<PAGE> 1
KEMPER BLUE CHIP FUND
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED OCTOBER 31, 1996
Seeking growth of capital and of income
"Careful selection of stocks in the financial sector contributed to the
second best year in the fund's history."
[KEMPER FUNDS LOGO]
<PAGE> 2
Table of
Contents
2
At a Glance
2
Terms to Know
3
Economic Overview
5
Performance Update
9
Industry Sectors
10
Largest Holdings
11
Portfolio of
Investments
15
Report of
Independent Auditors
16
Financial Statements
18
Notes to
Financial Statements
22
Financial Highlights
At A Glance
- --------------------------------------------------------------------------------
KEMPER BLUE CHIP FUND
TOTAL RETURNS
- --------------------------------------------------------------------------------
For the year ended October 31, 1996 (unadjusted for any sales charge)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 26.72%
CLASS B 25.82%
CLASS C 25.75%
LIPPER GROWTH & INCOME
FUNDS CATAGORY AVERAGE* 21.21%
- --------------------------------------------------------------------------------
</TABLE>
Returns and rankings 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.
*Lipper Analytical Services, Inc. returns and rankings are based upon changes in
net asset value with all dividends reinvested and do not include the effect of
sales charges and, if they had, results may have been less favorable.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
10/31/96 10/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER BLUE CHIP FUND CLASS A $17.14 $14.87
- --------------------------------------------------------------------------------
KEMPER BLUE CHIP FUND CLASS B $17.09 $14.82
- --------------------------------------------------------------------------------
KEMPER BLUE CHIP FUND CLASS C $17.15 $14.88
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER BLUE CHIP FUND LIPPER RANKINGS*
- --------------------------------------------------------------------------------
Compared to all other funds in the Lipper Growth and Income Funds category
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #54 OF #74 OF #78 OF
516 FUNDS 516 FUNDS 516 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #178 OF N/A N/A
210 FUNDS
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
During the fiscal year, Kemper Blue Chip Fund paid the following dividends:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME DIVIDEND: $ 0.195 $0.0759 $0.0811
- --------------------------------------------------------------------------------
SHORT-TERM
CAPITAL GAIN: $ 0.68 $0.68 $0.68
- --------------------------------------------------------------------------------
LONG-TERM
CAPITAL GAIN: $ 0.52 $0.52 $0.52
- --------------------------------------------------------------------------------
</TABLE>
Terms To Know
BETA A mathematical measure of the sensitivity of rates of return on a portfolio
or a given stock compared with rates of return on the market as a whole. A high
beta (above 1.0) indicates moderate or high price volatility. A beta of 1.5
forecasts a 1.5 percent change in the return on an asset for every 1 percent
change in the return on the market. As of October 31, 1996, Kemper Blue Chip
Fund had a beta of 1.03.
CORRECTION A reverse movement, usually downward, in the price of a group of
stocks or the overall market. Corrections are to be expected over a long term.
SECTOR A specific industry group.
SEMICONDUCTOR A material that is neither a good conductor of electricity, nor a
good insulator, and whose conduction properties can therefore be manipulated
easily. Semiconductor devices are the essential parts that make it possible to
build small, inexpensive electronic machines.
VOLATILITY Characteristic of a security, commodity or market to rise or fall
sharply in price within a short period of time. A measure of the relative
volatility of a stock to the overall market is its beta.
2
<PAGE> 3
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $76 BILLION IN ASSETS, INCLUDING $42 BILLION IN RETAIL
MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM
HARVARD UNIVERSITY.
DEAR SHAREHOLDER:
As we approach the close of 1996, it's remarkable how eventful the year has been
and yet, economically, we are essentially where we were one year ago.
The fundamentals of the economy are remarkably similar today to what they
were in 1995. Long-term interest rates are approximately 6.5% compared to 6.3%
in November 1995. The economy is growing at a rate of approximately 2.2%.
Inflation continues to be well under control, at about 3.0%.
One significant difference between today and one year ago is that prices of
the stocks are on average up 20%. While price movements were more volatile in
1996 than in the past few years, the patient investor was amply rewarded. The
prime element sending the stock market higher was strong positive cash flows.
This liquidity in an environment of modestly increasing corporate profits and
relatively stable interest rates pushed stocks higher for most of the year.
This higher stock market has caused many market observers to worry. While
we cannot ignore what has happened, we find no reason to be bearish over the
long term. The environment is benign to favorable for financial assets. Given
steady interest rates, moderate economic growth and continued moderate corporate
earnings growth, there are few excesses in the system. In fact, real interest
rates are probably too high considering our outlook for inflation, and we may
see them decline over time.
Naturally, we cannot rule out the possibility of a market correction. But,
in our belief, the downside would appear to be limited to 5% to 8%, which is the
size of a typical correction based on historical data. As we have said in
previous outlooks, three elements tend to move the market:
- EARNINGS. We forecast corporate earnings to range between 0% and 5% on
average for the Standard & Poor's 500* in 1997 -- not as high as in
recent years but positive nonetheless.
- INTEREST RATES. Rates should remain stable, and short-term interest rates
may even decline.
- LIQUIDITY. Investors, through mutual funds, 401(k)s and qualified
contribution plans in particular, will continue to create strong demand
for securities.
In order to move the market more than would be expected in a typical
decline, one or more of these elements will have to turn negative in 1997, and,
while future market conditions cannot be predicted with certainty, we fail to
see what would materially change our outlook. Our outlook going forward is that
1997 should be a lot like 1996.
While the economy continued along a relatively consistent path, the United
States took some politically significant steps in 1996. First, of course,
President Bill Clinton and a Republican Congress were re-elected by the voters.
