<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED APRIL 30, 2000
Seeking the highest total return, a combination of income
and capital appreciation, consistent with reasonable risk
KEMPER TOTAL
RETURN FUND
"... Overall, our balanced stock and bond
allocation allowed us to post competitive
returns while reducing risk. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
8
INDUSTRY SECTORS
9
LARGEST HOLDINGS
10
PORTFOLIO OF INVESTMENTS
17
FINANCIAL STATEMENTS
20
FINANCIAL HIGHLIGHTS
22
NOTES TO FINANCIAL STATEMENTS
AT A GLANCE
TERMS TO KNOW
KEMPER TOTAL RETURN FUND TOTAL RETURNS*
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 2000 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN KEMPER TOTAL RETURN LIPPER BALANCED FUNDS
KEMPER TOTAL RETURN FUND CLASS A FUND CLASS B FUND CLASS C CATEGORY AVERAGE*
-------------------------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C>
4.84 4.42 4.5 5.47
</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.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
4/30/00 10/31/99
..............................................................
<S> <C> <C> <C> <C>
KEMPER TOTAL RETURN FUND CLASS A $11.29 $11.35
..............................................................
KEMPER TOTAL RETURN FUND CLASS B $11.29 $11.34
..............................................................
KEMPER TOTAL RETURN FUND CLASS C $11.27 $11.32
..............................................................
</TABLE>
KEMPER TOTAL RETURN FUND
LIPPER RANKINGS AS OF 4/30/00*
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER BALANCED FUNDS CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
....................................................................................
<S> <C> <C> <C> <C> <C>
1-YEAR #197 of 461 funds #213 of 461 funds #214 of 461 funds
....................................................................................
5-YEAR #69 of 235 funds #93 of 235 funds #91 of 235 funds
....................................................................................
10-YEAR #14 of 62 funds N/A N/A
....................................................................................
15-YEAR #12 of 32 funds N/A N/A
....................................................................................
20-YEAR #8 of 28 funds N/A N/A
....................................................................................
</TABLE>
DIVIDEND REVIEW
DURING THE PERIOD, KEMPER TOTAL RETURN FUND PAID THE FOLLOWING DIVIDENDS PER
SHARE:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
...............................................................................................
<S> <C> <C> <C> <C> <C>
INCOME DIVIDEND: $0.1450 $0.0873 $0.0951
...............................................................................................
SHORT-TERM CAPITAL
GAIN: $0.0600 $0.0600 $0.0600
...............................................................................................
LONG-TERM CAPITAL
GAIN: $0.4000 $0.4000 $0.4000
...............................................................................................
</TABLE>
YOUR FUND'S STYLE
MORNINGSTAR EQUITY STYLE BOX(TM)
<TABLE>
<S> <C>
[MORNINGSTAR EQUITY STYLE Source: Morningstar, Inc. Chicago, IL (312)
BOX] 696-6000. The Equity Style Box placement is based
on two variables: a fund's market capitalization
relative to the movements of the market, and a
fund's valuation, which is calculated by
comparing the stocks in the fund's portfolio with
the most recent of the three market-cap groups.
THE STYLE BOX REPRESENTS A SNAPSHOT OF THE FUND'S
PORTFOLIO ON A SINGLE DAY. IT IS NOT AN EXACT
ASSESSMENT OF RISK AND DOES NOT REPRESENT FUTURE
PERFORMANCE. THE FUND'S PORTFOLIO CHANGES FROM
DAY TO DAY. A LONGER-TERM VIEW IS REPRESENTED BY
THE FUND'S MORNINGSTAR CATEGORY, WHICH IS BASED
ON ITS ACTUAL INVESTMENT STYLE AS MEASURED BY ITS
UNDERLYING PORTFOLIO HOLDINGS OVER THE PAST THREE
YEARS. CATEGORY PLACEMENTS OF NEW FUNDS ARE
ESTIMATED. MORNINGSTAR HAS PLACED KEMPER TOTAL
RETURN FUND IN THE DOMESTIC HYBRID CATEGORY.
PLEASE CONSULT THE PROSPECTUS FOR A DESCRIPTION
OF INVESTMENT POLICIES.
</TABLE>
BENCHMARK A point of comparison for gauging relative performance. A fund's
benchmark may be the overall stock market, an index or a peer-group average. To
use a given benchmark effectively, it's essential to consider any differences
between the benchmark and the fund.
CONSUMER STAPLE Consumer staple companies produce nondurable goods or services
that tend to be consumed or replaced within a relatively short period of time.
Due to the steadier demand for consumer nondurables, stocks in this sector are
often considered more defensive in nature than other stocks.
CYCLICAL STOCK Cyclical stocks carry a higher degree of economic sensitivity. In
accelerating economies, cyclical stocks tend to rise quickly; in decelerating
economies, they tend to decline quickly. Cyclical industries include industrial
machinery, paper and forestry, automobiles and construction.
GROWTH STOCK A stock in a company that is expected to experience rapid growth
resulting from strong sales, talented management and dominant market position.
Because growth stocks are typically in demand, they tend to carry relatively
high price tags and can also be volatile, based on changing perceptions of the
companies' growth.
PRICE-TO-EARNINGS RATIO (P/E) The P/E ratio indicates about how much investors
are paying for a company's earning power. The higher the P/E, the more investors
are paying and the more earnings growth they are expecting.
<PAGE> 3
ECONOMIC OVERVIEW
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER,
As we enter summer, there isn't much to complain about. For all the yammering
about the "new" economy, the old economy is doing pretty well. Consumers may
hanker for a new GPS handset or a Palm Pilot, but they lust after a suburban
mansion with a garage big enough to hold their luxury car and SUV -- and state
and local governments are laying old-fashioned asphalt almost as fast as
businesses are building the information superhighway. Satisfying both old and
new desires got the economy off to a fast start in the new century -- GDP growth
rose at an annual rate of more than 5 percent in the first quarter. Even with a
modest slowdown possible in the second half, growth for the year 2000 is likely
to be close to 5 percent.
So everyone is happy, right? Well, almost everyone. Consumers seldom have felt
so confident; businesspeople seldom have behaved so expansively. But there's
still one grump: Federal Reserve Board Chairman Alan Greenspan, who's become
increasingly worried that rapid growth will bring on inflation, and raised
interest rates by half a percentage point (0.50%) accordingly on May 16. The
Fed's move puts the benchmark federal funds rate at 6.5 percent, its highest
level since February 1991, and the more symbolic discount rate at 6.0 percent.
Despite Greenspan's attempt to slow spending by raising interest rates,
consumers are still splurging, and they show few signs of stopping. We know this
because shoppers are buying the big-ticket items they usually purchase early in
a cycle -- items such as personal computers, mobile phones, jewelry, fancy
kitchen appliances, exercise equipment and big boats. Why are consumers still
buying despite Greenspan's attempts to slow their splurging? There are three
answers: deflation, wealth and easy credit.
Falling prices have made big-ticket items almost irresistible. Since 1997,
prices of kitchen appliances have fallen 4.5 percent, TVs and VCRs 16 percent
and sporting equipment 6.5 percent. Even auto showrooms no longer produce
sticker shock, and drivers have responded with gusto, buying a record 16.9
million cars and light trucks in 1999. 2000 is likely to be the first year in
which automotive sales top 17 million.
Some of that spending has been made possible by stock market gains: Wall
Street has handed out windfalls to almost anyone holding equities in the past
few years. But consumers who don't own stocks are also spending, thanks to a
decade of debt. Young, poor or new to America? In the 1990s, it didn't matter;
lenders still loved you. While high-income families have been borrowing less,
those lower on the income scale have been borrowing more.
But it's not just consumers that Greenspan is concerned about; businesses are
splurging as well. During 1999, businesses increased spending on computers and
peripherals by 35 percent and spending on communications equipment by 25 percent
(both after adjusting for price declines). Far from slowing down this year, we
expect investment in these two categories to accelerate -- to 40 percent growth
for computers and 30 percent growth for communications equipment.
And just like consumers, businesses are borrowing to buy. You may think that
with booming sales, entrepreneurs are cash-rich and can afford it. But while
1999 saw economy-wide earnings jump 10 percent and profits of Standard and
Poor's (S&P) 500 companies leap nearly 14 percent, internal cash covered less
than 84 percent of capital spending. With the exception of 1998, that's the
lowest on record. Last year alone, corporate debt shot up by more than 11
percent to $560 billion. And new economy companies are no exception; they have
more debt than most people realize, issuing more than half of all convertible
bonds.
