<PAGE> 1
KEMPER EQUITY FUNDS
SUPPLEMENT TO PROSPECTUS
DATED FEBRUARY 1, 1996
CLASS I SHARES
KEMPER BLUE CHIP FUND
KEMPER GROWTH FUND
KEMPER QUANTITATIVE EQUITY FUND*
KEMPER SMALL CAPITALIZATION EQUITY FUND
KEMPER TECHNOLOGY FUND
KEMPER TOTAL RETURN FUND
KEMPER VALUE+GROWTH FUND
*THE KEMPER QUANTITATIVE EQUITY FUND WILL NOT
COMMENCE OPERATIONS UNTIL FEBRUARY 15, 1996.
Kemper Blue Chip Fund (the "Blue Chip Fund"), Kemper Growth Fund (the "Growth
Fund"), Kemper Quantitative Equity Fund (the "Quantitative Fund"), Kemper Small
Capitalization Equity Fund (the "Small Cap Fund"), Kemper Technology Fund (the
"Technology Fund"), Kemper Total Return Fund (the "Total Return Fund") and
Kemper Value+Growth Fund (the "Value+Growth" Fund) (collectively, the "Funds")
currently offer four classes of shares to provide investors with different
purchasing options. These are Class A, Class B and Class C shares, which are
described in the prospectus, and Class I shares, which are described in the
prospectus as supplemented hereby.
Class I shares are available for purchase exclusively by the following
investors; (a) tax-exempt retirement plans of Kemper Financial Services, Inc.
("KFS") and its affiliates; and (b) the following investment advisory clients of
KFS and its investment advisory affiliates (including Zurich Investment
Management, Inc.) and Dreman Value Advisors, Inc. that invest at least $1
million in a Fund; (1) unaffiliated benefit plans, such as qualified retirement
plans (other than individual retirement accounts and self-directed retirement
plans); (2) unaffiliated banks and insurance companies purchasing for their own
accounts; and (3) endowment funds of unaffiliated non-profit organizations.
Class I shares currently are available for purchase only from Kemper
Distributors, Inc., principal underwriter for the Funds. Share certificates are
not available for Class I shares.
The primary distinctions among the classes of each Fund's shares lie in their
initial and contingent deferred sales charge schedules and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. Class I shares are offered at net asset value without an
initial sales charge and are not subject to a contingent deferred sales charge
or a Rule 12b-1 distribution fee. Also, there is no administrative services fee
charged to Class I shares. As a result of the relatively lower expenses for
Class I shares, the level of income dividends per share (as a percentage of net
asset value) and, therefore, the overall investment return, will be higher for
Class I shares than for Class A, Class B and Class C shares.
The following information supplements the indicated sections of the prospectus.
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES (APPLICABLE TO ALL FUNDS) CLASS I
- ----------------------------------------------------------------------------------------- -------
<S> <C>
Maximum Sales Charge on Purchases
(as a percentage of offering price).................................................... None
Maximum Sales Charge on Reinvested Dividends............................................. None
Redemption Fees.......................................................................... None
Exchange Fee............................................................................. None
Deferred Sales Charge (as a percentage of redemption proceeds)........................... None
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
ANNUAL FUND
OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS, AND AFTER BLUE SMALL TOTAL VALUE+
MANAGEMENT FEE REDUCTION FOR CHIP GROWTH QUANTITATIVE CAP TECHNOLOGY RETURN GROWTH
VALUE+GROWTH FUND) FUND FUND FUND FUND FUND FUND FUND(1)
---- ------ ------------ ----- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees....................... .58% .54% .58% .73% .56% .54% .60%
12b-1 Fees............................ None None None None None None None
Other Expenses(2)..................... .08% .05% .15% .06% .09% .07% .15%
---- ---- ---- ---- ---- ---- ----
Total Operating Expenses.............. .66% .59% .73% .79% .65% .61% .75%
==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE FUND 1 YEAR 3 YEARS
- ------------------------------------------------------------------ ------------- ------ -------
<S> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, Blue Chip $7 $21
assuming
(1) 5% annual return and (2) redemption at the end of each time Growth $6 $19
period:
Quantitative $7 $23
Small Cap $8 $25
Technology $7 $21
Total Return $6 $20
Value+Growth $8 $24
</TABLE>
- ---------------
(1) After management fee and expense reimbursement reduction for Value+Growth
Fund for the current fiscal year.
(2) Other Expenses have been estimated for the current fiscal year.
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in Class I shares of a Fund will
bear directly or indirectly.
The base management fee for the Small Cap Fund is .65% and is subject to a
maximum upward or downward performance adjustment of .30 of 1%. The table
reflects the management fee for the prior short fiscal period after such
adjustment. Due to the short fiscal period for Class I shares (as reflected in
the Financial Highlights table below), the effective management fee was
different from that incurred by the Class A, B and C shares. The Quantitative
Fund will not commence operations until February 15, 1996 and the Value+Growth
Fund commenced operations on October 16, 1995; thus expenses are shown for only
the one and three year periods. KFS has agreed to temporarily reduce its
management fee and reimburse or pay certain operating expenses for the
Value+Growth Fund during its current fiscal year as described in the prospectus.
Without this waiver "Management Fees" would be .72% and "Total Operating
Expenses" would be .87%. See "Investment Manager and Underwriter" in the
prospectus.
The Example assumes a 5% annual rate of return pursuant to requirements of the
Securities and Exchange Commission. This hypothetical rate of return is not
intended to be representative of past or future performance of any Fund. THE
EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
2
<PAGE> 3
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
GROWTH SMALL CAP TECHNOLOGY TOTAL RETURN
FUND FUND FUND FUND
JULY 3, JULY 3, JULY 3, JULY 3,
1995 TO 1995 TO 1995 TO 1995 TO
SEPT. 30, SEPT. 30, OCT. 31, OCT. 31,
1995 1995 1995 1995
----------- --------- ---------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 14.80 6.27 12.72 10.07
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .03 -- (.02) .10
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain 1.26 .88 1.94 .52
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.29 .88 1.92 .62
- ------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income -- -- -- .08
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 16.09 7.15 14.64 10.61
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)(%) 8.72 14.04 15.09 6.21
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)(%):
Expenses .59 .79 .65 .61
- ------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) .92 (.14) (.33) 2.97
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
No financial information is presented for Class I shares of the Blue Chip Fund
or the Value+Growth Fund since no Class I shares had been issued as of such
Funds' fiscal year end. The Quantitative Fund will not commence operations until
February 15, 1996.
SPECIAL FEATURES
Shareholders of a Fund's Class I shares may exchange their shares for (i) shares
of Kemper Money Market Fund--Money Market Portfolio if the shareholders of Class
I shares have purchased shares because they are participants in tax-exempt
retirement plans of KFS and its affiliates and (ii) Class I shares of any other
"Kemper Mutual Fund" listed under "Special Features--Class A Shares--Combined
Purchases" in the prospectus. Conversely, shareholders of Kemper Money
Funds--Kemper Money Market Fund who have purchased shares because they are
participants in tax-exempt retirement plans of KFS and its affiliates may
exchange their shares for Class I shares of "Kemper Mutual Funds" to the extent
that they are available through their plan. Exchanges will be made at the shares
relative net asset values. Exchanges are subject to the limitations set forth in
the prospectus under "Special Features--Exchange Privilege--General."
February 1, 1996
KEF - 1 (2/96)
3
<PAGE> 4
<TABLE>
<S> <C>
TABLE OF CONTENTS
- -----------------------------------------------
Summary 1
- -----------------------------------------------
Summary of Expenses 2
- -----------------------------------------------
Financial Highlights 5
- -----------------------------------------------
Investment Objectives, Policies and Risk
Factors 11
- -----------------------------------------------
Investment Manager and Underwriter 24
- -----------------------------------------------
Dividends and Taxes 28
- -----------------------------------------------
Net Asset Value 29
- -----------------------------------------------
Purchase of Shares 30
- -----------------------------------------------
Redemption or Repurchase of Shares 35
- -----------------------------------------------
Special Features 39
- -----------------------------------------------
Performance 42
- -----------------------------------------------
Capital Structure 43
- -----------------------------------------------
</TABLE>
This combined prospectus of the Kemper Equity Funds contains information about
each of the Funds that you should know before investing and should be retained
for future reference. A Statement of Additional Information dated February 1,
1996, has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. It is available upon request without charge
from the Funds at the address or telephone number on this cover or the firm from
which this prospectus was obtained. Kemper Value+Growth Fund is also known as
Kemper Value Plus Growth Fund.
THE FUNDS' SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. INVESTMENT IN A
FUND'S SHARES INVOLVES RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
LOGO
KEMPER
EQUITY
FUNDS
PROSPECTUS FEBRUARY 1, 1996
KEMPER EQUITY FUNDS
120 South LaSalle Street, Chicago, Illinois 60603
1-800-621-1048
This prospectus describes a choice of seven equity and balanced mutual funds
managed by Kemper Financial Services, Inc.
KEMPER BLUE CHIP FUND
KEMPER GROWTH FUND
KEMPER QUANTITATIVE EQUITY FUND*
KEMPER SMALL CAPITALIZATION EQUITY FUND
KEMPER TECHNOLOGY FUND
KEMPER TOTAL RETURN FUND
KEMPER VALUE+GROWTH FUND
*THE KEMPER QUANTITATIVE EQUITY FUND WILL NOT COMMENCE OPERATIONS UNTIL FEBRUARY
15, 1996.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 5
KEMPER EQUITY FUNDS
120 SOUTH LASALLE STREET, CHICAGO, ILLINOIS 60603, TELEPHONE 1-800-621-1048
SUMMARY
INVESTMENT OBJECTIVES. The seven open-end, diversified management investment
companies (the "Funds") covered in this combined prospectus are as follows:
KEMPER BLUE CHIP FUND (the "Blue Chip Fund") seeks growth of capital and of
income.
KEMPER GROWTH FUND (the "Growth Fund") seeks growth of capital through
professional management and diversification of investment securities having
potential for capital appreciation.
KEMPER QUANTITATIVE EQUITY FUND (the "Quantitative Fund") seeks growth of
capital and reduction of risk through professional management of a diversified
portfolio of equity securities.
KEMPER SMALL CAPITALIZATION EQUITY FUND (the "Small Cap Fund") seeks maximum
appreciation of investors' capital.
KEMPER TECHNOLOGY FUND (the "Technology Fund") seeks growth of capital.
KEMPER TOTAL RETURN FUND (the "Total Return Fund") seeks to obtain the highest
total return, a combination of income and capital appreciation, consistent with
reasonable risk.
KEMPER VALUE+GROWTH FUND (the "Value+Growth Fund") seeks growth of capital
through professional management of a portfolio of growth and value stocks.
The Funds may purchase put and call options, engage in financial futures
transactions, invest in foreign securities, engage in related foreign currency
transactions and lend portfolio securities. The Technology and Quantitative
Funds may also write (sell) put and call options. The Funds may invest up to 25%
of total assets in foreign securities. See "Investment Objectives, Policies and
Risk Factors."
RISK FACTORS. There is no assurance that the investment objective of any Fund
will be achieved and investment in each Fund includes risks that vary in kind
and degree depending upon the investment policies of that Fund. The returns and
net asset value of each Fund will fluctuate. Investment by the Small Cap Fund
primarily in smaller companies and the emphasis of the Technology Fund on
smaller emerging growth technology companies involve greater risk than
investment in larger, more established companies. Foreign investments by the
Funds involve risk and opportunity considerations not typically associated with
investing in U.S. companies. The U.S. Dollar value of a foreign security tends
to decrease when the value of the U.S. Dollar rises against the foreign currency
in which the security is denominated and tends to increase when the value of the
U.S. Dollar falls against such currency. Thus, the U.S. Dollar value of foreign
securities in a Fund's portfolio, and the Fund's net asset value, may change in
response to changes in currency exchange rates even though the value of the
foreign securities in local currency terms may not have changed. While a Fund's
investments in foreign securities will principally be in developed countries,
the Fund may invest a portion of its assets in developing or "emerging" markets,
which involve exposure to economic structures that are generally less diverse
and mature than in the United States, and to political systems that may be less
stable. A portion of the assets of the Total Return Fund may be invested in
lower rated or unrated high yield bonds which entail greater risk of loss of
principal and interest than higher rated fixed income securities. There are
special risks associated with options, financial futures and foreign currency
transactions and other derivatives and there is no assurance that use of those
investment techniques will be successful. See "Investment Objectives, Policies
and Risk Factors."
PURCHASES AND REDEMPTIONS. Each Fund provides investors with the option of
purchasing shares in the following ways:
Class A Shares..............
Offered at net asset value plus a maximum sales
charge of 5.75% of the offering price. Reduced sales
charges apply to purchases of $50,000 or more. The
redemption within one year of Class A shares
purchased at net asset value under the Large Order
NAV Purchase Privilege may be subject to a 1%
contingent deferred sales charge.
1
<PAGE> 6
Class B Shares............ Offered at net asset value, subject to a Rule 12b-1
distribution fee and a contingent deferred sales
charge that declines from 4% to zero on certain
redemptions made within six years of purchase. Class
B shares automatically convert into Class A shares
(which have lower ongoing expenses) six years after
purchase.
Class C Shares............ Offered at net asset value without an initial or
contingent deferred sales charge, but subject to a
Rule 12b-1 distribution fee. Class C shares do not
convert into another class.
Each class of shares represents interests in the same portfolio of investments
of a Fund. The minimum initial investment is $1,000 and investments thereafter
must be at least $100. Shares are redeemable at net asset value, which may be
more or less than original cost, subject, in the case of Class A shares
purchased under the Large Order NAV Purchase Privilege and for Class B shares,
to any applicable contingent deferred sales charge. See "Purchase of Shares" and
"Redemption or Repurchase of Shares."
INVESTMENT MANAGER AND UNDERWRITER. Kemper Financial Services, Inc. ("KFS")
serves as investment manager for each Fund. KFS is paid an investment management
fee by each Fund based upon average daily net assets of that Fund at an
effective annual rate that differs for each Fund. Dreman Value Advisors, Inc.
("DVA"), a wholly owned subsidiary of KFS, is the sub-advisor for the
Value+Growth Fund and is paid a fee of .25% of average daily net assets of that
Fund by KFS. Kemper Distributors, Inc. ("KDI"), a wholly owned subsidiary of
KFS, is principal underwriter and administrator for each Fund. For Class B
shares and Class C shares, KDI receives a Rule 12b-1 distribution fee of .75% of
average daily net assets. KDI also receives the amount of any contingent
deferred sales charges paid on the redemption of shares. Administrative services
are provided to shareholders under administrative services agreements with KDI.
Each Fund pays an administrative services fee at the annual rate of up to .25%
of average daily net assets of each class of the Fund, which KDI pays to
financial services firms. See "Investment Manager and Underwriter."
DIVIDENDS. Each Fund normally distributes dividends of net investment income as
follows: annually for the Growth, Quantitative, Small Cap, Technology and
Value+Growth Funds; semi-annually for the Blue Chip Fund; and quarterly for the
Total Return Fund. Each Fund distributes any net realized short-term and
long-term capital gains at least annually. Income and capital gain dividends of
a Fund are automatically reinvested in additional shares of that Fund, without a
sales charge, unless the shareholder makes a different election. See "Dividends
and Taxes."