In the first few days after the general election, especially, investors
demonstrated their support for such a balance in our leadership. But of much
greater long-term significance is the expressed commitment by both parties to
balance the federal budget and address certain entitlement programs. The first
year after an election can be a fertile time to accomplish major initiatives,
and we are hopeful that progress can be made.
The future of the Social Security system, which many experts believe will
run out of money about 20 years from now, will be a subject in which you can
expect Zurich Kemper Investments, Inc. to play a leadership role. The possible
solutions for "fixing Social Security" are finite: raise Social Security taxes,
reduce benefits, raise the retirement age, change inflation assumptions or
pursue a higher rate of return on assets contributed by workers. We believe that
a bipartisan solution will be worked out, which will include giving individuals
the option of investing a portion of their Social Security contributions in an
account earmarked for them. This change is needed to return credibility to the
system, which many Americans have lost faith in.
What to do with Social Security is a debate that spans generations and
promises to occupy much attention in the coming years. As we hope to help
advance constructive debate, we'll be advocating partial privatization for this
federal program while maintaining a safety net for many low-wage earners and
providing a seamless transition for seniors near or in retirement.
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 (11/30/96) 6 MONTHS AGO 1 YEAR AGO 2 YEAR AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.2 6.91 5.71 7.81
PRIME RATE(2) 8.25 8.25 8.65 8.5
INFLATION RATE(3) 3.19 2.75 2.6 2.67
THE U.S. DOLLAR(4) 3.46 9.15 -2.58 -4.52
CAPITAL GOODS ORDERS(5)* 7.61 3.93 11.3 12.38
INDUSTRIAL PRODUCTION(5)* 3.6 3.35 1.71 6.58
EMPLOYMENT GROWTH(6) 2.11 2.08 1.92 3.4
</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%. 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, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this letter as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
December 10, 1996
*THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
4
<PAGE> 5
PERFORMANCE UPDATE
[CHESTER PHOTO]
TRACY MCCORMICK CHESTER JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN 1994 AND
IS NOW A SENIOR VICE PRESIDENT OF ZKI AND VICE PRESIDENT AND PORTFOLIO MANAGER
OF KEMPER BLUE CHIP FUND. CHESTER RECEIVED BOTH HER B.A. AND M.B.A. DEGREES FROM
MICHIGAN STATE UNIVERSITY.
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 DISCIPLINED APPROACH TO BUYING STOCKS AND SELLING HOLDINGS AT OR NEAR
EXPECTED VALUATIONS HELPED PORTFOLIO MANAGER TRACY MCCORMICK CHESTER GUIDE
KEMPER BLUE CHIP FUND THROUGH A VOLATILE MARKET IN 1996 TO ACHIEVE EXCEPTIONAL
PERFORMANCE.
Q WITH A RETURN OF 26.72 PERCENT (CLASS A SHARES UNADJUSTED FOR SALES CHARGE)
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996, THE FUND OUTPERFORMED BOTH THE
STANDARD & POOR'S 500 STOCK INDEX* AND THE RUSSELL 1000 INDEX**. IN JUST TWO
YEARS, KEMPER BLUE CHIP FUND HAS MOVED FROM THE THIRD QUARTILE OF THE LIPPER
GROWTH AND INCOME CATEGORY TO THE FIRST FOR THE 1-YEAR PERIOD ENDED OCTOBER 31,
1996 (SEE PAGE 2 FOR FULL RANKING DISCLOSURE). WHAT DID YOU DO TO CONTINUE THE
MOMENTUM DURING THIS PERIOD?
A This year, shareholders really got paid for active management because there
was a great deal of rotation and increased volatility in the market. We saw
significant corrections within groups and within individual stocks at different
points during the year. Early on, we had a strong position in retail and quite a
few conglomerates. Conversely, we were light in financials because we expected
economic concerns to hurt financials early in 1996. As we got to the end of the
first quarter, retail seemed to be fully valued so we reduced our exposure to
it. The conglomerates had also reached their target valuations so we stepped
away from them. The financials had underperformed, as we expected, because the
market was reacting to concerns about inflation and the possibility that the
Federal Reserve Board (the Fed) would increase interest rates. We didn't feel it
was likely that the Fed would make such a move because the economy seemed to be
weakening after a growth period, so we added financials we felt were
fundamentally well positioned. Careful selection of stocks in the financial
sector contributed to the second best year in the fund's history. In April,
financials took off and they really haven't stopped yet.
Throughout the year, we were careful about the amount of exposure we had to
technology. Our weightings were somewhat light and were focused mainly on the
service companies and some lower multiple stocks early on. As the year
progressed, we started raising our exposure to more aggressive technology names,
such as Analog Devices, National Semiconductor and Texas Instruments, because
the companies had gone through a year-long inventory correction cycle which we
felt had bottomed. Aerospace was another sector that performed well for us
throughout the period. Boeing has consistently had solid returns and this year
we expanded our exposure in this sector into some supplier names such as United
Technologies, Inc. and Sundstrand.
*The Standard & Poor's 500 Stock Index is an unmanaged index generally
representative of the U.S. stock market.
**The Russell 1000 Index is an unmanaged capitalization weighted price only
index comprised of the largest capitalized U.S. companies whose common stocks
are traded in the United States. This large capitalization market oriented index
is highly correlated with the S&P 500 Stock Index.
5
<PAGE> 6
PERFORMANCE UPDATE
Q BEYOND THE SECTOR PERFORMANCE, WHAT WERE THE EXCEPTIONAL PERFORMERS?