All this debt could cause problems. Although we've increased our 2001
inflation outlook to nearly 3 percent -- an entire percentage point higher than
our prediction three months ago -- we're not particularly worried about
inflation. It's the heavy borrowing we're concerned about. Debt continues to
exceed income growth, and when Greenspan succeeds in slowing the economy with
higher interest rates (which he will succeed in doing), all of the debt American
consumers and businesses are taking on could be tricky to handle. Private
financial obligations must be paid with personal income and corporate profits.
When the economy slows, personal income stagnates and corporate profits often
fall -- which makes it harder to pay off those debts. Consumers and businesses
may have to sell their assets to pay off the debt, and they may risk going into
default.
That being the case, a gradual economic slowdown may be in everyone's best
interest. But "gradual" is the key. Both the old and new economy have a lot
riding on the Fed's ability to rein in growth softly and smoothly, because
abrupt slowdowns encourage consumers and businesses to sell assets -- and
perhaps risk bankruptcy -- to pay off debt, as described above.
A gradual slowdown seems to be what the Fed is seeking, but for all of
Greenspan's semi-tough talk, some indicators suggest that monetary policy has
actually been lax. Broad money and credit creation have vastly exceeded
economic activity since 1995, and no central bank can allow that to continue
indefinitely without creating
3
<PAGE> 4
ECONOMIC OVERVIEW
ECONOMIC GUIDEPOSTS
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND
SHAREHOLDER DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR
DEFLATION, CREDIT EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON
MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR
INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE
10-YEAR TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES.
THE OTHER DATA REPORT YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (5/31/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.40 6.00 5.50 5.60
Prime rate (2) 9.50 8.50 7.75 8.50
Inflation rate (3)* 3.00 2.60 2.30 1.50
The U.S. dollar (4) 4.30 -0.70 -0.90 6.40
Capital goods orders (5)* 17.00 12.30 2.50 14.50
Industrial production (5)* 6.10 3.70 2.90 5.20
Employment growth (6) 2.60 2.20 2.30 2.60
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
*DATA AS OF 4/30/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
inflation. If we begin to see higher core inflation, the Fed will have to deal
with all that money it's created in a less gradualist manner -- and that could
get tricky. Financial turmoil accompanied each of the Fed's last two efforts to
slow the economy down. In 1994, there was a bond market meltdown that resulted
in a Mexican debt crisis. After a more timid Fed tightening in 1997, crises in
Asia were followed by problems with Russian debt, Brazilian debt and a large
American hedge fund. We don't think this is a coincidence: The global debt
market is so vast and interconnected that it's highly vulnerable to a rise in
the cost of its basic raw material -- short-term funds.
Let's hope, then, that the Fed can slow the economy without upsetting the
financial applecart, because that could affect everyone. After all, the old
economy and the new economy are wedded in many ways. Much of the money that
flows to IPOs is available because mature industries have borrowed to carry out
mergers and share buybacks. Old economy companies are the biggest customers of
new economy products. And e-commerce sites are all about moving traditional
goods over old-fashioned highways. Despite a lot of talk about old and new,
we're all in this economy together.
Happily, financial markets got some better news along that front in late May
and early June. A range of economic data, from retail sales to mortgage
applications to the all-important employment report, began to point to somewhat
softer economic growth. If the Fed believes that the economy is finally slowing
in response to its tightening, the end of the rate hikes could be in sight.
Markets certainly were willing to believe, and they staged a strong relief rally
in late May and early June. While we don't expect a quick end to market
volatility, a slowdown in growth would be most welcome, and would make the
outlook for both stocks and bonds better for the remainder of the year.
Sincerely,
Scudder Kemper Investments Economics Group
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF SCUDDER KEMPER
INVESTMENTS, INC. AS OF JUNE 6, 2000, AND MAY NOT ACTUALLY COME TO PASS. THIS
INFORMATION IS SUBJECT TO CHANGE. NO PART OF THIS MATERIAL IS INTENDED AS AN
INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
PERFORMANCE UPDATE
[LANGBAUM PHOTO]
LEAD PORTFOLIO MANAGER GARY A. LANGBAUM HAS BEEN A MANAGING DIRECTOR OF SCUDDER
KEMPER INVESTMENTS, INC. SINCE 1988. LANGBAUM IS A CHARTERED FINANCIAL ANALYST
AND HAS MORE THAN 25 YEARS OF EXPERIENCE IN EQUITY RESEARCH AND PORTFOLIO
MANAGEMENT.
[MCCORMICK PHOTO]
PORTFOLIO MANAGER TRACY MCCORMICK IS A MANAGING DIRECTOR AND HAS MORE THAN 15
YEARS OF INVESTMENT INDUSTRY EXPERIENCE. MCCORMICK FOCUSES HER CONTRIBUTIONS ON
THE EQUITY PORTION OF THE PORTFOLIO. PORTFOLIO MANAGER ROBERT CESSINE, A
MANAGING DIRECTOR WITH THE FIRM, WITH NEARLY 20 YEARS OF INVESTMENT INDUSTRY
EXPERIENCE, CONTRIBUTES TO THE MANAGEMENT OF THE BOND PORTION OF THE PORTFOLIO.
HE IS ALSO A CHARTERED FINANCIAL ANALYST.
THE MANAGEMENT TEAM IS SUPPORTED BY SCUDDER KEMPER INVESTMENTS' LARGE STAFF OF
ANALYSTS, RESEARCHERS, TRADERS AND ECONOMISTS.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
UNDER THE GUIDANCE OF LEAD PORTFOLIO MANAGER GARY LANGBAUM, KEMPER TOTAL
RETURN FUND POSTED A SOLID RETURN FOR THE SEMIANNUAL PERIOD, NOVEMBER 1,
1999 - APRIL 30, 2000. BELOW, LANGBAUM DISCUSSES THE EVENTS THAT SHAPED
THE MARKET, THE FUND'S BALANCED APPROACH AND HOW HE POSITIONED THE
PORTFOLIO.
Q BEFORE GOING INTO DETAIL ABOUT THE FUND, COULD YOU TELL US ABOUT THE
MARKET CLIMATE DURING THE SEMIANNUAL PERIOD?
A In the past six months, we witnessed two very distinct periods. From
November 1999 through the very beginning of 2000, we saw technology issues drive
robust market growth. The second half of the period was far different. After the
market peaked in February, there was a sharp correction in growth and technology
issues as investors began re-examining the high price-to-earnings multiples
(P/E) (see Terms To Know, page 2) of many technology issues, and more
specifically Internet-related stocks. The market has remained quite volatile
since then.
Q HOW DID KEMPER TOTAL RETURN FUND PERFORM IN THIS TYPE OF MARKET
ENVIRONMENT?
A For the six months ending April 30, 2000, Kemper Total Return Fund gained
4.84 percent (Class A shares, unadjusted for any sales charges). The fund
closely trailed its peers -- the average return for the Lipper Balanced Fund
category was 5.47 percent -- lagging due to its higher equity exposure in a
difficult market.
Q HOW DID THE FUND PERFORM RELATIVE TO ITS BENCHMARKS?
A During the semiannual period, the S&P 500 stock index (S&P 500) gained
7.18 percent, mostly on the strength of technology. By comparison, the Lehman
Brothers Government/Corporate Bond index* rose 1.51 percent.
When comparing fund returns with the all-equity S&P 500, it is important to
keep in mind that Kemper Total Return Fund is a balanced fund. Balanced funds
invest in both stocks and bonds. During the period, the fund generally held 65
percent of its assets in stocks. The remaining portion was invested in a core
bond portfolio that included a mix of high-grade and high-yield corporate bonds,
as well as U.S. Treasury and agency bonds. Based on the portion of fund assets
that we did invest in the equity market, the fund remained competitive with its
benchmark, the S&P 500.
* THE LEHMAN BROTHERS GOVERNMENT/ CORPORATE BOND INDEX IS AN UNMANAGED INDEX
COMPRISING INTERMEDIATE- AND LONG-TERM GOVERNMENT AND INVESTMENT-GRADE
CORPORATE DEBT SECURITIES. SOURCE IS LIPPER, INC.
Q DID KEMPER TOTAL RETURN FUND'S BALANCED APPROACH HELP ITS PERFORMANCE?