GENERAL. In the opinion of the staff of the Securities and Exchange Commission,
the use of this combined prospectus may make each Fund liable for any
misstatement or omission in this prospectus regardless of the particular Fund to
which it pertains.
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES (APPLICABLE TO ALL
FUNDS)(1) CLASS A CLASS B CLASS C
------- ------------------------ -------
<S> <C> <C> <C>
Maximum Sales Charge on Purchases (as a percentage of
offering price)...................................... 5.75%(2) None None
Maximum Sales Charge on Reinvested Dividends........... None None None
Redemption Fees........................................ None None None
Exchange Fee........................................... None None None
Deferred Sales Charge (as a percentage of redemption
proceeds)............................................ None(3) 4% during the first None
year, 3% during the
second and third years,
2% during the fourth and
fifth years and 1% in
the sixth year
</TABLE>
- -------------------------
(1) Investment dealers and other firms may independently charge additional fees
for shareholder transactions or for advisory services; please see their
materials for details.
(2) Reduced sales charges apply to purchases of $50,000 or more. See "Purchase
of Shares -- Initial Sales Charge Alternative -- Class A Shares."
(3) The redemption within one year of shares purchased at net asset value under
the Large Order NAV Purchase Privilege may be subject to a 1% contingent
deferred sales charge. See "Purchase of Shares -- Initial Sales Charge
Alternative -- Class A Shares."
2
<PAGE> 7
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets, and after management fee reduction for
Value+Growth Fund)
<TABLE>
<CAPTION>
TOTAL VALUE+
BLUE CHIP GROWTH QUANTITATIVE SMALL CAP TECHNOLOGY RETURN GROWTH
FUND FUND FUND FUND FUND FUND FUND(6)
--------- ------ ------------ --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Management Fees............... .58% .54% .58% .48% .56% .54% .60%
12b-1 Fees.................... None None None None None None None
Other Expenses(7)............. .72% .63% .90% .66% .32% .58% .90%
--------- ------ ------------ --------- ---------- ------- -------
Total Operating Expenses...... 1.30% 1.17% 1.48% 1.14% .88% 1.12% 1.50%
======= ====== ========= ======== ======== ====== ======
</TABLE>
<TABLE>
<CAPTION>
TOTAL VALUE+
BLUE CHIP GROWTH QUANTITATIVE SMALL CAP TECHNOLOGY RETURN GROWTH
FUND FUND FUND FUND FUND FUND FUND(6)
--------- ------ ------------ --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
Management Fees............... .58% .54% .58% .48% .56% .54% .60%
12b-1 Fees(4)................. .75% .75% .75% .75% .75% .75% .75%
Other Expenses(7)............. .73% .88% .93% .94% .51% .76% .93%
--------- ------ ------------ --------- ---------- ------- -------
Total Operating Expenses...... 2.06% 2.17% 2.26% 2.17% 1.82% 2.05% 2.28%
======= ====== ========= ======== ======== ====== ======
</TABLE>
<TABLE>
<CAPTION>
TOTAL VALUE+
BLUE CHIP GROWTH QUANTITATIVE SMALL CAP TECHNOLOGY RETURN GROWTH
FUND FUND FUND FUND FUND FUND FUND(6)
--------- ------ ------------ --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS C SHARES
Management Fees............... .58% .54% .58% .48% .56% .54% .60%
12b-1 Fees(5)................. .75% .75% .75% .75% .75% .75% .75%
Other Expenses(7)............. .68% .74% .90% .87% .45% .57% .90%
--------- ------ ------------ --------- ---------- ------- -------
Total Operating Expenses...... 2.01% 2.03% 2.23% 2.10% 1.76% 1.86% 2.25%
======= ====== ========= ======== ======== ====== ======
</TABLE>
- -------------------------
(4) Long-term shareholders may pay more than the economic equivalent of the
maximum initial sales charges permitted by the National Association of
Securities Dealers, although KDI believes that is unlikely because of the
automatic conversion feature described under "Purchase of Shares -- Deferred
Sales Charge Alternative -- Class B Shares."
(5) As a result of the accrual of 12b-1 fees, long-term shareholders may pay
more than the economic equivalent of the maximum initial sales charges
permitted by the National Association of Securities Dealers.
(6) After management fee reduction and expense reimbursement for Value+Growth
Fund for the current fiscal year.
(7) Other Expenses have been estimated for the Quantitative Fund and
Value+Growth Fund for the current fiscal year.
EXAMPLE
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
CLASS A SHARES
You would pay the following expenses on a Blue Chip $ 70 $ 96 $ 125 $205
$1,000 investment, assuming (1) 5% annual Growth $ 69 $ 93 $ 118 $191
return and (2) redemption at the end of Quantitative $ 72 $ 102 -- --
each time period: Small Cap $ 68 $ 92 $ 117 $188
Technology $ 66 $ 84 $ 103 $160
Total Return $ 68 $ 91 $ 116 $186
Value+Growth $ 72 $ 102 -- --
</TABLE>
3
<PAGE> 8
EXAMPLE
<TABLE>
<CAPTION>
1 3 5 10
FUND YEAR YEARS YEARS YEARS
------------- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
CLASS B SHARES(8)
You would pay the following expenses on Blue Chip $ 51 $ 85 $ 121 $ 239
a $1,000 investment, assuming (1) 5% Growth $ 52 $ 88 $ 126 $ 250
annual return and (2) redemption at the Quantitative $ 53 $ 91 -- --
end of each time period: Small Cap $ 52 $ 88 $ 126 $ 250
Technology $ 48 $ 77 $ 109 $ 214
Total Return $ 51 $ 84 $ 120 $ 238
Value+Growth $ 53 $ 91 -- --
You would pay the following expenses on Blue Chip $ 21 $ 65 $ 111 $ 239
the same investment, assuming no Growth $ 22 $ 68 $ 116 $ 250
redemption: Quantitative $ 23 $ 71 -- --
Small Cap $ 22 $ 68 $ 116 $ 250
Technology $ 18 $ 57 $ 99 $ 214
Total Return $ 21 $ 64 $ 110 $ 238
Value+Growth $ 23 $ 71 -- --
CLASS C SHARES
You would pay the following expenses on Blue Chip $ 20 $ 63 $ 108 $ 234
a $1,000 investment, assuming (1) 5% Growth $ 21 $ 64 $ 109 $ 236
annual return and (2) redemption at the Quantitative $ 23 $ 70 -- --
end of each time period: Small Cap $ 21 $ 66 $ 113 $ 243
Technology $ 18 $ 55 $ 95 $ 207
Total Return $ 19 $ 58 $ 101 $ 218
Value+Growth $ 23 $ 70 -- --
</TABLE>
- -------------------------
(8) Assumes conversion to Class A shares six years after purchase and was
calculated based upon the assumption that the shareholder was an owner of
the shares on the first day of the first year and the contingent deferred
sales charge was applied as follows: 1 year (3%), 3 years (2%), 5 years (1%)
and 10 years (0%). See "Redemption or Repurchase of Shares -- Contingent
Deferred Sales Charge -- Class B Shares" for more information regarding the
calculation of the contingent deferred sales charge.
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in a Fund will bear directly or
indirectly. See "Investment Manager and Underwriter" for more information.
The base management fee for the Small Cap Fund is .65% and is subject to a
maximum upward or downward performance adjustment of .30%. The table reflects
the base management fee for the prior fiscal year after such adjustment.
The Value+Growth Fund commenced operations on October 16, 1995, thus expenses
are shown for only the one and three year periods. KFS has agreed to temporarily
reduce its management fee and reimburse or pay certain operating expenses to the
extent necessary to limit the Fund's "Total Operating Expenses" to the levels
indicated in the tables above. Without such waiver and reimbursement,
"Management Fees" would be .72% and "Total Operating Expenses" for Class A, B
and C shares would be 1.62%, 2.40% and 2.37%, respectively.
The Quantitative Fund will commence operations on February 15, 1996, thus
expenses are shown for only the one and three year periods.
The Example assumes a 5% annual rate of return pursuant to requirements of the
Securities and Exchange Commission. This hypothetical rate of return is not
intended to be representative of past or future performance of any Fund. THE
EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
4
<PAGE> 9
FINANCIAL HIGHLIGHTS
The tables below show financial information for each Fund except the
Quantitative Fund expressed in terms of one share outstanding throughout the
period. The information in the tables for each Fund is covered by the report of
the Fund's independent auditors. The report for each Fund is contained in its
Registration Statement and is available from that Fund. The financial statements
contained in each Fund's 1995 Annual Report to Shareholders are incorporated
herein by reference and may be obtained by writing or calling that Fund.
BLUE CHIP FUND
<TABLE>
<CAPTION>
NOV. 23, 1987
YEAR ENDED OCTOBER 31, TO OCT. 31,
1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $12.33 13.88 12.72 13.24 9.65 10.07 8.41 9.00
- --------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .19 .19 .18 .18 .11 .13 .18 .35
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 2.57 (.71) 1.13 .41 3.63 (.45) 1.78 (.80)
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.76 (.52) 1.31 .59 3.74 (.32) 1.96 (.45)
- --------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .20 .19 .15 .14 .15 .10 .30 .14
- --------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain .02 .84 -- .97 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total dividends .22 1.03 .15 1.11 .15 .10 .30 .14
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.87 12.33 13.88 12.72 13.24 9.65 10.07 8.41
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) (%) 22.74 (3.82) 10.35 4.76 39.19 (3.23) 24.08 (4.99)
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED) (%):
Expenses 1.30 1.48 1.25 1.46 1.66 1.91 2.08 1.83
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income 1.47 1.50 1.28 1.63 .88 1.28 1.99 4.47
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
----------- -----------
MAY 31, MAY 31,
YEAR ENDED 1994 TO YEAR ENDED 1994 TO
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CLASS B AND C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 12.29 12.30 12.32 12.30
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .09 .06 .07 .09
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 2.56 (.01) 2.62 (.01)
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.65 .05 2.69 .08
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .10 .06 .11 .06
- -----------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain .02 -- .02 --
- -----------------------------------------------------------------------------------------------------------------------------
Total dividends .12 .06 .13 .06
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 14.82 12.29 14.88 12.32
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) (%) 21.76 .42 22.04 .67
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED) (%):
Expenses 2.06 2.43 2.01 2.33
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income .71 .33 .76 .43
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NOV. 23, 1987
YEAR ENDED OCTOBER 31, TO OCT. 31,
1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ALL CLASSES
SUPPLEMENTAL DATA:
Net assets at end of period
(in thousands) $168,266 153,172 196,327 182,553 61,146 32,172 26,164 20,421
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 117 131 222 178 162 93 89 326
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 10
GROWTH FUND
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $12.93 15.33 13.09 13.14 9.00 9.79 7.61 13.73 13.07 12.29
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .05 .01 .01 .03 .06 .18 .17 .23 .20 .24
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 3.27 (1.41) 2.29 .71 4.57 (.79) 2.24 (2.83) 4.13 2.28
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.32 (1.40) 2.30 .74 4.63 (.61) 2.41 (2.60) 4.33 2.52
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income -- -- .03 .05 .11 .18 .23 .21 .10 .30
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain .18 1.00 .03 .74 .38 -- -- 3.31 3.57 1.44
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .18 1.00 .06 .79 .49 .18 .23 3.52 3.67 1.74
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $16.07 12.93 15.33 13.09 13.14 9.00 9.79 7.61 13.73 13.07
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) 26.07 (9.39) 17.60 5.55 54.13 (6.37) 32.60 (15.15) 44.69 23.37
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (%):
Expenses 1.17 1.09 1.00 1.03 1.04 .89 .83 .82 .80 .78
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .43 .24 .06 .32 .59 1.84 2.11 3.38 1.67 1.96
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
----------------------------- -----------------------------
MAY 31, MAY 31,
YEAR ENDED 1994 TO YEAR ENDED 1994 TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CLASS B AND C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 12.88 13.10 12.88 13.09
- ------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.08) (.03) (.07) (.02)
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 3.23 (.19) 3.24 (.19)
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.15 (.22) 3.17 (.21)
- ------------------------------------------------------------------------------------------------------------------------------
Less distribution from net realized gain .18 -- .18 --
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 15.85 12.88 15.87 12.88
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) (%) 24.83 (1.68) 24.99 (1.60)
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED) (%):
Expenses 2.17 2.11 2.03 2.09
- ------------------------------------------------------------------------------------------------------------------------------
Net investment loss (.57) (.76) (.43) (.67)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ALL CLASSES
SUPPLEMENTAL DATA:
Net assets at end of
year (in thousands) $2,503,301 2,255,977 1,826,961 1,419,292 613,245 307,555 335,998 285,485 376,045 275,060
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover
rate (%) 67 115 139 83 143 194 160 61 247 181
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 11
SMALL CAP FUND
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1995 1994 1993 1992(A) 1991 1990 1989 1988 1987 1986
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 5.81 6.45 5.25 5.35 3.79 4.71 3.66 6.69 5.80 4.93
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.01) (.01) (.02) (.02 ) .02 .05 .10 .05 .09 .10
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 1.68 (.27) 1.71 .40 1.89 (.86) 1.00 (1.45) 1.82 1.01
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.67 (.28) 1.69 .38 1.91 (.81) 1.10 (1.40) 1.91 1.11
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income -- -- -- .01 .06 .11 .05 .13 -- .11
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain .34 .36 .49 .47 .29 -- -- 1.50 1.02 .13
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .34 .36 .49 .48 .35 .11 .05 1.63 1.02 .24
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 7.14 5.81 6.45 5.25 5.35 3.79 4.71 3.66 6.69 5.80
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) 30.88 (4.31) 34.11 7.02 55.16 (17.52) 30.58 (17.34) 39.40 23.71
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (%):
Expenses 1.14 1.34 1.03 1.28 1.25 .86 .64 .72 .53 .48
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (.18) (.76) (.43) (.43 ) .27 1.22 2.55 1.42 1.62 1.83
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------ ------------------------------
MAY 31, MAY 31,
YEAR ENDED 1994 TO YEAR ENDED 1994 TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CLASS B AND C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 5.78 5.65 5.77 5.65
- ------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.07) (.02) (.07) (.03)
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain 1.66 .15 1.66 .15
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.59 .13 1.59 .12
- ------------------------------------------------------------------------------------------------------------------------------
Less distribution from net realized gain .34 -- .34 --
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.03 5.78 7.02 5.77
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) (%) 29.59 2.30 29.65 2.12
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED) (%):
Expenses 2.17 2.29 2.10 2.10
- ------------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.21) (1.38) (1.14) (1.21)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ALL CLASSES
SUPPLEMENTAL DATA:
Net assets at end of year (in
thousands) $839,905 631,607 510,060 329,116 289,345 179,092 286,411 284,426 353,111 273,736
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 102 58 82 73 126 107 100 90 115 113
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 12
TECHNOLOGY FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1995 1994 1993(A) 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $11.50 10.68 9.95 12.42 9.37 10.19 9.39 11.76 13.82 11.45
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.03) -- (.01) .01 .13 .22 .26 .18 .19 .20
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 4.66 1.49 2.03 .04 3.35 (.45) 1.28 .07 .56 3.03
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 4.63 1.49 2.02 .05 3.48 (.23) 1.54 .25 .75 3.23
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income -- -- -- .03 .20 .29 .23 .12 .13 .21
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain 1.50 .67 1.29 2.49 .23 .30 .51 2.50 2.68 .65
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends 1.50 .67 1.29 2.52 .43 .59 .74 2.62 2.81 .86
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $14.63 11.50 10.68 9.95 12.42 9.37 10.19 9.39 11.76 13.82
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) 47.30 14.95 21.76 .32 38.58 (2.51) 18.19 3.84 6.32 29.79
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (%):
Expenses .88 .89 .81 .82 .81 .71 .69 .69 .63 .60
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (.23) .05 (.06) .07 1.24 2.23 2.92 2.26 1.17 1.58
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------- ----------------------------
MAY 31, MAY 31,
YEAR ENDED 1994 TO YEAR ENDED 1994 TO
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1995 1994 1995 1994
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS B AND C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 11.45 9.99 11.45 9.99
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (.15) (.05) (.15) (.05)
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain 4.59 1.51 4.65 1.51
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 4.44 1.46 4.50 1.46
- -------------------------------------------------------------------------------------------------------------------------------
Less distribution from net realized gain 1.50 -- 1.50 --
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 14.39 11.45 14.45 11.45
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) (%) 45.65 14.61 46.23 14.61
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED) (%):
Expenses 1.82 1.99 1.76 1.83
- -------------------------------------------------------------------------------------------------------------------------------
Net investment loss (1.17) (1.08) (1.11) (.92)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ALL CLASSES
SUPPLEMENTAL DATA:
Net assets at end of year
(in thousands) $1,017,955 713,654 612,604 559,279 606,295 472,992 532,760 513,800 566,241 598,722
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 105 81 95 95 81 25 39 11 41 37
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 13
TOTAL RETURN FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 9.10 11.23 10.07 10.07 7.78 8.34 7.34 7.24 8.78 7.28
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .29 .19 .30 .22 .36 .46 .37 .36 .27 .33
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) 1.46 (1.01) 1.54 .37 2.42 (.64) 1.04 .23 (.55) 1.77
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.75 (.82) 1.84 .59 2.78 (.18) 1.41 .59 (.28) 2.10
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .25 .23 .24 .29 .49 .38 .41 .29 .28 .21
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- 1.08 .44 .30 -- -- -- .20 .98 .39
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .25 1.31 .68 .59 .49 .38 .41 .49 1.26 .60
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $10.60 9.10 11.23 10.07 10.07 7.78 8.34 7.34 7.24 8.78
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) 19.46 (7.92) 19.08 6.09 37.20 (2.31) 20.00 8.75 (4.18) 30.57
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (%):
Expenses 1.12 1.13 1.02 1.06 1.03 .87 .79 .78 .72 .72
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 3.00 2.34 2.94 2.23 3.96 5.87 4.76 5.10 3.05 4.02
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------- ----------------------------
MAY 31, MAY 31,
YEAR ENDED 1994 TO YEAR ENDED 1994 TO
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
--------------------------------------------------------------
CLASS B AND C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.09 9.24 9.09 9.24
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .20 .06 .21 .06
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 1.46 (.16) 1.48 (.16)
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.66 (.10) 1.69 (.10)
- -------------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .16 .05 .17 .05
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.59 9.09 10.61 9.09
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) (%) 18.42 (1.06) 18.76 (1.05)
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED) (%):
Expenses 2.05 2.03 1.86 2.00
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income 2.07 1.57 2.26 1.60
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------
ALL CLASSES
SUPPLEMENTAL DATA:
Net assets at end of year (in
thousands) $2,926,542 2,864,322 1,509,687 1,212,896 998,465 781,417 937,804 976,972 1,077,369 677,618
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 142 121 180 150 157 157 130 187 171 172
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 14
For the period from October 16, 1995 (initial public offering) to November 30,
1995.