A This was a market that favored larger company stocks which is an obvious
advantage to a fund focused on blue chip companies. Our consumer staples, which
included Clorox, Avon and Procter & Gamble, did well as the market became more
defensive midyear. In the gaming industry, we had a nice run with Circus Circus
Enterprises. We acted on news of restructuring in the Hilton Hotels and enjoyed
some nice gains there, too. Our largest holding in the fund at the close of the
fiscal year was Ryder System, Inc. This is a good example of a stock that is not
getting a great deal of attention from the market but one where we see a great
deal of upside potential. We started building a position in Ryder over the
summer because of some positive restructuring we saw happening. They recently
announced the sale of their consumer rental unit and, based on the research we
conducted, we feel they are poised for growth if they pull off becoming more of
a pure logistics management company.
Q AS SHAREHOLDERS COMPARE THE FUND'S TOP 20 HOLDINGS (SEE PAGE 10) AT THE END
OF THIS YEAR WITH THOSE THAT WERE LISTED LAST YEAR, WHAT WILL THEY SEE?
A Big changes have been made as a result of our active management this year
and the moves we made to succeed in a volatile market. One of the elements we
look for in a stock that we have a large position in is a consistent ability to
outperform the fund's overall return. We want to make sure they are pulling
their weight. If we don't see that kind of performance, we reevaluate the
positions and move out of those holdings that appear to be fully valued.
Q AFTER SUCH A SUCCESSFUL YEAR, IT APPEARS YOU AND YOUR STAFF DID NEARLY
EVERYTHING RIGHT BUT WERE THERE ANY OPPORTUNITIES YOU MISSED DURING THE YEAR?
A Well, I do wish we had been a little more aggressive in buying some of the
undervalued technology stocks that were out there early in the fall when
technology prices were way down. I was somewhat restrained because our
performance for 1996 was very strong at that point and I was reluctant to go out
on a limb and take on the risk. I am very conscious of managing the risk to the
fund.
A move that did hurt us slightly was a somewhat premature selling of our
consumer staples. They continued to keep climbing after we sold so we missed
part of that run. We had done a good job of buying names like Avon and Clorox
and we did make a fair amount of money on them but we just did not hold them
long enough. It was disappointing to miss a portion of that move but if you are
committed to stepping away from a stock when it reaches the expected targets,
you avoid holding it too long and ending up with something that is played out.
Being overly optimistic is usually dangerous in the market.
Q WHAT IS YOUR OUTLOOK FOR THE MARKET AND WHAT ARE YOU DOING WITH KEMPER BLUE
CHIP FUND TO POSITION IT FOR THE UPCOMING MONTHS?
A I am raising my beta a little bit in technology. We went through a pretty
significant correction in 1996 and I do think 1997 could be a better year for
semiconductors in particular -- National Semiconductor and Texas Instruments are
names I bought near the end of the period. The market seems to be reflecting a
slowdown in the economy and a belief that interest rates are going to stay at
this level or lower. I am reexamining some of the consumer cyclicals like
Federated Department Stores that have corrected significantly recently. I'm also
focusing on stocks which have not received a great deal of attention from Wall
Street. As I mentioned, this is where our research provides a lot of added
value. Examples include McKesson, a distributor which recently acquired the
assets of Foxmeyer, another distributor, out of bankruptcy. We believe this
acquisition could greatly increase sales and earnings for McKesson. Another
example is Jefferson-Pilot, an insurance company that we believe has significant
earnings leverage as it redeploys excess capital.
Q HOW DO YOU EXPECT THE FUND TO RESPOND IF THE MARKET SLIPS IN 1997?
A Our disciplined valuation approach should help us in a down market -- when
holdings reach expected targets, we
6
<PAGE> 7
PERFORMANCE UPDATE
normally eliminate or reduce our position. The temptation is to raise targets
because the stock has been a good performer. We also try not to buy a stock
unless we see 20 to 25 percent upside potential. This has been a market where,
at any point, one sector can look good and then another can spring up with a
strong outlook as well, so we have been moving around. If this pattern
continues, we will just keep shifting in an attempt to take advantage of the
greatest opportunities.
Q ARE YOU AT ALL SURPRISED AT THE SUCCESS YOU HAVE HAD IN TURNING THIS FUND
AROUND IN JUST TWO YEARS?
A I always knew we could do well in this category. Our research and analysis
is truly top-notch so we have the information we need to make educated
decisions. Personally, I made a point early in this fiscal year to become more
familiar with the financial sector because I had not done a great deal with this
sector previously and I wanted to make certain we got our positioning right
there. Our success investing in financials this year is proof that we did get it
right. Certain market shifts could be a detriment to this fund but, over the
long haul, I don't think there is any reason why we shouldn't continue to do
well.
7
<PAGE> 8
PERFORMANCE UPDATE
KEMPER BLUE CHIP FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
For periods ended October 31, 1996 (adjusted for the maximum sales charge)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR 5-YEAR CLASS
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
KEMPER BLUE CHIP FUND CLASS A 19.41% 10.26% 11.22% (since 11/23/87)
- -----------------------------------------------------------------------------------------------------
KEMPER BLUE CHIP FUND CLASS B 22.82% N/A 18.51 (since 5/31/94)
- -----------------------------------------------------------------------------------------------------
KEMPER BLUE CHIP FUND CLASS C 25.75% N/A 19.69 (since 5/31/94)
- -----------------------------------------------------------------------------------------------------
</TABLE>
[Line Graph]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper Blue Chip Fund Class A from 12/1/87 through 10/31/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12/1/87 12/31/90 12/31/93 10/31/96
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER BLUE CHIP FUND CLASS A 10000 11581 17157 25876
RUSSELL 1000 INDEX + 10000 15726 25137 40281
RUSSELL 1000 GROWTH INDEX ++ 10000 16465 25113 41314
S & P 500 STOCK INDEX +++ 10000 16077 24811 40239
</TABLE>
[Line Graph]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper Blue Chip Fund Class B from 5/31/94 through 10/31/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 10/31/96
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER BLUE CHIP FUND CLASS B 10000 9801 12828 15084
RUSSELL 1000 INDEX + 10000 10190 14040 16270
RUSSELL 1000 GROWTH INDEX ++ 10000 10529 14445 16872
S & P 500 STOCK INDEX +++ 10000 10284 14135 16456
</TABLE>
[Line Graph]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper Blue Chip Fund Class C from 5/31/94 through 10/31/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 10/31/96
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER BLUE CHIP FUND CLASS C 10000 9838 12890 15448
RUSSELL 1000 INDEX + 10000 10190 14040 16270
RUSSELL 1000 GROWTH INDEX ++ 10000 10529 14445 16872
S & P 500 STOCK INDEX +++ 10000 10284 14135 16456
</TABLE>
Returns 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.
