-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wt6z7cwv4r+S3ZIkzKvjy6PVMhsEoCGPGg9Q2QyQjwU14J1N5R2A5g+msmhwhOKG 12RR29f1S5C+ty5SSiEoZw== 0000950137-98-000006.txt : 19980106 0000950137-98-000006.hdr.sgml : 19980106 ACCESSION NUMBER: 0000950137-98-000006 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980105 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEMPER INTERNATIONAL FUND CENTRAL INDEX KEY: 0000350562 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 363124258 STATE OF INCORPORATION: MA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-03136 FILM NUMBER: 98500616 BUSINESS ADDRESS: STREET 1: 222 SOUTH RIVERSIDE PLAZA CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3125371569 MAIL ADDRESS: STREET 1: 222 SOUTH RIVERSIDE PLAZA CITY: CHICAGO STATE: IL ZIP: 60606 FORMER COMPANY: FORMER CONFORMED NAME: KEMPER INTERNATIONAL FUND INC DATE OF NAME CHANGE: 19870127 N-30D 1 ANNUAL REPORT DATED 10-31-97 1 KEMPER INTERNATIONAL FUND ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED OCTOBER 31, 1997 LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM) Seeking total return, a combination of capital growth and income, principally through an internationally diversified portfolio of equity securities "...the portfolio was consistently overweighted in Europe, increasingly underweighted in Japan and ... Southeast Asia..." [KEMPER FUNDS LOGO] 2 CONTENTS 3 ECONOMIC OVERVIEW 5 PERFORMANCE UPDATE 9 INDUSTRY SECTORS 10 LARGEST HOLDINGS 11 PORTFOLIO OF INVESTMENTS 16 REPORT OF INDEPENDENT AUDITORS 17 FINANCIAL STATEMENTS 19 NOTES TO FINANCIAL STATEMENTS 23 FINANCIAL HIGHLIGHTS AT A GLANCE - ------------------------------------------------------------------------------- KEMPER INTERNATIONAL FUND TOTAL RETURNS - ------------------------------------------------------------------------------- FOR THE YEAR ENDED OCTOBER 31, 1997 (UNADJUSTED FOR ANY SALES CHARGE) [BAR GRAPH] - ------------------------------------------------------------------------------ CLASS A 13.49% CLASS B 12.32% CLASS C 12.45% LIPPER INTERNATIONAL FUNDS CATEGORY AVERAGE* 10.39%
- ------------------------------------------------------------------------------ Returns and rankings are historical and do not represent future performance. Returns and net asset value fluctuate. Shares are redeemable at current net asset value, which may be 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 - ------------------------------------------------------------------------------ AS OF AS OF 10/31/97 10/31/96 - ------------------------------------------------------------------------------ KEMPER INTERNATIONAL FUND CLASS A $12.68 $11.96 - ------------------------------------------------------------------------------ KEMPER INTERNATIONAL FUND CLASS B $12.50 $11.81 - ------------------------------------------------------------------------------ KEMPER INTERNATIONAL FUND CLASS C $12.51 $11.81 - ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------ KEMPER INTERNATIONAL FUND LIPPER RANKINGS* - ------------------------------------------------------------------------------ COMPARED TO ALL OTHER FUNDS IN THE LIPPER INTERNATIONAL FUNDS CATEGORY
CLASS A CLASS B CLASS C - ------------------------------------------------------------------------------ 1-YEAR #129 OF 406 FUNDS #142 OF 406 FUNDS 140 OF 406 FUNDS - ------------------------------------------------------------------------------ 5-YEAR #36 OF 102 FUNDS N/A N/A - ------------------------------------------------------------------------------ 10-YEAR #12 OF 32 FUNDS N/A N/A - ------------------------------------------------------------------------------ 15-YEAR # 5 OF 10 FUNDS N/A N/A - ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------ DIVIDEND REVIEW - ------------------------------------------------------------------------------ DURING THE FISCAL YEAR, KEMPER INTERNATIONAL FUND MADE THE FOLLOWING DISTRIBUTIONS PER SHARE:
CLASS A CLASS B CLASS C - ------------------------------------------------------------------------------ INCOME DIVIDEND $0.1250 $0.0163 $0.0199 - ------------------------------------------------------------------------------ SHORT-TERM CAPITAL GAIN $0.0200 $0.0200 $0.0200 - ------------------------------------------------------------------------------ LONG-TERM CAPITAL GAIN $0.6600 $0.6600 $0.6600 - ------------------------------------------------------------------------------
Investment in foreign securities presents special risk considerations including fluctuating currency exchange rates, government regulation and differences in liquidity that may increase the volatility of your investment. TERMS TO KNOW YOUR FUND'S STYLE - ------------------------------------------------------------------------------ MORNINGSTAR EQUITY STYLE BOX - ------------------------------------------------------------------------------ [MORNINGSTAR STYLE BOX] MORNINGSTAR EQUITY STYLE BOX Source: Morningstar, Inc., Chicago, IL (312) 696-6000. (Morningstar Style Box is based on a portfolio date as of October 31, 1997.) The Equity Style Box placement is based on a fund's price-to-earnings and price-to-book ratio relative to the S&P 500, as well as the size of the companies in which it invests, or median market capitalization. Please note that style boxes do not represent an exact assessment of risk and do not represent future performance. Please consult the prospectus for a description of investment policies. 3 ECONOMIC OVERVIEW [TIMBERS PHOTO] Stephen B. Timbers is president, chief executive and chief investment officer of Zurich Kemper Investments, Inc. (ZKI). ZKI and its affiliates manage approximately $86 billion in assets, including $49 billion in retail mutual funds. Timbers is a graduate of Yale University and holds an M.B.A. from Harvard University. DEAR SHAREHOLDERS, Once again, investors experienced extreme market volatility in the month of October. Unlike the October corrections of 1987 and 1989, this year's market drop occurred at a time when the United States economy is remarkably healthy and resilient. As we have noted, the U.S. economy has been moving forward for several years with an alternating fast/slow pace that has proven successful in removing whatever excesses build from quarter to quarter. As a consequence, interest rates and the rate of inflation are both low and stable. Moreover, the federal budget deficit has been reduced to such an extent that discussion has now turned to what the government should do with a projected surplus in 1998. Fortunately, no part of our strong economic foundation was shaken by the market correction. If anything, the correction provided a short-lived and relatively painless lesson about the vulnerability of a highly valued market. When markets are high, everything -- economic news, corporate earnings and liquidity -- must go right. When markets are high -- as our equity market was for most of this year -- they are vulnerable to relatively minor disappointments. As you have read, of course, the direct source of the October correction was Southeast Asia, where the world's highest growth economies had been stumbling since the summer. These economies had become overextended, banks ran into trouble with bad loans and the local governments failed to take prompt action. The result was a domino effect of competitive devaluations of currencies, crashing markets and political chaos. But while Southeast Asia produced the event that led to the mini-panic in the U.S. equity market -- resulting in a 7 percent loss on October 27 -- the world quickly looked to the U.S. for solutions. When the U.S. market quickly rebounded, other markets became less volatile. Considering U.S. economic fundamentals and the relatively small effect that Southeast Asian problems have on U.S. companies as a whole, rational investors had to expect our market to bounce back. In fact, if the U.S. equity market had not been so highly valued, we would have expected the market's reaction to the Asian problems to be quite muted. For instance, if the Dow Jones Industrial Average had been closer to 7000 than to 8000, we would have expected that the market would have dropped only slightly. But as we have said before, today's markets move very fast. We experienced in one day the kind of correction that we used to experience over a six-month period. By Wednesday, November 19, the Dow Jones Industrial Average had climbed back to where it was before Gray Monday, October 27, 1997. It took only 26 days to recoup -- contrast that with the 463 days needed to recoup from Black Monday. The market did not recover from its 22.6 percent October 19, 1987, market correction until January 24, 1989. At this writing, the U.S. equity market remains very volatile. We expect that condition to continue, as volatility is a factor of higher valued markets. Despite what the last few years may have suggested, markets do not go in just one direction. Our recent experience supported many of the basic tenets of investing: - Invest for the long term and don't react to the short-term noise. Investors who got hurt in the October correction were those who had borrowed the money they invested and were forced to sell at low prices. Investors who were able to remain invested and did, lost only some of their above-average gain for the year. - Diversification helps reduce overall portfolio risk. Government securities investors, for example, found the bond market to be a safe haven as the bond market rallied during the stock market correction. - Investing abroad is complex and requires expert advice. Currency valuations, in particular, can have a significant effect on investment returns. Our forecast for the next several months calls for moderate economic growth, stable interest rates and controlled inflation. While we cannot rule out the possibility of another market event that would add to the excitement of equity investing, we would expect the U.S. market to again demonstrate its resiliency. 3 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]