VALUE+GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
-------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.50 9.50 9.50
- ----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .02 .02 .01
- ----------------------------------------------------------------------------------------------------------------------------
Net unrealized gain .50 .50 .50
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .52 .52 .51
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.02 10.02 10.01
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) (%) 5.47 5.47 5.37
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED) (%):
Expenses 1.35 2.10 2.07
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income 2.25 1.50 1.53
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets at end of period (in thousands) $5,851
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate --
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(a) Per share data were determined based on average shares outstanding.
Total return does not reflect the effect of any sales charges. The Funds are
organized as separate Massachusetts business trusts. As discussed under
"Investment Manager and Underwriter," effective May 31, 1994, the investment
management fee for some Funds changed, resulting in a higher fee for the Growth
Fund, the Technology Fund and the Total Return Fund and a lower fee for the Blue
Chip Fund. The fee schedule for the Small Cap Fund is unchanged, except that the
performance adjustment is based upon the performance of the Fund's Class A
shares.
10
<PAGE> 15
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following information sets forth each Fund's investment objective and
policies. Each Fund's returns and net asset value will fluctuate and there is no
assurance that any Fund will meet its objective.
BLUE CHIP FUND. The Blue Chip Fund seeks growth of capital and of income. In
seeking to achieve its objective, the Fund will invest primarily in common
stocks of well capitalized, established companies that the Fund's investment
manager believes to have the potential for growth of capital, earnings and
dividends. Under normal market conditions, the Fund will, as a fundamental
policy, invest at least 65%, and may invest up to 100%, of its total assets in
the common stocks of companies with a market capitalization of at least $1
billion at the time of investment.
In pursuing its objective, the Fund will emphasize investments in common stocks
of large, well known, high quality companies. Companies of this general type are
often referred to as "Blue Chip" companies. "Blue Chip" companies are generally
identified by their substantial capitalization, established history of earnings
and dividends, easy access to credit, good industry position and superior
management structure. "Blue Chip" companies are believed to generally exhibit
less investment risk and less price volatility than companies lacking these high
quality characteristics, such as smaller, less seasoned companies. In addition,
the large market of publicly held shares for such companies and the generally
high trading volume in those shares results in a relatively high degree of
liquidity for such investments. The characteristics of high quality and high
liquidity of "Blue Chip" investments should make the market for such stocks
attractive to investors both within and outside the United States. The Fund will
generally attempt to avoid speculative securities or those with significant
speculative characteristics.
Examples of "Blue Chip" companies currently eligible for investment by the Fund
include, but are not limited to, companies such as Pfizer Inc., Merck & Co.,
Inc., Hewlett-Packard Company, AT&T Company, General Reinsurance, J.P. Morgan &
Co., Union Pacific Corporation and PepsiCo. Inc. While the Fund's portfolio will
not be limited to the examples noted and need not contain any specific security,
companies of this general quality comprise a relatively small, select group. In
general, the Fund will seek to invest in those established, high quality
companies whose industries are experiencing favorable secular or cyclical
change. Thus, the Fund in seeking its objective will endeavor to select its
investments from among high quality companies operating in the more attractive
industries.
As indicated above, the Fund's investment portfolio will normally consist
primarily of common stocks. The Fund may invest to a more limited extent in
preferred stocks, debt securities and securities convertible into or
exchangeable for common stocks, including warrants and rights, when they are
believed to offer opportunities for growth of capital and of income. The Fund
may also purchase options, engage in financial futures transactions, purchase
foreign securities, engage in related foreign currency transactions and lend its
portfolio securities. See "Special Risk Factors--Foreign Securities" and
"Additional Investment Information" below. The Fund may engage in short sales
against-the-box, although it is the Fund's current intention that no more than
5% of its net assets will be at risk. When, as a result of market conditions
affecting "Blue Chip" companies, a defensive position is deemed advisable to
help preserve capital, the Fund may temporarily invest without limit in
high-grade debt securities, securities of the U.S. Government and its agencies,
and high quality money market instruments, including repurchase agreements, or
retain cash.
The Fund does not generally make investments for short-term profits, but it is
not restricted in policy with regard to portfolio turnover and will make changes
in its investment portfolio from time to time as business and economic
conditions and market prices may dictate and as its investment policy may
require.
There are risks inherent in the investment in any security, including shares of
the Fund. The investment manager attempts to reduce risk through diversification
of the Fund's portfolio and fundamental research; however, there is no guarantee
that such efforts will be successful. The investment manager believes that there
are
11
<PAGE> 16
opportunities for growth of capital and growth of dividends from investments in
"Blue Chip" companies over time. The Fund's shares are intended for long-term
investment.
GROWTH FUND. The Growth Fund seeks growth of capital through professional
management and diversification of investments in securities it believes to have
potential for capital appreciation. In seeking to obtain capital appreciation,
the Fund may trade in securities for the short-term. To this extent, the Fund
will be engaged in trading operations based on short-term market considerations
as distinct from long-term investment based upon fundamental valuation of
securities. However, the Fund will emphasize fundamental research in attempting
to identify under-valued situations that it hopes will appreciate over the
longer term. The Fund's investment policy may involve a somewhat greater risk
than is inherent in the ordinary investment security. Since any income received
from such securities will be entirely incidental, an investor should not
consider a purchase of Fund shares as equivalent to a complete investment
program.
In seeking to achieve its objective, it will be the Fund's policy to invest
primarily in securities that it believes offer the potential for increasing the
Fund's total asset value. While it is anticipated that most investments will be
in common stocks of companies with above-average growth prospects, investments
may also be made to a limited degree in other common stocks and in convertible
securities (including warrants), such as bonds and preferred stocks. The Fund
may also purchase options, engage in financial futures transactions, purchase
foreign securities, engage in related foreign currency transactions and lend its
portfolio securities. See "Special Risk Factors--Foreign Securities" and
"Additional Investment Information" below. There may also be times when a
significant portion of the Fund's assets may be held temporarily in cash or
defensive type securities, such as high-grade debt securities, securities of the
U.S. Government or its agencies and high quality money market instruments,
including repurchase agreements, depending upon the investment manager's
analysis of business and economic conditions and the outlook for security
prices.
Some of the factors the Fund's management will consider in making its
investments are patterns of increasing growth in sales and earnings, the
development of new or improved products or services, favorable outlooks for
growth in the industry, the probability of increased operating efficiencies,
emphasis on research and development, cyclical conditions, or other signs that a
company is expected to show greater than average capital appreciation and
earnings growth.
QUANTITATIVE FUND. The Quantitative Fund seeks growth of capital and reduction
of risk through professional management of a diversified portfolio of equity
securities. In seeking to achieve the Fund's objectives, the investment manager
will emphasize the use of fundamental research and advanced quantitative
technology. There is no assurance that the management strategy for the Fund will
be successful or that the Fund will achieve its objectives.
The investment manager uses a disciplined approach to stock selection and
fundamental research to help it identify quality "growth" companies, whose
stocks are selling at reasonable prices based upon their earnings potential and
whose earnings are growing faster than the market average. Those stocks that are
believed by the investment manager to have superior price appreciation potential
are considered as eligible for investment by the Fund. Thus, a list of eligible
investments is developed by the investment manager through a regimented review
process that applies the results of research generated by the investment
manager's analytical staff to well defined quantitative factors (e.g., return on
equity, earnings per share growth) and qualitative factors (e.g., industry
growth, market share). As described below, the Fund's portfolio is structured by
the investment manager from eligible investments by using advanced quantitative
technology with a view to reducing the degree by which the volatility of the
portfolio differs from the volatility of the market for growth stocks generally.
The investment manager believes that there are identifiable macro-economic
factors that are major contributors to the volatility of the stock market.
Examples of these factors include: economic growth, the direction of long-term
interest rates and the credit spread, which is the spread between Treasury and
corporate fixed income securities. In selecting among the growth stocks
identified as being eligible for inclusion in the Fund's portfolio,
12
<PAGE> 17
the investment manager applies advanced quantitative techniques to help
structure the portfolio so that normally it is neutrally weighted to these
macro-economic factors. These techniques involve the use of computer modeling to
help select a portfolio of securities believed to be attractive while
simultaneously maintaining a neutral macroeconomic posture. Neutral weighting
means that the exposure of the Fund's portfolio to the effect of these
macro-economic factors is, in the view of the investment manager, generally the
same as the exposure of the market for growth stocks as a whole. The purpose of
this process is to reduce the degree by which the volatility of the portfolio
differs from the volatility of the market for growth stocks and to increase the
importance of fundamental research and stock selection in the management
process.
Depending upon economic and market conditions, the investment manager may at
times under- or overweight the portfolio with respect to certain macro-economic
factors. In those circumstances, the return potential as well as the risk
profile of the Fund's portfolio may be increased relative to the market for
growth stocks generally. However, a primary goal of portfolio structuring for
the Fund is to reduce those risks and the investment manager would normally not
be expected to so weight the portfolio.
Under normal conditions, the Fund will invest at least 65%, and may invest up to
100%, of its total assets in equity securities. Equity securities include common
stocks, preferred stocks, securities convertible into or exchangeable for common
or preferred stocks, equity investments in partnerships, joint ventures and
other forms of non-corporate investment and warrants and rights exercisable for
equity securities. Normally, the Fund's primary investments will be common
stocks of large, well capitalized companies. The Fund currently does not intend
to invest more than 5% of its net assets in debt securities (including
convertible debt securities) during the current year (except for defensive
investments described below).
The Fund may also purchase and write options, engage in financial futures
transactions, purchase foreign securities and engage in related foreign currency
transactions and lend its portfolio securities. See "Special Risk
Factors--Foreign Securities" and "Additional Investment Information" below. From
time to time, all or a significant portion of the Fund's assets may be held
temporarily in cash or defensive type securities, such as high-grade debt
securities, securities of the U.S. Government or its agencies and high quality
money market instruments, including repurchase agreements.
The Fund does not generally make investments for short-term profits, but it is
not restricted in policy with regard to portfolio turnover and will make changes
in its investment portfolio from time to time as business and economic
conditions and market prices may dictate and as its investment policy may
require.
SMALL CAP FUND. The Small Cap Fund seeks maximum appreciation of investors'
capital. Current income will not be a significant factor. The Fund is designed
primarily for investors with substantial resources and the investment experience
to consider their shares as a long-term investment involving financial risk
commensurate with potential substantial gains.
The Fund seeks attractive areas for investment opportunity arising from such
factors as technological advances, new marketing methods, and changes in the
economy and population. Currently, the investment manager believes that such
investment opportunities may be found among the following: (a) companies engaged
in high technology fields such as electronics, medical technology, computer
software and specialty retailing; (b) companies having a significantly improved
earnings outlook as the result of a changed economic environment, acquisitions,
mergers, new management, changed corporate strategy or product innovation; (c)
companies supplying new or rapidly growing services to consumers and businesses
in such fields as automation, data processing, communications, marketing and
finance; and (d) companies having innovative concepts or ideas.
As a non-fundamental policy, at least 65% of the Fund's total assets normally
will be invested in the equity securities of smaller companies, i.e., those
having a market capitalization of $1 billion or less at the time of investment,
many of which would be in the early stages of their life cycle. The investment
manager currently believes that investment in such companies may offer greater
opportunities for growth of capital than larger,
13
<PAGE> 18
more established companies, but also involves certain special risks. Smaller
companies often have limited product lines, markets, or financial resources, and
they may be dependent upon one or a few key people for management. The
securities of such companies generally are subject to more abrupt or erratic
market movements and may be less liquid than securities of larger, more
established companies or the market averages in general.