* 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%, for
Class B shares adjustment for the applicable contingent deferred sales charge
(CDSC) of 3% and for Class C shares no adjustment for sales charge. The maximum
B share CDSC is 4%. For C shares purchased on or after April 1, 1996, there is
a 1% 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 A shares and the contingent deferred sales charge in
effect at the end of the period for B shares. In comparing Kemper Blue Chip
Fund to the three indices, you should also note that the fund's performance
reflects the maximum sales charge, while no such charges are reflected in the
performance of the indices. Beginning with the next annual report, the Russell
1000 Index, a more representative index for the fund, will be shown instead of
the Russell 1000 Growth Index.
+ The Russell 1000 Index is an unmanaged capitalization weighted
price only index comprised of the largest capitalized U.S. companies whose
common stocks are traded in the United States. This large capitalization market
oriented index is highly correlated with the S&P 500 Stock Index.
++ The Russell 1000 Growth Index is an unmanaged index comprised of common
stocks of larger U.S. companies with greater than average growth orientation
and represents the universe of stocks from which "earnings/growth" money
managers typically select.
+++ The Standard & Poor's 500 Stock Index is an unmanaged index generally
representative of the U.S. stock market. Source is Towers Data Systems.
8
<PAGE> 9
INDUSTRY SECTORS
A YEAR-TO-YEAR COMPARISON
Data show the percentage of the common stocks in the portfolio that each sector
represented on October 31, 1996, and on October 31, 1995.
[Year-to-Year Comparison Bar Graph]
<TABLE>
<CAPTION>
KEMPER BLUE CHIP FUND KEMPER BLUE CHIP FUND
ON 10/31/96 ON 10/31/95
<S> <C> <C>
CONSUMER NON-DURABLES 18.3% 19.0%
FINANCE 16.2% 9.0%
HEALTH CARE 14.4% 16.0%
CAPITAL GOODS 11.9% 17.6%
TECHNOLOGY 10.1% 16.7%
ENERGY 9.1% 4.7%
BASIC INDUSTRIES 7.8% 5.6%
UTILITIES 6.3% 7.2%
TRANSPORTATION 5.9% 1.6%
CONSUMER DURABLES 0.0% 2.6%
</TABLE>
A COMPARISON WITH THE RUSSELL 1000 INDEX*
Data show the percentage of the common stocks in the portfolio that each sector
of Kemper Blue Chip Fund represented on October 31, 1996, compared to the
industry sectors that make up the fund's benchmark, the Russell 1000 Index.
[Russell Comparison Bar Graph]
<TABLE>
<CAPTION>
KEMPER BLUE CHIP FUND RUSSELL 1000 INDEX
ON 10/31/96 ON 10/31/96
<S> <C> <C>
CONSUMER NON-DURABLES 18.3% 21.1%
FINANCE 16.2% 16.8%
HEALTH CARE 14.4% 10.9%
CAPITAL GOODS 11.9% 9.7%
TECHNOLOGY 10.1% 13.0%
ENERGY 9.1% 8.2%
BASIC INDUSTRIES 7.8% 5.6%
UTILITIES 6.3% 10.4%
TRANSPORTATION 5.9% 1.5%
CONSUMER DURABLES 0.0% 2.8%
</TABLE>
* The Russell 1000 Index is an unmanaged capitalization weighted price only
index comprised of the largest capitalized U.S. companies whose common stocks
are traded in the United States. This large capitalization market oriented
index is highly correlated with the S&P 500 Stock Index.
9
<PAGE> 10
LARGEST HOLDINGS
THE FUND'S 20 LARGEST HOLDINGS*
Representing 30.9% of the fund's total net assets on October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
HOLDINGS PERCENT
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1. RYDER Truck, tractor and trailer lessor and renter 2.1%
SYSTEM
INC.
- --------------------------------------------------------------------------------
2. AMERITECH Telecommunications and exchange access services 1.9%
CORP.
- --------------------------------------------------------------------------------
3. SUNDSTRAND Systems and components for aerospace and industrial 1.7%
CORP. applications
- --------------------------------------------------------------------------------
4. PERKIN-ELMER Analytical instruments, optics, life science 1.7%
CORP.
- --------------------------------------------------------------------------------
5. MOBIL International oil/gas exploration, development 1.7%
CORP.
- --------------------------------------------------------------------------------
6. EMERSON Diversified manufacturer of electrical equipment 1.6%
ELECTRIC
CO.
- --------------------------------------------------------------------------------
7. UNOCAL Crude oil and natural gas 1.6%
CORP.
- --------------------------------------------------------------------------------
8. PROCTER & Household, personal care and food products 1.5%
GAMBLE
CO.
- --------------------------------------------------------------------------------
9. BURLINGTON Transportation and information services 1.5%
NORTHERN
- --------------------------------------------------------------------------------
10. CROWN Metal, plastic and composite containers 1.5%
CORK &
SEAL CO.