A Yes, the fund performed as it was designed to during a hostile market
climate. Early in the period, stocks -- particularly technology
stocks -- dramatically outperformed everything else. Our significant bond
position, while appropriate for this balanced fund, limited gains. As the market
shifted in March, the fund's bond position limited losses. Overall, our balanced
stock and bond allocation allowed
5
<PAGE> 6
PERFORMANCE UPDATE
us to post competitive returns while reducing downside risk.
Remember, Kemper Total Return Fund seeks both capital growth and current
income. To pursue these goals, we combine stocks and bonds in a single
portfolio. In exchange for higher return potential, stocks have tended to be
more volatile. Bonds, meanwhile, typically offer a lower level of return but
also carry a lower degree of risk compared with stocks. Because the fund
provides exposure to both stocks and bonds, your eggs aren't all in one basket.
If stocks falter, bond returns may at least partially offset the losses, and
that is what happened in March and April as technology stocks stumbled and
volatility increased.
Q BASED ON THE CHANGING MARKET ENVIRONMENT, DID YOU ADJUST THE FUND'S
POSITION IN STOCKS VERSUS BONDS?
A No, we did not change our asset allocation mix. Although the equity market
stumbled in March and April, we viewed this as a temporary event, not one that
would prompt us to restructure the portfolio. So, despite the market's
volatility, we maintain our optimistic outlook for stocks.
Q DID RISING INTEREST RATES IMPACT THE BONDS IN THE PORTFOLIO?
A Bond market returns for the six months were up modestly across the board.
Throughout the period, as interest rates rose, bonds struggled. This
demonstrated the inverse relationship between bonds and interest rates.
Typically, when interest rates rise, the prices of bonds fall.
As the equity markets stumbled, investors gravitated to investments that
provided more security. The fund's government bonds posted the best performance,
up just under 2 percent, while high-grade and high-yield corporate bonds
struggled with the equity market to break even. Despite the mixed performance,
the bond portion of the portfolio did what it was supposed to -- it dampened
volatility and mitigated losses as the stock market tumbled.
Q DID THE RISING-RATE ENVIRONMENT AFFECT THE FUND'S STOCK HOLDINGS AS WELL?
A The rising-interest-rate climate took a toll on many of the fund's
financial stocks. The weakest area was banks, which suffered over investor
concern that bank loan business would decline as rates rose. We had a
below-average position in these types of interest-rate-sensitive stocks.
Instead, we focused on stocks that are less sensitive to rate movements. These
included brokerage and diversified financial firms such as Morgan Stanley Dean
Witter and Merrill Lynch. These types of firms benefited from a strong initial
public offering market.
Q WHAT DETERMINES YOUR BUY AND SELL DISCIPLINE FOR STOCKS?
A We understand that investors choose Kemper Total Return Fund for its
quality-focused approach. Accordingly, within our stock allocation, we favor
established, large-cap growth domestic companies with excellent fundamentals,
strong earnings-growth potential and reasonable stock prices. We're currently
not invested in small caps (under $1 billion in market capitalization) or
mid-cap stocks (between $1 billion and $5 billion in market capitalization) and
have virtually no foreign stock exposure, although we do have the ability to
invest in any size company, as well as foreign companies. Generally, we begin to
sell stocks when their prices reach our predetermined targets. A key objective
of this discipline is to have logic, not emotion, drive the process. We also
sell stocks when we see indications of potentially deteriorating fundamentals or
signs of slowing earnings growth.
We rely on independent and rigorous research to guide our stock selection. We
use both fundamental and quantitative measures. Throughout, we actively leverage
Scudder Kemper Investments' extensive research and analytical capabilities.
Q WHERE DID YOU SEE THE BEST OPPORTUNITIES IN TECHNOLOGY?
A Our best-performing sector was technology. Internet companies, up until
March and April, had been some of the most dynamic performers. We gained
exposure to this subsector by investing in more established companies that
provide goods and services that make the Internet work. Companies such as Oracle
and Sun Microsystems gained with the Internet frenzy but carried less risk due
to their diverse businesses, long-term track record and strong fundamentals. And
while we may not be investing directly in the "dot-com" stocks, we do believe
that the portfolio is well positioned to participate in this still-growing
segment of technology.
Another way we are participating is through investments in companies that are
using the Internet to build their market share and increase profit potential.
More and more companies are embracing the Internet business model. We're
watching companies closely, placing a premium on companies that have the "first
move" advantage when it comes to exploiting the opportunities of electronic
commerce. Semiconductor equipment manufacturers and semiconductor companies also
supported the fund's
6
<PAGE> 7
PERFORMANCE UPDATE
performance. These firms produce the equipment needed to manufacture chips, as
well as the chips themselves, that are the building blocks for cellular and
wireless telecommunications, computers, calculators and a host of other goods.
In this subsector of technology, Intel, Applied Materials and Teradyne were all
huge winners. Semiconductor demand continues to grow on a global basis.
Therefore, we are maintaining our overweighted position relative to the S&P 500
benchmark.
Q DID THE TECHNOLOGY MARKET IMPACT OTHER SECTORS?
A Yes. As companies are embracing technological advances, technology is
impacting many areas. The fund's media stocks are a good example. Many of these
large companies are indirectly involved in the Internet as they benefit from
these companies buying advertising time on television and radio to gain market
exposure and brand identity. These had been big winners for us over the last
several years. However, they started to weaken as investors expressed concern
about the ability of the "dot-com" stocks to continue their spending sprees or
to continue to have access to the capital markets. Among the fund's
disappointments here were Clear Channel, Omnicom and Infinity.
Q ONE ISSUE THAT HAS BEEN RECEIVING QUITE A BIT OF THE MARKET'S ATTENTION
LATELY IS THE GOVERNMENT'S ANTITRUST LITIGATION AGAINST MICROSOFT. DOES THE FUND
HOLD MICROSOFT? WAS THE FUND'S POSITION REDUCED OR INCREASED AS THE STOCK
TUMBLED?
A Microsoft is one of our top holdings and has been a disappointment. Its
large drop had a seriously negative effect on fund performance. The litigation
has created anxiety among investors, and we have seen that reflected in the
volatility of the company's short-term stock price. We had hoped that the
litigation would not be a major issue and looked forward to a resolution with
the government. When that didn't come, the stock reacted adversely.
However, our fundamental analysis of Microsoft's business prospects shows that
the company and its technology-sector peers are well positioned to expand sales
and earnings in the coming months. Given this outlook, we have not changed our
holdings during the sell-off, content that we are well positioned in the stock.
Q CAN YOU TELL US ABOUT SOME OF THE FUND'S OTHER NOTABLE SECTORS AND STOCKS?
A Outside of technology, we feel there are three areas that have favorable
opportunities ahead.
Energy: Our energy sector contributed to returns. The big integrated oil
companies have seen good performance as of late. But the real story has been in
oil services, specifically drilling and exploration companies, which really
helped the fund's performance. Our position in offshore driller Transocean has
been quite positive. We see oil service stocks as being the main beneficiary of
higher-than-usual oil prices as companies increase their budgets to search for
oil. We anticipate that these higher oil prices will be maintained, making these
companies attractive investments.
Retail: We are also optimistic about retail companies. Home Depot outperformed
the market for us, and we maintain notable positions in Wal-Mart and Target.
Although the latter three underperformed during the period amid concerns of an
economic slowdown, we think it is just a temporary situation. Looking ahead, we
see demographics continuing to favor growth in the labor force, which would
create more income and likely result in increased consumer discretionary
spending. This would, of course, be positive for retail stocks.
Health care: Health care is an area we continue to examine closely. Some of
our holdings, such as Forest Labs, did well. But other issues, such as Baxter,
were flat. With a lack of merger and acquisition activity going on in the
large-cap pharmaceutical area, we failed to witness many big gains here. But we
have started to see some movement as investors, concerned about technology
valuations, make a defensive shift into large-cap pharmaceutical issues with
consistent earnings. We still like the long-term outlook for this sector, and we
are seeking out new opportunities in companies with acceptable valuations.
Q WHAT IS YOUR OUTLOOK FOR 2000?
A We don't believe the Federal Reserve Board will tighten interest rates so
much that it will result in a recession. If rates continue to rise, though, it
may hurt bonds and interest- rate-sensitive stocks. However, we believe the
equity market is strong enough to withstand some level of increased interest
rates. We are anticipating a slowdown in the overall growth of the U.S. economy,
but to a steady rate. Reported profits should also continue to grow at an
above-average pace. Taken together, these trends would create a positive
environment for Kemper Total Return Fund.
