<PAGE> 1
KEMPER
BLUE CHIP FUND
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED OCTOBER 31, 1997
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
Seeking growth of capital and of income
"... Overall, it was an excellent period
for equity markets, although it was
more volatile than recent years..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
8
Industry Sectors
9
Largest Holdings
10
Portfolio of Investments
14
Report of Independent Auditors
15
Financial Statements
17
Notes to Financial Statements
20
Financial Highlights
AT A GLANCE
- ------------------------------------------------------------------------------
KEMPER BLUE CHIP FUND
TOTAL RETURNS
- ------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31, 1997
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 26.78%
CLASS B 25.62%
CLASS C 25.71%
LIPPER GROWTH & INCOME FUNDS CATEGORY AVERAGE* 28.12%
</TABLE>
- ------------------------------------------------------------------------------
Returns and rankings are historical and do not represent future performance.
Returns, rankings 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
10/31/97 10/31/96
- ------------------------------------------------------------------------------
<S> <C> <C>
KEMPER BLUE CHIP FUND CLASS A $17.68 $17.14
- ------------------------------------------------------------------------------
KEMPER BLUE CHIP FUND CLASS B $17.61 $17.09
- ------------------------------------------------------------------------------
KEMPER BLUE CHIP FUND CLASS C $17.69 $17.15
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</TABLE>
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KEMPER BLUE CHIP FUND
LIPPER RANKINGS*
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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 #379 of 589 funds #437 of 589 funds #434 of 589 funds
- ------------------------------------------------------------------------------
5-YEAR #184 of 228 funds N/A N/A
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</TABLE>
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DIVIDEND REVIEW
- ------------------------------------------------------------------------------
DURING THE YEAR ENDED OCTOBER 31, 1997, KEMPER BLUE CHIP FUND MADE THE
FOLLOWING DISTRIBUTIONS PER SHARE:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME DIVIDEND $0.2050 $0.0616 $0.0696
- ------------------------------------------------------------------------------
SHORT-TERM CAPITAL
GAIN $ 1.81 $ 1.81 $ 1.81
- ------------------------------------------------------------------------------
LONG-TERM CAPITAL GAIN $ 1.32 $ 1.32 $ 1.32
- ------------------------------------------------------------------------------
</TABLE>
TERMS TO KNOW
YOUR FUND'S STYLE
[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.
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.
PRICE-TO-EARNINGS RATIO A company's stock price divided by its earnings for the
past four quarters, also referred to as its P/E.
SECTOR Stocks usually found in related industries. Stocks within a market sector
may be similarly effected by financial, economic, business and other
developments.
<PAGE> 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
<PAGE> 4
ECONOMIC OVERVIEW
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ECONOMIC GUIDEPOSTS
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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 (11/30/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
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
</TABLE>
(1) Falling interest rates in recent years have been a big plus for
financial assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6 percent. The low, moderate inflation of
the last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of October 31, 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
<PAGE> 5
PERFORMANCE UPDATE
[CHESTER PHOTO]
TRACY MCCORMICK CHESTER JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN 1994 AND
IS NOW A FIRST 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.
VOLATILITY RETURNED TO THE MARKET IN A BIG WAY NEAR THE END OF THE FISCAL
YEAR. YET PORTFOLIO MANAGER TRACY CHESTER REGISTERED A RESPECTABLE RETURN BY
FOCUSING ON SOLID GROWTH COMPANIES SELLING AT ATTRACTIVE PRICES.
Q TRACY, BEFORE YOU DETAIL THE FUND'S PERFORMANCE OVER THE LAST YEAR, COULD
YOU PROVIDE SOME BACKGROUND REGARDING THE PERFORMANCE OF STOCKS IN GENERAL?
A Overall, it was an excellent period for equity markets, although it was
more volatile than recent years. In broad terms, large company stocks performed
the best during the first half of the fiscal year, and smaller stocks performed
the best during the last half. For the year ended October 31, 1997, the Russell
1000 Index, the benchmark we use for large company growth stocks, rose 31.84
percent.
Over the last 36 months or so, the market has advanced so routinely that
people may have forgotten that it isn't always smooth sailing. They were
reminded of the market's potential volatility over the last six months. But if
investors didn't get spooked, they ended up with solid gains, and that just
highlights the importance of maintaining a long-term focus.
Q HOW DID THE FUND PERFORM IN COMPARISON?