- --------------------------------------------------------------------------------
11. CORESTATES Banking, discount brokerage and leasing services 1.5%
FINANCIAL
CORP.
- --------------------------------------------------------------------------------
12. HARRIS Government systems/communications 1.5%
CORP.
- --------------------------------------------------------------------------------
13. PITNEY Mailing, shipping, copying, dictating and facsimile 1.5%
BOWES systems
- --------------------------------------------------------------------------------
14. GM HUGHES Electronic systems for automotive, 1.5%
ELECTRONICS telecommunications
CORP. and defense applications
- --------------------------------------------------------------------------------
15. ITT Insurance provider 1.5%
HARTFORD
GROUP
- --------------------------------------------------------------------------------
16. CINCINNATI Telecommunications services, information systems and 1.4%
BELL marketing services
- --------------------------------------------------------------------------------
17. ELI LILLY Pharmaceutical and animal health products 1.4%
& CO.
- --------------------------------------------------------------------------------
18. MERCK & Research-driven pharmaceutical products and services 1.3%
CO., INC.
- --------------------------------------------------------------------------------
19. UNITED Designs, develops, manufactures and sells 1.3%
TECHNOLOGIES high-technology products
- --------------------------------------------------------------------------------
20. BETZ Water treatment chemicals 1.2%
LABORATORIES
- --------------------------------------------------------------------------------
</TABLE>
*Portfolio composition and holdings are subject to change.
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
KEMPER BLUE CHIP FUND
Portfolio of Investments at October 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
COMMON STOCKS NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC INDUSTRIES--6.7% Air Products & Chemicals 41,600 $ 2,496
Betz Laboratories 60,700 3,187
Canon, Inc. 1,000 19
Cementos Mexicanos, S.A. de C.V., "B", ADR 21,000 75
Crown Cork & Seal Co., convertible preferred 85,000 3,952
W.R. Grace & Co. 35,500 1,881
Mitsubishi Heavy Industries 9,000 69
Monsanto Co. 30,000 1,189
Pall Corp. 80,000 2,050
Rentokil Group PLC 11,000 74
Sumitomo Metal Industries 23,000 63
Technip S.A. 352 31
Toray Industries 11,000 66
Witco Corp. 67,000 2,077
--------------------------------------------------------------------------
17,229
- -----------------------------------------------------------------------------------------------------------
CAPITAL GOODS--10.2% Boeing Co. 15,000 1,431
Emerson Electric Co. 46,350 4,125
GM Hughes Electronics Corp. 70,000 3,736
General Electric Co. 26,400 2,554
B.F. Goodrich Co. 69,300 2,937
Honda Motor Co., Ltd. 3,000 72
Kyocera Corp. 400 26
Laidlaw One Inc., convertible preferred 30,000 1,320
Matsushita Electric Industrial Co., Ltd. 4,500 72
Murata Manufacturing 2,200 71
Sundstrand Corp. 107,000 4,307
United Technologies 25,000 3,219
Westinghouse Electric Corp. 130,000 2,226
--------------------------------------------------------------------------
26,096
- -----------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS--9.1% Brunswick Corp. 120,000 2,820
Burton Group PLC 37,784 92
Circuit City Stores 56,000 1,834
(a)Circus Circus Enterprises 30,000 1,035
(a)Consolidated Stores Corporation 55,400 2,140
Deluxe Corp. 90,000 2,936
Walt Disney Company 17,100 1,126
(a)Liberty Media Group, "A" 40,000 1,030
Marriott International 20,000 1,138
Melville Corp. 70,000 2,608
Meredith Corp. 40,000 2,010
Reader's Digest Association 75,000 2,672
Reed International PLC 4,719 88
(a)Toys R Us 55,000 1,863
--------------------------------------------------------------------------
23,392
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER STAPLES--6.6% Dole Food Co.
common stock 25,000 $ 975
convertible preferred 60,000 2,362
Duracell International Inc. 22,750 1,519
Kimberly-Clark Corp. 15,000 1,399
Philip Morris Companies 32,000 2,964
Procter & Gamble Co. 40,000 3,960
Seagram Co. Ltd. 25,000 947
Sysco Corp. 80,000 2,720
--------------------------------------------------------------------------
16,846
- -----------------------------------------------------------------------------------------------------------
ENERGY--7.8% AMOCO Corp. 35,000 2,651
Amerada Hess Corp. 45,000 2,492
Enron Corp., convertible preferred 60,000 1,470
Halliburton Co. 30,000 1,699
Mobil Corp. 36,300 4,238
Ultramar Corp. 100,000 2,862
Union Pacific Resources Group 23,714 652
Unocal Corp. 110,000 4,029
--------------------------------------------------------------------------
20,093
- -----------------------------------------------------------------------------------------------------------
FINANCE--14.0% Allstate Corp. 54,000 3,031
Bank of Boston 40,800 2,611
Bank of Ireland 11,172 92
CITIC Pacific Ltd. 11,000 53
Chase Manhattan Corp. 20,000 1,715
Cheung Kong Holdings Ltd. 5,000 40
Chubb Corp. 28,000 1,400
Corestates Financial Corp. 80,000 3,890
Development Bank of Singapore 5,000 60
Federal National Mortgage Association 41,000 1,604
First Chicago NBD Corp. 45,000 2,295
General Re Corp. 15,000 2,209