NOW (11/30/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO 10-YEAR TREASURY RATE(1) 5.88 6.49 6.3 5.71 PRIME RATE(2) 8.5 8.5 8.25 8.65 INFLATION RATE(3)* 2.08 2.3 3.25 2.6 THE U.S. DOLLAR(4) 9.65 5.52 4.36 -2.58 CAPITAL GOODS ORDERS(5)* 9.92 7.16 3.3 8.09 INDUSTRIAL PRODUCTION(5)* 5.51 4.23 4.33 3.4 EMPLOYMENT GROWTH(6) 2.52 2.13 2.15 1.91
(1) Falling interest rates in recent years have been a big plus for financial assets. (2) The interest rate that commercial lenders charge their best borrowers. (3) Inflation reduces an investor's real return. In the last five years, inflation has been as high as 6 percent. The low, moderate inflation of the last few years has meant high real returns. (4) Changes in the exchange value of the dollar impact U.S. exporters and the value of U.S. firms foreign profits. (5) These influence corporate profits and equity performance. (6) An influence on family income and retail sales. * Data as of October 31, 1997. Sources: Economics Department, Zurich Kemper Investments, Inc. Thank you for your continued support. We appreciate the opportunity to serve your investment needs. Sincerely, /s/ Stephen B. Timbers STEPHEN B. TIMBERS PRESIDENT AND CHIEF INVESTMENT OFFICER ZURICH KEMPER INVESTMENTS INC. December 4, 1997 4 5 PERFORMANCE UPDATE [FERRO PHOTO] DENNIS FERRO IS CHIEF EXECUTIVE OF ZURICH INVESTMENT MANAGEMENT LTD. (LONDON) AND HEAD OF GLOBAL EQUITY INVESTMENTS. HE HOLDS AN M.B.A. IN FINANCE FROM ST. JOHN'S UNIVERSITY IN NEW YORK AND A BACHELOR'S DEGREE FROM VILLANOVA UNIVERSITY IN PENNSYLVANIA. HE IS A CHARTERED FINANCIAL ANALYST. THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER CONDITIONS. A FOCUS ON EUROPE, REDUCED EXPOSURE TO JAPAN AND AN INVESTMENT PROCESS THAT HELPED FUND MANAGEMENT AVOID MUCH OF THE SOUTHEAST ASIA DOWNSLIDE HELPED KEMPER INTERNATIONAL FUND MORE THAN DOUBLE THE RETURN OF ITS BENCHMARK INDEX. PORTFOLIO MANAGER DENNIS FERRO DISCUSSES THE FUND'S PERFORMANCE AND WORLD MARKET ACTIVITY. Q WHAT DID YOU SEE HAPPENING IN THE GLOBAL ECONOMY DURING THE PERIOD? A In Europe, we saw the continuation of modest but consistent economic expansion. Although the high unemployment levels that have plagued the region for the last several years have not meaningfully improved, there has been some increase in economic activity, industrial production and exports. Throughout the past year, interest rates were generally modest which helped economic expansion and there was some modest pick-up in retail spending and consumer confidence. In Japan, we saw little forward progress. A new fiscal program was implemented that had a tightening effect on the economy and prevented economic activity from expanding as hoped. As a result, the Japanese economy and corporate activity remained somewhat flat. In addition, the financial sector made little discernible progress in improving its financial position. In Southeast Asia, economic growth was stalled as most countries experienced slowdowns in their own economies. Financial strains began to pop up as banks and the real estate sector showed signs of being overextended. In addition, corporate profits did not seem to be growing at a pace similar to that forecasted for gross domestic product. In our opinion, the rates of economic growth had been overstated. Latin American economies were generally positive as domestic markets recovered from the downturn of two years ago. Expanding trade with the U.S. also had a positive effect. Q KEMPER INTERNATIONAL FUND ENDED THE PERIOD UP 13.49 PERCENT (CLASS A SHARES, UNADJUSTED FOR SALES CHARGE), STRONGLY OUTPERFORMING THE EAFE INDEX* RETURN OF 4.92 PERCENT. WHAT STEPS DID YOU AND YOUR TEAM TAKE TO ACHIEVE THESE IMPRESSIVE RESULTS? A Within the economic environment that I described, we attempted to move to those markets and market segments that had the highest growth potential and the least amount of economic or valuation risk. With this criteria in mind, the portfolio was consistently overweighted in Europe, increasingly underweighted in Japan and, especially during the second half of the fiscal year, underweighted in Southeast Asia. We stayed focused on high-quality companies in Asia that had some ability to weather the storms that started in those markets during the summer months and came to a head in late October. Our primary exposure in Southeast Asia was Hong Kong which, despite its volatility at the end of the fiscal year, was still the best performing market in the region. 5 6 PERFORMANCE UPDATE In Europe, our focus on economies and sectors benefiting from the lower interest rates was an important theme. The Spanish and Italian markets offered very good value as those economies restructured to meet the European Monetary Union (EMU) requirements. The Netherlands, where we found companies that combined strong management and consistent earnings, was also an attractive market. In Latin America we focused primarily on Mexico where we selected companies with broad exposure to the domestic market that are playing a strong role in the country's economic recovery. * The EAFE index (Morgan Stanley Capital International Europe, Australasia, Far East Index) is an unmanaged index generally accepted as a benchmark for major overseas markets. Q AND WHAT INDUSTRIES ARE YOU FOCUSING ON IN THE FUND? A In Europe we have continued to focus on the pharmaceutical sector with holdings in Roche and Novartis in Switzerland and Glaxo Wellcome and Zeneca in the United Kingdom. Pharmaceuticals are benefiting from increased demand due to a growing global marketplace and strong new product research and development. We also focused on financials, a sector benefiting from the moderate inflation and lower interest rates in the region. We sought well-managed companies that generate improved profitability through a mix of business. Financial holdings that we believe meet these criteria are ING Groep and Aegon in the Netherlands, and Barclays in the UK. We focused on companies that demonstrated an ability to be global and that generate high relative returns on equity and capital in their industries. Although the Japanese market as a whole has done poorly, Honda, for example, has done well because of its global position. Canon is also a company with a strong domestic presence that participates in the global market and does so successfully. In Latin America we invested in companies that are participating in the domestic revival of the economies. In Mexico that includes Cementos Mexicanos and Kimberly-Clark de Mexico. We also focused on mid-cap companies that have strong local franchises. An example would be Nedcon Groep, an inventory management company in the Netherlands, and Shokkoh Fund, a commercial finance company in Japan. Temporary employment and corporate services companies are also growing in Europe and they tend to be smaller, domestic companies. In this industry we held Rentokil Group in the UK and Prosegur in Spain. Q THE PERIOD ENDED WITH MARKET TURMOIL THROUGHOUT THE WORLD SPARKED BY THE PROBLEMS IN SOUTHEAST ASIA. YOU HAVE MENTIONED THAT THE FUND HAD A LESSER WEIGHTING IN ASIA; WHAT PROCESS DID YOU AND YOUR TEAM USE TO SUCCESSFULLY AVOID MUCH OF THE DOWNTURN IN THAT REGION? A We utilized a proprietary market valuation model that helps us identify both opportunity and risk in various markets. This model identified an above average level of risk in the Asian markets early in the new year. As a result of that, we were consistently underweighted in the markets that saw such large drops. We believe the problems in Asia aren't over yet and we expect to