A For the year ended October 31, 1997, the fund's total return for Class A
shares (unadjusted for any sales charge) was 26.78 percent, so we modestly
lagged the market. As far as our peer group is concerned, the Lipper Growth &
Income Fund Category Average returned 28.12 percent, so we performed about
average. For us, however, our performance relative to our peers is disappointing
because we were ahead of the Lipper average up until the last two or three
months of the fiscal year.
Q WHAT HAMPERED PERFORMANCE DURING THOSE LAST MONTHS?
A There were a couple of factors. First, the market's volatility, which
normally helps us, hindered us a bit. Second, there were a few negative
surprises in an otherwise well-positioned portfolio.
Q COULD YOU ELABORATE ON THAT FIRST POINT?
A Certainly. Our philosophy has always been "bottom up" stock selection.
Rather than focus on economic conditions or entire sectors, we tend to choose
stocks based on their individual merits, and seek those that offer above-average
growth prospects, but are selling at what we believe to be attractive prices. To
do that, we set upper and lower price targets on stocks. If a stock falls below
a certain price level, we buy. If it rallies above a certain price level, we
sell. In this way, we hope to benefit from most of the ride up, but avoid most
of the ride down.
When the market is volatile, that usually gives us opportunities to buy good
stocks on a dip. Unfortunately, that disciplined approach to valuations worked
against us over the last few months. The expensive stocks just got more
expensive, and the less expensive stocks got less expensive.
Q WHY WAS THAT?
A The market's volatility, particularly in light of the problems experienced
by Pacific Rim economies, made many investors nervous. The response was a flight
to big, brand-name stocks that people believed were safer, and they would pay
any price to do so. The lofty valuations that resulted
5
<PAGE> 6
PERFORMANCE UPDATE
made us hesitant to buy companies like Coke or Merck or Pfizer. There's not a
lot of upside in stocks priced that highly, and they are susceptible to a big
plunge on any bad news. Regardless, the market continued to bid them up, and we
didn't participate as fully as we would have liked.
Q YOU ALSO MENTIONED A FEW GLITCHES IN AN OTHERWISE WELL-POSITIONED
PORTFOLIO. COULD YOU PROVIDE SOME EXAMPLES?
A Our difficulties tended to be name-specific rather than sector-specific.
One example was Sears. Our retail holdings performed very well overall, but
Sears' credit operation, which should have operated smoothly in a growing
economy, created problems and the stock declined.
Another example was our position in pharmaceutical stocks. As a group, they
delivered strong gains well into the summer, when we lightened up on the larger
companies because they'd become fully valued. We maintained a significant
weighting in the sector by shifting assets into stocks that had better
valuations, such as American Home Products. So far, however, it has lagged the
giants.
Finally, in the technology sector, we trimmed semiconductors before they
corrected, but not enough as they were particularly hard hit in the wake of the
Asian currency problems.
Q DID YOU REPOSITION THE PORTFOLIO IN LIGHT OF THE TURBULENCE IN THE PACIFIC
RIM?
A We have relatively little international exposure, but we did adopt a
slightly more defensive position. As is our strategy, we made moves on a
company-by-company basis rather than making sector bets. We are maintaining an
overweighted position in finance, but are avoiding big money-center banks that
have greater exposure to Asian currency problems. Instead, we're concentrating
on strong regional banks with good franchises that are good candidates for a
takeover.
We've been somewhat defensive in technology and have favored service-oriented
companies such as Computer Sciences, IBM, AMP and Diebold -- they're boring but
solid companies that are unlikely to experience the "Asian flu" as severely as
smaller, PC-oriented companies.
We've reduced our exposure in capital goods stocks and cutting our basic
industry exposure in half. That's a function of emphasizing domestic stocks.
Overall, we treated the widespread price decline as an opportunity to reduce
positions in more vulnerable companies and boost positions in our higher
confidence stocks.
Q WHAT DECISIONS WORKED OUT BEST DURING THE YEAR?
A Financial stocks were an area of solid performance. We traded around them
efficiently and were proactive when they reached our targets. That was
particularly true of life insurance companies. There are a lot of management
changes, consolidation, and structural changes within the industry, and many
companies were beneficiaries. Our overweighting in retail also helped provide a
good boost for the portfolio.
Q WHAT STRATEGIES DIDN'T WORK OUT AS WELL?
A Rails were a bit disappointing. We still like the sector and it had a nice
run up until the summer, but they retraced a lot of their gains due largely to
Union Pacific's problems coloring the sector. Transportation stocks as a whole
are now even cheaper with solid, good quality companies available for very
attractive prices. So we're maintaining an overweight in transports such as CSX,
Norfolk Southern and Canadian Pacific.