7
<PAGE> 8
INDUSTRY SECTORS
A SIX-MONTH COMPARISON OF THE EQUITY PORTION OF
KEMPER TOTAL RETURN FUND
The equity portion of Kemper Total Return Fund can be reviewed according to the
concentration of industry sectors that the fund invests in. The graphs below
provide a look at how the composition of the equity portion of the portfolio has
changed in the last six-months, by presenting the fund's sectors represented on
April 30, 2000, and on October 31, 1999.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN FUND ON KEMPER TOTAL RETURN FUND ON
4/30/00 10/31/99
--------------------------- ---------------------------
<S> <C> <C>
TECHNOLOGY 28.1 18.4
CONSUMER NONDURABLES 15.9 18.9
FINANCE 15.4 15.8
COMMUNICATION SERVICES 12.4 18.6
HEALTH CARE 11.1 12.5
CAPITAL GOODS 10.8 9.5
ENERGY 6.3 5.5
TRANSPORTATION 0 0.8
</TABLE>
A COMPARISON WITH THE S&P 500 STOCK INDEX, THE BENCHMARK FOR THE EQUITY PORTION
OF THE FUND
The equity portion of Kemper Total Return Fund can be compared to the S&P 500
stock index as a benchmark. The S&P 500 stock index is an unmanaged index
generally representative of the U.S. stock market. The chart below shows the
percentage of the common stocks in the portfolio that each sector of Kemper
Total Return Fund represented on April 30, 2000, compared to the industry
sectors of the S&P 500 stock index.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN FUND ON
4/30/00 S&P 500 STOCK INDEX ON 4/30/00
--------------------------- ------------------------------
<S> <C> <C>
TECHNOLOGY 28.1 33.5
CONSUMER NONDURABLES 15.9 18
FINANCE 15.4 13
COMMUNICATION SERVICES 12.4 7.6
HEALTH CARE 11.1 9.1
CAPITAL GOODS 10.8 8.2
ENERGY 6.3 5.4
UTILITIES 0 2.3
TRANSPORTATION 0 0.6
BASIC INDUSTRIES 0 2.3
</TABLE>
8
<PAGE> 9
LARGEST HOLDINGS
LARGEST HOLDINGS
The fund's largest equity holdings*
Representing 17.7% percent of the fund's total portfolio on April 30, 2000
<TABLE>
<CAPTION>
HOLDINGS PERCENT
<S> <C> <C> <C>
-------------------------------------------------------------------------------------
1. GENERAL ELECTRIC A broadly diversified company with 2.7%
major business in power
generators, appliances, lighting,
plastics, medical systems,
aircraft engines, financial
services and broadcasting.
-------------------------------------------------------------------------------------
2. CISCO SYSTEMS Large, comprehensive supplier of 2.7%
routing software and related
systems that direct the flow of
data between local networks.
-------------------------------------------------------------------------------------
3. INTEL Engaged in the design, 2.6%
development, manufacture and sale
of advanced microcomputer
components.
-------------------------------------------------------------------------------------
4. MICROSOFT Develops, markets and supports a 2.0%
variety of microcomputer software,
operating systems, language and
application programs, related
books and peripheral devices.
-------------------------------------------------------------------------------------
5. WAL-MART Large, global retailer with 1.6%
operations in the United States,
Asia and Latin America. Wal-Mart
operates Wal-Marts, Wal-Mart
Supercenters and Sam's Clubs.
Sells brand merchandise under the
Popular Mechanics, Better Homes &
Gardens and Sam's America Choice
labels.
-------------------------------------------------------------------------------------
6. EXXON MOBIL Engaged in the exploration, 1.3%
production, manufacture,
transportation and sale of crude
oil, natural gas and petroleum
products.
-------------------------------------------------------------------------------------
7. PEPSI One of the largest international 1.2%
soft drink and snack food
producers.
-------------------------------------------------------------------------------------
8. ORACLE A leading global provider of 1.2%
database management software.
-------------------------------------------------------------------------------------
9. TANDY Operates company-owned or 1.2%
franchised RadioShack stores.
Tandy is one of the leading
electronics retailers in the U.S.
In addition, RadioShack repairs
products and offers Internet and
wireless phone plans.
-------------------------------------------------------------------------------------
10. TARGET Retail merchandise seller 1.2%
operating department and discount
stores including Target, Mervyn's,
Dayton, Hudson and Marshall
Field's.
-------------------------------------------------------------------------------------
</TABLE>
*Portfolio composition and holdings are subject to change.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER TOTAL RETURN FUND
Portfolio of Investments at April 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
REPURCHASE AGREEMENTS--1.5% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
State Street Bank and Trust Company,
5.68%, to be repurchased at $54,650,856
on 5/1/2000
(Cost $54,625,000)(b) $ 54,625,000 $ 54,625,000
---------------------------------------------------------------------------------
<CAPTION>
U. S. GOVERNMENT OBLIGATIONS--24.4%
<S> <C> <C> <C> <C> <C>
U.S. Treasury Bond, 5.250%, 02/15/2029 25,550,000 22,444,142
U.S. Treasury Bond, 6.125%, 08/15/2029 9,200,000 9,221,528
U.S. Treasury Bond, 6.500%, 02/15/2010 13,625,000 13,895,320
U.S. Treasury Bond, 8.750%, 08/15/2020 14,000,000 17,900,260
U.S. Treasury Bond, 9.125%, 05/15/2009 21,610,000 23,375,969
U.S. Treasury Bond, 9.375%, 02/15/2006 95,000,000 107,216,050
U.S. Treasury Bond, 10.375%, 11/15/2009 24,405,000 27,814,134
U.S. Treasury Bond, 10.625%, 08/15/2015 90,000,000 127,209,600
U.S. Treasury Bond, 10.75%, 05/15/2003 20,945,000 23,248,950
U.S. Treasury Note, 5.500%, 05/31/2003 30,000,000 29,071,800
U.S. Treasury Note, 5.500%, 08/31/2001 4,500,000 4,433,896
U.S. Treasury Note, 6.000%, 08/15/2004 6,650,000 6,510,749
U.S. Treasury Note, 6.000%, 08/15/2009 24,550,000 23,982,159
U.S. Treasury Note, 6.500%, 10/15/2006 11,300,000 11,275,253
U.S. Treasury Note, 6.625%, 04/30/2002 16,550,000 16,524,182
U.S. Treasury Note, 6.625%, 05/15/2007 120,000,000 120,787,200
U.S. Treasury Note, 7.500%, 02/15/2005 158,575,000 164,397,874
U.S. Treasury Note, 7.750%, 02/15/2001 77,500,000 78,275,000
U.S. Treasury Note, 8.750%, 08/15/2000 48,300,000 48,647,277
---------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $889,431,948) 876,231,343
---------------------------------------------------------------------------------
<CAPTION>
CORPORATE BONDS--10.4%
<S> <C> <C> <C> <C> <C>
COMMUNICATIONS--2.0%
Esprit Telecom Group, PLC, 11.500%,
12/15/2007 2,370,000 2,109,300
Intermedia Communications, 8.600%,
06/01/2008 11,370,000 10,431,975
McLeod USA, Inc., Step-up Coupon, 0% to
03/01/2002, 10.500% to 03/01/2007*** 11,700,000 9,301,500
MetroNet Communications Corp., Step-up
Coupon, 0% to 06/15/2003, 9.950% to
06/15/2008*** 14,700,000 11,686,500
Nextel Communications, Inc 9.375%,
11/15/2009 8,320,000 7,924,800
Qwest Communications International,
7.500%, 11/01/2008 4,500,000 4,277,700
Rogers Cantel Inc., 8.800%, 10/01/2007 7,900,000 7,781,500
Vodafone Airtouch PLC, 6.250%, 02/15/2010 14,100,000 13,905,420
WorldCom, Inc., 6.400%, 08/15/2005 5,050,000 4,796,136
---------------------------------------------------------------------------------
72,214,831
------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--.3%
Del Webb Corp., 9.750%, 01/15/2008 7,370,000 6,080,250
Nortek, Inc., 9.875%, 03/01/2004 5,220,000 4,932,900
---------------------------------------------------------------------------------