The Fund's investment portfolio will normally consist primarily of common stocks
and securities convertible into or exchangeable for common stocks, including
warrants and rights. The Fund may also invest to a limited degree in preferred
stocks and debt securities when they are believed by the investment manager to
offer opportunities for capital growth. The Fund may also purchase options,
engage in financial futures transactions, purchase foreign securities, engage in
related foreign currency transactions and lend its portfolio securities. See
"Special Risk Factors--Foreign Securities" and "Additional Investment
Information" below. When a defensive position is deemed advisable, it may,
without limit, invest in high-grade senior securities and securities of the U.S.
Government and its instrumentalities or retain cash or cash equivalents,
including repurchase agreements.
In the selection of investments, long-term capital appreciation will take
precedence over short range market fluctuations. The Fund does not intend to
engage actively in trading for short-term profits, although it may occasionally
make investments for short-term capital appreciation when such action is
believed to be desirable and consistent with sound investment procedure.
Generally, the Fund will make long-term rather than short-term investments.
Nevertheless, it may dispose of such investments at any time it may be deemed
advisable because of a subsequent change in the circumstances of a particular
company or industry or in general market or economic conditions. For example, a
security initially purchased for long-term growth potential may be sold at any
time when it is determined that future growth may not be at an acceptable rate
or that there is a risk of substantial decline in market price. The rate of
portfolio turnover is not a limiting factor when changes in investments are
deemed appropriate. In addition, market conditions, cash requirements for
redemption and repurchase of Fund shares or other factors could affect the
portfolio turnover rate.
Since many of the securities in the Fund's portfolio may be considered
speculative in nature by traditional investment standards, substantially greater
than average market volatility and investment risk may be involved. There can be
no assurance that the Fund's shareholders will be protected from the risk of
loss inherent in security ownership.
TECHNOLOGY FUND. The Technology Fund seeks growth of capital. In seeking to
achieve its objective, the Fund will invest primarily in securities of companies
which the investment manager expects to benefit from technological advances and
improvements ("technology companies") with an emphasis on the securities of
companies that the investment manager believes have potential for long-term
capital growth. Receipt of income from such securities will be entirely
incidental. Technology companies include those whose processes, products or
services, in the judgment of the investment manager, are or may be expected to
be significantly benefited by scientific developments and the application of
technical advances in industry, manufacturing and commerce resulting from
improving technology in such fields as, for example, aerospace, chemistry,
electronics, genetic engineering, geology, information sciences (including
computers and computer software), metallurgy, medicine (including pharmacology,
biotechnology and biophysics) and oceanography. This investment policy permits
the investment manager to seek stocks having superior growth potential in
virtually any industry in which they may be found. The above objective and
policies may not be changed without shareholder approval.
The investment manager currently believes that investments in smaller emerging
growth technology companies may offer greater opportunities for growth of
capital than investments in larger, more established technology companies.
However, such investments also involve certain special risks. Smaller companies
often have limited product lines, markets, or financial resources; and they may
be dependent upon one or a few persons for management. The securities of such
companies generally are subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. Thus, investment by the Fund in smaller emerging growth technology
companies may expose investors to greater than average financial and market
risk. There is no assurance that the Fund's objective will be achieved.
14
<PAGE> 19
The Fund's investment portfolio will normally consist primarily of common stocks
and securities convertible into or exchangeable for common stocks, including
warrants and rights. The Fund may also invest to a limited degree in preferred
stocks and debt securities when they are believed to offer opportunities for
capital growth. The Fund may also purchase and write options, engage in
financial futures transactions, purchase foreign securities, engage in related
foreign currency transactions and lend its portfolio securities. See "Special
Risk Factors--Foreign Securities" and "Additional Investment Information" below.
When a defensive position is deemed advisable, the Fund may, without limit,
invest in high-grade senior securities and securities of the U.S. Government and
its instrumentalities or retain cash or cash equivalents, such as high quality
money market instruments, including repurchase agreements. The Fund's shares are
intended for long-term investment.
The Fund may invest up to 10% of its total assets in entities, such as limited
partnerships or trusts, that invest primarily in the securities of technology
companies. The investment manager believes that the flexibility to make limited
indirect investment in technology companies through entities such as limited
partnerships and trusts will provide the Fund with increased opportunities for
growth of capital. However, there is no assurance that such investments will be
profitable. Entities that invest in the securities of technology companies
normally have management fees and other costs that are in addition to those of
the Fund. Such fees and costs will reduce any returns directly attributable to
the underlying technology companies. The effect of these fees will be considered
by the investment manager in connection with any decision to invest in such
entities. Securities issued by these entities are normally privately placed,
restricted and illiquid.
The Fund purchases securities for long-term investment, but it is the investment
manager's belief that a sound investment program must be flexible in order to
meet changing conditions, and changes in holdings will be made whenever deemed
advisable.
TOTAL RETURN FUND. The Total Return Fund seeks the highest total return, a
combination of income and capital appreciation, consistent with reasonable risk.
The Fund will emphasize liberal current income in seeking its objective. The
Fund's investments will normally consist of domestic and foreign fixed income
and equity securities. Fixed income securities will include bonds and other debt
securities (such as U.S. and foreign Government securities and investment grade
and high yield corporate obligations) and preferred stocks, some of which may
have a call on common stocks through attached warrants or a conversion
privilege. The percentage of assets invested in specific categories of fixed
income and equity securities will vary from time to time depending upon the
judgment of management as to general market and economic conditions, trends in
yields and interest rates and changes in fiscal or monetary policies. The Fund
may also purchase options, engage in financial futures transactions, engage in
foreign currency transactions and lend its portfolio securities. See "Special
Risk Factors--Foreign Securities" and "Additional Investment Information" below.
As noted above, the Fund may invest in high yield fixed income securities which
are in the lower rating categories and those which are unrated. Thus, the Fund
could invest in some instruments considered by the rating services to have
predominantly speculative characteristics. Investments in lower rated or
non-rated securities, while generally providing greater income and opportunity
for gain than investments in higher rated securities, entail greater risk of
loss of income and principal. Currently, it is anticipated that the Fund would
invest less than 35% of its total assets in high yield bonds. For a discussion
of lower rated and non-rated securities and related risks, see "Special Risk
Factors--High Yield (High Risk) Bonds" below.
The Fund does not make investments for short-term profits, but it is not
restricted in policy with regard to portfolio turnover and will make changes in
its investment portfolio from time to time as business and economic conditions
and market prices may dictate and as its investment policy may require.
VALUE+GROWTH FUND. The Value+Growth Fund seeks growth of capital through
professional management of a portfolio of growth and value stocks. These stocks
include stocks of large established companies, as well as stocks of small
companies. A secondary objective is the reduction of risk over a full market
cycle compared to a portfolio of only growth stocks or only value stocks.
15
<PAGE> 20
Growth stocks are stocks of companies whose earnings per share are expected by
the investment manager to grow faster than the market average. Growth stocks
tend to trade at higher price to earnings (P/E) ratios than the general market,
but the investment manager believes that the potential of such stocks for above
average earnings more than justifies their price. Value stocks are considered
"bargain stocks" because they are perceived as undervalued, i.e., attractively
priced in relation to their earnings potential (low P/E ratios). Value stocks
typically have dividend yields higher than the average of the companies
represented in the Standard & Poor's 500 Stock Index.
The allocation between growth and value stocks in the Fund's portfolio will be
made by the investment manager's Quantitative Research Department with the help
of a proprietary model that evaluates macro-economic factors such as the
strength of the economy, interest rates and special factors concerning growth
and value stocks. Historically, the performance of growth and value stocks has
tended to be counter-cyclical, i.e., when one was in favor, the other was out of
favor relative to the equity market in general. Through the allocation process,
the investment manager will seek to weight the portfolio more heavily in the
type of stocks that are believed to present greater return opportunities at the
time. The neutral allocation between growth and value stocks would be 50%/50%.
Although allocations in favor of growth or value normally would not be expected
to exceed 60%, the allocation to growth or value may be up to 75% at any time.
Allocation decisions are normally based upon long-term considerations and
changes would normally be expected to be gradual. There is no assurance that the
allocation process will improve investment results.
KFS manages the growth portion of the Fund. In managing the growth portion of
the portfolio, KFS emphasizes stock selection and fundamental research in
seeking to enhance long-term performance potential. KFS considers a number of
quantitative and qualitative factors in considering whether to invest in a stock
including high return on equity and earnings growth rate, low level of debt,
strong balance sheet, good management and industry leadership. DVA manages the
value portion of the Fund. DVA seeks stocks it believes to be undervalued. The
principal factor considered is P/E ratios. Typically stocks of both types will
have a market capitalization in excess of $1 billion. In selecting among stocks
with low P/E ratios, DVA considers other factors such as financial strength,
book to market value, earnings and dividend growth rates, return on equity and
earnings estimates.
Although it is anticipated that the Fund will invest primarily in common stocks
of domestic companies, the Fund may also purchase convertible securities, such
as bonds and preferred stocks (including warrants and rights). The Fund may also
purchase options, engage in financial futures transactions, purchase foreign
securities, engage in related foreign currency transactions and lend its
portfolio securities. See "Special Risk Factors-- Foreign Securities" and
"Additional Investment Information" below. From time to time, a significant
portion of the Fund's assets may be held temporarily in cash or defensive type
securities, such as high-grade debt securities, securities of the U.S.
Government or its agencies and high quality money market instruments, including
repurchase agreements.
The Fund does not generally make investments for short-term profits, but it is
not restricted in policy with regard to portfolio turnover and will make changes
in its investment portfolio from time to time as business and economic
conditions and market prices may dictate and as its investment policy may
require.
SPECIAL RISK FACTORS--FOREIGN SECURITIES. The Funds invest primarily in
securities that are publicly traded in the United States; but, they have
discretion to invest a portion of their assets in foreign securities that are
traded principally in securities markets outside the United States. The Funds
currently limit investment in foreign securities not publicly traded in the
United States to 25% of their total assets. The Funds may also invest without
limit in U.S. Dollar denominated American Depository Receipts ("ADRs"), which
are bought and sold in the United States and are not subject to the preceding
limitation. In connection with their foreign securities investments, the Funds
may, to a limited extent, engage in foreign currency exchange, options and
futures transactions as a hedge and not for speculation. Additional information
concerning foreign securities and related techniques is contained under
"Additional Investment Information" below and "Investment Policies and
Techniques" in the Statement of Additional Information.
16
<PAGE> 21
Foreign securities involve currency risks. The U.S. Dollar value of a foreign
security tends to decrease when the value of the U.S. Dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the U.S. Dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be repatriated
based on the exchange rate at the time of disbursement or payment, and
restrictions on capital flows may be imposed. Losses and other expenses may be
incurred in converting between various currencies.
Foreign securities may be subject to foreign government taxes that reduce their
attractiveness. Other risks of investing in such securities include political or
economic instability in the country involved, the difficulty of predicting
international trade patterns and the possible imposition of exchange controls.
The prices of such securities may be more volatile than those of domestic
securities and the markets for such securities may be less liquid. In addition,
there may be less publicly available information about foreign issuers than
about domestic issuers. Many foreign issuers are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic issuers. There is generally less regulation of stock
exchanges, brokers, banks and listed companies abroad than in the United States.
With respect to certain foreign countries, there is a possibility of
expropriation or diplomatic developments that could affect investment in these
countries.
EMERGING MARKETS. While each Fund's investments in foreign securities will be
principally in developed countries, a Fund may make investments in developing or
"emerging" countries, which involve exposure to economic structures that are
generally less diverse and mature than in the United States, and to political
systems that may be less stable. A developing or emerging market country can be
considered to be a country that is in the initial stages of its
industrialization cycle. Currently, emerging markets generally include every
country in the world other than the United States, Canada, Japan, Australia, New
Zealand, Hong Kong, Singapore and most Western European countries. Currently,
investing in many emerging markets may not be desirable or feasible because of
the lack of adequate custody arrangements for a Fund's assets, overly burdensome
repatriation and similar restrictions, the lack of organized and liquid
securities markets, unacceptable political risks or other reasons. As
opportunities to invest in securities in emerging markets develop, a Fund may
expand and further broaden the group of emerging markets in which it invests. In
the past, markets of developing or emerging market countries have been more
volatile than the markets of developed countries; however, such markets often
have provided higher rates of return to investors. The investment manager
believes that these characteristics can be expected to continue in the future.
Many of the risks described above relating to foreign securities generally will
be greater for emerging markets than for developed countries. For instance,
economies in individual developing markets may differ favorably or unfavorably
from the U.S. economy in such respects as growth of domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many emerging markets have
experienced substantial rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain developing markets.
Economies in emerging markets generally are dependent heavily upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
affected adversely by economic conditions in the countries with which they
trade.
Also, the securities markets of developing countries are substantially smaller,
less developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure, regulatory and
accounting standards in many respects are less stringent than in the United
States and other developed markets. There also may be a lower level of
monitoring and regulation of developing markets and the activities of investors
in such markets, and enforcement of existing regulations has been extremely
limited.
17
<PAGE> 22
In addition, brokerage commissions, custodial services and other costs relating
to investment in foreign markets generally are more expensive than in the United
States; this is particularly true with respect to emerging markets. Such markets
have different settlement and clearance procedures. In certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Such settlement problems may cause emerging market securities to be illiquid.
The inability of a Fund to make intended securities purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security caused by settlement problems could
result either in losses to a Fund due to subsequent declines in value of the
portfolio security or, if a Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Certain emerging
markets may lack clearing facilities equivalent to those in developed countries.
Accordingly, settlements can pose additional risks in such markets and
ultimately can expose the Fund to the risk of losses resulting from a Fund's
inability to recover from a counterparty.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading securities may cease or may be
substantially curtailed and prices for a Fund's portfolio securities in such
markets may not be readily available. A Fund's portfolio securities in the
affected markets will be valued at fair value determined in good faith by or
under the direction of the Board of Trustees.
Investment in certain emerging market securities is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in certain emerging market securities and increase the costs
and expenses of a Fund. Emerging markets may require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments, the market could impose temporary
restrictions on foreign capital remittances.
FIXED INCOME. Since most foreign fixed income securities are not rated, a Fund
(principally the Total Return Fund) will invest in foreign fixed income
securities based on the investment manager's analysis without relying on
published ratings. Since such investments will be based upon the investment
manager's analysis rather than upon published ratings, achievement of a Fund's
goals may depend more upon the abilities of the investment manager than would
otherwise be the case.
The value of the foreign fixed income securities held by a Fund, and thus the
net asset value of the Fund's shares, generally will fluctuate with (a) changes
in the perceived creditworthiness of the issuers of those securities, (b)
movements in interest rates, and (c) changes in the relative values of the
currencies in which a Fund's investments in fixed income securities are
denominated with respect to the U.S. Dollar. The extent of the fluctuation will
depend on various factors, such as the average maturity of a Fund's investments
in foreign fixed income securities, and the extent to which a Fund hedges its
interest rate, credit and currency exchange rate risks. Many of the foreign
fixed income obligations in which a Fund will invest will have long maturities.
A longer average maturity generally is associated with a higher level of
volatility in the market value of such securities in response to changes in
market conditions.
Investments in sovereign debt, including Brady Bonds, involve special risks.