Q WHERE ARE YOU LOOKING FOR OPPORTUNITIES RIGHT NOW?
A We continue to like consumer cyclicals like Toys R Us. We also like the
radio area where there is a lot of consolidation going on. Clear Channel is an
example, as is Westinghouse, which has divested itself of most of its non-
broadcasting businesses.
Health care is also an area of emphasis. We've been moving into service areas
like HEALTHSOUTH Corp. We eliminated big names like Medtronic, Pfizer and Lilly
simply because they look hugely expensive and don't appear to have much upside
left. As we've gotten somewhat defensive we've built food and staples positions.
We were lucky when they got hit hard earlier in the year because we had a chance
to buy companies like Gillette at a less expensive price. General Mills and
International Flavors & Fragrances were other examples.
Q THE MARKET APPEARS AS IF IT WILL POST SIGNIFICANT GAINS FOR THE THIRD YEAR
IN A ROW. DO YOU THINK THIS PERFORMANCE WILL CONTINUE?
A I'm not much of a prognosticator when it comes to the market. But the
economy's growth, coupled with an environment of low inflation and low interest
rates, offers many individual COMPANIES the potential to experience such gains.
We intend to maintain strict attention to valuations and try to find these kinds
of companies when they are priced attractively. At some point, the market is
going to realize that there are a number of bargains on solid growth companies
out there, and that's when we believe this fund will benefit the most.
6
<PAGE> 7
PERFORMANCE UPDATE
- -------------------------------------------------------------------------------
KEMPER BLUE CHIP FUND
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- -------------------------------------------------------------------------------
FOR PERIODS ENDED OCTOBER 31, 1997 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR LIFE OF CLASS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER BLUE CHIP FUND CLASS A 19.46% 14.55% 12.69% (since 11/23/87)
- ------------------------------------------------------------------------------------------------------
KEMPER BLUE CHIP FUND CLASS B 22.62% N/A 20.86 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------
KEMPER BLUE CHIP FUND CLASS C 25.71% N/A 21.40 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- -------------------------------------------------------------------------------
Kemper Blue Chip Fund Class A
- -------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class A shares from 12/1/87 to 10/31/97
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12/1/87 12/31/87 12/31/90 12/31/93 10/31/97
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kemper Blue Chip Fund Class A(1) 10000 9581 11581 17157 32805
Russell 1000 Index+ 10000 10733 15726 25137 53095
Standard & Poor's 500 Stock Index++ 10000 10825 16077 24811 53158
</TABLE>
[LINE GRAPH]
- -------------------------------------------------------------------------------
Kemper Blue Chip Fund Class B
- -------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class B shares from 5/31/94 to 10/31/97
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/95 12/31/96 10/31/97
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Blue Chip Fund Class B(1) 10000 12828 16232 19125
Russell 1000 Index+ 10000 14040 17188 21446
Standard & Poor's 500 Stock Index++ 10000 14135 17377 21739
</TABLE>
[LINE GRAPH]
- -------------------------------------------------------------------------------
Kemper Blue Chip Fund Class C
- -------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class C shares from 5/31/94 to 10/31/97
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 12/31/96 10/31/97
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kemper Blue Chip Fund Class C(1) 10000 9838 12890 16310 19420
Russell 1000 Index+ 10000 10190 14048 17188 21446
Standard & Poor's 500 Stock Index++ 10000 10284 14135 17372 21739
</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 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. The maximum Class B share 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 Blue Chip Fund
Class A and Class B shares to the two indices, you should also note that
the fund's performance reflects the applicable sales charge, while no such
charges are reflected in the performance of the indices.
+ 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 Standard & Poor's 500 Stock Index is an unmanaged index generally
representative of the U.S. stock market. Source is Towers Data Systems.
7
<PAGE> 8
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, 1997, and on October 31, 1996.
