Group, Inc.,
8.75%, 2007 3,890 3,647
Tele-Communications, Inc., 9.80%, 2012 5,950 7,721
(b)TeleWest Communications, PLC, 11.00%,
2007 17,250 13,627
Time Warner, Inc.
9.125%, 2013 2,075 2,553
9.15%, 2023 2,325 2,910
United Artists Theatre Co., 9.75%, 2008 7,300 6,643
Viacom, Inc., 8.00%, 2006 9,475 9,759
WorldCom, Inc.
6.40%, 2005 4,000 4,172
7.75%, 2007 1,050 1,174
7.75%, 2027 3,425 3,841
---------------------------------------------------------------------------
190,202
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER DURABLES--.3% Del Webb Corp., 9.75%, 2008 8,400 8,190
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--.2% Riverwood International, 10.25%, 2006 8,350 7,766
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
ENERGY--.4% Benton Oil & Gas Co.
11.625%, 2003 1,460 1,153
9.375%, 2007 360 234
Clark Refining, 8.875%, 2007 1,290 1,084
Dailey International, Inc., 9.50%, 2008 420 189
GTE North, Inc., 6.90%, 2008 2,500 2,742
Gulf Canada Resources, Ltd., 9.25%, 2004 7,000 7,175
Gulfmark Offshore, Inc., 8.75%, 2008 1,680 1,554
---------------------------------------------------------------------------
14,131
- ------------------------------------------------------------------------------------------------------------------------
FINANCE--1.4% AB Spintab, 7.50%, 2049 4,100 3,936
ABN-AMRO Bank, 8.25%, 2009 4,250 4,584
Abbey National, PLC, 6.69%, 2005 3,700 3,822
BCH Cayman Island, Ltd.
7.50%, 2005 2,500 2,594
7.70%, 2006 1,000 1,053
BankAmerica Corp., 9.50%, 2004 2,400 2,799
Crestar Financial Corp., 8.25%, 2002 2,400 2,578
Den Danske Bank, 6.375%, 2008 4,150 4,105
Empress River Casino Finance, 10.75%,
2002 2,000 2,145
FINOVA Capital Corp., 6.50%, 2002 2,950 2,974
Ford Motor Credit Corp., 7.75%, 2005 2,400 2,662
Repsol International Finance, 7.00%,
2005 5,000 5,353
Scotland International Finance Co.,
8.80%, 2004 1,350 1,534
Svenska Handelsbanken, 7.125%, 2049 1,575 1,482
Wells Fargo & Co., 6.875%, 2006 5,000 5,283
---------------------------------------------------------------------------
46,904
</TABLE>
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HEALTH CARE--.4% Magellan Health Services, 9.00%, 2008 $ 10,000 $ 8,450
(b)Mariner Post-Acute Network, Inc.,
10.50%, 2007 6,000 2,880
---------------------------------------------------------------------------
11,330
- ------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--.1% PSINet, Inc., 10.00%, 2005 4,010 3,930
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--.4% Continental Airlines, Inc.
7.75%, 2014 1,898 2,044
6.90%, 2018 1,850 1,898
Hayes Wheels International, Inc.,
11.00%, 2006 8,000 8,640
---------------------------------------------------------------------------
12,582
- ------------------------------------------------------------------------------------------------------------------------
UTILITIES--1.5% BellSouth Telecommunications, Inc.,
6.375%, 2028 2,500 2,547
(b)Call-Net Enterprises, Inc., 13.25%,
2004 6,350 6,096
Commonwealth Edison
7.375%, 2004 3,800 4,034
7.00%, 2005 1,250 1,320
Esprit Telecom Group, PLC, 11.50%, 2007 2,370 2,086
(b)International CableTel, Inc.
12.75%, 2005 870 757
11.50%, 2006 11,330 8,384
(b)McLeod, Inc., 10.50%, 2007 11,700 8,307
NTL, Inc., 11.00%, 2008 405 419
(b)Nextel Communications, 9.95%, 2008 14,150 7,641
U.S. West Cap Funding, Inc.