Brady Bonds are debt securities issued under a plan implemented to other debtor
nations to restructure their outstanding commercial bank indebtedness. Foreign
governmental issuers of debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or pay
interest when due. In the event of default, there may be limited or no legal
recourse in that, generally, remedies for defaults must be pursued in the courts
of the defaulting party. Political conditions, especially a sovereign entity's
willingness to meet the terms of its fixed income securities, are of
considerable significance. Also, there can be no assurance that the holders of
commercial bank loans to the same sovereign entity may not contest payments to
the holders of sovereign debt in the event of default under commercial bank loan
agreements. In addition, there is no bankruptcy proceeding with respect to
sovereign debt on which a sovereign has defaulted, and a Fund may be unable to
collect all or any part of its investment in a particular issue.
18
<PAGE> 23
Foreign investment in certain sovereign debt is restricted or controlled to
varying degrees, including requiring governmental approval for the repatriation
of income, capital or proceed of sales by foreign investors. These restrictions
or controls may at times limit or preclude foreign investment in certain
sovereign debt or increase the costs and expenses of a Fund. A significant
portion of the sovereign debt in which a Fund may invest is issued as part of
debt restructuring and such debt is to be considered speculative. There is a
history of defaults with respect to commercial bank loans by public and private
entities issuing Brady Bonds. All or a portion of the interest payments and/or
principal repayment with respect to Brady Bonds may be uncollateralized.
PRIVATIZED ENTERPRISES. Investments in foreign securities may include securities
issued by enterprises that have undergone or are currently undergoing
privatization. The governments of certain foreign countries have, to varying
degrees, embarked on privatization programs contemplating the sale of all or
part of their interests in state enterprises. A Fund's investments in the
securities of privatized enterprises include privately negotiated investments in
a government- or state-owned or controlled company or enterprise that has not
yet conducted an initial equity offering, investments in the initial offering of
equity securities of a state enterprise or former state enterprise and
investments in the securities of a state enterprise following its initial equity
offering.
In certain jurisdictions, the ability of foreign entities, such as a Fund, to
participate in privatizations may be limited by local law, or the price or terms
on which the Fund may be able to participate may be less advantageous than for
local investors. Moreover, there can be no assurance that governments that have
embarked on privatization programs will continue to divest their ownership of
state enterprises, that proposed privatization will be successful or that
governments will not re-nationalize enterprises that have been privatized.
In the case of the enterprises in which a Fund may invest, large blocks of the
stock of those enterprises may be held by a small group of stockholders, even
after the initial equity offerings by those enterprises. The sale of some
portion or all of those blocks could have an adverse effect on the price of the
stock of any such enterprise.
Prior to making an initial equity offering, most state enterprises or former
state enterprises go through an internal reorganization of management. Such
reorganizations are made in an attempt to better enable these enterprises to
compete in the private sector. However, certain reorganizations could result in
a management team that does not function as well as the enterprise's prior
management and may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a number of
years, with the government continuing to hold a controlling position in the
enterprise even after the initial equity offering for the enterprise.
Prior to privatization, most of the state enterprises in which a Fund may invest
enjoy the protection of and receive preferential treatment from the respective
sovereigns that own or control them. After making an initial equity offering
these enterprises may no longer have such protection or receive such
preferential treatment and may become subject to market competition from which
they were previously protected. Some of these enterprises may not be able to
effectively operate in a competitive market and may suffer losses or experience
bankruptcy due to such competition.
DEPOSITORY RECEIPTS. For many foreign securities, there are U.S. Dollar
denominated ADRs, which are bought and sold in the United States and are issued
by domestic banks. ADRs represent the right to receive securities of foreign
issuers deposited in the domestic bank or a correspondent bank. ADRs do not
eliminate all the risk inherent in investing in the securities of foreign
issuers, such as changes in foreign currency exchange rates. However, by
investing in ADRs rather than directly in foreign issuers' stock, the Fund
avoids currency risks during the settlement period. In general, there is a
large, liquid market in the United States for most ADRs. The Funds may also
invest in European Depository Receipts ("EDRs"), which are receipts evidencing
an arrangement with a European bank similar to that for ADRs and are designed
for use in the European securities markets. EDRs are not necessarily denominated
in the currency of the underlying security.
SPECIAL RISK FACTORS--HIGH YIELD (HIGH RISK) BONDS. As stated above, the Total
Return Fund may invest a portion of its assets in fixed income securities that
are in the lower rating categories (below the fourth category) of recognized
rating agencies or are non-rated. These lower rated and non-rated fixed income
securities are considered, on balance, as predominantly speculative with respect
to capacity to pay interest and repay
19
<PAGE> 24
principal in accordance with the terms of the obligation and generally will
involve more credit risk than securities in the higher rating categories. Lower
rated and non-rated securities, which are commonly referred to as "junk bonds,"
have widely varying characteristics and quality. The market values of such
securities tend to reflect individual corporate developments to a greater extent
than do those of higher rated securities, which react primarily to fluctuations
in the general level of interest rates. Such lower rated securities also are
more sensitive to economic conditions than are higher rated securities. Adverse
publicity and investor perceptions regarding lower rated bonds, whether or not
based upon fundamental analysis, may depress the prices for such securities.
These and other factors adversely affecting the market value of high yield
securities will adversely affect the Fund's net asset value. Although some risk
is inherent in all securities ownership, holders of fixed income securities have
a claim on the assets of the issuer prior to the holders of common stock.
Therefore, an investment in fixed income securities generally entails less risk
than an investment in common stock of the same issuer. The Fund may have
difficulty disposing of certain high yield securities because they may have a
thin trading market. The lack of a liquid secondary market may have an adverse
effect on market price and the Fund's ability to dispose of particular issues
and may also make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing these assets. Additional information
concerning high yield securities appears under "Investment Policies and
Techniques--Other Considerations--High Yield (High Risk) Bonds" and
"Appendix--Ratings of Fixed Income Investments" in the Statement of Additional
Information.
ADDITIONAL INVESTMENT INFORMATION. The portfolio turnover rates for the Funds
(other than the Quantitative and Value+Growth Funds) are listed under "Financial
Highlights." It is anticipated that, under normal circumstances, the portfolio
turnover rate for the Quantitative and Value+Growth Funds will not exceed 100%.
Certain Funds may experience high turnover rates (over 100%). Higher portfolio
turnover involves correspondingly greater brokerage commissions or other
transaction costs. Higher portfolio turnover may result in the realization of
greater net short-term capital gains. In order to continue to qualify as a
regulated investment company for federal income tax purposes, less than 30% of
the annual gross income of a Fund must be derived from the sale or other
disposition of securities and certain other investments held by a Fund for less
than three months. See "Dividends and Taxes" in the Statement of Additional
Information.
The Blue Chip Fund may not borrow money except as a temporary measure for
extraordinary or emergency purposes and not for leverage purposes, and then only
in an amount up to one-third of the value of its total assets in order to meet
redemption requests without immediately selling any portfolio securities or
other assets. If, for any reason, the current value of the Fund's total assets
falls below an amount equal to three times the amount of its indebtedness from
money borrowed, the Fund will, within three days (not including Sundays and
holidays), reduce its indebtedness to the extent necessary. The Fund will not
borrow for leverage purposes. The Fund may pledge up to 15% of its total assets
to secure any such borrowings. The Growth, Quantitative, Small Cap, Technology,
Total Return and Value+Growth Funds each may not borrow money except for
temporary or emergency purposes (but not for the purchase of investments) and
then only in an amount not to exceed 5% of its net assets. These Funds may not
pledge their assets in an amount exceeding the amount of the borrowings secured
by such pledge.
A Fund will not purchase illiquid securities, including repurchase agreements
maturing in more than seven days, if, as a result thereof, more than 15% of the
Fund's net assets, valued at the time of the transaction, would be invested in
such securities. If a Fund holds a material percentage of its assets in illiquid
securities, there may be a question concerning the ability of the Fund to make
payment within seven days of the date its shares are tendered for redemption.
SEC guidelines provide that the usual limit on aggregate holdings by an open-end
investment company of illiquid assets is 15% of its net assets. See "Investment
Policies and Techniques--Over-the-Counter Options" in the Statement of
Additional Information for a description of the extent to which over-the-counter
traded options are in effect considered as illiquid for purposes of the limit on
illiquid securities for the Funds. Each Fund may invest in securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933. This rule
permits otherwise restricted securities to be sold to certain institutional
buyers, such as the Portfolios. Such securities may be illiquid and subject to
the Fund's limitation on illiquid securities. A "Rule 144A" security may be
treated as liquid, however, if so determined pursuant to procedures adopted by
20
<PAGE> 25
the Board of Trustees. Investing in Rule 144A securities could have the effect
of increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become uninterested for a time in purchasing Rule 144A
securities.
Each Fund has adopted certain fundamental investment restrictions, which are
presented in the Statement of Additional Information and which, together with
the investment objective and policies of a Fund (other than policies that are
not fundamental), cannot be changed without approval by holders of a majority of
its outstanding voting shares. As defined in the Investment Company Act of 1940,
this means the lesser of the vote of (a) 67% of the shares of a Fund present at
a meeting where more than 50% of the outstanding shares are present in person or
by proxy; or (b) more than 50% of the outstanding shares of a Fund. Policies of
the Blue Chip, Quantitative and Value+Growth Funds that are neither designated
as fundamental nor incorporated into any of the fundamental investment
restrictions referred to above are not fundamental and may be changed by the
Board of Trustees of the Fund without shareholder approval.
OPTIONS AND FINANCIAL FUTURES TRANSACTIONS. The Funds may each deal in options
on securities, securities indexes and foreign currencies, which options may be
listed for trading on a national securities exchange or traded over-the-counter.
The Quantitative and Technology Funds may write (sell) covered call and secured
put options on up to 25% of net assets and each Fund may purchase put and call
options provided that no more than 5% of its net assets may be invested in
premiums on such options.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security or other asset at the exercise price
during or at the end of the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security or
other asset at the exercise price during or at the end of the option period. The
writer of a covered call owns securities or other assets that are acceptable for
escrow and the writer of a secured put invests an amount not less than the
exercise price in eligible securities or other assets to the extent that it is
obligated as a writer. If a call written by a Fund is exercised, the Fund
foregoes any possible profit from an increase in the market price of the
underlying security or other asset over the exercise price plus the premium
received. In writing puts, there is a risk that a Fund may be required to take
delivery of the underlying security or other asset at a disadvantageous price.
Over-the-counter traded options ("OTC options") differ from exchange traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer as a result of the insolvency of such dealer or otherwise, in which event
a Fund may experience material losses. However, in writing options (for the
Quantitative and Technology Funds) the premium is paid in advance by the dealer.
OTC options are available for a greater variety of securities or other assets,
and a wider range of expiration dates and exercise prices, than for exchange
traded options.
Each Fund may engage in financial futures transactions. Financial futures
contracts are commodity contracts that obligate the long or short holder to take
or make delivery of a specified quantity of a financial instrument, such as a
security, or the cash value of a securities index during a specified future
period at a specified price. A Fund will "cover" futures contracts sold by the
Fund and maintain in a segregated account certain liquid assets in connection
with futures contracts purchased by the Fund as described under "Investment
Policies and Techniques" in the Statement of Additional Information. In
connection with their foreign securities investments, the Funds may also engage
in foreign currency financial futures transactions. A Fund will not enter into
any futures contracts or options on futures contracts if the aggregate of the
contract value of the outstanding futures contracts of the Fund and futures
contracts subject to outstanding options written by the Fund would exceed 50% of
the total assets of the Fund.
The Funds may engage in financial futures transactions and may use index options
as an attempt to hedge against market risks. For example, when the near-term
market view is bearish but the portfolio composition is judged satisfactory for
the longer term, exposure to temporary declines in the market may be reduced by
entering into futures contracts to sell securities or the cash value of a
securities index. Conversely, where the near-term view is bullish, but the Fund
is believed to be well positioned for the longer term with a high cash
21
<PAGE> 26
position, the Fund can hedge against market increases by entering into futures
contracts to buy securities or the cash value of a securities index. In either
case, the use of futures contracts would tend to reduce portfolio turnover and
facilitate the Fund's pursuit of its investment objective.
Futures contracts entail risks. If the investment manager's judgment about the
general direction of interest rates, markets or exchange rates is wrong, the
overall performance may be poorer than if no such contracts had been entered
into. There may be an imperfect correlation between movements in prices of
futures contracts and portfolio assets being hedged. In addition, the market
prices of futures contracts may be affected by certain factors. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the assets and futures market could result. Price
distortions also could result if investors in futures contracts decide to make
or take delivery of underlying securities or other assets rather than engage in
closing transactions because of the resultant reduction in the liquidity of the
futures market. In addition, because, from the point of view of speculators,
margin requirements in the futures market are less onerous than margin
requirements in the cash market, increased participation by speculators in the
futures market could cause temporary price distortions. Due to the possibility
of price distortions in the futures market and because of the imperfect
correlation between movements in the prices of securities or other assets and
movements in the prices of futures contracts, a correct forecast of market
trends by the investment manager still may not result in a successful hedging
transaction. If any of these events should occur, a Fund could lose money on the
financial futures contracts and also on the value of its portfolio assets. The
costs incurred in connection with futures transactions could reduce a Fund's
return.
Index options involve risks similar to those risks relating to transactions in
financial futures contracts described above. Also, an option purchased by a Fund
may expire worthless, in which case a Fund would lose the premium paid therefor.
A Fund may engage in futures transactions only on commodities exchanges or
boards of trade. A Fund will not engage in transactions in index options,
financial futures contracts or related options for speculation, but only as an
attempt to hedge against changes in interest rates or market conditions
affecting the values of securities which the Fund owns or intends to purchase.
FOREIGN CURRENCY TRANSACTIONS. The Funds may invest a portion of their assets in
securities denominated in foreign currencies. The Funds may engage in foreign
currency transactions in connection with their investments in foreign securities
but will not speculate in foreign currency exchange.
The value of the foreign securities investments of a Fund measured in U.S.
Dollars (including ADRs) may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations, and the Fund
may incur costs in connection with conversions between various currencies. A
Fund will conduct its foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through forward contracts to purchase or sell foreign currencies. A
forward foreign currency exchange contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may want to establish the U.S. Dollar cost
or proceeds, as the case may be. By entering into a forward contract in U.S.
Dollars for the purchase or sale of the amount of foreign currency involved in
an underlying security transaction, the Fund is able to protect itself against a
possible loss between trade and settlement dates resulting from an adverse
change in the relationship between the U.S. Dollar and such foreign currency.
However, this tends to limit potential gains that might result from a positive
change in such currency relationships. A Fund may also hedge its foreign
currency exchange rate risk by engaging in currency financial futures and
options transactions.
22
<PAGE> 27
When the investment manager believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. Dollar, it may enter
into a forward contract to sell an amount of foreign currency approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. The forecasting of short-term currency market movement is extremely
difficult and whether such a short-term hedging strategy will be successful is
highly uncertain.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a contract. Accordingly, it may be
necessary for a Fund to purchase additional currency on the spot market (and
bear the expense of such purchase) if the market value of the security is less
than the amount of foreign currency the Fund is obligated to deliver when a
decision is made to sell the security and make delivery of the foreign currency
in settlement of a forward contract. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Fund is obligated to deliver.