[YEAR-TO-YEAR COMPARISON BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER BLUE CHIP FUND KEMPER BLUE CHIP FUND
ON 10/31/97 ON 10/31/96
<S> <C> <C>
CONSUMER NONDURABLES 24.6% 18.3%
FINANCE 20.5% 16.2%
TECHNOLOGY 13.1% 10.1%
HEALTH CARE 12.1% 14.4%
ENERGY 8.2% 9.1%
CAPITAL GOODS 7.3% 11.9%
TRANSPORATION 4.9% 5.9%
UTILITIES 4.8% 6.3%
BASIC INDUSTRIES 3.0% 7.8%
CONSUMER DURABLES 1.5% 0.0%
</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, 1997, 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 10/31/97 ON 10/31/97
<S> <C> <C>
CONSUMER NONDURABLES 24.6% 20.6%
FINANCE 20.5% 18.6%
TECHNOLOGY 13.1% 14.3%
HEALTH CARE 12.1% 11.0%
ENERGY 8.2% 8.4%
CAPITAL GOODS 7.3% 8.7%
TRANSPORATION 4.9% 1.6%
UTILITIES 4.8% 9.3%
BASIC INDUSTRIES 3.0% 4.7%
CONSUMER DURABLES 1.5% 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.
8
<PAGE> 9
LARGEST HOLDINGS
THE FUND'S 20 LARGEST HOLDINGS*
Representing 31.8 percent of the fund's total net assets on October 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Holdings Percent
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. AMERICAN HOME PRODUCTS Manufactures and markets health care products. 2.3%
2. MAY DEPARTMENT STORES CO. Owns and operates retail department stores and 2.0%
self-service shoe stores.
3. AMERICAN GENERAL CORP. A leading provider of annuities, consumer loans 2.0%
and life insurance.
4. CSX CORP. A transportation company involved in rails, 1.9%
shipping and trucking worldwide.
5. SBC COMMUNICATIONS INC. One of the world's leading diversified 1.9%
telecommunications companies.
6. MOBIL CORP. Produces, transports, refines and markets 1.8%
petroleum and natural gas and related products.
7. BRISTOL-MYERS SQUIBB CO. Diversified manufacturer of health and personal 1.6%
care products worldwide.
8. INTERNATIONAL FLAVORS & Creates and produces flavor and fragrance 1.6%
FRAGRANCES products used by manufacturers.
9. J.C. PENNEY INC. Department store chain. 1.5%
10. NORFOLK SOUTHERN CORP. A holding company which owns Norfolk Southern 1.5%
Railway and motor carrier North American Van
Lines, Inc.
11. UNOCAL CORP. Crude oil and natural gas. 1.5%
12. HARCOURT GENERAL Engaged in publishing and specialty retailing. 1.5%
13. STANLEY WORKS A worldwide producer of tools, hardware and 1.4%
specialty hardware for consumer, industrial and
professional use.
14. SAFECO CORP. Engaged in insurance and investment management. 1.4%
15. JEFFERSON-PILOT CORP. Writes life, health and accident insurance and 1.4%
annuities.
16. BENEFICIAL CORP. Consumer financial company. 1.4%
17. R.R. DONNELLY & SONS CO. World's largest provider of print and 1.3%
print-related services.
18. SUNDSTRAND CORP. Systems and components for aerospace and 1.3%
industrial applications.
19. INTERNATIONAL BUSINESS Manufactures data processing equipment and 1.3%
MACHINES CORP. systems.
20. HEWLETT-PACKARD CO. Manufactures computers and computer-related 1.2%
products.
</TABLE>
* PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER BLUE CHIP FUND
PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC INDUSTRIES--2.8% Betz Dearborn, Inc. 68,700 $ 4,405
Canon, Inc. 1,000 24
Cementos Mexicanos, S.A. de C.V., "B," ADR 14,000 61
PPG Industries, Inc. 85,000 4,813
Rentokil Initial, PLC 22,000 89
RPM, Inc. 160,000 3,000
---------------------------------------------------------------------------
12,392
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--6.8% Emerson Electric Co. 65,900 3,456
GM Corp. 70,000 4,428
General Electric Co. 50,400 3,254
Matsushita Electric Industrial Co., Ltd. 3,500 59
Murata Manufacturing 1,200 49
Raytheon Co. 85,000 4,611
Sundstrand Corp. 110,000 5,981
Technip, S.A. 704 75
United Technologies Corp. 40,000 2,800