6.25%, 2005 2,000 2,113
6.375%, 2008 2,000 2,127
Yorkshire Power, 6.496%, 2008 2,125 2,167
---------------------------------------------------------------------------
47,998
---------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--11.5%
(Cost: $391,964) 381,085
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--5.01% to 5.45%
INSTRUMENTS--1.3% Due--November 1998
(Cost: $43,878) 43,970 43,879
---------------------------------------------------------------------------
TOTAL INVESTMENTS--99.3%
(Cost: $2,910,873) 3,298,773
---------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--.7% 22,481
---------------------------------------------------------------------------
NET ASSETS--100% $3,321,254
---------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security.
(b) Deferred interest obligation; currently zero coupon under the terms of the
initial offering.
Based on the cost of investments of $2,910,873,000 for federal income tax
purposes at October 31, 1998, the gross unrealized appreciation was
$447,169,000, the gross unrealized depreciation was $59,269,000 and the net
unrealized appreciation on investments was $387,900,000.
See accompanying Notes to Financial Statements.
17
<PAGE> 18
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER TOTAL RETURN FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Total Return Fund as of
October 31, 1998, the related statements of operations for the year then ended
and changes in net assets for each of the two years in the period then ended,
and the financial highlights for each of the fiscal periods since 1994. 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.
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
October 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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
Total Return Fund at October 31, 1998, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the fiscal periods
since 1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 14, 1998
18
<PAGE> 19
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998
(in thousands)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investments, at value
(Cost: $2,910,873) $3,298,773
- --------------------------------------------------------------------------
Cash 65
- --------------------------------------------------------------------------
Receivable for:
Investments sold 5,314
- --------------------------------------------------------------------------
Fund shares sold 1,494
- --------------------------------------------------------------------------
Dividends and interest 32,513
- --------------------------------------------------------------------------
Due from Adviser 333
- --------------------------------------------------------------------------
TOTAL ASSETS 3,338,492
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Payable for:
Investments purchased 11,018
- --------------------------------------------------------------------------
Fund shares redeemed 2,151
- --------------------------------------------------------------------------
Management fee 1,428
- --------------------------------------------------------------------------
Distribution services fee 541
- --------------------------------------------------------------------------
Administrative services fee 657
- --------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 1,317
- --------------------------------------------------------------------------
Trustees' fees 126
- --------------------------------------------------------------------------
Total liabilities 17,238
- --------------------------------------------------------------------------
NET ASSETS $3,321,254
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------
Paid-in capital $2,709,415
- --------------------------------------------------------------------------
Undistributed net realized gain on investments 214,821
- --------------------------------------------------------------------------
Net unrealized appreciation on investments 387,900
- --------------------------------------------------------------------------
Undistributed net investment income 9,118
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $3,321,254
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($2,406,414 / 228,232 shares outstanding) $10.54
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering price) $11.18
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($877,077 / 83,330 shares outstanding) $10.52
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($25,681 / 2,437 shares outstanding) $10.54
- --------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($12,082 / 1,146 shares outstanding) $10.54
- --------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
19
<PAGE> 20
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended October 31, 1998
(in thousands)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------
Interest $100,972
- ------------------------------------------------------------------------
Dividends 26,242
- ------------------------------------------------------------------------
Total investment income 127,214
- ------------------------------------------------------------------------
Expenses:
Management fee 18,088
- ------------------------------------------------------------------------
Distribution services fee 7,941
- ------------------------------------------------------------------------
Administrative services fee 7,912
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 9,651
- ------------------------------------------------------------------------
Professional fees 87
- ------------------------------------------------------------------------
Reports to shareholders 860
- ------------------------------------------------------------------------
Trustees' fees and other 90
- ------------------------------------------------------------------------
Total expenses 44,629
- ------------------------------------------------------------------------
NET INVESTMENT INCOME 82,585
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- ------------------------------------------------------------------------