A Fund will not speculate in foreign currency exchange. A Fund will not enter
into such forward contracts or maintain a net exposure in such contracts where
the Fund would be obligated to deliver an amount of foreign currency in excess
of the value of the Fund's securities or other assets denominated in that
currency. The Funds do not intend to enter into such forward contracts if they
would have more than 15% of the value of their total assets committed to forward
contracts for the purchase of a foreign currency. A Fund segregates cash or
liquid high-grade securities in an amount not less than the value of the Fund's
total assets committed to forward foreign currency exchange contracts entered
into for the purchase of a foreign currency. If the value of the securities
segregated declines, additional cash or securities are added so that the
segregated amount is not less than the amount of the Fund's commitments with
respect to such contracts. A Fund generally does not enter into a forward
contract with a term longer than one year.
DERIVATIVES. In addition to options, financial futures and foreign currency
transactions, consistent with its objective, each Fund may invest in a broad
array of financial instruments and securities in which the value of the
instrument or security is "derived" from the performance of an underlying asset
or a "benchmark" such as a security index, an interest rate or a currency
("derivatives"). Derivatives are most often used in an effort to manage
investment risk, to increase or decrease exposure to an asset class or benchmark
(as a hedge or to enhance return), or to create an investment position
indirectly (often because it is more efficient or less costly than direct
investment). There is no guarantee that these results can be achieved through
the use of derivatives. The types of derivatives used by each Fund and the
techniques employed by the investment manager may change over time as new
derivatives and strategies are developed or regulatory changes occur.
SPECIAL RISK FACTORS--OPTIONS, FUTURES, FOREIGN CURRENCIES AND OTHER
DERIVATIVES. The Statement of Additional Information contains further
information about the characteristics, risks and possible benefits of options,
futures, foreign currency and other derivative transactions. See "Investment
Policies and Techniques" in the Statement of Additional Information. The
principal risks are: (a) possible imperfect correlation between movements in the
prices of options, currencies, futures contracts or other derivatives and
movements in the prices of the securities or currencies hedged, used for cover
or that the derivative intended to replicate; (b) lack of assurance that a
liquid secondary market will exist for any particular option, futures, foreign
currency or other derivatives contract at any particular time; (c) the need for
additional skills and techniques beyond those required for normal portfolio
management; (d) losses on futures contracts resulting from market movements not
anticipated by the investment manager; (e) the possible need to defer closing
out certain options, futures or other derivatives contracts in order to continue
to qualify for beneficial tax treatment afforded "regulated investment
companies" under the Internal Revenue Code; and (f) the possible non-performance
of the counter-party to the derivative contract.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Funds may lend securities (principally to broker-dealers)
without limit where such loans are callable at any time and are continuously
secured by segregated collateral (cash or U.S. Government securities) equal to
no less than the
23
<PAGE> 28
market value, determined daily, of the securities loaned. The Funds will receive
amounts equal to dividends or interest on the securities loaned. The Funds will
also earn income for having made the loan. Any cash collateral pursuant to these
loans will be invested in short-term money market instruments. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, the loans would be made only to firms deemed by the investment manager
to be of good standing, and when the investment manager believes the potential
earnings justify the attendant risk. Management will limit such lending to not
more than one-third of the value of a Fund's total assets.
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Kemper Financial Services, Inc. (to be named Zurich Kemper
Investments, Inc. on or about March 1, 1996) ("KFS"), 120 South LaSalle Street,
Chicago, Illinois 60603, is the investment manager of each Fund and provides
each Fund with continuous professional investment supervision. Dreman Value
Advisors, Inc. ("DVA") is the sub-adviser for the Value+Growth Fund. See
"Value+Growth Fund" below for information about DVA. KFS is one of the largest
investment managers in the country and has been engaged in the management of
investment funds for more than forty-five years. KFS and its affiliates provide
investment advice and manage investment portfolios for the Kemper Funds, the
affiliated insurance companies, and other corporate, pension, profit-sharing and
individual accounts representing approximately $63 billion under management. KFS
acts as investment manager for 28 open-end and seven closed-end investment
companies, with 68 separate investment portfolios, representing more than 3
million shareholder accounts. KFS is an indirect subsidiary of Zurich Insurance
Company, an internationally recognized company providing services in life and
non-life insurance, reinsurance and asset management.
Responsibility for overall management of each Fund rests with its Board of
Trustees and officers. Professional investment supervision is provided by KFS.
The investment management agreements provide that KFS shall act as each Fund's
investment adviser, manage its investments and provide it with various services
and facilities. KFS will from time to time use the services of Zurich Investment
Management Limited, 1 Fleet Place, London EC4M 7RQ, a wholly-owned subsidiary of
KFS, with respect to foreign securities investments of the Funds including
analysis, research, execution and trading services.
Tracy McCormick Chester has been the portfolio manager of the Blue Chip Fund
since September, 1994 when she joined KFS. She is a vice president of the Blue
Chip Fund and senior vice president of KFS. Prior to coming to KFS, she was a
senior vice president and portfolio manager of an investment management company;
and prior thereto, she managed private accounts. She received a B.A. and an
M.B.A. in Finance from Michigan State University, East Lansing, Michigan.
Steven H. Reynolds and the KFS Equity Investment Committee have managed the
Growth Fund since September, 1995. Mr. Reynolds joined KFS in September, 1995 as
an executive vice president and chief investment officer -- equities.
Immediately prior to joining KFS, he was a senior vice president and equity
portfolio manager of an investment manager; and prior thereto, he was a senior
vice president, managing director and head of active equities at a national
bank. Mr. Reynolds received a bachelor's degree from Johns Hopkins University,
Baltimore, Maryland, and an M.B.A. in finance from the University of Virginia,
Charlottesville, Virginia.
Frank D. Korth and Richard A. Goers are the portfolio co-managers of the
Technology Fund. Mr. Korth has served as portfolio co-manager since January,
1994. Mr. Korth joined KFS in March, 1990 and is currently a senior vice
president of KFS and a vice president of the Fund. Prior to coming to KFS, Mr.
Korth was president and portfolio manager of a mutual fund investing primarily
in equity securities. He received a B.A. in Math from Mankato State University,
Mankato, Minnesota and an M.B.A. in Finance from Bernard Baruch College, New
York, New York. Mr. Korth is a Chartered Financial Analyst. Mr. Goers has served
as a portfolio co-manager since 1991. Mr. Goers joined KFS in January, 1971 and
is currently a senior vice president of KFS and a vice president of the Fund.
Mr. Goers received a B.S. in Industrial (Business) Administration from Iowa
State University, Ames, Iowa and an M.B.A. in Finance from Northwestern
University, Chicago, Illinois. Mr. Goers is a Chartered Financial Analyst.
24
<PAGE> 29
Gary A. Langbaum has been the portfolio manager of the Total Return Fund since
February, 1995 and the portfolio manager of the Small Cap Fund since January,
1996. He is assisted by investment personnel who specialize in certain areas.
Mr. Langbaum joined KFS in 1988 and is an executive vice president of KFS. He
received a B.A. in Finance from the University of Maryland, College Park,
Maryland.
Daniel J. Bukowski will become the portfolio manager of the Quantitative Fund
upon commencement of operations on February 15, 1996 and has been a portfolio
co-manager of the Value+Growth Fund since October, 1995. Mr. Bukowski joined KFS
in 1989 and is a senior vice president and Director of Quantitative Research of
KFS and a vice president of the Quantitative Fund and the Value+Growth Fund. Mr.
Bukowski received a B.A. in Statistics and an M.B.A. in Finance from the
University of Chicago, Chicago, Illinois. Mr. Reynolds is a portfolio co-manager
of the Value+Growth Fund primarily responsible for management of the growth
portion since the Fund's inception in 1995. David N. Dreman is also a portfolio
co-manager of the Value+Growth Fund. See "Value+Growth Fund" below for more
information on management of that Fund and Mr. Dreman.
KFS has an Equity Investment Committee that determines overall investment
strategy for equity portfolios managed by KFS. The Equity Investment Committee
is currently comprised of the following members: Daniel J. Bukowski, Tracy
McCormick Chester, James H. Coxon, Richard A. Goers, Frank D. Korth, Gary A.
Langbaum, Maura J. Murrhy, James R. Neel, Thomas M. Regner, Steven H. Reynolds
and Stephen B. Timbers. The portfolio managers work together as a team with the
Equity Investment Committee and various equity analysts and equity traders to
manage each Fund's investments. Equity analysts--through research, analysis and
evaluation--work to develop investment ideas appropriate for the Fund. These
ideas are studied and debated by the Equity Investment Committee and, if
approved, are added to a list of eligible investments. The portfolio managers
use the list of eligible investments to help them structure the Fund's portfolio
in a manner consistent with the Fund's objective. The KFS International Equity
Investments area, directed by Dennis H. Ferro, and the KFS International Fixed
Income Investments area, directed by Gordon K. Johns, provide research and
analysis regarding foreign investments to the portfolio managers. After
investment decisions are made, equity traders execute the portfolio manager's
instructions through various broker-dealer firms.
The Funds (other than the Small Cap Fund) pay KFS investment management fees,
payable monthly, at the annual rates shown below. Before May 31, 1994, each Fund
(other than the Small Cap Fund, Quantitative Fund and Value+Growth Fund) paid
KFS an investment management fee under different schedules that are described in
the Statement of Additional Information. The Small Cap Fund pays a base annual
management fee, payable monthly, at the rate of .65% of the average daily net
assets of the Fund. This base fee is subject to upward or downward adjustment
between .35% and .95% on the basis of the investment performance of the Class A
shares of the Fund compared with the performance of the Standard & Poor's 500
Stock Index as described in the Statement of Additional Information.
<TABLE>
<CAPTION>
BLUE CHIP,
GROWTH,
QUANTITATIVE,
TECHNOLOGY
AND TOTAL VALUE+
AVERAGE DAILY NET ASSETS RETURN FUNDS GROWTH FUND
- ------------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
$0 - $250 million........................................................ .58% .72%
$250 million - $1 billion................................................ .55 .69
$1 billion - $2.5 billion................................................ .53 .66
$2.5 billion - $5 billion................................................ .51 .64
$5 billion - $7.5 billion................................................ .48 .60
$7.5 billion - $10 billion............................................... .46 .58
$10 billion - $12.5 billion.............................................. .44 .56
Over $12.5 billion....................................................... .42 .54
</TABLE>
25
<PAGE> 30
KFS has agreed to temporarily reduce its investment management fee and reimburse
or pay operating expenses of the Value+Growth Fund to the extent necessary to
limit the Fund's operating expenses to the levels described under "Summary of
Expenses." For this purpose "operating expenses" do not include taxes, interest,
extraordinary expenses, brokerage commissions or transaction costs. KFS can
terminate this arrangement at any time upon notice to the Fund.
VALUE+GROWTH FUND. As mentioned above, DVA is the sub-adviser for the
Value+Growth Fund. Under the terms of the Sub-Advisory Agreement, DVA will
manage the value portion of the Fund and will provide such other investment
advice, research and assistance as KFS may, from time to time, reasonably
request. DVA, which was formed in October, 1994, has served as investment
manager for Kemper-Dreman Fund, Inc. ("KDF") and certain institutional accounts
since August, 1995 when it acquired substantially all the assets of Dreman Value
Management, L.P., the former adviser for KDF. DVA is a wholly-owned subsidiary
of KFS and is located at 10 Exchange Place, Suite 2050, Jersey City, New Jersey
07302. KFS pays DVA for its services a sub-advisory fee, payable monthly at the
annual rate of .25% of average daily net assets of the Fund. David N. Dreman has
been a portfolio co-manager of the Fund and primarily responsible for management
of the value portion of the Value+Growth Fund since its inception in 1995. Mr.
Dreman is the Chairman and a Director of DVA and a vice president of the Fund.
Mr. Dreman is a pioneer of the philosophy of contrarian investing (buying what
is out of favor) and a leading proponent of the low P/E investment style. He is
a columnist for Forbes and the author of several books on the value style of
investing. Mr. Dreman received a Bachelor of Finance in Commerce from the
University of Manitoba, Winnipeg, Manitoba, Canada.
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement") with each Fund, Kemper Distributors, Inc.
("KDI"), 120 South LaSalle Street, Chicago, Illinois, 60603, an affiliate of
KFS, is the principal underwriter and distributor of each Fund's shares and acts
as agent of each Fund in the sale of its shares. KDI bears all its expenses of
providing services pursuant to the distribution agreement, including the payment
of any commissions. KDI provides for the preparation of advertising or sales
literature and bears the cost of printing and mailing prospectuses to persons
other than shareholders. KDI bears the cost of qualifying and maintaining the
qualification of Fund shares for sale under the securities laws of the various
states and each Fund bears the expense of registering its shares with the
Securities and Exchange Commission. KDI may enter into related selling group
agreements with various broker-dealers, including affiliates of KDI, that
provide distribution services to investors. KDI also may provide some of the
distribution services. Before February 1, 1995, KFS was the principal
underwriter and distributor.
Class A Shares. KDI receives no compensation from the Funds as principal
underwriter for Class A shares and pays all expenses of distribution of each
Fund's Class A shares under the distribution agreements not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI retains the sales charge upon the purchase of shares and pays or
allows concessions or discounts to firms for the sale of each Fund's shares.
Class B Shares. For its services under the distribution agreement, KDI receives
a fee from each Fund, payable monthly, at the annual rate of .75% of average
daily net assets of each Fund attributable to Class B shares. This fee is
accrued daily as an expense of Class B shares. KDI also receives any contingent
deferred sales charges. See "Redemption or Repurchase of Shares--Contingent
Deferred Sales Charge--Class B Shares." KDI currently compensates firms for
sales of Class B shares at a commission rate of 3.75%.
Class C Shares. For its services under the distribution agreement, KDI receives
a fee from each Fund, payable monthly, at the annual rate of .75% of average
daily net assets of each Fund attributable to Class C shares. This fee is
accrued daily as an expense of Class C shares. KDI currently pays firms for
sales of Class C shares a distribution fee, payable quarterly, at an annual rate
of .75% of net assets attributable to Class C shares maintained and serviced by
the firm. A firm becomes eligible for the distribution fee based upon assets in
accounts in the month of purchase and the fee continues until terminated by KDI
or a Fund.
Rule 12b-1 Plan. Since each distribution agreement provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by KDI to
pay for distribution services for those classes, that
26
<PAGE> 31
agreement is approved and reviewed separately for the Class B shares and the
Class C shares in accordance with Rule 12b-1 under the Investment Company Act of
1940, which regulates the manner in which an investment company may, directly or
indirectly, bear the expenses of distributing its shares. The table below shows
amounts paid in connection with each Fund's Rule 12b-1 Plan during its 1995
fiscal year (except the Quantitative Fund which will commence operations
February 15, 1996).
<TABLE>
<CAPTION>
DISTRIBUTION FEES
DISTRIBUTION EXPENSES PAID CONTINGENT DEFERRED
INCURRED BY BY FUND TO SALES CHARGES PAID
UNDERWRITER UNDERWRITER TO UNDERWRITER
--------------------- -------------------- -------------------
FUND CLASS B CLASS C CLASS B CLASS C CLASS B
- -------------------------------------- ---------- ------- --------- ------- -------------------
<S> <C> <C> <C> <C> <C>
Blue Chip............................. $ 332,000 32,000 59,000 5,000 29,000
Growth................................ $6,065,000 128,000 5,249,000 23,000 2,368,000
Small Cap............................. $2,408,000 74,000 1,341,000 13,000 518,000
Technology............................ $1,069,006 40,000 168,000 5,000 56,000
Total Return.......................... $7,592,000 136,000 8,303,000 26,000 3,318,000
Value+Growth*......................... $ 90,000 3,000 1,000 0 0
</TABLE>
- ---------------
* For the period October 16, 1995 to November 30, 1995.