11,013,150
</TABLE>
10 The accompanying notes are an integral part of the financial statements.
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
CONSUMER
DISCRETIONARY--1.0%
AFC Enterprises, 10.25%, 05/15/2007 $ 2,840,000 $ 2,783,200
AMF Bowling, Inc., 10.875%, 05/15/2006*** 3,500,000 1,190,000
AMF Bowling, Inc., Step-up Coupon, 0% to
03/15/2001, 12.250% to 03/15/2006 921,000 211,830
Cinemark USA, Inc., Series 9.625%,
08/01/2008 5,940,000 3,979,800
Dillards, Inc., 6.170%, 08/01/2001** 9,000,000 8,656,380
Dillards, Inc., 6.430%, 08/01/2004 2,000,000 1,785,080
Park Place Entertainment, Inc., 9.375%,
02/15/2007 9,050,000 8,959,500
Royal Caribbean Cruises, Ltd., 8.250%,
04/01/2005 4,250,000 4,068,015
Target Corp., 7.500%, 02/15/2005 3,250,000 3,264,235
---------------------------------------------------------------------------------
34,898,040
------------------------------------------------------------------------------------------------------------------------
DURABLES--.1%
United Rentals, Inc., 9.25%, 01/15/2009 2,660,000 2,374,050
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
ENERGY--.3%
Benton Oil & Gas Co., 11.625%, 05/01/2003 480,000 321,600
Gulf Canada Resources, Inc 9.250%,
01/15/2004 7,000,000 6,977,390
Petroleum Geo-Services, 7.500%, 03/31/2007 2,356,000 2,230,872
Pride International, Inc., 10.000%,
06/01/2009 510,000 510,000
Williams Gas Pipeline Cent 7.375%,
11/15/2006 1,250,000 1,205,262
---------------------------------------------------------------------------------
11,245,124
------------------------------------------------------------------------------------------------------------------------
FINANCIALS--2.2%
ABN AMRO, 8.250%, 08/01/20 4,250,000 4,203,930
Abbey National PLC Global Medium Term
Note, 6.690%, 10/17/2005 3,700,000 3,535,239
Chase Manhattan Corp., 5.750%, 04/15/2004 3,000,000 2,811,840
Den Danske Bank, 6.375%, 06/15/2008** 4,150,000 3,932,250
Ford Motor Credit Co., 7.375%, 10/28/2009 8,800,000 8,527,200
Ford Motor Credit Corp., 5.750%,
02/23/2004 3,200,000 2,991,040
General Electric Capital Corp., 8.750%,
05/21/2007 6,050,000 6,477,432
General Motors Acceptance Corp., 6.150%,
04/05/2007 2,400,000 2,174,160
General Motors Acceptance Corp., 7.750%,
01/19/2010 1,800,000 1,777,626
Goldman Sachs Group, Inc., 7.800%,
01/28/2010 8,600,000 8,505,400
Merrill Lynch & Co., Inc., 6.000%,
02/17/2009 3,600,000 3,174,192
PNC Funding Corp., 7.500%, 11/01/2009 13,300,000 12,826,520
Province of Quebec, Canada, 8.625%,
01/19/2005 8,250,000 8,599,965
Repsol International Finance, 7.00%,
08/01/2005 5,000,000 4,716,300
Scotland International, 8.800%, 01/27/2004 1,350,000 1,397,250
Svenska Handelsbanken, 7.125%,
03/29/2049** 5,675,000 5,241,940
Wells Fargo & Co., 6.875%, 04/01/2006 5,000,000 4,737,750
---------------------------------------------------------------------------------
85,630,034
------------------------------------------------------------------------------------------------------------------------
HEALTH--.2%
Magellan Health Services, Inc., 9.00%,
02/15/2008 10,000,000 6,600,000
---------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
MANUFACTURING--1.0%
Delco Remy International, 10.625%,
08/01/2006 $ 8,620,000 $ 8,447,600
Hayes Wheels International Inc., 11.000%,
07/15/2006 8,000,000 8,060,000
Neenah Corp., 11.125%, 05/01/2007 1,600,000 1,248,000
Neenah Corp., 11.125%, 05/01/2007 2,400,000 1,872,000
Plainwell, Inc., 11.000%, 03/01/2008 4,230,000 1,142,100
Riverwood International Corp., 10.250%,
04/01/2006 8,350,000 8,266,500
Stone Container Corp., 11.500%, 08/15/2006 2,500,000 2,600,000
Stone Container Corp., 12.580%, 08/01/2016 3,500,000 3,714,375
---------------------------------------------------------------------------------
35,350,575
------------------------------------------------------------------------------------------------------------------------
MEDIA--2.6%
AMFM, Inc., 9.000%, 10/01/2008 5,640,000 5,724,600
American Radio Systems, 9.000%, 02/01/2006 3,680,000 3,781,200
CSC Holdings, Inc., 9.250%, 11/01/2005 8,290,000 8,207,100
Charter Communications Holdings LLC,
8.625%, 04/01/2009 8,500,000 7,437,500
Comcast Cable Communication, 8.500%,
05/01/2027 1,400,000 1,420,860
Comcast Corp., 9.375%, 05/15/2005 8,500,000 8,905,365
Diamond Cable Communications, PLC Step-up
Coupon, 0% to 02/15/2002, 10.750% to
02/15/2007*** 4,840,000 3,678,400
Diamond Cable Communications, PLC Step-up
Coupon, 0% to 12/15/2000, 11.750% to
12/15/2005*** 1,660,000 1,543,800
Frontiervision LP, 11.000%, 10/15/2006 5,000,000 5,100,000
K-III Communications Corp., 8.500%,
02/01/2006 4,250,000 4,048,125
NTL Communications Corp., Step-up Coupon
0% to 10/01/2003, 12.375% to 10/01/2008 750,000 485,625
NTL, Inc., Step-up Coupon, to 02/01/2001,
11.500% to 02/01/2006*** 11,330,000 10,480,250
NTL, Inc., 11.500%, 10/01/2008*** 475,000 482,125
News America Holdings, Inc., 9.250%,
02/01/2013 1,950,000 2,057,738
Sinclair Broadcasting Group Inc., 8.750%,
12/15/2007 3,890,000 3,384,300
Tele-Communications, PLC 9.800%,
02/01/2012 5,950,000 6,887,601
TeleWest Communications, PLC*** Step-up
Coupon, 0% to 10/01/2000, 11.000% to
10/01/2007 17,250,000 16,085,625
Time Warner, Inc., 9.125%, 01/15/2013 2,075,000 2,232,015
---------------------------------------------------------------------------------
91,942,229
------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--.3%
Euramax International, PLC 11.250%,
10/01/2006 8,400,000 8,442,000
MMI Products, Inc., 11.250%, 04/15/2007 1,600,000 1,600,000
---------------------------------------------------------------------------------
10,042,000
------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--.2%
PSINet, Inc., 10.000%, 02/15/2005 3,210,000 2,824,800
PSINet, Inc., 11.500%, 11/01/2008 4,030,000 3,687,450
---------------------------------------------------------------------------------
6,512,250
------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--.1%
Delta Air Lines, 7.900%, 12/15/2009 3,400,000 3,178,660
---------------------------------------------------------------------------------