U.S. Industries 120,000 3,225
York International Corp. 50,000 2,281
---------------------------------------------------------------------------
30,219
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS--10.9% (a)Clear Channel Communication 55,000 3,630
Dillard Department Stores 105,000 4,029
Evergreen Media Corp., convertible preferred 17,500 1,078
R.R. Donnelley & Sons Co. 184,000 6,003
Harcourt General 130,000 6,508
Hudson's Bay Co. 4,100 94
May Department Stores Co. 166,700 8,981
Meredith Corp. 45,000 1,533
J.C. Penney, Inc. 115,000 6,749
Sony Corp. 500 42
Time Warner, Inc. 85,000 4,903
(a)Toys R Us 150,000 5,109
---------------------------------------------------------------------------
48,659
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER DURABLES--1.4% Honda Motor Co., Ltd. 1,000 34
Stanley Works 148,500 6,274
---------------------------------------------------------------------------
6,308
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER STAPLES--11.9% CPC International 25,000 $ 2,475
Dial Corp. 185,000 3,122
General Mills, Inc. 45,000 2,970
Gillette Co. 30,000 2,672
H.J. Heinz Co. 100,000 4,644
International Flavors & Fragrances 145,000 7,014
Kimberly-Clark Corp. 90,000 4,674
(a)MGM Grand 70,000 3,071
McCormick & Co. 38,900 972
PepsiCo 130,000 4,786
Philip Morris Co. 53,000 2,100
Procter & Gamble Co. 39,000 2,652
Seagram Co. 90,000 3,032
(a)Tricon Global Restaurants, Inc. 13,000 394
Unilever N.V., ADR 78,000 4,163
Whitman Corp. 105,000 2,756
Wm. Wrigley Jr. Co. 26,400 1,911
----------------------------------------------------------------------------
53,408
- -------------------------------------------------------------------------------------------------------------------------
ENERGY--7.6% AMOCO Corp. 25,000 2,292
Baker Hughes, Inc. 100,000 4,594
British Petroleum, PLC 6,504 96
Chevron Corp. 50,000 4,147
Exxon Corp. 55,000 3,379
MCN Corp., convertible preferred 40,000 2,215
Mobil Corp. 112,600 8,199
Petro-Canada 6,000 121
Unocal Corp. 161,000 6,641
(a)Western Atlas 25,000 2,155
----------------------------------------------------------------------------
33,839
- -------------------------------------------------------------------------------------------------------------------------
FINANCE--19.0% American Express Co. 42,000 3,276
American General Corp. 175,000 8,925
Banc One Corp. 86,000 4,483
Banco Santander, S.A. 1,950 55
BankAmerica Corp. 21,000 1,502
Bank of Ireland 11,484 145
Beneficial Corp. 80,000 6,135
CITIC Pacific, Ltd. 11,000 53
Federal National Mortgage Association 55,000 2,664
First Union Corp. 110,900 5,441
Fleet Financial Group, Inc. 60,000 3,859
General Growth Properties, Inc. 70,000 2,415
General RE Corp. 15,000 2,958
Highwood Properties, Inc. 110,000 3,795
HSBC Holdings, PLC 1,600 36
ING Groep, N.V. 3,010 126
Jefferson-Pilot Corp.
common stock 80,000 6,185
convertible preferred 9,000 954
KeyCorp 50,000 3,059
Mid Ocean, Ltd. 68,000 4,412
Morgan Stanley, Dean Witter Discover & Co. 85,000 4,165
NationsBank 70,000 4,191
PNC Bank Corp. 100,000 4,750
Safeco Corp. 130,000 6,191
Summit Bancorp 30,000 1,281
U.S. Bancorp 17,500 1,780
Wilmington Trust Corp. 40,000 2,230
----------------------------------------------------------------------------
85,066
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HEALTH CARE--11.3% ALZA Corp. 80,000 $ 2,085
Abbott Laboratories 90,000 5,518
American Home Products 140,000 10,378
Baxter International, Inc. 85,000 3,931
Bristol-Myers Squibb Co. 80,000 7,020
(a)British Bio-Technology Group 17,000 29
(a)Crescendo Pharmaceutical Corp. 6,181 70
(a)HealthCare COMPARE Corp. 36,000 1,935
(a)HEALTHSOUTH Corp. 155,000 3,962
McKesson Corp.