Great Western Financial Corp. 100,000 2,800
ITT Hartford Group 59,000 3,717
Internationale Nederlanden Groep 2,934 92
Jefferson-Pilot Corp. 33,400 1,900
KeyCorp 26,000 1,212
Krung Thai Bank Public Co. Ltd. 3,600 10
Northern Trust Co. 9,000 623
PNC Bank Corp. 70,000 2,537
Signet Banking Corp. 39,900 1,152
Wilmington Trust Corp. 71,200 2,688
--------------------------------------------------------------------------
35,731
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HEALTH CARE--12.4% Abbott Laboratories 28,000 $ 1,417
American Home Products 30,200 1,850
(a)Amgen, Inc. 20,000 1,226
Astra AB 1,780 82
Beckman Instruments 70,000 2,572
(a)Fresenius Medical AG, ADS 26,751 799
(a)HealthCare COMPARE Corp. 30,000 1,320
Eli Lilly & Co. 52,000 3,666
McKesson Corp. 37,000 1,841
Merck & Co., Inc. 45,000 3,336
(a)Nellcor Puritan Bennett Incorporated 60,000 1,170
Omnicare Inc. 30,000 818
Perkin-Elmer Corp. 80,000 4,290
Pharmacia & Upjohn 69,000 2,484
Roche Holding AG, with warrants expiring May 1998 9 69
(a)St. Jude Medical 56,600 2,236
Sandoz, Ltd. 22,500 1,297
(a)Ventritex Inc. 52,300 1,193
--------------------------------------------------------------------------
31,666
- -----------------------------------------------------------------------------------------------------------
TECHNOLOGY--8.7% Adobe Systems 35,000 1,212
(a)Cadence Design Systems 30,100 1,099
(a)Ceridian Corp. 20,000 992
(a)Compaq Computer Corp. 10,000 696
Electronic Data Systems 35,534 1,599
L.M. Ericsson Telephone Co., "B" 2,459 67
Harris Corp. 61,100 3,826
(a)National Semiconductor Corp. 90,000 1,732
(a)Oracle Corp. 15,000 635
Pitney Bowes 68,000 3,800
(a)Sterling Commerce 40,000 1,125
(a)Sun Microsystems 27,700 1,690
Texas Instruments 50,000 2,406
Xerox Corporation 28,425 1,318
--------------------------------------------------------------------------
22,197
- -----------------------------------------------------------------------------------------------------------
TRANSPORTATION--5.1% Burlington Northern 48,000 3,954
Canadian National Railway Company 54,276 1,493
Nippon Express 4,000 33
Ryder System Inc. 182,000 5,414
Swire Pacific Ltd., "A" 5,500 49
Union Pacific Corp. 37,000 2,077
--------------------------------------------------------------------------
13,020
- -----------------------------------------------------------------------------------------------------------
UTILITIES--5.4% Ameritech Corp. 90,000 4,927
Cincinnati Bell 74,820 3,694
Frontier Corp. 75,000 2,175
Iberdrola, S.A. 6,800 72
SBC Communications Inc. 61,000 2,966
Telefonica del Peru, S.A., ADS 3,500 72
--------------------------------------------------------------------------
13,906
--------------------------------------------------------------------------
TOTAL COMMON STOCKS--86.0%
(Cost: $201,869) 220,176
--------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------
CONVERTIBLE CORPORATE OBLIGATIONS PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER CYCLICALS--3.7% Federated Department Stores, 5.00%, 2003 $1,800 $ 2,020
Hilton Hotels, 5.00%, 2006 2,250 2,497
Home Depot, 3.25%, 2001 2,500 2,500
Pep Boys - Manny Moe & Jack, 4.00%, 1999 800 836
Saks Holdings, Inc., 5.50%, 2006 1,500 1,575
--------------------------------------------------------------------------
9,428
- -----------------------------------------------------------------------------------------------------------
CONSUMER DURABLES--.5% Magna International Inc., 5.00%, 2002 1,300 1,427
--------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
HEALTH CARE--1.3% ALZA Corp., 5.00%, 2006 2,500 2,400
Sandoz Capital BVI, 2.00%, 2002 800 878
--------------------------------------------------------------------------
3,278
- -----------------------------------------------------------------------------------------------------------
TECHNOLOGY--2.5% Analog Devices, 3.50%, 2000 1,700 1,989
National Data Corp., 5.00%, 2003 2,000 2,000
3Com Corporation, 10.25%, 2001 700 1,453
Xilinx, Inc., 5.25%, 2002 1,000 950
--------------------------------------------------------------------------
6,392
--------------------------------------------------------------------------
TOTAL CONVERTIBLE CORPORATE OBLIGATIONS--8.0%
(Cost: $19,507) 20,525
--------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--5.28% to 5.40%
INSTRUMENTS--9.7% Due--November and December 1996
Bridgestone Corporation 5,000 4,992
Dynamic Funding Corporation 6,000 5,990
Enserch Corporation 5,000 4,976
Other 9,000 8,981
--------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--9.7%
(Cost: $24,940) 24,939
--------------------------------------------------------------------------
TOTAL INVESTMENTS--103.7%
(Cost: $246,316) 265,640
--------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(3.7)% (9,468)
--------------------------------------------------------------------------
NET ASSETS--100% $256,172
--------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) Non-income producing security.
Based on the cost of investments of $246,316,000 for federal income tax purposes
at October 31, 1996, the gross unrealized appreciation was $22,060,000, the
gross unrealized depreciation was $2,736,000 and the net unrealized appreciation
on investments was $19,324,000.
See accompanying Notes to Financial Statements.