</TABLE>
12 The accompanying notes are an integral part of the financial statements.
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
UTILITIES--.1%
Alabama Power Co., 7.125%, 08/15/2004 $ 3,500,000 $ 3,422,441
---------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $399,335,382) 374,423,384
---------------------------------------------------------------------------------
<CAPTION>
NUMBER OF
COMMON STOCKS--63.7% SHARES
<S> <C> <C> <C> <C> <C>
CONSUMER DISCRETIONARY--5.1%
DEPARTMENT & CHAIN
STORES--3.9%
Dollar General Corp. 1 23
Home Depot, Inc. 727,503 40,785,636
Target Corp. 644,000 42,866,250
Wal-Mart Stores, Inc. 1,043,200 57,767,200
---------------------------------------------------------------------------------
141,419,109
SPECIALTY RETAIL--1.2%
Tandy Corp. 762,800 43,479,600
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--2.6%
FOOD & BEVERAGE--2.0%
Bestfoods 300,000 15,075,000
H.J. Heinz Co. 372,000 12,648,000
PepsiCo, Inc. 1,205,000 44,208,437
---------------------------------------------------------------------------------
71,931,437
PACKAGE GOODS/
COSMETICS--0.6%
Colgate-Palmolive Co. 400,000 22,850,000
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
HEALTH--7.1%
BIOTECHNOLOGY--1.1%
Amgen Inc.* 343,000 19,208,000
Genentech, Inc.* 80,000 9,360,000
PE Corp-PE Biosystems Group 200,000 12,000,000
---------------------------------------------------------------------------------
40,568,000
MEDICAL SUPPLY &
SPECIALTY--1.5%
Baxter International, Inc. 567,900 36,984,487
Becton, Dickinson & Co. 555,000 14,221,875
Edwards Lifesciences Corp.* 98,580 1,478,700
---------------------------------------------------------------------------------
52,685,062
PHARMACEUTICALS--4.5%
Abbott Laboratories 755,000 29,020,313
Allergan, Inc. 430,800 25,363,350
Forest Laboratories, Inc.* 275,000 23,117,187
Merck & Co., Inc. 433,000 30,093,500
Pfizer, Inc. 505,000 21,273,125
Warner-Lambert Co. 290,000 33,005,625
---------------------------------------------------------------------------------
161,873,100
------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--3.1%
CELLULAR TELEPHONE--.6%
Vodafone AirTouch PLC (ADR) 445,000 20,915,000
---------------------------------------------------------------------------------
TELEPHONE/
COMMUNICATIONS--2.5%
AT&T Corp. 595,000 27,779,063
Bell Atlantic Corp. 415,000 24,588,750
BroadWing, Inc.* 823,000 23,301,188
Qwest Communications International Inc.* 305,000 13,229,375
---------------------------------------------------------------------------------
88,898,376
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
<S> <C> <C> <C> <C> <C>
FINANCIAL--9.9%
BANKS--.5%
Wells Fargo Co. 440,000 $ 18,067,500
---------------------------------------------------------------------------------
INSURANCE--3.5%
American International Group, Inc. 355,000 38,939,063
Aon Corp. 655,800 17,747,587
Cigna Corp. 261,200 20,830,700
Jefferson Pilot Corp. 325,500 21,666,094
St. Paul Companies, Inc. 765,000 27,253,125
---------------------------------------------------------------------------------
126,436,569
CONSUMER FINANCE--3.7%
American Express Co. 180,000 27,011,250
Capital One Finance Corp. 702,400 30,730,000
Citigroup, Inc. 701,248 41,680,428
Household International, Inc. 783,022 32,691,169
---------------------------------------------------------------------------------
132,112,847
OTHER FINANCIAL
COMPANIES--2.2%
Federal National Mortgage Association 410,000 24,728,125
Marsh & McLennan Companies Inc. 215,800 21,269,788
Merrill Lynch & Co., Inc. 130,000 13,251,875
Morgan Stanley Dean Witter Co. 230,000 17,652,500
---------------------------------------------------------------------------------
76,902,288
------------------------------------------------------------------------------------------------------------------------
MEDIA--4.9%
ADVERTISING--.3%
Omnicom Group, Inc. 97,700 8,896,806
---------------------------------------------------------------------------------
BROADCASTING &
ENTERTAINMENT--3.8%
CBS Corp.* 517,800 30,420,750
Clear Channel Communication Inc.* 428,931 30,883,032
Infinity Broadcasting Corp "A"* 837,400 28,419,263
Univision Communications, Inc.* 219,100 23,936,675
Walt Disney Co. 575,000 24,904,688
---------------------------------------------------------------------------------
138,564,408
CABLE TELEVISION--.8%
AT&T Corp. -- Liberty Media Group "A"* 545,000 27,215,937
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--2.3%
EDP SERVICES--1.8%
Electronic Data Systems Co 585,000 40,218,750
First Data Corp. 570,000 27,751,875
---------------------------------------------------------------------------------
67,970,625
PRINTING/PUBLISHING--.5%
McGraw-Hill, Inc. 322,200 16,915,500
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
DURABLES--1.6%
AEROSPACE
Boeing Co. 445,000 17,660,937
United Technologies Corp.* 640,000 39,800,000
---------------------------------------------------------------------------------
57,460,937
MANUFACTURING--5.2%
DIVERSIFIED
MANUFACTURING--3.7%
General Electric Co. 621,000 97,652,250
Tyco International Ltd. 791,528 36,360,817
---------------------------------------------------------------------------------
134,013,067
MACHINERY/COMPONENTS/
CONTROLS--.8%
Parker-Hannifin Corp. 645,000 29,992,500
---------------------------------------------------------------------------------
OFFICE EQUIPMENT/
SUPPLIES--.7%
Lexmark International Group Inc. "A"* 225,000 26,550,000
---------------------------------------------------------------------------------
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
<S> <C> <C> <C> <C> <C>
TECHNOLOGY--17.9%
COMPUTER SOFTWARE--3.4%
Microsoft Corp.* 1,035,000 $ 72,191,250
Oracle Corp.* 549,000 43,885,688
Siebel Systems, Inc.* 54,000 6,635,250
---------------------------------------------------------------------------------
122,712,188
DIVERSE ELECTRONIC
PRODUCTS--4.6%
Applied Materials, Inc.* 270,000 27,489,375
Dell Computer Corp.* 525,000 26,315,625
General Motors Corp. "H" (New)* 225,000 21,670,312
Motorola Inc. 275,000 32,742,188
Solectron Corp.* 740,000 34,641,250
Teradyne, Inc.* 201,000 22,110,000
---------------------------------------------------------------------------------
164,968,750
ELECTRONIC COMPONENTS/
DISTRIBUTORS--2.7%
Cisco Systems, Inc.* 1,390,000 96,366,094
---------------------------------------------------------------------------------
ELECTRONIC DATA
PROCESSING--2.6%
Hewlett-Packard Co. 285,000 38,475,000
International Business Machines Corp. 195,000 21,766,875
Sun Microsystems, Inc.* 370,000 34,016,875
---------------------------------------------------------------------------------
94,258,750
SEMICONDUCTORS--4.0%
Intel Corp. 735,000 93,207,187
Texas Instruments, Inc. 180,000 29,317,500
Xilinx, Inc.* 283,800 20,788,350
---------------------------------------------------------------------------------
143,313,037
MISCELLANEOUS--.6%
Agilent Technologies, Inc.* 229,900 20,374,888
Cimlinc Incorporated, convertible
preferred* 37,716 141,435
---------------------------------------------------------------------------------
20,516,323
------------------------------------------------------------------------------------------------------------------------
ENERGY--4.0%
OIL & GAS
PRODUCTION--2.0%
Exxon Mobil Corp. 608,916 47,305,161
Royal Dutch Petroleum Co. (New York
shares)* 430,000 24,671,250
---------------------------------------------------------------------------------
71,976,411
OILFIELD SERVICES/
EQUIPMENT--2.0%
Halliburton Co. 345,000 15,244,688
Schlumberger Ltd. 475,000 36,367,188
Transocean Sedo Forex, Inc. 426,960 20,067,120
---------------------------------------------------------------------------------
71,678,996
---------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $1,605,149,306) 2,291,509,217
---------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100.0%
(Cost $2,948,541,636) $3,596,788,944
---------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost for federal income tax purpose was $2,948,541,636. At April 30,
2000, net unrealized appreciation for all securities based on tax cost was
$648,247,308. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess of market value over tax
cost of $750,109,871 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$101,862,563.
(b) Repurchase agreement is fully collateralized by U.S. Treasury or
Government agency securities.
* Non-income producing securities.
** Floating rate notes are securities whose interest rates vary with a
designated market index or market rate, such as the coupon equivalent of
the U.S. Treasury bill rate. The securities are shown at their rate as of
April 30, 2000.
*** Deferred interest obligation; currently zero coupon under the terms of the
initial offering.