common stock 27,500 2,951
convertible preferred 30,000 2,280
Perkin-Elmer Corp. 32,000 2,000
Roche Holdings, A.G., rights 9 79
(a)Tenet Healthcare Corp. 153,200 4,682
United Healthcare Corp. 75,000 3,473
----------------------------------------------------------------------------
50,393
- -------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--12.2% AMP, Inc. 122,500 5,513
(a)Analog Devices, Inc. 100,000 3,056
(a)Cadence Design Systems 30,600 1,629
(a)Cisco Systems 55,000 4,512
Computer Associates International 27,000 2,013
(a)Computer Sciences Corp. 30,000 2,128
Diebold Corp. 95,000 4,186
L.M. Ericsson Telephone Co., "B" 2,459 108
(a)Gartner Group 55,000 1,554
Harris Corp. 124,200 5,418
Hewlett-Packard Co. 90,000 5,552
Intel Corp. 14,000 1,078
International Business Machines Corp. 60,000 5,884
(a)National Semiconductor Corp. 60,000 2,160
(a)Oracle Corp. 79,000 2,827
Pitney Bowes 50,000 3,966
(a)Sun Microsystems 80,400 2,754
----------------------------------------------------------------------------
54,338
- -------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--4.5% CSX Corp. 155,000 8,477
Canadian Pacific, Ltd. 175,000 5,217
Norfolk Southern Corp. 210,000 6,746
----------------------------------------------------------------------------
20,440
- -------------------------------------------------------------------------------------------------------------------------
UTILITIES--4.4% AirTouch Communications, convertible
preferred 40,000 2,400
Ameritech Corp. 77,000 5,005
AT &T 80,000 3,915
SBC Communications, Inc. 131,000 8,335
(a)Telecom Italia, SpA 6,450 40
Telefonica de Espana, S.A. 3,100 85
----------------------------------------------------------------------------
19,780
----------------------------------------------------------------------------
TOTAL COMMON STOCKS--92.8%
(Cost: $380,687) 414,842
----------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
CONVERTIBLE CORPORATE OBLIGATIONS PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HEALTH CARE--.7% ALZA Corp., 5.00%, 2006 $ 3,000 $ 2,895
----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--.6% Kent Electronics Corp., 4.50%, 2004 2,940 2,800
----------------------------------------------------------------------------
TOTAL CONVERTIBLE CORPORATE OBLIGATIONS--1.3% 5,695
(Cost: $5,975)
----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
MONEY MARKET
INSTRUMENTS--7.0%
Yield--4.89% to 5.82%
Due--November and December, 1997
American Honda Finance Corp. 6,500 6,480
ConAgra 2,500 12,462
Sanwa Business Credit Corp. 4,600 4,597
Other 7,700 7,695
----------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--7.0%
(Cost: $31,234) 31,234
----------------------------------------------------------------------------
TOTAL INVESTMENTS--101.1%
(Cost: $417,896) 451,771
----------------------------------------------------------------------------
LIABILITIES, LESS OTHER ASSETS--(1.1%) (4,880)
----------------------------------------------------------------------------
NET ASSETS--100% $446,891
----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security.
Based on the cost of investments of $417,896,000 for federal income tax purposes
at October 31, 1997, the gross unrealized appreciation was $39,184,000, the
gross unrealized depreciation was $5,309,000 and the net unrealized appreciation
on investments was $33,875,000.
See accompanying Notes to Financial Statements.
13
<PAGE> 14
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, 1997, 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 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, 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
14
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $417,896) $451,771
- ------------------------------------------------------------------------
Receivable for:
Investments sold 20,592
- ------------------------------------------------------------------------
Fund shares sold 2,238
- ------------------------------------------------------------------------
Dividends and interest 654
- ------------------------------------------------------------------------
TOTAL ASSETS 475,255
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Cash overdraft 1,237
- ------------------------------------------------------------------------
Payable for:
Investments purchased 26,004
- ------------------------------------------------------------------------
Fund shares redeemed 497
- ------------------------------------------------------------------------
Management fee 219
- ------------------------------------------------------------------------
Distribution services fee 95
- ------------------------------------------------------------------------
Administrative services fee 88
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 194
- ------------------------------------------------------------------------
Trustees' fees 30
- ------------------------------------------------------------------------
Total liabilities 28,364
- ------------------------------------------------------------------------
NET ASSETS $446,891
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $354,029
- ------------------------------------------------------------------------
Undistributed net realized gain on investments 57,107
- ------------------------------------------------------------------------
Net unrealized appreciation on investments 33,875
- ------------------------------------------------------------------------
Undistributed net investment income 1,880
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $446,891
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($307,726 / 17,403 shares outstanding) $17.68
- ------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering price) $18.76
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($123,449 / 7,011 shares outstanding) $17.61
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($10,609 / 600 shares outstanding) $17.69
- ------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($5,107 / 288 shares outstanding) $17.72
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------
Dividends $ 6,320
- -------------------------------------------------------------------------------------------
Interest 1,687
- -------------------------------------------------------------------------------------------
Total investment income 8,007
- -------------------------------------------------------------------------------------------