Net realized gain on sales of investments 212,374
- ------------------------------------------------------------------------
Change in net unrealized appreciation on investments 30,147
- ------------------------------------------------------------------------
Net gain on investments 242,521
- ------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $325,106
- ------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1998 1997
- ------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 82,585 82,022
- ------------------------------------------------------------------------------------------
Net realized gain 212,374 438,347
- ------------------------------------------------------------------------------------------
Change in net unrealized appreciation 30,147 17,097
- ------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 325,106 537,466
- ------------------------------------------------------------------------------------------
Net equalization charges -- (1,348)
- ------------------------------------------------------------------------------------------
Distribution from net investment income (86,123) (81,608)
- ------------------------------------------------------------------------------------------
Distribution from net realized gain (439,382) (395,023)
- ------------------------------------------------------------------------------------------
Total dividends to shareholders (525,505) (476,631)
- ------------------------------------------------------------------------------------------
Net increase from capital share transactions 280,270 161,098
- ------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 79,871 220,585
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------------------------
Beginning of year 3,241,383 3,020,798
- ------------------------------------------------------------------------------------------
END OF YEAR (including undistributed
net investment income of
$9,118 and $13,629, respectively) $3,321,254 3,241,383
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE Kemper Total Return Fund is an open-end management
FUND investment company organized as a business trust
under the laws of Massachusetts. The fund 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 are sold 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 SECURITY 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 on
the Nasdaq. If there are no such sales, the value
is the most recent bid quotation. Securities which
are not quoted on the 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.
Portfolio debt securities are valued by pricing
agents approved by the officers of the fund, which
quotations reflect broker/dealer-supplied
valuations and electronic data processing
techniques. If the pricing agents are unable to
provide such quotations, the most recent bid
quotation supplied by a bona fide market maker
shall be used. All other securities are valued at
their fair market value as determined in good faith
by the Valuation Committee of the Board of
Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Dividend income is recorded on the
ex-dividend date, and interest income is recorded
on the accrual basis and includes discount
amortization on fixed income securities. Realized
gains and losses from investment transactions are
reported on an identified cost basis.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the close of the Exchange. The net
asset value per share is
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
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.
EQUALIZATION ACCOUNTING. Prior to November 1, 1997,
the fund used equalization accounting to keep a
continuing shareholder's per share interest in
undistributed net investment income unaffected by
shareholder activity. This was accomplished by
allocating a portion of the proceeds from sales and
the cost of redemptions of fund shares to
undistributed net investment income. As of November
1, 1997, the fund discontinued using equalization.
This change has no effect on the fund's net assets,
net asset value per share or distributions to
shareholders. Discontinuing the use of equalization
accounting will result in simpler financial
statements. The cumulative effect of the
discontinuance of equalization accounting was to
decrease undistributed net investment income and
increase paid-in-capital previously reported
through October 31, 1997 by $973,000.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH MANAGEMENT AGREEMENT. The fund has a management
AFFILIATES agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper), and pays a monthly investment
management fee of 1/12 of the annual rate of .58%
of the first $250 million of average daily net
assets declining to .42% of average daily net
assets in excess of $12.5 billion. The fund
incurred a management fee of $18,088,000 for the
year ended October 31, 1998. During the year ended
October 31, 1998, Scudder Kemper agreed to
reimburse the fund $333,000 for a loss incurred in
connection with equity securities trading.
ZURICH/B.A.T MERGER. On September 7, 1998, Zurich
Insurance Company (Zurich), majority owner of
Scudder Kemper, entered into an agreement with
B.A.T Industries, p.l.c. (B.A.T) pursuant to which
the financial services businesses of B.A.T were
combined with Zurich's businesses to form a new
global insurance and financial services company
known as Zurich Financial Services. Upon
consummation of the transaction, the fund's
investment management agreement with Scudder Kemper
was deemed to have been assigned and, therefore,
terminated. The Board of Trustees of the fund has
approved a new investment management agreement with
Scudder Kemper, which is substantially identical to
the former investment management agreement, except
for the dates of execution and termination. The
Board of Trustees of the fund will seek shareholder
approval of the new investment management agreement
through a proxy solicitation that is currently
scheduled to conclude in mid-December.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI).