16 The accompanying notes are an integral part of the financial statements.
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF ASSETS & LIABILITIES
As of April 30, 2000
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value
(cost $2,948,541,636) $3,596,788,944
------------------------------------------------------------------------------
Cash 548,689
------------------------------------------------------------------------------
Receivable for investments sold 18,649,372
------------------------------------------------------------------------------
Dividends receivable 1,236,980
------------------------------------------------------------------------------
Interest receivable 25,019,969
------------------------------------------------------------------------------
Receivable for Fund shares sold 2,212,879
------------------------------------------------------------------------------
TOTAL ASSETS 3,644,456,833
------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased 14,302,812
------------------------------------------------------------------------------
Payable for Fund shares redeemed 4,185,811
------------------------------------------------------------------------------
Accrued management fee 1,613,638
------------------------------------------------------------------------------
Other accrued expenses and payables 3,891,581
------------------------------------------------------------------------------
Total liabilities 23,993,842
------------------------------------------------------------------------------
NET ASSETS, AT VALUE $3,620,462,991
------------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income (loss) $ 4,020,015
------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments 648,247,308
------------------------------------------------------------------------------
Accumulated net realized gain (loss) 208,840,963
------------------------------------------------------------------------------
Paid-in capital 2,759,354,705
------------------------------------------------------------------------------
NET ASSETS, AT VALUE $3,620,462,991
------------------------------------------------------------------------------
NET ASSET VALUE AND OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($2,923,389,029 / 258,902,170 outstanding shares of
beneficial interest, $.01 par value, unlimited number of
shares authorized) $11.29
------------------------------------------------------------------------------
Maximum offering price per share (100 / 94.25 of $11.29) $11.98
------------------------------------------------------------------------------
CLASS B SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($630,449,608
/ 55,861,396 outstanding shares of beneficial interest,
$.01 par value, unlimited number of shares authorized) $11.29
------------------------------------------------------------------------------
CLASS C SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($54,965,587 /
4,877,619 outstanding shares of beneficial interest, $.01
par value, unlimited number of shares authorized) $11.27
------------------------------------------------------------------------------
CLASS I SHARES
Net asset value, offering and redemption price per share
($11,658,767 / 1,029,287 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $11.33
------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 17
<PAGE> 18
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended April 30, 2000
(UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $10,072) $ 9,901,114
----------------------------------------------------------------------------
Interest 51,090,166
----------------------------------------------------------------------------
Total income 60,991,280
----------------------------------------------------------------------------
Expenses:
Management fee 9,728,984
----------------------------------------------------------------------------
Services to shareholders 4,456,351
----------------------------------------------------------------------------
Custodian fees 45,504
----------------------------------------------------------------------------
Distribution services fees 2,782,217
----------------------------------------------------------------------------
Administrative services fees 4,573,184
----------------------------------------------------------------------------
Auditing 42,212
----------------------------------------------------------------------------
Legal 10,010
----------------------------------------------------------------------------
Trustees' fees and expenses 25,844
----------------------------------------------------------------------------
Reports to shareholders 815,945
----------------------------------------------------------------------------
Registration fees 34,629
----------------------------------------------------------------------------
Other 32,607
----------------------------------------------------------------------------
Total expenses, before expense reductions 22,547,487
----------------------------------------------------------------------------
Expense reductions (123,879)
----------------------------------------------------------------------------
Total expenses, after expense reductions 22,423,608
----------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 38,567,672
----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from investments 211,095,111
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on investments (77,103,412)
----------------------------------------------------------------------------
Net gain (loss) on investment transactions 133,991,699
----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $172,559,371
----------------------------------------------------------------------------
</TABLE>
18 The accompanying notes are an integral part of the financial statements.
<PAGE> 19
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30, YEAR ENDED
2000 OCTOBER 31,
(UNAUDITED) 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ 38,567,672 88,720,995
----------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions 211,095,111 146,151,777
----------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period (77,103,412) 337,450,337
----------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 172,559,371 572,323,109
----------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
----------------------------------------------------------------------------------------------------
Class A (36,899,443) (74,596,106)
----------------------------------------------------------------------------------------------------
Class B (5,253,277) (13,995,350)
----------------------------------------------------------------------------------------------------
Class C (408,732) (699,320)
----------------------------------------------------------------------------------------------------
Class I (164,503) (341,247)
----------------------------------------------------------------------------------------------------
From net realized gains
----------------------------------------------------------------------------------------------------
Class A (115,967,738) (155,081,902)
----------------------------------------------------------------------------------------------------
Class B (28,527,232) (54,431,309)
----------------------------------------------------------------------------------------------------
Class C (1,824,608) (1,770,844)
----------------------------------------------------------------------------------------------------
Class I (453,978) (839,343)
----------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 421,051,086 785,522,939
----------------------------------------------------------------------------------------------------
Reinvestment of distributions 178,621,891 284,806,801
----------------------------------------------------------------------------------------------------
Cost of shares redeemed (644,293,033) (980,127,714)
----------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions (44,620,056) 90,202,026
----------------------------------------------------------------------------------------------------
Increase (decrease) in net assets (61,560,196) 360,769,714
----------------------------------------------------------------------------------------------------
NET ASSETS AT BEGINNING OF PERIOD 3,682,023,187 3,321,253,473
----------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $4,020,015 and $8,178,298,
respectively) $3,620,462,991 3,682,023,187
----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 19
<PAGE> 20
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLES INCLUDE SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
CLASS A
SIX MONTHS
ENDED
APRIL 30, YEAR ENDED OCTOBER 31,
2000 -------------------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period
$11.35 10.54 11.34 11.28 10.60 9.10
--------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) .13(a) .30(a) .29 .31 .28 .29
--------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions .42 1.50 .77 1.57 1.24 1.46
--------------------------------------------------------------------------------------------------------------------------
Total from investment operations .55 1.80 1.06 1.88 1.52 1.75
--------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.15) (.31) (.31) (.33) (.34) (.25)
--------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.46) (.68) (1.55) (1.49) (.50) --
--------------------------------------------------------------------------------------------------------------------------
Total distributions (.61) (.99) (1.86) (1.82) (.84) (.25)
--------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.29 11.35 10.54 11.34 11.28 10.60
--------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (B) 4.84** 17.91 10.47 18.95 15.34 19.46
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ thousands) 2,923,389 2,884,634 2,406,414 2,079,560 1,865,933 1,772,822
--------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions
(%) 1.05* 1.02 1.01 1.01 1.05 1.12
--------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.04* 1.02 1.01 1.01 1.05 1.12
--------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 2.27* 2.71 2.75 2.92 2.76 3.00
--------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 65* 64 80 122 85 142
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
SIX MONTHS
ENDED
APRIL 30, YEAR ENDED OCTOBER 31,
2000 ---------------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period
$11.34 10.52 11.33 11.27 10.59 9.09
------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) .08(a) .19(a) .19 .22 .19 .20
------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions .42 1.50 .75 1.55 1.23 1.46
------------------------------------------------------------------------------------------------------------------------
Total from investment operations .50 1.69 .94 1.77 1.42 1.66
------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.09) (.19) (.20) (.22) (.24) (.16)
------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.46) (.68) (1.55) (1.49) (.50) --
------------------------------------------------------------------------------------------------------------------------
Total distributions (.55) (.87) (1.75) (1.71) (.74) (.16)
------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.29 11.34 10.52 11.33 11.27 10.59
------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (B) 4.42** 16.76 9.30 17.86 14.28 18.42
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ thousands) 630,450 744,232 877,077 1,132,158 1,132,718 1,135,827
------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.95* 2.03 2.01 1.95 1.99 2.05
------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.94* 2.03 2.01 1.95 1.99 2.05
------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 1.37* 1.70 1.75 1.98 1.82 2.07
------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 65* 64 80 122 85 142
------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
SIX MONTHS
ENDED
APRIL 30, YEAR ENDED OCTOBER 31,
2000 -----------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $11.32 10.54 11.34 11.28 10.61 9.09
---------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) .08(a) .20(a) .20 .22 .20 .21
---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions .43 1.48 .77 1.56 1.22 1.48
---------------------------------------------------------------------------------------------------------------------
Total from investment operations .51 1.68 .97 1.78 1.42 1.69
---------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.10) (.22) (.22) (.23) (.25) (.17)
---------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.46) (.68) (1.55) (1.49) (.50) --
---------------------------------------------------------------------------------------------------------------------
Total distributions (.56) (.90) (1.77) (1.72) (.75) (.17)
---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.27 11.32 10.54 11.34 11.28 10.61
---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (B) 4.50** 16.64 9.50 17.92 14.31 18.76
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ thousands) 54,966 42,841 25,681 17,472 11,067 5,357
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.86* 1.89 1.90 1.90 1.89 1.86
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.85* 1.89 1.90 1.90 1.89 1.86
---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 1.46* 1.84 1.86 2.03 1.92 2.26
---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 65* 64 80 122 85 142
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS I
SIX MONTHS
ENDED
APRIL 30, YEAR ENDED OCTOBER 31,
2000 ------------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $11.38 10.54 11.33 11.27 10.61 10.07
---------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) .15(a) .34(a) .34 .36 .32 .10
---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions .43 1.53 .77 1.55 1.23 .52
---------------------------------------------------------------------------------------------------------------------
Total from investment operations .58 1.87 1.11 1.91 1.55 .62
---------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.17) (.35) (.35) (.36) (.39) (.08)
---------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.46) (.68) (1.55) (1.49) (.50) --
---------------------------------------------------------------------------------------------------------------------
Total distributions (.63) (1.03) (1.90) (1.85) (.89) (.08)
---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.33 11.38 10.54 11.33 11.27 10.61
---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (B) 5.11** 18.65 10.98 19.40 15.64 6.21
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ thousands) 11,659 10.316 12,082 12,193 11,080 12,537
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .67* .67 .64 .71 .72 .61
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .66* .67 .64 .71 .72 .61
---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 2.65* 3.06 3.12 3.22 3.09 2.97
---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 65* 64 80 122 85 142
---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Not annualized
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of sales charges.