If a Rule 12b-1 Plan is terminated in accordance with its terms, the obligation
of a Fund to make payments to KDI pursuant to the Plan will cease and the Fund
will not be required to make any payments past the termination date. Thus, there
is no legal obligation for the Fund to pay any expenses incurred by KDI in
excess of its fees under a Plan, if for any reason the Plan is terminated in
accordance with its terms. Future fees under a Plan may or may not be sufficient
to reimburse KDI (or KFS as predecessor to KDI) for its expenses incurred.
ADMINISTRATIVE SERVICES. KDI also provides information and administrative
services for shareholders of each Fund pursuant to administrative services
agreements ("administrative agreements"). KDI may enter into related
arrangements with various financial services firms, such as broker-dealer firms
or banks ("firms"), that provide services and facilities for their customers or
clients who are shareholders of the Funds. Such administrative services and
assistance may include, but are not limited to, establishing and maintaining
shareholder accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding each Fund and its special
features, and such other services as may be agreed upon from time to time and
permitted by applicable statute, rule or regulation. KDI bears all its expenses
of providing services pursuant to the administrative agreement, including the
payment of any service fees. For services under the administrative agreements,
each Fund pays KDI a fee, payable monthly, at the annual rate of up to .25% of
average daily net assets of each class of such Fund. KDI then pays each firm a
service fee at an annual rate of up to .25% of net assets of each class of those
accounts that it maintains and services for each Fund. Firms to which service
fees may be paid include broker-dealers affiliated with KDI. A firm becomes
eligible for the service fee based on assets in the accounts in the month
following the month of purchase (in the month of purchase for Class C Shares)
and the fee continues until terminated by KDI or a Fund. The fees are calculated
monthly and paid quarterly. KDI may advance to financial services firms the
first year service fee related to Class B shares sold by such firms at a rate of
up to .25% of the purchase price of such shares. As compensation therefor, KDI
may retain the administrative services fee paid by a Fund with respect to such
shares for the first year after purchase. Financial services firms will become
eligible for future service fees with respect to such shares commencing in the
thirteenth month following the month of purchase.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreements not paid to firms to compensate
itself for administrative functions performed for each Fund. Currently, the
administrative services fee payable to KDI is based only upon Fund assets in
accounts for which there is a firm listed on a Fund's records and it is intended
that KDI will pay all the administrative services fee that it receives from each
Fund to firms in the form of service fees. The effective administrative services
fee rate
27
<PAGE> 32
to be charged against all assets of each Fund while this procedure is in effect
will depend upon the proportion of Fund assets that is in accounts for which
there is a firm of record.
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary
Trust Company ("IFTC"), 127 West 10th Street, Kansas City, Missouri 64105, as
custodian, and State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as sub-custodian, have custody of all securities and cash
of each Fund maintained in the United States. The Chase Manhattan Bank, N.A.,
Chase MetroTech Center, Brooklyn, New York 11245, as custodian, has custody of
all securities and cash of each Fund held outside the United States. IFTC also
is the Funds' transfer agent and dividend-paying agent. Pursuant to a services
agreement with IFTC, Kemper Service Company, an affiliate of KFS, serves as
"Shareholder Service Agent" of the Funds and, as such, performs all of IFTC's
duties as transfer agent and dividend-paying agent. For a description of
transfer agent and shareholder service agent fees, see "Investment Manager and
Underwriter" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS. KFS places all orders for purchases and sales of a
Fund's securities (except that DVA places all orders for the value portion of
the Value+Growth Fund). Subject to seeking best execution of orders, KFS or DVA
may consider sales of shares of a Fund and other funds managed by KFS and DVA as
a factor in selecting broker-dealers. See "Portfolio Transactions" in the
Statement of Additional Information.
DIVIDENDS AND TAXES
DIVIDENDS. Each Fund normally distributes dividends of net investment income as
follows: annually for the Growth, Quantitative, Small Cap, Technology and
Value+Growth Funds; semi-annually for the Blue Chip Fund; and quarterly for the
Total Return Fund. Each Fund distributes any net realized short-term and
long-term capital gains at least annually. The quarterly distribution to
shareholders of the Total Return Fund may include short-term capital gains.
Dividends paid by a Fund as to each class of its shares will be calculated in
the same manner, at the same time and on the same day. The level of income
dividends per share (as a percentage of net asset value) will be lower for Class
B and Class C shares than for Class A shares primarily as a result of the
distribution services fee applicable to Class B and Class C shares.
Distributions of capital gains, if any, will be paid in the same amount for each
class.
Income and capital gain dividends, if any, of a Fund will be credited to
shareholder accounts in full and fractional shares of the same class of that
Fund at net asset value on the reinvestment date, except that, upon written
request to the Shareholder Service Agent, a shareholder may select one of the
following options:
(1) To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset
value; or
(2) To receive income and capital gain dividends in cash.
Any dividends of a Fund that are reinvested normally will be reinvested in
shares of the same class of that same Fund. However, upon written request to the
Shareholder Service Agent, a shareholder may elect to have dividends of a Fund
invested in shares of the same class of another Kemper Fund at the net asset
value of such class of such other fund. See "Special Features--Class A
Shares--Combined Purchases" for a list of such other Kemper Funds. To use this
privilege of investing dividends of a Fund in shares of another Kemper Fund,
shareholders must maintain a minimum account value of $1,000 in the Fund
distributing the dividends and a minimum account value of $1,000 in the Kemper
Fund in which dividends are reinvested. The Funds will reinvest dividend checks
(and future dividends) in shares of that same Fund and class if checks are
returned as undeliverable.
TAXES. Each Fund intends to continue to qualify (or for the Quantitative Fund,
that intends to qualify) as a regulated investment company under Subchapter M of
the Internal Revenue Code (the "Code") and, if so qualified, will not be liable
for federal income taxes to the extent its earnings are distributed. Dividends
derived
28
<PAGE> 33
from net investment income and net short-term capital gains are taxable to
shareholders as ordinary income and long-term capital gain dividends are taxable
to shareholders as long-term capital gain regardless of how long the shares have
been held and whether received in cash or shares. Long-term capital gain
dividends received by individual shareholders are taxed at a maximum rate of
28%. Dividends declared in October, November or December to shareholders of
record as of a date in one of those months and paid during the following January
are treated as paid on December 31 of the calendar year declared. A portion of
the dividends paid by the Funds may qualify for the dividends received deduction
available to corporate shareholders.
A dividend received shortly after the purchase of shares reduces the net asset
value of the shares by the amount of the dividend and, although in effect a
return of capital, will be taxable to the shareholder. If the net asset value of
shares were reduced below the shareholder's cost by dividends representing gains
realized on sales of securities, such dividends would be a return of investment
though taxable as stated above.
Each Fund is required by law to withhold 31% of taxable dividends and redemption
proceeds paid to certain shareholders who do not furnish a correct taxpayer
identification number (in the case of individuals, a social security number) and
in certain other circumstances. Trustees of qualified retirement plans and
403(b)(7) accounts are required by law to withhold 20% of the taxable portion of
any distribution that is eligible to be "rolled over". The 20% withholding
requirement does not apply to distributions from Individual Retirement Accounts
(IRAs) or any part of a distribution that is transferred directly to another
qualified retirement plan, 403(b)(7) account, or IRA. Shareholders should
consult with their tax advisers regarding the 20% withholding requirement.
After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction except that statements will be sent
quarterly for transactions involving reinvestment of dividends and periodic
investment and redemption programs. Information for income tax purposes,
including, when appropriate, information regarding any foreign taxes and
credits, will be provided after the end of the calendar year. Shareholders are
encouraged to retain copies of their account confirmation statements or year-end
statements for tax reporting purposes. However, those who have incomplete
records may obtain historical account transaction information at a reasonable
fee.
NET ASSET VALUE
The net asset value per share of a Fund is determined separately for each class
by dividing the value of the Fund's net assets attributable to that class by the
number of shares of that class outstanding. The per share net asset value of the
Class B and Class C shares of a Fund will generally be lower than that of the
Class A shares of the Fund because of the higher expenses borne by Class B and
Class C shares. Portfolio securities that are primarily 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 price available, at the last current
bid quotation. Portfolio securities that are primarily traded on foreign
securities exchanges are generally valued at the preceding closing values of
such securities on their respective exchanges where primarily traded. A security
that is listed or traded on more than one exchange is valued at the quotation on
the exchange determined to be the primary market for such security by the Board
of Trustees or its delegates. 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
priced is used. Exchange traded fixed income options are valued at the last sale
price unless there is no sale price, in which event current prices provided by
market makers are used. Over-the-counter traded options are valued based upon
current prices provided by market makers. 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. Other securities and assets are valued at
fair value as determined in good faith by the Board of Trustees. Because of the
need to obtain prices as of the close of trading on various exchanges throughout
the world, the calculation of net asset value of a Fund
29
<PAGE> 34
investing in foreign securities does not necessarily take place
contemporaneously with the determination of the prices of a Fund's foreign
securities, which may be made prior to the determination of net asset value. For
purposes of determining the Fund's net asset value of a Fund investing in
foreign securities, all assets and liabilities initially expressed in foreign
currency values will be converted into U.S. Dollar values at the mean between
the bid and offered quotations of such currencies against U.S. Dollars as last
quoted by a recognized dealer. If an event were to occur, after the value of a
security was so established but before the net asset value per share was
determined, which was likely to materially change the net asset value, then that
security would be valued using fair value considerations by the Board of
Trustees or its delegates. On each day the New York Stock Exchange (the
"Exchange") is open for trading, the net asset value is determined as of the
earlier of 3:00 p.m. Chicago time or the close of the Exchange.
PURCHASE OF SHARES
ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of each Fund 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 or a contingent deferred sales charge
but are subject to higher ongoing expenses than Class A shares and do not
convert into another class. When placing purchase orders, investors must specify
whether the order is for Class A, Class B or Class C shares.
The primary distinctions among the classes of each Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. See,
also, "Summary of Expenses." Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class that
best suits their circumstances and objectives.
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
--------------------------------- ------------------------ ---------------------------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of None Initial sales charge waived or
5.75% of the public offering reduced for certain purchases
price
Class B Maximum contingent deferred sales 0.75% Shares convert to Class A shares
charge of 4% of redemption six years after issuance
proceeds; declines to zero after
six years
Class C None 0.75% No conversion feature
</TABLE>
The minimum initial investment for each Fund is $1,000 and the minimum
subsequent investment is $100. The minimum initial investment for an Individual
Retirement Account is $250 and the minimum subsequent investment is $50. Under
an automatic investment plan, such as Bank Direct Deposit, Payroll Direct
Deposit or Government Direct Deposit, the minimum initial and subsequent
investment is $50. These minimum amounts may be changed at any time in
management's discretion.
Share certificates will not be issued unless requested in writing. It is
recommended that investors not request share certificates unless needed for a
specific purpose. You cannot redeem shares by telephone or wire transfer or use
the telephone exchange privilege if share certificates have been issued. A lost
or destroyed certificate is difficult to replace and can be expensive to the
shareholder (a bond worth 2% or more of the certificate value is normally
required).
30
<PAGE> 35
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
SALES CHARGE
----------------------------------------
ALLOWED
TO
DEALERS
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF OF NET OF
OFFERING ASSET OFFERING
AMOUNT OF PURCHASE PRICE VALUE* PRICE
------ ------ ------
<S> <C> <C> <C>
Less than $50,000..................................... 5.75 % 6.10 % 5.20 %
$50,000 but less than $100,000........................ 4.50 4.71 4.00
$100,000 but less than $250,000....................... 3.50 3.63 3.00
$250,000 but less than $500,000....................... 2.60 2.67 2.25
$500,000 but less than $1 million..................... 2.00 2.04 1.75
$1 million and over................................... .00 ** .00 ** ***
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge as
discussed below.
*** Commission is payable by KDI as discussed below.
Each Fund receives the entire net asset value of all its Class A shares sold.
KDI, the Funds' principal underwriter, retains the sales charge on sales of
Class A shares from which it allows discounts from the applicable public
offering price to investment dealers, which discounts are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table. Upon notice to all dealers with whom it
has sales agreements, KDI may reallow up to the full applicable sales charge, as
shown in the above table, during periods and for transactions specified in such
notice and such reallowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares of a Fund may be purchased at net asset value to the extent that
the amount invested represents the net proceeds from a redemption of shares of a
mutual fund for which KFS or DVA does not serve as investment manager
("non-Kemper fund") provided that: (a) the investor has previously paid either
an initial sales charge in connection with the purchase of the non-Kemper fund
shares redeemed or a contingent deferred sales charge in connection with the
redemption of the non-Kemper fund shares, and (b) the purchase of Fund shares is
made within 90 days after the date of such redemption. To make such a purchase
at net asset value, the investor or the investor's dealer must, at the time of
purchase, submit a request that the purchase be processed at net asset value
pursuant to this privilege. Effective March 1, 1996, KDI may in its discretion
compensate firms for sales of Class A shares under this privilege at a
commission rate of .50% of the amount of Class A shares purchased.
Class A shares of a Fund may be purchased at net asset value by: (a) any
purchaser provided that the amount invested in such Fund or other Kemper Mutual
Funds listed under "Special Features--Class A Shares--Combined Purchases" totals
at least $1,000,000 including purchases of Class A shares pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features"; or (b) a participant-directed qualified
retirement plan described in Code Section 401(a) or a participant-directed
non-qualified deferred compensation plan described in Code Section 457 provided
in either case that such plan has not less than 200 eligible employees (the
"Large Order NAV Purchase Privilege"). Redemption within one year of shares
purchased under the Large Order NAV Purchase Privilege may be subject to a
contingent deferred sales charge. See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charge--Large Order NAV Purchase Privilege."
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of a Fund to
employer sponsored employee benefit plans using the subaccount recordkeeping
system made available through the Shareholder Service Agent at net asset value
in accordance with the
31
<PAGE> 36
Large Order NAV Purchase Privilege up to the following amounts: 1.00% of the net
asset value of shares sold on amounts up to $5 million in any calendar year,
.50% on the next $5 million and .25% on amounts over $10 million in such
calendar year. KDI may in its discretion compensate investment dealers or other
financial services firms in connection with the sale of Class A shares of each
Fund to other purchasers at net asset value in accordance with the Large Order
NAV Purchase Privilege up to the following amounts: 1.00% of the net asset value
of shares sold on amounts up to $3 million, .50% on the next $2 million and .25%
on amounts over $5 million. For purposes of determining the appropriate
commission percentage to be applied to a particular sale under the foregoing
schedules, KDI will consider the cumulative amount invested by the purchaser in
a Fund and other Kemper Mutual Funds listed under "Special Features--Class A
Shares--Combined Purchases," including purchases pursuant to the "Combined
Purchases," "Letter of Intent" and "Cumulative Discount" features referred to
above. The privilege of purchasing Class A shares of a Fund at net asset value
under the Large Order NAV Purchase Privilege is not available if another net
asset value purchase privilege is also applicable.