see continued downgrades in earnings forecasts. The potential for loan loss surprises in the region remains very high. We plan to continue to be very conservative with our investments in the region. Q HOW DID THE DIFFERENT WORLD MARKETS PERFORM? A In general, top performance came from the European markets and the weaker markets were those in Southeast Asia. The chart on page 9 shows the top five and bottom five markets and their returns. It is interesting to note that even during this period of booming U.S. market performance, the Standard & Poor's 500 Stock Index** was up 32.10 percent putting it in sixth place for the period. ** The Standard & Poor's 500 Stock Index is a broad-based measurement of U.S. market activity based on the average performance of 500 widely held common stocks. Q WHILE IT WAS A GOOD YEAR FOR THE FUND, WERE THERE ANY MISSES? A Having even less exposure to Japan and more with the markets that provided extraordinary performance would have even further boosted our results. But, the companies we owned in Japan have performed extremely well relative to that market. To turn the question around a bit, we did "miss" a lot of the downside in Southeast Asia which was obviously a positive. Q WHAT, IF ANY, WAS YOUR HEDGING STRATEGY DURING THE YEAR? A Our hedging during the period was a net positive but more so during the first half of the fiscal year. As the dollar weakened slightly, the hedge had more of a neutral to slightly negative effect on performance. We had a larger hedge during the first half when the dollar was exerting most of its strength and we did cut down the size of 6 7 PERFORMANCE UPDATE the hedge during the second half of the year. In October we eliminated the hedges. The U. S. dollar has had a meaningful move over the last two years and while it has been benefiting most recently from a move towards safety by some international investors, from a trade standpoint the dollar is reasonably valued and I don't expect any major shifts from here. We feel the potential for rates in Europe to rise relative to the U.S. over the next two years will keep a lid on the dollar from here on. Q WHAT IS YOUR OUTLOOK FOR THE COMING MONTHS? A We believe growth in the Western economies will be good although there may be some modest trimming as a result of the problems in Asia. Monetary policies should continue to support economic expansion and interest rates in a low inflationary environment should continue to support above average equity valuations. Companies should be able to generate consistent growth in earnings and attractive returns on capital going forward due to this positive economic environment. In Europe, EMU efforts will benefit those companies that have efficiency of scale and strong marketing because they will have a broader market to work in with fewer trade barriers. As the European market becomes one, it will be a wider and deeper marketplace for companies to participate in. In emerging markets, we plan to primarily concentrate on Southeast Asia and Latin America. We do think there are manufacturing companies in Southeast Asia that are attractive and we will look very closely at the financial strength and product menu of these companies to identify those that can compete going forward. The stronger companies will be major beneficiaries of the decline in Asian currencies. In Latin America we believe the fundamental story remains very strong. The economic recovery and an increased focus on containing inflation and maintaining a positive economic environment should be good for companies overall. We don't see any early solutions to the fundamental problems in Japan and Southeast Asia but we do think combined world financial support and economic growth elsewhere will eventually lead to a recovery in that region. 7 8 PERFORMANCE UPDATE - -------------------------------------------------------------------------------- KEMPER INTERNATIONAL FUND - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS* - -------------------------------------------------------------------------------- FOR PERIODS ENDED OCTOBER 31, 1997 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
LIFE 1-YEAR 5-YEAR 10-YEAR OF CLASS - ---------------------------------------------------------------------------------------------------------- KEMPER INTERNATIONAL FUND CLASS A 6.96% 12.28% 9.86% 12.20% (since 5/21/81) - ---------------------------------------------------------------------------------------------------------- KEMPER INTERNATIONAL FUND CLASS B 9.32 N/A N/A 8.66 (since 5/31/94) - ---------------------------------------------------------------------------------------------------------- KEMPER INTERNATIONAL FUND CLASS C 12.45 N/A N/A 9.17 (since 5/31/94) - ----------------------------------------------------------------------------------------------------------
[LINE GRAPH] - ------------------------------------------------------------------------------- KEMPER INTERNATIONAL FUND CLASS A - ------------------------------------------------------------------------------- Growth of an assumed $10,000 investment in Class A shares from 5/21/81 to 10/31/97 - -------------------------------------------------------------------------------
5/21/81 12/31/86 12/31/91 10/31/97 - ----------------------------------------------------------------------------------- Kemper International Fund Class A(1) 10000 25248 37718 66392 EAFE Index+ 10000 35398 54440 83573 Consumer Price Index++ 10000 12305 15356 17951
[LINE GRAPH] - ------------------------------------------------------------------------------- KEMPER INTERNATIONAL FUND CLASS B - ------------------------------------------------------------------------------- Growth of an assumed $10,000 investment in Class B shares from 5/31/94 to 10/31/97 - -------------------------------------------------------------------------------
5/31/94 12/31/94 12/31/95 12/31/96 10/31/97 - ----------------------------------------------------------------------------------------- Kemper International Fund Class B(1) 10000 9761 10929 12677 13286 EAFE Index+ 10000 10063 11226 11940 12199 Consumer Price Index++ 10000 10149 10407 10753 10929
[LINE GRAPH] - ------------------------------------------------------------------------------- KEMPER INTERNATIONAL FUND CLASS C - ------------------------------------------------------------------------------- Growth of an assumed $10,000 investment in Class C shares from 5/31/94 to 10/31/97 - -------------------------------------------------------------------------------
5/31/94 12/31/94 12/31/95 12/31/96 10/31/97 - ----------------------------------------------------------------------------------------- Kemper International Fund Class C(1) 10000 9761 10929 12681 13501 EAFE Index+ 10000 10063 11226 11940 12199 Consumer Price Index++ 10000 10149 10407 10753 10929
Returns are historical and do not reflect future performance. Returns and net asset value fluctuate. Shares are redeemable at current net asset value, which may be more or less than original cost. * Average annual total return measures net investment income and capital gain or loss from portfolio investments, assuming reinvestment of all dividends and for Class A shares adjustment for the maximum sales charge of 5.75 percent, for Class B shares adjustment for the applicable contingent deferred sales charge (CDSC) as follows: 1 year, 3 percent; 5 year, 1 percent; since inception, 0 percent. For Class C shares there is no adjustment for sales charge. For Class B shares, the maximum CDSC is 4 percent. For Class C shares, there is a 1 percent CDSC on certain redemptions within the first year of purchase. During the periods noted, securities prices fluctuated. For additional information, see the Prospectus and Statement of Additional Information and the Financial Highlights at the end of this report. (1) Performance includes reinvestment of dividends and adjustment for the maximum sales charge for Class A shares and the CDSC in effect at the end of the period for Class B shares. In comparing Kemper International Fund Class A and Class B shares to the EAFE Index, you should also note that the fund's performance reflects the applicable sales charge, while no such charge is reflected in the performance of the index. + The EAFE Index (Morgan Stanley Capital International Europe, Australasia, Far East Index) is an unmanaged index generally accepted as a benchmark for major overseas markets. Source is Towers Data Systems. ++ The Consumer Price Index is a statistical measure of change, over time, in the prices of goods and services in major expenditure groups for all urban consumers. Source is Towers Data Systems. 8 9 INDUSTRY SECTORS A FOCUS ON THE NETHERLANDS HELPED KEMPER INTERNATIONAL FUND OUTPERFORM* Data shows the geographic composition of the FT/S&P World Ex U.S. Index, an unmanaged index that is a generally accepted benchmark for major overseas markets, and the corresponding percentage for Kemper International Fund as of October 31, 1997. Differences in the composition help explain the differences in the performance of each. Please note, the fund also invests in other countries not reflected in this chart. [BAR GRAPH]