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
Underwriting commissions paid in connection with
the distribution of Class A shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS ALLOWED
BY KDI
COMMISSIONS -----------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Year ended October 31, 1998 $233,000 2,219,000 6,000
</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 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 October 31, 1998 $9,205,000 3,898,000
</TABLE>
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 (ASF) paid
are as follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY ----------------------------
THE FUND TO KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Year ended October 31, 1998 $7,912,000 7,976,000 17,000
</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
$7,277,000 for the year ended October 31, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. During the year ended October 31,
1998, the fund made no payments to its officers and
incurred trustees' fees of $53,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT For the year ended October 31, 1998, investment
TRANSACTIONS transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $2,940,078
Proceeds from sales 3,029,607
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE The following table summarizes the activity in
TRANSACTIONS capital shares of the fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1998 1997
----------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 21,584 $ 229,022 15,216 $ 167,389
---------------------------------------------------------------------------------
Class B 13,596 146,824 13,404 147,504
---------------------------------------------------------------------------------
Class C 1,252 13,430 748 8,218
---------------------------------------------------------------------------------
Class I 408 4,356 422 4,707
---------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 32,505 327,702 28,102 284,189
---------------------------------------------------------------------------------
Class B 16,317 163,540 16,342 164,518
---------------------------------------------------------------------------------
Class C 280 2,818 177 1,792
---------------------------------------------------------------------------------
Class I 202 2,032 180 1,820
---------------------------------------------------------------------------------
SHARES REDEEMED
Class A (38,307) (411,357) (35,349) (386,500)
---------------------------------------------------------------------------------
Class B (17,413) (185,508) (20,367) (222,852)
---------------------------------------------------------------------------------
Class C (636) (6,892) (365) (4,008)
---------------------------------------------------------------------------------
Class I (540) (5,697) (509) (5,679)
---------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 29,080 315,751 9,946 109,458
---------------------------------------------------------------------------------
Class B (29,137) (315,751) (9,963) (109,458)
---------------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL SHARE
TRANSACTIONS $ 280,270 $ 161,098
---------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED OCTOBER 31,
--------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------
Net asset value, beginning of year $11.34 11.28 10.60 9.10 11.23
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .29 .31 .28 .29 .19
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .77 1.57 1.24 1.46 (1.01)
- ---------------------------------------------------------------------------------------
Total from investment operations 1.06 1.88 1.52 1.75 (.82)
- ---------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .31 .33 .34 .25 .23
- ---------------------------------------------------------------------------------------
Distribution from net realized gain 1.55 1.49 .50 -- 1.08
- ---------------------------------------------------------------------------------------
Total dividends 1.86 1.82 .84 .25 1.31
- ---------------------------------------------------------------------------------------
Net asset value, end of year $10.54 11.34 11.28 10.60 9.10
- ---------------------------------------------------------------------------------------
TOTAL RETURN 10.47% 18.95 15.34 19.46 (7.92)
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------
Expenses 1.01% 1.01 1.05 1.12 1.13
- ---------------------------------------------------------------------------------------
Net investment income 2.75% 2.92 2.76 3.00 2.34
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
YEAR ENDED OCTOBER 31, MAY 31 TO
------------------------------ OCTOBER 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------
Net asset value, beginning of period $11.33 11.27 10.59 9.09 9.24
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .19 .22 .19 .20 .06
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .75 1.55 1.23 1.46 (.16)
- ---------------------------------------------------------------------------------------
Total from investment operations .94 1.77 1.42 1.66 (.10)
- ---------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .20 .22 .24 .16 .05
- ---------------------------------------------------------------------------------------
Distribution from net realized gain 1.55 1.49 .50 -- --
- ---------------------------------------------------------------------------------------
Total dividends 1.75 1.71 .74 .16 .05