14
<PAGE> 15
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER BLUE CHIP FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Blue Chip Fund as of October
31, 1996, 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 1992. 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, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Blue Chip Fund at October 31, 1996, 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 1992, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 17, 1996
15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
(in thousands)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------
Investments, at value
(Cost: $246,316) $265,640
- -------------------------------------------------------------------------------------------------------
Cash 576
- -------------------------------------------------------------------------------------------------------
Receivable for:
Investments sold 1,254
- -------------------------------------------------------------------------------------------------------
Fund shares sold 1,078
- -------------------------------------------------------------------------------------------------------
Dividends and interest 619
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS 269,167
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------------------------------------
Payable for:
Investments purchased 11,561
- -------------------------------------------------------------------------------------------------------
Fund shares redeemed 1,052
- -------------------------------------------------------------------------------------------------------
Management fee 124
- -------------------------------------------------------------------------------------------------------
Distribution services fee 35
- -------------------------------------------------------------------------------------------------------
Administrative services fee 52
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 145
- -------------------------------------------------------------------------------------------------------
Trustees' fees 26
- -------------------------------------------------------------------------------------------------------
Total liabilities 12,995
- -------------------------------------------------------------------------------------------------------
NET ASSETS $256,172
- -------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------------------------------------
Paid-in capital $186,540
- -------------------------------------------------------------------------------------------------------
Undistributed net realized gain on investments 48,645
- -------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 19,324
- -------------------------------------------------------------------------------------------------------
Undistributed net investment income 1,663
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $256,172
- -------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- -------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($198,968,000 / 11,607,000 shares outstanding) $17.14
- -------------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering price) $18.19
- -------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($54,085,500 / 3,165,600 shares outstanding) $17.09
- -------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($3,105,000 / 181,000 shares outstanding) $17.15
- -------------------------------------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($13,800 / 800 shares outstanding) $17.18
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
16
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended October 31, 1996
(in thousands)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------
Dividends $ 3,915
- -------------------------------------------------------------------------------------------------------
Interest 1,579
- -------------------------------------------------------------------------------------------------------
Total investment income 5,494
- -------------------------------------------------------------------------------------------------------
Expenses:
Management fee 1,198
- -------------------------------------------------------------------------------------------------------
Distribution services fee 245
- -------------------------------------------------------------------------------------------------------
Administrative services fee 497
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 816
- -------------------------------------------------------------------------------------------------------
Professional fees 39
- -------------------------------------------------------------------------------------------------------
Reports to shareholders 55
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 24
- -------------------------------------------------------------------------------------------------------
Total expenses 2,874
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,620
- -------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Net realized gain on sales of investments and foreign currency transactions 48,809
- -------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments (3,487)
- -------------------------------------------------------------------------------------------------------
Net gain on investments 45,322
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $47,942
- -------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------------
Net investment income $ 2,620 2,226
- ---------------------------------------------------------------------------------------------------------
Net realized gain 48,809 13,899
- ---------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (3,487) 15,753
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 47,942 31,878
- ---------------------------------------------------------------------------------------------------------
Net equalization credits (charges) 36 (252)
- ---------------------------------------------------------------------------------------------------------
Distribution from net investment income (2,271) (2,340)
- ---------------------------------------------------------------------------------------------------------
Distribution from net realized gain (13,966) (244)
- ---------------------------------------------------------------------------------------------------------
Total dividends to shareholders (16,237) (2,584)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions 56,165 (13,948)
- ---------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 87,906 15,094
- ---------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------
Beginning of year 168,266 153,172
- ---------------------------------------------------------------------------------------------------------
END OF YEAR (including undistributed
net investment income of
$1,663 and $1,262, respectively) $256,172 168,266
- ---------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Blue Chip 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, for shares sold on or after April 1,
1996, 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 or securities listed
on the NASDAQ National Market are valued at the
last sale price on the exchange or market where
primarily traded or listed or, if there is no
recent sale, 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. Securities not so traded or listed 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 are valued at the forward rates
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.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Dividend income is recorded on the
ex-dividend date, and interest income is recorded
on the accrual basis and includes discount
amortization on fixed income securities. Realized
gains and losses from investment transactions are
reported on an identified cost basis.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income
semi-annually and net realized capital gains
annually, which are recorded on the ex-dividend
date. Dividends are determined in accordance with
income tax principles which may treat certain
transactions differently from generally accepted
accounting principles.
EQUALIZATION ACCOUNTING. 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 .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 $1,198,000 for the
year ended October 31, 1996.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS -----------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------- -------------
<S> <C> <C> <C>
Year ended
October 31, 1996 $72,000 424,000 11,000
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, KDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees and
commissions paid in connection with the sale of
Class B and
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Class C shares, and the CDSC received in connection
with the redemption of such shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS AND
DISTRIBUTION FEES
DISTRIBUTION FEES PAID BY KDI
AND CDSC RECEIVED -----------------------------
BY KDI TO ALL FIRMS TO AFFILIATES
----------------- ------------- -------------
<S> <C> <C> <C>
Year ended
October 31, 1996 $ 286,000 539,000 3,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of Fund accounts the firms