KEMPER INTERNATIONAL FUND FT/S&P WORLD EX U.S. INDEX AT 10/31/97 AT 10/31/97 NETHERLANDS 15.9% 4.6% JAPAN 12.4% 27.2% UNITED KINGDOM 12.4% 21.0% SWITZERLAND 7.3% 5.8% FRANCE 5.9% 6.3% CANADA 5.5% 5.0% GERMANY 4.2% 7.3% ITALY 4.2% 3.0% SWEDEN 3.9% 2.7% HONG KONG 1.0% 3.2%
*Portfolio composition and holdings are subject to change. [BAR GRAPH]
TOP AND BOTTOM MARKET PERFORMANCE 11/1/96-10/31/97 FINLAND 42.6% ITALY 40.7% SPAIN 33.9% MEXICO 32.9% NORWAY 32.2% SINGAPORE -38.6% INDONESIA -39.3% PHILIPPINES -55.1% MALAYSIA -59.7% THAILAND -74.4%
Source: FT/S&P World Indices, generally accepted benchmarks for world market performance. Returns in $US. Returns shown are historical and do not guarantee future results. 9 10 LARGEST HOLDINGS KEMPER INTERNATIONAL FUND'S TOP 20 HOLDINGS* Following is a list of the top 20 holdings in the fund as of October 31, 1997 and the percentage of net assets for each holding.
- ------------------------------------------------------------------------------------------------------- Holdings Country Percent - ------------------------------------------------------------------------------------------------------- 1. BANK OF IRELAND Ireland 3.6% 2. ELF AQUITAINE France 3.1% 3. NOVARTIS Switzerland 3.0% 4. L.M. ERICSSON Sweden 2.7% 5. BARCLAYS United Kingdom 2.7% 6. GLAXO WELLCOME United Kingdom 2.6% 7. AEGON Netherlands 2.3% 8. PETRO CANADA Canada 2.2% 9. ROCHE HOLDINGS Switzerland 2.2% 10. TELECOM ITALIA MOBILE Italy 2.2% 11. ING GROEP Netherlands 2.1% 12. BRITISH PETROLEUM United Kingdom 2.1% 13. TELECOM ITALIA Italy 2.0% 14. CARREFOUR France 1.8% 15. PHILIP SERVICES Canada 1.7% 16. HUDSON'S BAY CO. Canada 1.6% 17. VEBA Germany 1.6% 18. KONINKLIJKE AHOLD Netherlands 1.6% 19. SONY CORP. Japan 1.6% 20. BANCO POPULAR Spain 1.5%
*PORTFOLIO HOLDINGS ARE SUBJECT TO CHANGE. 10 11 PORTFOLIO OF INVESTMENTS KEMPER INTERNATIONAL FUND PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 1997 (DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------- COMMON STOCKS NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------------------- EUROPE NETHERLANDS--15.8% Aalberts Industries, N.V. capital goods and components 240,425 $ 6,305 Aegon, N.V. insurance company 170,851 13,469 Beter Bed Holding, N.V. furniture retailer 83,500 1,820 De Boer Unigro, N.V. food retailer 168,600 5,647 Getronics, N.V. information and communication services 197,000 6,507 IHC Caland, N.V. engineering services 85,333 5,250 ING Groep, N.V. banking and insurance 300,784 12,632 Koninklijke Ahold, N.V. food retailer 365,478 9,360 Nedcon Groep manufacturer of racking systems 67,000 3,763 Oce-Van Der Grinten photocopy and printing services 44,903 5,125 Royal Dutch Petroleum petroleum producer 123,040 6,511 Sligro Beheer, N.V. distributor of food and nonfood products 50,000 3,336 Unique International, N.V. temporary employment 268,080 6,672 Vedior, N.V. temporary employment 329,500 6,774 ----------------------------------------------------------------------- 93,171 - ---------------------------------------------------------------------------------------------------------------- UNITED KINGDOM--12.4% BBA Group, PLC diversified engineering company 743,541 5,011 Barclays, PLC banking 623,530 15,611 (a)British Bio-Technology Group pharmaceutical company 1,397,500 2,379 British Petroleum petroleum producer 826,837 12,146 Glaxo Wellcome pharmaceutical company 712,861 15,277 Marks & Spencer, PLC consumer goods and foods retailer 340,000 3,450 Prudential Corp., PLC financial services 565,000 6,026 Rentokil Group, PLC services company 1,440,000 5,795 Zeneca Group, PLC pharmaceutical company 220,000 6,939 ----------------------------------------------------------------------- 72,634
11 12 PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS) - ---------------------------------------------------------------------------------------------------------------- NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------------------- SWITZERLAND--7.3% Alusuisee-Lonza Holding aluminum, chemicals and packaging manufacturer 6,000 $ 5,393 Ciba Specialty Chemicals chemical producer 71,493 7,040 Novartis pharmaceutical company 11,200 17,589 Roche Holdings, A.G., with warrants expiring 1998 pharmaceutical company 1,487 13,103 ----------------------------------------------------------------------- 43,125 - ---------------------------------------------------------------------------------------------------------------- FRANCE--5.9% Carrefour, S.A. food retailer 20,845 10,901 Elf Aquitaine oil and gas producer 149,000 18,483 Technip, S.A. engineering company 50,000 5,307 ----------------------------------------------------------------------- 34,691 - ---------------------------------------------------------------------------------------------------------------- SPAIN--5.0% Banco Bilbao Vizcaya, S.A. banking 163,140 4,366 Banco Popular Espanol, S.A. banking 148,800 8,793 Banco Santander, S.A. banking 273,000 7,653 Prosegur, Cia de Seguridad, S.A. security services provider 290,000 3,252 Telefonica de Espana, S.A. domestic and international telecommunications 200,000 5,463 ----------------------------------------------------------------------- 29,527 - ---------------------------------------------------------------------------------------------------------------- IRELAND--4.8% Bank of Ireland banking 1,660,727 20,987 Independent Newspapers, PLC publisher 1,208,734 7,028 ----------------------------------------------------------------------- 28,015 - ---------------------------------------------------------------------------------------------------------------- ITALY--4.2% Telecom Italia Mobile mobile telecommunications provider 3,480,000 12,930 Telecom Italia, SpA telecommunications provider 1,872,000 11,752 ----------------------------------------------------------------------- 24,682 - ---------------------------------------------------------------------------------------------------------------- GERMANY--4.2% Mannesmann, A.G. capital goods producer 16,000 6,768 SGL CARBON, A.G. chemical producer 60,000 8,437 Veba, A.G. electric utility 169,000 9,436 ----------------------------------------------------------------------- 24,641
12 13 PORTFOLIO OF INVESTMENTS (DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------- NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------------------- L.M. Ericsson Telephone Co., "B" telecommunications equipment SWEDEN--3.9% MANUFACTURER 360,000 $ 15,874 Skandia Forsakrings, A.B. insurance and banking 145,240 6,792 ----------------------------------------------------------------------- 22,666 - ---------------------------------------------------------------------------------------------------------------- PORTUGAL--.6% Electricidade electricity provider 208,000 3,657 ----------------------------------------------------------------------- TOTAL EUROPEAN COUNTRIES--64.1% 376,809 - ---------------------------------------------------------------------------------------------------------------- PACIFIC REGION - ---------------------------------------------------------------------------------------------------------------- JAPAN--12.3% Bellsystem 24, Inc. telemarketing firm 27,000 3,727 Canon, Inc. precision instruments manufacturer 299,000 7,259 Circle K Japan convenience retailer 90,000 4,625 Fuji Photo Film Co., Ltd. precision instruments manufacturer 216,000 7,830 Honda Motor Co., Ltd. automobile manufacturer 218,000 7,341 Murata Manufacturing electronics components manufacturer 142,000 5,762 Nikon Corp. precision instruments manufacturer 305,000 3,398 Noritsu Koki Co., Ltd. precision instruments manufacturer 82,600 2,747 Ricoh Co., Ltd. precision instruments manufacturer 559,000 7,204 Shohkoh Fund & Co., Ltd. financing company 15,200 4,929 Sony Corp. electronics manufacturer 112,000 9,303 Toppan Printing Co., Ltd. printing services 236,000 2,963 Toray Industries textile manufacturer 1,015,000 5,654 ----------------------------------------------------------------------- 72,742 - ---------------------------------------------------------------------------------------------------------------- HONG KONG--1.0% CITIC Pacific, Ltd. conglomerate 600,000 2,872 HSBC Holdings, PLC banking 139,804 3,165 ----------------------------------------------------------------------- 6,037 - ---------------------------------------------------------------------------------------------------------------- SINGAPORE--.4% Development Bank of Singapore banking 218,000 2,037 ----------------------------------------------------------------------- TOTAL PACIFIC REGION--13.7% 80,816