- ---------------------------------------------------------------------------------------
Net asset value, end of period $10.52 11.33 11.27 10.59 9.09
- ---------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 9.30% 17.86 14.28 18.42 (1.06)
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------
Expenses 2.01% 1.95 1.99 2.05 2.03
- ---------------------------------------------------------------------------------------
Net investment income 1.75% 1.98 1.82 2.07 1.57
- ---------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
YEAR ENDED OCTOBER 31, MAY 31 TO
------------------------------ OCTOBER 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of period $11.34 11.28 10.61 9.09 9.24
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .20 .22 .20 .21 .06
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .77 1.56 1.22 1.48 (.16)
- ---------------------------------------------------------------------------------------------
Total from investment operations .97 1.78 1.42 1.69 (.10)
- ---------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .22 .23 .25 .17 .05
- ---------------------------------------------------------------------------------------------
Distribution from net realized gain 1.55 1.49 .50 -- --
- ---------------------------------------------------------------------------------------------
Total dividends 1.77 1.72 .75 .17 .05
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $10.54 11.34 11.28 10.61 9.09
- ---------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 9.50% 17.92 14.31 18.76 (1.05)
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------
Expenses 1.90% 1.90 1.89 1.86 2.00
- ---------------------------------------------------------------------------------------------
Net investment income 1.86% 2.03 1.92 2.26 1.60
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS I
YEAR ENDED OCTOBER 31, JULY 3 TO
---------------------- OCTOBER 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------
Net asset value, beginning of period $11.33 11.27 10.61 10.07
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .34 .36 .32 .10
- --------------------------------------------------------------------------------------
Net realized and unrealized gain .77 1.55 1.23 .52
- --------------------------------------------------------------------------------------
Total from investment operations 1.11 1.91 1.55 .62
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .35 .36 .39 .08
- --------------------------------------------------------------------------------------
Distribution from net realized gain 1.55 1.49 .50 --
- --------------------------------------------------------------------------------------
Total dividends 1.90 1.85 .89 .08
- --------------------------------------------------------------------------------------
Net asset value, end of period $10.54 11.33 11.27 10.61
- --------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 10.98% 19.40 15.64 6.21
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------
Expenses .64% .71 .72 .61
- --------------------------------------------------------------------------------------
Net investment income 3.12% 3.22 3.09 2.97
- --------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $3,321,254 3,241,383 3,020,798 2,926,542 2,864,322
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 80% 122 85 142 121
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
26
<PAGE> 27
FINANCIAL HIGHLIGHTS
TAX INFORMATION
The fund paid a distribution of $1.03 per share from net long-term capital gains
during the year ended October 31, 1998, of which 49% represents 20% rate gains.
Pursuant to Section 852 of the Internal Revenue Code, the fund designates
$209,042,000 as capital gain dividends for the year ended October 31, 1998, of
which 100% represents 20% rate gains.
For corporate shareholders, 29% of the income dividends paid during the year
ended October 31, 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.
27
<PAGE> 28
TRUSTEES AND OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY STEVEN H. REYNOLDS
Chairman and Trustee President Vice President
DAVID W. BELIN PHILIP J. COLLORA LINDA J. WONDRACK
Trustee Vice President and Vice President
Secretary
LEWIS A. BURNHAM MAUREEN E. KANE
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
DONALD L. DUNAWAY CAROLINE PEARSON
Trustee GARY A. LANGBAUM Assistant Secretary
Vice President
ROBERT B. HOFFMAN ELIZABETH C. WERTH
Trustee THOMAS W. LITTAUER Assistant Secretary
Vice President
DONALD R. JONES BRENDA LYONS
Trustee ANN M. MCCREARY Assistant Treasurer
Vice President
SHIRLEY D. PETERSON
Trustee KATHRYN L. QUIRK
Vice President
WILLIAM P. SOMMERS
Trustee
EDMOND D. VILLANI
Trustee
</TABLE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------
<S> <C>
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
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SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
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CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania Avenue
Kansas City, MO 64105
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INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
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PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
</TABLE>
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Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Equity Funds/Growth Style prospectus.
KTRF - 2 (12/98) 1061640