Expenses:
Management fee 2,018
- -------------------------------------------------------------------------------------------
Distribution services fee 708
- -------------------------------------------------------------------------------------------
Administrative services fee 834
- -------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 1,325
- -------------------------------------------------------------------------------------------
Professional fees 40
- -------------------------------------------------------------------------------------------
Reports to shareholders 85
- -------------------------------------------------------------------------------------------
Trustees' fees and other 19
- -------------------------------------------------------------------------------------------
Total expenses 5,029
- -------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,978
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- -------------------------------------------------------------------------------------------
Net realized gain on sales of investments and foreign
currency transactions 56,879
- -------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 14,551
- -------------------------------------------------------------------------------------------
Net gain on investments 71,430
- -------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $74,408
- -------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -------------------------------------------------------------------------------------------
Net investment income $ 2,978 2,620
- -------------------------------------------------------------------------------------------
Net realized gain 56,879 48,809
- -------------------------------------------------------------------------------------------
Change in net unrealized appreciation 14,551 (3,487)
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 74,408 47,942
- -------------------------------------------------------------------------------------------
Net equalization credits 209 36
- -------------------------------------------------------------------------------------------
Distribution from net investment income (2,968) (2,271)
- -------------------------------------------------------------------------------------------
Distribution from net realized gain (48,419) (13,966)
- -------------------------------------------------------------------------------------------
Total dividends to shareholders (51,387) (16,237)
- -------------------------------------------------------------------------------------------
Net increase from capital share transactions 167,489 56,165
- -------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 190,719 87,906
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------
Beginning of year 256,172 168,266
- -------------------------------------------------------------------------------------------
END OF YEAR (including undistributed
net investment income of
$1,880 and $1,663, respectively) $446,891 256,172
- -------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
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 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 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
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
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 $2,018,000 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.
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:
<TABLE>
<CAPTION>
COMMISSIONS
COMMISSIONS ALLOWED BY ZKDI
RETAINED BY ----------------------------
ZKDI TO ALL FIRMS TO AFFILIATES
----------- ------------ -------------
<S> <C> <C> <C>
Year ended October 31, 1997 $124,000 1,101,000 7,000
</TABLE>
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:
<TABLE>
<CAPTION>
DISTRIBUTION FEES
AND CDSC COMMISSIONS AND
RECEIVED BY DISTRIBUTION FEES PAID
ZKDI BY ZKDI TO FIRMS
----------------- ----------------------
<S> <C> <C>
Year ended October 31, 1997 $839,000 1,957,000
</TABLE>
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
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
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 ASF PAID BY
THE FUND TO ZKDI ZKDI TO FIRMS
----------------- -------------
<S> <C> <C>
Year ended October 31, 1997 $834,000 886,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Funds transfer agent,
Zurich Kemper Service Company (ZKSvC) is the
shareholder service agent of the Fund. Under the
agreement, ZKSvC received shareholder services fees
of $959,000 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 $17,000 to independent trustees.
- --------------------------------------------------------------------------------
4 TRANSACTIONS
INVESTMENT For the year ended October 31, 1997, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $747,839
Proceeds from sales 639,687
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996
--------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 6,618 $112,272 2,996 $46,627
------------------------------------------------------------------------------
Class B 5,184 87,500 3,136 49,419
------------------------------------------------------------------------------
Class C 580 9,803 168 2,667
------------------------------------------------------------------------------
Class I 407 7,030 3 39
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 2,615 38,297 976 13,750
------------------------------------------------------------------------------
Class B 716 10,448 110 1,543
------------------------------------------------------------------------------
Class C 40 586 6 80
------------------------------------------------------------------------------
Class I 1 23 -- --
------------------------------------------------------------------------------
SHARES REDEEMED
Class A (3,646) (61,114) (2,753) (42,327)
------------------------------------------------------------------------------
Class B (1,845) (31,843) (956) (14,819)
------------------------------------------------------------------------------
Class C (201) (3,375) (51) (785)
------------------------------------------------------------------------------
Class I (121) (2,138) (2) (29)
------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 209 3,585 70 1,055
------------------------------------------------------------------------------
Class B (210) (3,585) (70) (1,055)