13 14 PORTFOLIO OF INVESTMENTS (DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------- COMMONWEALTH COUNTRIES NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------------------- CANADA--5.5% Hudson's Bay Co. department store retailer 412,400 $ 9,441 Petro-Canada oil and gas company 645,300 13,108 (a)Philip Services Corp. recycling 564,700 9,882 ----------------------------------------------------------------------- 32,431 - ---------------------------------------------------------------------------------------------------------------- NEW ZEALAND--.4% Restaurant Brands New Zealand, Ltd. retailer food chains 1,925,000 2,498 ----------------------------------------------------------------------- TOTAL COMMONWEALTH COUNTRIES--5.9% 34,929 - ---------------------------------------------------------------------------------------------------------------- LATIN AMERICA - ---------------------------------------------------------------------------------------------------------------- MEXICO--3.2% Cementos Mexicanos, S.A. de C.V., "B," ADR cement producer 712,000 3,092 Fomento Economico Mexicano de C.V., "B," ADR beer and soft drink manufacturer 470,000 3,159 Grupo Carso, S.A. de C.V., ADR industrial conglomerate 452,700 2,817 Grupo Elektra, S.A. de C.V., GDR retailer 2,400,000 3,279 Industries Bachoco, S.A. poultry producer 161,750 2,750 Kimberly-Clark de Mexico, S.A. de C.V. paper products producer 813,000 3,429 ----------------------------------------------------------------------- 18,526 - ---------------------------------------------------------------------------------------------------------------- CHILE--.6% Supermercados Unimarc, S.A. food retailer 257,900 3,869 ----------------------------------------------------------------------- TOTAL LATIN AMERICAN COUNTRIES--3.8% 22,395 ----------------------------------------------------------------------- TOTAL COMMON STOCKS--87.5% (Cost: $410,409) 514,949 ----------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE - ---------------------------------------------------------------------------------------------------------------- MONEY MARKET Yield--5.54% to 5.70% INSTRUMENTS--10.1% Due--November and December, 1997 Countrywide Home $ 7,000 6,988 Dynamic Funding Co. 6,500 6,458 Enron Corp. 13,400 13,348 GTE Corp. 13,000 12,937 Other 19,600 19,561 ----------------------------------------------------------------------- TOTAL MONEY MARKET INSTRUMENTS--10.1% (Cost: $59,294) 59,292 ----------------------------------------------------------------------- TOTAL INVESTMENTS--97.6% (Cost: $469,703) 574,241 ----------------------------------------------------------------------- OTHER ASSETS, LESS LIABILITIES--2.4% 13,828 ----------------------------------------------------------------------- NET ASSETS--100% $588,069 -----------------------------------------------------------------------
14 15 PORTFOLIO OF INVESTMENTS At October 31, 1997, the Fund's portfolio of investments had the following industry diversification (dollars in thousands):
VALUE % - ------------------------------------------------------------------------------- Financial 109,332 18.6 - ------------------------------------------------------------------------------- Consumer Cyclical 84,512 14.4 - ------------------------------------------------------------------------------- Health Care 55,287 9.4 - ------------------------------------------------------------------------------- Energy 50,248 8.5 - ------------------------------------------------------------------------------- Utilities 47,657 8.1 - ------------------------------------------------------------------------------- Technology 46,015 7.8 - ------------------------------------------------------------------------------- Consumer Staples 43,404 7.4 - ------------------------------------------------------------------------------- Capital Goods 42,051 7.0 - ------------------------------------------------------------------------------- Basic Industries 36,443 6.2 - ------------------------------------------------------------------------------- TOTAL COMMON STOCKS 514,949 87.5 - ------------------------------------------------------------------------------- OTHER NET ASSETS 73,120 12.5 - ------------------------------------------------------------------------------- NET ASSETS $588,069 100.0 - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- NOTES TO PORTFOLIO OF INVESTMENTS - ------------------------------------------------------------------------------- (a) Non-income producing security. Based on the cost of investments of $469,703,000 for federal income tax purposes at October 31 1997, the gross unrealized appreciation was $117,515,000, the gross unrealized depreciation was $12,977,000 and the net unrealized appreciation on investments was $104,538,000. See accompanying Notes to Financial Statements. 15 16 REPORT OF INDEPENDENT AUDITORS THE BOARD OF TRUSTEES AND SHAREHOLDERS KEMPER INTERNATIONAL FUND We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Kemper International Fund as of October 31, 1997, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the fiscal periods since 1993. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as of October 31, 1997, by correspondence with the custodians and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Kemper International Fund at October 31, 1997, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the fiscal periods since 1993, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois December 16, 1997 16 17 FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 1997 (IN THOUSANDS) - ------------------------------------------------------------------------ ASSETS - ------------------------------------------------------------------------ Investments, at value (Cost: $469,703) $574,241 - ------------------------------------------------------------------------ Receivable for: Investments sold 22,899 - ------------------------------------------------------------------------ Fund shares sold 2,873 - ------------------------------------------------------------------------ Dividends 1,112 - ------------------------------------------------------------------------ TOTAL ASSETS 601,125 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ LIABILITIES AND NET ASSETS - ------------------------------------------------------------------------ Cash overdraft 1,899 - ------------------------------------------------------------------------ Payable for: Investments purchased 8,583 - ------------------------------------------------------------------------ Fund shares redeemed 1,251 - ------------------------------------------------------------------------ Management fee 387 - ------------------------------------------------------------------------ Distribution services fee 108 - ------------------------------------------------------------------------ Administrative services fee 138 - ------------------------------------------------------------------------ Custodian and transfer agent fees and related expenses 635 - ------------------------------------------------------------------------ Trustees' fees 55 - ------------------------------------------------------------------------ Total liabilities 13,056 - ------------------------------------------------------------------------ NET ASSETS $588,069 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ ANALYSIS OF NET ASSETS - ------------------------------------------------------------------------ Paid-in capital $456,080 - ------------------------------------------------------------------------ Undistributed net realized gain on investments and foreign currency transactions 24,701 - ------------------------------------------------------------------------ Net unrealized appreciation on investments and assets and liabilities in foreign currencies 104,563 - ------------------------------------------------------------------------ Undistributed net investment income 2,725 - ------------------------------------------------------------------------ NET ASSETS APPLICABLE TO SHARES OUTSTANDING $588,069 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ THE PRICING OF SHARES - ------------------------------------------------------------------------ CLASS A SHARES Net asset value and redemption price per share ($409,470 / 32,299 shares outstanding) $12.68 - ------------------------------------------------------------------------ Maximum offering price per share (net asset value, plus 6.10% of net asset value or 5.75% of offering price) $13.45 - ------------------------------------------------------------------------ CLASS B SHARES Net asset value and redemption price (subject to contingent deferred sales charge) per share ($143,144 / 11,450 shares outstanding) $12.50 - ------------------------------------------------------------------------ CLASS C SHARES Net asset value and redemption price (subject to contingent deferred sales charge) per share ($16,658 / 1,332 shares outstanding) $12.51 - ------------------------------------------------------------------------ CLASS I SHARES Net asset value and redemption price per share ($18,797 / 1,478 shares outstanding) $12.72 - ------------------------------------------------------------------------