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES Kemper Total Return Fund (the "Fund") is registered
under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end,
diversified management investment company organized
as a Massachusetts business trust.
The Fund offers multiple classes of shares. Class A
shares are offered to investors subject to an
initial sales charge. Class B shares are offered
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are offered without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares are offered to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expenses reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of the Fund have
equal rights with respect to voting subject to
class specific arrangements.
The Fund's financial statements are prepared in
accordance with generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Investments are stated at value
determined as of the close of regular trading on
the New York Stock Exchange. Securities which are
traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on
the exchange on which the security is traded most
extensively. If no sale occurred, the security is
then valued at the calculated mean between the most
recent bid and asked quotations. If there are no
such bid and asked quotations, the most recent bid
quotation is used. Securities quoted on the Nasdaq
Stock Market ("Nasdaq"), for which there have been
sales, are valued at the most recent sale price
reported. If there are no such sales, the value is
the most recent bid quotation. Securities which are
not quoted on Nasdaq but are traded in another
over-the-counter market are valued at the most
recent sale price, or if no sale occurred, at the
calculated mean between the most recent bid and
asked quotations on such market. If there are no
such bid and asked quotations, the most recent bid
quotation shall be used.
Portfolio debt securities purchased with an
original maturity greater than sixty days are
valued by pricing agents approved by the officers
of the trust, whose 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. Money market instruments
purchased with an original maturity of sixty days
or
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
less are valued at amortized cost. All other
securities are valued at their fair value as
determined in good faith by the Valuation Committee
of the Board of Trustees.
FOREIGN CURRENCY TRANSLATIONS. The books and
records of the Fund are maintained in U.S. dollars.
Investment securities and other assets and
liabilities denominated in a foreign currency are
translated into U.S. dollars at the prevailing
exchange rates at period end. Purchases and sales
of investment securities, income and expenses are
translated into U.S. dollars at the prevailing
exchange rates on the respective dates of the
transactions.
Net realized and unrealized gains and losses on
foreign currency transactions represent net gains
and losses between trade and settlement dates on
securities transactions, the disposition of forward
foreign currency exchange contracts and foreign
currencies, and the difference between the amount
of net investment income accrued and the U.S.
dollar amount actually received. That portion of
both realized and unrealized gains and losses on
investments that results from fluctuations in
foreign currency exchange rates is not separately
disclosed but is included with net realized and
unrealized gains and losses on investment
securities.
REPURCHASE AGREEMENTS. The Fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
FEDERAL INCOME TAXES. The Fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies and to distribute
all of its taxable income to its shareholders.
Accordingly, the Fund paid no federal income taxes
and no federal income tax provision was required.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made quarterly.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the Fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital
accounts without impacting the net asset value of
the Fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Dividend income is recorded on
the ex-dividend date. Certain dividends from
foreign securities may be recorded subsequent to
the ex-dividend date as soon as the Fund is
informed of such dividends. Realized gains and
losses from
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
investment transactions are recorded on an
identified cost basis. All discounts are accreted
for both tax and financial reporting purposes.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other
Trust expenses are allocated between the Funds in
proportion to their relative net assets.
--------------------------------------------------------------------------------
2 PURCHASES AND SALES
OF SECURITIES For the six months ended April 30, 2000, investment
transactions (excluding short-term investments and
direct U.S. Government obligations) are as follows:
Purchases $1,014,805,245
Proceeds from sales 1,298,999,538
Purchases and sales of direct U.S. Government
obligations are as follows:
Purchases $144,664,967
Proceeds from sales 103,483,615
--------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper), and pays a monthly investment
management fee of 1/12 of the annual rate of .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 $9,728,984 for the six
months ended April 30, 2000 which was equivalent to
an annualized effective rate of .53%.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the six months ended April
30, 2000 are $145,506.
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 for Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charger
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the six months ended April 30, 2000 are
$3,604,517, of which $423,871 is unpaid at April
30, 2000.
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of fund accounts the firms
service. Administrative services fees paid by the
Fund to KDI for the six months ended April 30, 2000
are $4,573,184, of which $1,059,219 is unpaid at
April 30, 2000. Additionally, $4,972 was paid by
KDI to affiliates.
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
24
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
services fees of $3,499,071 for the six months
ended April 30, 2000 of which $2,018,543 is unpaid
at April 30, 2000.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. The Fund made no payments to its
officers and incurred trustees' fees of $25,844 to
independent trustees.
--------------------------------------------------------------------------------
4
CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL 30, YEAR ENDED OCTOBER 31,
2000 1999
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 16,209,899 $ 183,919,592 29,205,481 $ 321,328,459
---------------------------------------------------------------------------------
Class B 8,035,793 90,925,695 15,729,881 173,113,495
---------------------------------------------------------------------------------
Class C 1,917,041 21,673,689 2,235,297 24,645,489
---------------------------------------------------------------------------------
Class I 324,245 3,710,395 635,107 7,003,950
---------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 12,787,979 143,982,313 20,418,344 216,307,128
---------------------------------------------------------------------------------
Class B 2,846,834 31,988,865 6,165,885 64,996,852
---------------------------------------------------------------------------------
Class C 181,295 2,035,633 219,206 2,321,361
---------------------------------------------------------------------------------
Class I 54,452 615,080 111,780 1,181,460
---------------------------------------------------------------------------------
SHARES REDEEMED
Class A (34,905,198) (395,778,304) (47,087,616) (519,741,060)
---------------------------------------------------------------------------------
Class B (10,177,768) (113,444,470) (16,139,135) (177,775,452)
---------------------------------------------------------------------------------
Class C (1,1004,658) (11,326,002) (1,107,339) (12,316,816)
---------------------------------------------------------------------------------
Class I (255,984) (2,922,542) (986,847) (10,862,840)
---------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 10,629,382 120,821,715 23,411,340 259,431,546
---------------------------------------------------------------------------------
Class B (10,477,348) (120,821,715) (23,452,311) (259,431,546)
---------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $ (44,620,056) $ 90,202,026
---------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
5
EXPENSE OFF-SET
ARRANGEMENTS The Fund has entered into arrangements with its
custodian and transfer agent whereby credits
realized as a result of uninvested cash balances
were used to reduce a portion of the Fund's
expenses. During the period, the Fund's custodian
and transfer agent fees were reduced by $3,322 and
$120,557, respectively, under these arrangements.
--------------------------------------------------------------------------------
6
LINE OF CREDIT The Fund and several Kemper funds (the
"Participants") share in a $750 million revolving
credit facility for temporary or emergency
purposes, including the meeting of redemption
requests that otherwise might require the untimely
disposition of securities. The Participants are
charged an annual commitment fee which is allocated
pro rata among each of the Participants. Interest
is calculated based on the market rates at the time
of the borrowing. The Fund may borrow up to a
maximum of 33 percent of its net assets under the
agreement.
25
<PAGE> 26
NOTES
26
<PAGE> 27
NOTES
27
<PAGE> 28
TRUSTEES&OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
JOHN W. BALLANTINE MARK S. CASADY LINDA J. WONDRACK
Trustee President Vice President
LEWIS A. BURNHAM PHILIP J. COLLORA MAUREEN E. KANE
Trustee Vice President and Assistant Secretary
Secretary
LINDA C. COUGHLIN CAROLINE PEARSON
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
DONALD L. DUNAWAY BRENDA LYONS
Trustee GARY A. LANGBAUM Assistant Treasurer
Vice President
ROBERT B. HOFFMAN
Trustee ANN M. MCCREARY
Vice President
DONALD R. JONES
Trustee KATHRYN L. QUIRK
Vice President
THOMAS W. LITTAUER
Trustee and Vice President WILLIAM F. TRUSCOTT
Vice President
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
</TABLE>
<TABLE>
<S> <C>
.............................................................................................
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
.............................................................................................
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 219557
Kansas City, MO 64121
.............................................................................................
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02110
.............................................................................................
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
.............................................................................................
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
.............................................................................................
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
</TABLE>
KEMPER FUNDS LOGO Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Equity Funds/Growth Style prospectus.
KTRF - 3 (6/25/00) 1114140
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