service. Administrative services fees (ASF) paid
are as follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY -----------------------------
THE FUND TO KDI TO ALL FIRMS TO AFFILIATES
---------------- ------------- -------------
<S> <C> <C> <C>
Year ended
October 31, 1996 $497,000 512,000 15,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of $633,000
for the year ended October 31, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the year ended October 31, 1996, the Fund
made no payments to its officers and incurred
trustees' fees of $19,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended October 31, 1996, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $389,471
Proceeds from sales 352,743
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
1996 YEAR ENDED OCTOBER 31, 1995
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
------------------------------------------------------------------------------
Class A 2,996 $ 46,627 1,743 $ 23,136
------------------------------------------------------------------------------
Class B 3,136 49,419 1,447 19,285
------------------------------------------------------------------------------
Class C 168 2,667 102 1,283
------------------------------------------------------------------------------
Class I 3 39 -- --
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
------------------------------------------------------------------------------
Class A 976 13,750 198 2,454
------------------------------------------------------------------------------
Class B 110 1,543 4 46
------------------------------------------------------------------------------
Class C 6 80 -- --
------------------------------------------------------------------------------
SHARES REDEEMED
------------------------------------------------------------------------------
Class A (2,753) (42,327) (3,870) (50,273)
------------------------------------------------------------------------------
Class B (956) (14,819) (672) (9,197)
------------------------------------------------------------------------------
Class C (51) (785) (53) (682)
------------------------------------------------------------------------------
Class I (2) (29) -- --
------------------------------------------------------------------------------
CONVERSION OF SHARES
------------------------------------------------------------------------------
Class A 70 1,055 16 212
------------------------------------------------------------------------------
Class B (70) (1,055) (16) (212)
------------------------------------------------------------------------------
NET INCREASE (DECREASE)
FROM CAPITAL SHARE
TRANSACTIONS $ 56,165 $(13,948)
------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------
CLASS A
--------------------------------------------
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $14.87 12.33 13.88 12.72 13.24
- -------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .22 .19 .19 .18 .18
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 3.45 2.57 (.71) 1.13 .41
- -------------------------------------------------------------------------------------------------------
Total from investment operations 3.67 2.76 (.52) 1.31 .59
- -------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .20 .20 .19 .15 .14
- -------------------------------------------------------------------------------------------------------
Distribution from net realized gain 1.20 .02 .84 -- .97
- -------------------------------------------------------------------------------------------------------
Total dividends 1.40 .22 1.03 .15 1.11
- -------------------------------------------------------------------------------------------------------
Net asset value, end of year $17.14 14.87 12.33 13.88 12.72
- -------------------------------------------------------------------------------------------------------
TOTAL RETURN 26.72% 22.74 (3.82) 10.35 4.76
RATIOS TO AVERAGE NET ASSETS
Expenses 1.26% 1.30 1.48 1.25 1.46
- -------------------------------------------------------------------------------------------------------
Net investment income 1.40% 1.47 1.50 1.28 1.63
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
CLASS B
----------------------------------------------------
MAY 31
YEAR ENDED OCTOBER 31, TO OCTOBER 31,
1996 1995 1994
- ---------- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------- --------------------------------------------------------------------------------------------
Net asset value, beginning of period $14.82 12.29 12.30
- ---------- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .10 .09 .06
- ---------- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 3.45 2.56 (.01)
- ---------- --------------------------------------------------------------------------------------------
Total from investment operations 3.55 2.65 .05
- ---------- --------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .08 .10 .06
- ---------- --------------------------------------------------------------------------------------------
Distribution from net realized gain 1.20 .02 --
- ---------- --------------------------------------------------------------------------------------------
Total dividends 1.28 .12 .06
- ---------- --------------------------------------------------------------------------------------------
Net asset value, end of period $17.09 14.82 12.29
- ---------- --------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 25.82% 21.76 .42
- ---------- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------- --------------------------------------------------------------------------------------------
Expenses 2.08% 2.06 2.43
- ---------- --------------------------------------------------------------------------------------------
Net investment income .58% .71 .33
- ---------- --------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
FINANCIAL HIGHLIGHTS
[CAPTION]
<TABLE>
<CAPTION>
CLASS C CLASS I
----------------------------------- -------------
MAY 31 NOVEMBER 22,
YEAR ENDED TO 1995 TO
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995 1994 1996
- ------------------------------------------------------------------------------------ -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------ -------------
Net asset value, beginning of period $14.88 12.32 12.30 15.30
- ------------------------------------------------------------------------------------ -------------
Income from investment operations:
Net investment income .10 .07 .09 .36
- ------------------------------------------------------------------------------------ -------------
Net realized and unrealized gain (loss) 3.45 2.62 (.01) 2.96
- ------------------------------------------------------------------------------------ -------------
Total from investment operations 3.55 2.69 .08 3.32
- ------------------------------------------------------------------------------------ -------------
Less dividends:
Distribution from net investment income .08 .11 .06 .24
- ------------------------------------------------------------------------------------ -------------
Distribution from net realized gain 1.20 .02 -- 1.20
- ------------------------------------------------------------------------------------ -------------
Total dividends 1.28 .13 .06 1.44
- ------------------------------------------------------------------------------------ -------------
Net asset value, end of period $17.15 14.88 12.32 17.18
- ------------------------------------------------------------------------------------ -------------
TOTAL RETURN (NOT ANNUALIZED) 25.75% 22.04 .67 21.89
- ------------------------------------------------------------------------------------ -------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------ -------------
Expenses 2.05% 2.01 2.33 1.31
- ------------------------------------------------------------------------------------ -------------
Net investment income .61% .76 .43 1.33
- ------------------------------------------------------------------------------------ -------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $256,172 168,266 153,172 196,327 182,553
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 166% 117 131 222 178
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Average commission rate paid per share on stock transactions for the year ended
October 31, 1996 was $.0587.
- --------------------------------------------------------------------------------
NOTE: Total return does not reflect the effect of any sales charges.
23
<PAGE> 24
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS TRACY M. CHESTER
President and Trustee Vice President
DAVID W. BELIN CHARLES R. MANZONI, JR.
Trustee Vice President
LEWIS A. BURNHAM JOHN E. NEAL
Trustee Vice President
DONALD L. DUNAWAY STEVEN H. REYNOLDS
Trustee Vice President
ROBERT B. HOFFMAN PHILIP J. COLLORA
Trustee Vice President
and Secretary
DONALD R. JONES
Trustee JEROME L. DUFFY
Treasurer
DOMINIQUE P. MORAX
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 SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
1-800-621-1048
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
http://www.kemper.com
(RECYCLE LOGO)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Equity Fund prospectus.
KBCF - 2 (12/96)
KEMPER FUNDS LOGO
1025990
Printed in the U.S.A.