See accompanying Notes to Financial Statements. 17 18 FINANCIAL STATEMENTS STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 1997 (IN THOUSANDS) - ------------------------------------------------------------------------------------------- NET INVESTMENT INCOME - ------------------------------------------------------------------------------------------- Dividends $ 8,353 - ------------------------------------------------------------------------------------------- Interest 1,355 - ------------------------------------------------------------------------------------------- 9,708 - ------------------------------------------------------------------------------------------- Less foreign taxes withheld 814 - ------------------------------------------------------------------------------------------- Total investment income 8,894 - ------------------------------------------------------------------------------------------- Expenses: Management fee 4,131 - ------------------------------------------------------------------------------------------- Administrative services fee 1,280 - ------------------------------------------------------------------------------------------- Distribution services fee 1,066 - ------------------------------------------------------------------------------------------- Custodian and transfer agent fees and related expenses 3,366 - ------------------------------------------------------------------------------------------- Professional fees 97 - ------------------------------------------------------------------------------------------- Reports to shareholders 140 - ------------------------------------------------------------------------------------------- Trustees' fees and other 45 - ------------------------------------------------------------------------------------------- Total expenses 10,125 - ------------------------------------------------------------------------------------------- NET INVESTMENT LOSS (1,231) - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS - ------------------------------------------------------------------------------------------- Net realized gain on sales of investments and foreign currency transactions 29,101 - ------------------------------------------------------------------------------------------- Change in net unrealized appreciation on investments and assets and liabilities in foreign currencies 37,579 - ------------------------------------------------------------------------------------------- Net gain on investments 66,680 - ------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $65,449 - -------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (IN THOUSANDS)
YEAR ENDED OCTOBER 31, 1997 1996 - ------------------------------------------------------------------------------------------- OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY - ------------------------------------------------------------------------------------------- Net investment income (loss) $ (1,231) 847 - ------------------------------------------------------------------------------------------- Net realized gain 29,101 32,629 - ------------------------------------------------------------------------------------------- Change in net unrealized appreciation 37,579 21,127 - ------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 65,449 54,603 - ------------------------------------------------------------------------------------------- Net equalization credits (charges) (309) 399 - ------------------------------------------------------------------------------------------- Distribution from net investment income (4,092) (3,561) - ------------------------------------------------------------------------------------------- Distribution from net realized gain (27,136) (1,726) - ------------------------------------------------------------------------------------------- Total dividends to shareholders (31,228) (5,287) - ------------------------------------------------------------------------------------------- Net increase from capital share transactions 81,914 57,820 - ------------------------------------------------------------------------------------------- TOTAL INCREASE IN NET ASSETS 115,826 107,535 - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- NET ASSETS - ------------------------------------------------------------------------------------------- Beginning of year 472,243 364,708 - ------------------------------------------------------------------------------------------- END OF YEAR (including undistributed net investment income of $2,725 and $4,541, respectively) $588,069 472,243 - -------------------------------------------------------------------------------------------
18 19 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1 DESCRIPTION OF THE FUND Kemper International Fund is an open-end management investment company organized as a business trust under the laws of Massachusetts. The Fund currently offers four classes of shares. Class A shares are sold to investors subject to an initial sales charge. Class B shares are sold without an initial sales charge but are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions. Class B shares automatically convert to Class A shares six years after issuance. Class C shares are sold without an initial sales charge but are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions within one year of purchase. Class C shares do not convert into another class. Class I shares are sold to a limited group of investors, are not subject to initial or contingent deferred sales charges and have lower ongoing expenses than other classes. Differences in class expenses will result in the payment of different per share income dividends by class. All shares of the Fund have equal rights with respect to voting, dividends and assets, subject to class specific preferences. - -------------------------------------------------------------------------------- 2 SIGNIFICANT ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at value. Portfolio securities that are traded on a domestic securities exchange are valued at the last sale price on that exchange or, if there is no recent sale price available, at the last current bid quotation. Portfolio securities that are primarily traded on foreign securities exchanges are generally valued at the preceding closing values of such securities on their respective exchanges where primarily traded. A security that is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security by the Board of Trustees or its delegates. All other securities not so traded are valued at the last current bid quotation if market quotations are available. Fixed income securities are valued by using market quotations, or independent pricing services that use prices provided by market makers or estimates of market values obtained from yield data relating to instruments or securities with similar characteristics. Equity options are valued at the last sale price unless the bid price is higher or the asked price is lower, in which event such bid or asked price is used. Financial futures and options thereon are valued at the settlement price established each day by the board of trade or exchange on which they are traded. Forward foreign currency contracts and foreign currencies are valued at the forward and current exchange rates, respectively, prevailing on the day of valuation. Other securities and assets are valued at fair value as determined in good faith by the Board of Trustees. CURRENCY TRANSLATION. The books and records of the Fund are maintained in U.S. dollars. All assets and liabilities initially expressed in foreign currency values are converted into U.S. dollar values at the mean between the bid and offered quotations of such currencies against U.S. dollars as last quoted by a recognized dealer. If such quotations are not readily available, the rates of exchange are determined in good faith by the Board of Trustees. Income and expenses and purchases and sales of investments are translated into U.S. dollars at the rates of exchange prevailing on the respective dates of such transactions. The Fund includes that portion of the results of operations resulting from changes in foreign exchange rates with net realized and unrealized gain (loss) on investments, as appropriate. 