------------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL SHARE TRANSACTIONS $167,489 $56,165
------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------
Class A
----------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------
Net asset value, beginning of year $17.14 14.87 12.33 13.88 12.72
- --------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .18 .22 .19 .19 .18
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 3.70 3.45 2.57 (.71) 1.13
- --------------------------------------------------------------------------------------------------
Total from investment operations 3.88 3.67 2.76 (.52) 1.31
- --------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .21 .20 .20 .19 .15
- --------------------------------------------------------------------------------------------------
Distribution from net realized gain 3.13 1.20 .02 .84 --
- --------------------------------------------------------------------------------------------------
Total dividends 3.34 1.40 .22 1.03 .15
- --------------------------------------------------------------------------------------------------
Net asset value, end of year $17.68 17.14 14.87 12.33 13.88
- --------------------------------------------------------------------------------------------------
TOTAL RETURN 26.78% 26.72 22.74 (3.82) 10.35
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------
Expenses 1.19% 1.26 1.30 1.48 1.25
- --------------------------------------------------------------------------------------------------
Net investment income 1.07% 1.40 1.47 1.50 1.28
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------
Class B
---------------------------------------------
YEAR ENDED OCTOBER 31, MAY 31
---------------------- TO OCTOBER 31,
1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------
Net asset value, beginning of period $17.09 14.82 12.29 12.30
- -------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .04 .10 .09 .06
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 3.67 3.45 2.56 (.01)
- -------------------------------------------------------------------------------------------------
Total from investment operations 3.71 3.55 2.65 .05
- -------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .06 .08 .10 .06
- -------------------------------------------------------------------------------------------------
Distribution from net realized gain 3.13 1.20 .02 --
- -------------------------------------------------------------------------------------------------
Total dividends 3.19 1.28 .12 .06
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $17.61 17.09 14.82 12.29
- -------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 25.62% 25.82 21.76 .42
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------------
Expenses 2.06% 2.08 2.06 2.43
- -------------------------------------------------------------------------------------------------
Net investment income .20% .58 .71 .33
- -------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
FINANCIAL HIGHLIGHTS
[CAPTION]
<TABLE>
<CAPTION>
--------------------------------- ------------------------------
CLASS C CLASS I
--------------------------------- ------------------------------
MAY 31, NOVEMBER 22,
YEAR ENDED OCTOBER 31, TO YEAR ENDED 1995 TO
---------------------- OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995 1994 1997 1996
- ---------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------- ------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------- ------------------------------
Net asset value, beginning of period $17.15 14.88 12.32 12.30 17.18 15.30
- ---------------------------------------------------------------------------------- ------------------------------
Income from investment operations:
Net investment income .03 .10 .07 .09 .32 .36
- ---------------------------------------------------------------------------------- ------------------------------
Net realized and unrealized gain (loss) 3.71 3.45 2.62 (.01) 3.58 2.96
- ---------------------------------------------------------------------------------- ------------------------------
Total from investment operations 3.74 3.55 2.69 .08 3.90 3.32
- ---------------------------------------------------------------------------------- ------------------------------
Less dividends:
Distribution from net investment income .07 .08 .11 .06 .23 .24
- ---------------------------------------------------------------------------------- ------------------------------
Distribution from net realized gain 3.13 1.20 .02 -- 3.13 1.20
- ---------------------------------------------------------------------------------- ------------------------------
Total dividends 3.20 1.28 .13 .06 3.36 1.44
- ---------------------------------------------------------------------------------- ------------------------------
Net asset value, end of period $17.69 17.15 14.88 12.32 17.72 17.18
- ---------------------------------------------------------------------------------- -----------------------------
TOTAL RETURN (NOT ANNUALIZED) 25.71% 25.75 22.04 .67 26.89 21.89
- ---------------------------------------------------------------------------------- -----------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------- -----------------------------
Expenses 2.00% 2.05 2.01 2.33 .70 1.31
- ---------------------------------------------------------------------------------- ------------------------------
Net investment income .26% .61 .76 .43 1.56 1.33
- ---------------------------------------------------------------------------------- ------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $446,891 256,172 168,266 153,172 196,327
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 183% 166 117 131 222
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Average commission rates paid per share on stock transactions for the years
ended October 31, 1997 and 1996 were $.0593 and $.0587, respectively.
NOTE: Total return does not reflect the effect of any sales charges.
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
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 JEROME L. DUFFY
Trustee Treasurer
SHIRLEY D. PETERSON ELIZABETH C. WERTH
Trustee Assistant Secretary
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
- ------------------------------------------------------------------------------
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 Equity Funds/Growth Style prospectus.
KBCF - 2 (12/97) 1040970