19 20 NOTES TO FINANCIAL STATEMENTS INVESTMENT TRANSACTIONS AND INVESTMENT INCOME. Investment transactions are accounted for on the trade date (date the order to buy or sell is executed). Dividend income is recorded on the ex-dividend date, except that certain dividends from foreign securities are recorded as soon as the information is available to the Fund. Interest income is recorded on the accrual basis and includes discount amortization on money market instruments. Realized gains and losses from investment transactions are reported on an identified cost basis. FUND SHARE VALUATION. Fund shares are sold and redeemed on a continuous basis at net asset value (plus an initial sales charge on most sales of Class A shares). Proceeds payable on redemption of Class B and Class C shares will be reduced by the amount of any applicable contingent deferred sales charge. On each day the New York Stock Exchange is open for trading, the net asset value per share is determined as of the earlier of 3:00 p.m. Chicago time or the close of the Exchange. The net asset value per share is determined separately for each class by dividing the Fund's net assets attributable to that class by the number of shares of the class outstanding. Because of the need to obtain prices as of the close of trading on various exchanges throughout the world, the calculation of net asset value does not take place contemporaneously with the determination of the prices of the majority of the portfolio securities. FEDERAL INCOME TAXES. The Fund has complied with the special provisions of the Internal Revenue Code available to investment companies and therefore no federal income tax provision is required. The Fund may make an election under the Internal Revenue Code so that shareholders may claim a tax credit or deduction for their share of foreign taxes paid by the Fund. DIVIDENDS TO SHAREHOLDERS. The Fund declares and pays dividends of net investment income and net realized capital gains annually, which are recorded on the ex-dividend date. Dividends are determined in accordance with income tax principles which may treat certain transactions differently from generally accepted accounting principles. These differences are primarily due to differing treatments for certain transactions such as foreign currency transactions. EQUALIZATION ACCOUNTING. A portion of proceeds from sales and cost of redemptions of Fund shares is credited or charged to undistributed net investment income so that income per share available for distribution is not affected by sales or redemptions of shares. - -------------------------------------------------------------------------------- 3 TRANSACTIONS WITH AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management agreement with Zurich Kemper Investments, Inc. (ZKI) and pays a management fee at an annual rate of .75% of the first $250 million of average daily net assets declining to .62% of average daily net assets in excess of $12.5 billion. The Fund incurred a management fee of $4,131,000 for the year ended October 31, 1997. Zurich Investment Management Limited, an affiliate of ZKI, serves as sub-adviser with respect to foreign securities investments in the Fund, and is paid by ZKI for its services. 20 21 NOTES TO FINANCIAL STATEMENTS UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT. The Fund has an underwriting and distribution services agreement with Zurich Kemper Distributors, Inc. (ZKDI). Underwriting commissions paid in connection with the distribution of Class A shares are as follows:
COMMISSIONS COMMISSIONS RETAINED BY ALLOWED BY ZKDI ZKDI TO FIRMS ----------- --------------- Year ended October 31, 1997 $96,000 959,000
For services under the distribution services agreement, the Fund pays ZKDI a fee of .75% of average daily net assets of the Class B and Class C shares. Pursuant to the agreement, ZKDI enters into related selling group agreements with various firms at various rates for sales of Class B and Class C shares. In addition, ZKDI receives any contingent deferred sales charges (CDSC) from redemptions of Class B and Class C shares. Distribution fees and commissions paid in connection with the sale of Class B and Class C shares and the CDSC received in connection with the redemption of such shares are as follows:
DISTRIBUTION FEES COMMISSIONS AND AND CDSC DISTRIBUTION FEES PAID RECEIVED BY ZKDI BY ZKDI TO FIRMS ----------------- ---------------------- Year ended October 31, 1997 $1,296,000 1,826,000
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an administrative services agreement with ZKDI. For providing information and administrative services to Class A, Class B and Class C shareholders, the Fund pays ZKDI a fee at an annual rate of up to .25% of average daily net assets of each class. ZKDI in turn has various agreements with financial services firms that provide these services and pays these firms based on assets of Fund accounts the firms service. Administrative services fees (ASF) paid are as follows:
ASF PAID BY THE ASF PAID BY ZKDI FUND TO ZKDI TO FIRMS --------------- ---------------- Year ended October 31, 1997 $1,280,000 1,301,000
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a services agreement with the Fund's transfer agent, Zurich Kemper Service Company (ZKSvC) is the shareholder service agent of the Fund. Under the agreement, ZKSvC received shareholder services fees of $1,913,000 for the year ended October 31, 1997. OFFICERS AND TRUSTEES. Certain officers or trustees of the Fund are also officers or directors of ZKI. During the year ended October 31, 1997, the Fund made no payments to its officers and incurred trustees' fees of $23,000 to independent trustees. 21 22 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 4 INVESTMENT TRANSACTIONS For the year ended October 31, 1997, investment transactions (excluding short-term instruments) are as follows (in thousands): Purchases $440,256 Proceeds from sales 451,844 - -------------------------------------------------------------------------------- 5 CAPITAL SHARE TRANSACTIONS The following table summarizes the activity in capital shares of the Fund (in thousands):
YEAR ENDED OCTOBER 31, 1997 1996 ----------------------- ---------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------------------- SHARES SOLD Class A 14,874 $ 187,364 9,032 $ 103,622 ------------------------------------------------------------------------------- Class B 8,424 106,475 6,520 75,871 ------------------------------------------------------------------------------- Class C 1,156 14,610 558 6,539 ------------------------------------------------------------------------------- Class I 1,171 14,846 922 10,499 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- SHARES ISSUED IN REINVESTMENT OF DIVIDENDS Class A 2,001 22,720 432 4,573 ------------------------------------------------------------------------------- Class B 509 5,790 27 288 ------------------------------------------------------------------------------- Class C 42 481 1 15 ------------------------------------------------------------------------------- Class I 101 1,173 23 243 ------------------------------------------------------------------------------- SHARES REDEEMED Class A (14,522) (184,532) (9,179) (104,837) ------------------------------------------------------------------------------- Class B (5,205) (66,707) (2,290) (28,074) ------------------------------------------------------------------------------- Class C (486) (6,267) (145) (1,808) ------------------------------------------------------------------------------- Class I (1,094) (14,039) (787) (9,111) ------------------------------------------------------------------------------- CONVERSION OF SHARES Class A 433 5,529 139 1,595 ------------------------------------------------------------------------------- Class B (438) (5,529) (140) (1,595) ------------------------------------------------------------------------------- NET INCREASE FROM CAPITAL SHARE TRANSACTIONS $ 81,914 $ 57,820 -------------------------------------------------------------------------------
22 23 FINANCIAL HIGHLIGHTS
------------------------------------------- CLASS A ------------------------------------------- YEAR ENDED OCTOBER 31, ------------------------------------------- 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE - -------------------------------------------------------------------------------------- Net asset value, beginning of year $11.96 10.59 11.13 10.56 8.17 - -------------------------------------------------------------------------------------- Income from investment operations: Net investment income -- .04 .07 -- .03 - -------------------------------------------------------------------------------------- Net realized and unrealized gain 1.52 1.50 .05 .86 2.54 - -------------------------------------------------------------------------------------- Total from investment operations 1.52 1.54 .12 .86 2.57 - -------------------------------------------------------------------------------------- Less dividends: Distribution from net investment income .12 .12 -- -- .18 - -------------------------------------------------------------------------------------- Distribution from net realized gain .68 .05 .66 .29 -- - -------------------------------------------------------------------------------------- Total dividends .80 .17 .66 .29 .18 - -------------------------------------------------------------------------------------- Net asset value, end of year $12.68 11.96 10.59 11.13 10.56 - -------------------------------------------------------------------------------------- TOTAL RETURN 13.49% 14.70 1.69 8.32 32.08 - -------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS - -------------------------------------------------------------------------------------- Expenses 1.57% 1.64 1.57 1.54 1.69 - -------------------------------------------------------------------------------------- Net investment income .16% .34 .83 .02 .37 - --------------------------------------------------------------------------------------
23 24 FINANCIAL HIGHLIGHTS
---------------------------------------- CLASS B ---------------------------------------- YEAR ENDED OCTOBER 31, MAY 31 TO --------------------- OCTOBER 31, 1997 1996 1995 1994 - ----------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE - ----------------------------------------------------------------------------------- Net asset value, beginning of period $11.81 10.46 11.09 10.58 - ----------------------------------------------------------------------------------- Income from investment operations: Net investment loss (.12) (.06) (.02) (.04) - ----------------------------------------------------------------------------------- Net realized and unrealized gain 1.51 1.47 .05 .55 - ----------------------------------------------------------------------------------- Total from investment operations 1.39 1.41 .03 .51 - ----------------------------------------------------------------------------------- Less dividends: Distribution from net investment income .02 .01 -- -- - ----------------------------------------------------------------------------------- Distribution from net realized gain .68 .05 .66 -- - ----------------------------------------------------------------------------------- Total dividends .70 .06 .66 -- - ----------------------------------------------------------------------------------- Net asset value, end of period $12.50 11.81 10.46 11.09 - ----------------------------------------------------------------------------------- TOTAL RETURN (NOT ANNUALIZED) 12.32% 13.59 .84 4.82 - ----------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS (ANNUALIZED) - ----------------------------------------------------------------------------------- Expenses 2.57% 2.53 2.50 2.58 - ----------------------------------------------------------------------------------- Net investment loss (.84)% (.55) (.10) (.97) - -----------------------------------------------------------------------------------
24 25 FINANCIAL HIGHLIGHTS
----------------------------------- -------------------------- CLASS C CLASS I ----------------------------------- -------------------------- YEAR ENDED YEAR ENDED OCTOBER 31, MAY 31 TO OCTOBER 31, JULY 3 TO --------------------- OCTOBER 31, -------------- OCTOBER 31, 1997 1996 1995 1994 1997 1996 1995 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $11.81 10.46 11.09 10.58 11.99 10.61 10.09 - ---------------------------------------------------------------------------------- --------------------------- Income from investment operations: Net investment income (loss) (.09) (.06) (.02) (.04) .07 .10 .04 - ---------------------------------------------------------------------------------- --------------------------- Net realized and unrealized gain 1.49 1.47 .05 .55 1.53 1.48 .48 - ---------------------------------------------------------------------------------- --------------------------- Total from investment operations 1.40 1.41 .03 .51 1.60 1.58 .52 - ---------------------------------------------------------------------------------- --------------------------- Less dividends: Distribution from net investment income .02 .01 -- -- .19 .15 -- - ---------------------------------------------------------------------------------- --------------------------- Distribution from net realized gain .68 .05 .66 -- .68 .05 -- - ---------------------------------------------------------------------------------- --------------------------- Total dividends .70 .06 .66 -- .87 .20 -- - ---------------------------------------------------------------------------------- --------------------------- Net asset value, end of period $12.51 11.81 10.46 11.09 12.72 11.99 10.61 - ---------------------------------------------------------------------------------- --------------------------- TOTAL RETURN (NOT ANNUALIZED) 12.45% 13.59 .84 4.82 14.19 15.19 5.15 - ---------------------------------------------------------------------------------- --------------------------- RATIOS TO AVERAGE NET ASSETS (ANNUALIZED) - ---------------------------------------------------------------------------------- --------------------------- Expenses 2.49% 2.50 2.50 2.52 1.04 1.10 .85 - ---------------------------------------------------------------------------------- --------------------------- Net investment income (loss) (.76)% (.52) (.10) (.91) .69 .88 1.32 - ---------------------------------------------------------------------------------- ---------------------------
- ------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA FOR ALL CLASSES YEAR ENDED OCTOBER 31, - ------------------------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------ Net assets at end of year (in thousands) $588,069 472,243 364,708 418,282 289,898 - ------------------------------------------------------------------------------------------------------ Portfolio turnover rate 76% 104 114 103 156 - ------------------------------------------------------------------------------------------------------ Average commission rates paid per share on stock transactions for the years ended October 31, 1997 and 1996 were $.0130 and $.0182, respectively. Foreign commissions usually are lower than U.S. commissions when expressed as cents per share due to the lower per share price of many non-U.S. securities. - ------------------------------------------------------------------------------------------------------
NOTES: Total return does not reflect the effect of any sales charges. Per share data for the years ended 1995 and 1996 were determined based on average shares outstanding. 25 26 NOTES 26 27 NOTES 27 28 TRUSTEES AND OFFICERS TRUSTEES OFFICERS STEPHEN B. TIMBERS CHARLES R. MANZONI, JR. President and Trustee Vice President DAVID W. BELIN JOHN E. NEAL Trustee Vice President LEWIS A. BURNHAM STEVEN H. REYNOLDS Trustee Vice President DONALD L. DUNAWAY PHILIP J. COLLORA Trustee Vice President and Secretary ROBERT B. HOFFMAN Trustee JEROME L. DUFFY Treasurer DONALD R. JONES Trustee ELIZABETH C. WERTH Assistant Secretary SHIRLEY D. PETERSON Trustee WILLIAM P. SOMMERS Trustee - -------------------------------------------------------------------------------- LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ 222 North LaSalle Street Chicago, IL 60601 - -------------------------------------------------------------------------------- SHAREHOLDER ZURICH KEMPER SERVICE COMPANY SERVICE AGENT P.O. Box 419557 Kansas City, MO 64141 - -------------------------------------------------------------------------------- CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY TRANSFER AGENT 801 Pennsylvania Kansas City, MO 64105 - -------------------------------------------------------------------------------- FOREIGN CUSTODIAN THE CHASE MANHATTAN BANK Chase Metro Center Brooklyn, NY 11245 - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS ERNST & YOUNG LLP 233 South Wacker Drive Chicago, IL 60606 - -------------------------------------------------------------------------------- PRINCIPAL UNDERWRITER ZURICH KEMPER DISTRIBUTORS, INC. 222 South Riverside Plaza Chicago, IL 60606 www.kemper.com [KEMPER FUNDS LOGO] LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM) Printed on recycled paper in the U.S.A. This report is not to be distributed unless preceded or accompanied by a Kemper International and Global Funds prospectus. KIF - 2 (12/97) 1040960 -----END PRIVACY-ENHANCED MESSAGE-----