Effective on February 1, 1996, Class A shares of a Fund or any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be purchased at net asset value in any amount by members of the plaintiff
class in the proceeding known as Howard and Audrey Tabankin, et al. v. Kemper
Short-Term Global Income Fund, et al., Case No. 93 C 5231 (N.D. IL). This
privilege is generally non-transferrable and continues for the lifetime of
individual class members and for a ten year period for non-individual class
members. To make a purchase at net asset value under this privilege, the
investor must, at the time of purchase, submit a written request that the
purchase be processed at net asset value pursuant to this privilege specifically
identifying the purchaser as a member of the "Tabankin Class." Shares purchased
under this privilege will be maintained in a separate account that includes only
shares purchased under this privilege. For more details concerning this
privilege, class members should refer to the Notice of (1) Proposed Settlement
with Defendants; and (2) Hearing to Determine Fairness of Proposed Settlement,
dated August 31, 1995, issued in connection with the aforementioned court
proceeding. For sales of Fund shares at net asset value pursuant to this
privilege, KDI may in its discretion pay investment dealers and other financial
services firms a concession, payable quarterly, at an annual rate of up to .25%
of net assets attributable to such shares maintained and serviced by the firm. A
firm becomes eligible for the concession based upon assets in accounts
attributable to shares purchased under this privilege in the month after the
month of purchase and the concession continues until terminated by KDI. The
privilege of purchasing Class A shares of a Fund at net asset value under this
privilege is not available if another net asset value purchase privilege also
applies.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, directors, employees (including retirees) and sales representatives of
a Fund, its investment manager, its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and employees of broker-dealers having selling group agreements
with KDI and officers, directors and employees of service agents of the Funds,
for themselves or their spouses or dependent children; (c) shareholders who
owned shares of Kemper-Dreman Fund, Inc. ("KDF") on September 8, 1995, and have
continuously owned shares of KDF (or a Kemper Fund acquired by exchange of KDF
shares) since that date, for themselves or members of their families; and (d)
any trust, pension, profit-sharing or other benefit plan for only such persons.
Class A shares may be sold at net asset value in any amount to selected
employees (including their spouses and dependent children) of banks and other
financial services firms that provide administrative services related to order
placement and payment to facilitate transactions in shares of the Funds for
their clients pursuant to an agreement with KDI or one of its affiliates. Only
those employees of such banks and other firms who as part of their usual duties
provide services related to transactions in Fund shares may purchase Fund Class
A shares at net asset value hereunder. Class A shares may be sold at net asset
value in any amount to unit investment trusts sponsored by Everen Securities,
Inc. In addition, unitholders of unit investment trusts sponsored by Everen
Securities, Inc. or its predecessors may purchase a Fund's Class A shares at net
asset value through reinvestment programs described in the prospectuses of such
trusts which have such programs. Class A shares of a Fund may be sold at net
asset value through certain investment advisers registered under the Investment
Advisers Act of 1940 and other financial services firms that adhere to certain
standards established by KDI, including a
32
<PAGE> 37
requirement that such shares be sold for the benefit of their clients
participating in a "wrap account" or similar program under which such clients
pay a fee to the investment adviser or other firm. Such shares are sold for
investment purposes and on the condition that they will not be resold except
through redemption or repurchase by the Funds. The Funds may also issue Class A
shares at net asset value in connection with the acquisition of the assets of or
merger or consolidation with another investment company, or to shareholders in
connection with the investment or reinvestment of income and capital gain
dividends.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares--Contingent Deferred
Sales Charge--Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by each Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of a Fund will automatically convert to Class A shares of the
same Fund six years after issuance on the basis of the relative net asset value
per share. Class B shareholders of the Funds who originally acquired their
shares as Initial Shares of Kemper Portfolios, formerly known as Kemper
Investment Portfolios ("KIP"), hold them subject to the same conversion period
schedule as that of their KIP Portfolio. Class B shares representing Initial
Shares of a former KIP Portfolio will automatically convert to Class A shares of
the applicable Fund six years after issuance of the Initial Shares for shares
issued on or after February 1, 1991 and seven years after issuance of the
Initial Shares for shares issued before February 1, 1991. The purpose of the
conversion feature is to relieve holders of Class B shares from the distribution
services fee when they have been outstanding long enough for KDI to have been
compensated for distribution related expenses. For purposes of conversion to
Class A shares, shares purchased through the reinvestment of dividends and other
distributions paid with respect to Class B shares in a shareholder's Fund
account will be converted to Class A shares on a pro rata basis.
PURCHASE OF CLASS C SHARES. The public offering price of the Class C shares of a
Fund is the next determined net asset value. No initial or contingent deferred
sales charge is imposed. Since Class C shares are sold without an initial sales
charge, the full amount of the investor's purchase payment will be invested in
Class C shares for his or her account. KDI pays firms for sales of Class C
shares a distribution fee, payable quarterly, at an annual rate of .75% of net
assets attributable to Class C shares maintained and serviced by the firm. KDI
is compensated by each Fund for services as distributor and principal
underwriter for Class C shares. See "Investment Manager and Underwriter."
WHICH ARRANGEMENT IS BETTER FOR YOU? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
making investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge and who plan to
hold their investment for more than six
33
<PAGE> 38
years might consider Class B shares. Investors who prefer not to pay an initial
sales charge but who plan to redeem their shares within six years might consider
Class C shares. Orders for Class B shares or Class C shares for $500,000 or more
will be declined. Orders for Class B shares or Class C shares by employer
sponsored employee benefit plans using the subaccount record keeping system made
available through the Shareholder Service Agent will be invested instead in
Class A shares at net asset value where the combined subaccount value in a Fund
or other Kemper Mutual Funds listed under "Special Features -- Class A Shares --
Combined Purchases" is in excess of $5 million including purchases pursuant to
the "Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features." For more information about the three sales
arrangements, consult your financial representative or the Shareholder Service
Agent. Financial services firms may receive different compensation depending
upon which class of shares they sell.
GENERAL. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of a Fund for their clients, and KDI may pay them a transaction fee up to
the level of the discount or commission allowable or payable to dealers, as
described above. Banks are currently prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be appropriate. KDI does not believe that termination of a
relationship with a bank would result in any material adverse consequences to a
Fund.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash or other compensation, to firms that sell shares
of the Funds. Non cash compensation includes luxury merchandise and trips to
luxury resorts. In some instances, such discounts, commissions or other
incentives will be offered only to certain firms that sell or are expected to
sell during specified time periods certain minimum amounts of shares of the
Funds, or other funds underwritten by KDI.
Orders for the purchase of shares of a Fund will be confirmed at a price based
on the net asset value of that Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders received by dealers or other
financial services firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of its business day will be
confirmed at a price based on the net asset value effective on that day. The
Funds reserve the right to determine the net asset value more frequently than
once a day if deemed desirable. Dealers and other financial services firms are
obligated to transmit orders promptly. Collection may take significantly longer
for a check drawn on a foreign bank than for a check drawn on a domestic bank.
Therefore, if an order is accompanied by a check drawn on a foreign bank, funds
must normally be collected before shares will be purchased. See "Purchase and
Redemption of Shares" in the Statement of Additional Information.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Funds' shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Funds' shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Funds' transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Funds through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of
34
<PAGE> 39
cash dividends. Such firms, including affiliates of KDI, may receive
compensation from the Funds through the Shareholder Service Agent for these
services. This prospectus should be read in connection with such firms' material
regarding their fees and services.
The Funds reserve the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders. Also, from time to time, each
Fund may temporarily suspend the offering of any class of its shares to new
investors. During the period of such suspension, persons who are already
shareholders of such class of such Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this prospectus.
REDEMPTION OR REPURCHASE OF SHARES
GENERAL. Any shareholder may require a Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Funds' transfer agent,
the shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box
419557, Kansas City, Missouri 64141-6557. When certificates for shares have been
issued, they must be mailed to or deposited with the Shareholder Service Agent,
along with a duly endorsed stock power and accompanied by a written request for
redemption. Redemption requests and a stock power must be endorsed by the
account holder with signatures guaranteed by a commercial bank, trust company,
savings and loan association, federal savings bank, member firm of a national
securities exchange or other eligible financial institution. The redemption
request and stock power must be signed exactly as the account is registered
including any special capacity of the registered owner. Additional documentation
may be requested, and a signature guarantee is normally required, from
institutional and fiduciary account holders, such as corporations, custodians
(e.g., under the Uniform Transfers to Minors Act), executors, administrators,
trustees or guardians.
The redemption price for shares of a Fund will be the net asset value per share
of that Fund next determined following receipt by the Shareholder Service Agent
of a properly executed request with any required documents as described above.
Payment for shares redeemed will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed request
accompanied by any outstanding share certificates in proper form for transfer.
When a Fund is asked to redeem shares for which it may not have yet received
good payment, it may delay transmittal of redemption proceeds until it has
determined that collected funds have been received for the purchase of such
shares, which will be up to 15 days from receipt by a Fund of the purchase
amount. The redemption within one year of Class A shares purchased at net asset
value under the Large Order NAV Purchase Privilege may be subject to a 1%
contingent deferred sales charge (see "Purchase of Shares") and the redemption
of Class B shares may be subject to a contingent deferred sales charge (see
"Contingent Deferred Sales Charge--Class B Shares" below).
Because of the high cost of maintaining small accounts, the Funds reserve the
right to redeem an account (and, in the case of Class B shares, impose any
applicable contingent deferred sales charge) that falls below the minimum
investment level, currently $1,000, as a result of redemptions. Currently,
Individual Retirement Accounts and employee benefit plan accounts are not
subject to this procedure. A shareholder will be notified in writing and will be
allowed 60 days to make additional purchases to bring the account value up to
the minimum investment level before a Fund redeems the shareholder's account.
The investment required to reach that level may be made at net asset value
(without any initial sales charge in the case of Class A shares).
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent
35
<PAGE> 40
for appropriate instructions. Please note that the telephone exchange privilege
is automatic unless the shareholder refuses it on the account application. A
Fund or its agents may be liable for any losses, expenses or costs arising out
of fraudulent or unauthorized telephone requests pursuant to these privileges
unless the Fund or its agents reasonably believe, based upon reasonable
verification procedures, that the telephonic instructions are genuine. The
SHAREHOLDER WILL BEAR THE RISK OF LOSS, including loss resulting from fraudulent
or unauthorized transactions, so long as reasonable verification procedures are
followed. Verification procedures include recording instructions, requiring
certain identifying information before acting upon instructions and sending
written confirmations.
TELEPHONE REDEMPTIONS. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge in the case of Class B
shares) are $50,000 or less and the proceeds are payable to the shareholder of
record at the address of record, normally a telephone request or a written
request by any one account holder without a signature guarantee is sufficient
for redemptions by individual or joint account holders, and trust, executor and
guardian account holders (excluding custodial accounts for gifts and transfers
to minors), provided the trustee, executor or guardian is named in the account
registration. Other institutional account holders and guardian account holders
of custodial accounts for gifts and transfers to minors may exercise this
special privilege of redeeming shares by telephone request or written request
without signature guarantee subject to the same conditions as individual account
holders and subject to the limitations on liability described under "General"
above, provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 15 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Funds reserve the right to terminate or modify
this privilege at any time.
REPURCHASES (CONFIRMED REDEMPTIONS). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which each Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
EXPEDITED WIRE TRANSFER REDEMPTIONS. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of a Fund can be redeemed and proceeds sent by federal wire
transfer to a single previously designated account. Requests received by the
Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value of the Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption of $250,000 or more may be delayed by the Fund for up to seven days
if KFS deems it appropriate under then current market conditions. Once
authorization is on file, the Shareholder Service Agent will honor requests by
telephone at 1-800-621-1048 or in writing, subject to the limitations on
liability described under "General" above. The Funds are not responsible for the
efficiency of the federal wire system or the account holder's financial services
firm or bank. The Funds currently do not charge the account holder for wire
transfers. The account holder is responsible for any charges imposed by the
account holder's firm or bank. There is a $1,000 wire redemption minimum
36
<PAGE> 41
(including any contingent deferred sales charge). To change the designated
account to receive wire redemption proceeds, send a written request to the
Shareholder Service Agent with signatures guaranteed as described above or
contact the firm through which shares of the Fund were purchased. Shares
purchased by check or through EXPRESS-Transfer or Bank Direct Deposit may not be
redeemed by wire transfer until such shares have been owned for at least 15
days. Account holders may not use this privilege to redeem shares held in
certificated form. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the expedited
wire transfer redemption privilege. The Funds reserve the right to terminate or
modify this privilege at any time.
CONTINGENT DEFERRED SALES CHARGE--LARGE ORDER NAV PURCHASE PRIVILEGE. A
contingent deferred sales charge of 1% may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege if they
are redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived in the event of: (a)
redemptions by a participant-directed qualified retirement plan described in
Code Section 401(a) or a participant-directed non-qualified deferred
compensation plan described in Code Section 457; (b) redemptions by employer
sponsored employee benefit plans using the subaccount record keeping system made
available through the Shareholder Service Agent; (c) redemption of shares of a
shareholder (including a registered joint owner) who has died; (d) redemption of
shares of a shareholder (including a registered joint owner) who after purchase
of the shares being redeemed becomes totally disabled (as evidenced by a
determination by the federal Social Security Administration); and (e)
redemptions under a Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed excluding amounts not subject to the charge.
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES
YEAR OF REDEMPTION AFTER PURCHASE CHARGE
------------------------------------------------------------------------ ----------
<S> <C>
First................................................................... 4%
Second.................................................................. 3%
Third................................................................... 3%
Fourth.................................................................. 2%
Fifth................................................................... 2%
Sixth................................................................... 1%
</TABLE>
Class B shareholders who originally acquired their shares as Initial Shares of
Kemper Portfolios, formerly known as Kemper Investment Portfolios, hold them
subject to the same CDSC schedule that applied when those shares were purchased,
as follows:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
YEAR OF ----------------------------------------------------------------------------------------
REDEMPTION SHARES PURCHASED ON OR AFTER
AFTER SHARES PURCHASED ON OR AFTER FEBRUARY 1, 1991 AND BEFORE SHARES PURCHASED BEFORE
PURCHASE MARCH 1, 1993 MARCH 1, 1993 FEBRUARY 1, 1991
------------------------ ----------------------------- ----------------------------- ------------------------
<S> <C> <C> <C>
First................... 4% 3% 5%
Second.................. 3% 3% 4%
Third................... 3% 2% 3%
Fourth.................. 2% 2% 2%
Fifth................... 2% 1% 2%
Sixth................... 1% 1% 1%
</TABLE>
37
<PAGE> 42
The following example will illustrate the operation of the contingent deferred
sales charge. Assume that an investor makes a single purchase of $10,000 of a
Fund's Class B shares and that 16 months later the value of the shares has grown
by $1,000 through reinvested dividends and by an additional $1,000 in
appreciation to a total of $12,000. If the investor were then to redeem the
entire $12,000 in share value, the contingent deferred sales charge would be
payable only with respect to $10,000 because neither the $1,000 of reinvested
dividends nor the $1,000 of share appreciation is subject to the charge. The
charge would be at the rate of 3% ($300) because it was in the second year after
the purchase was made.
The rate of the contingent deferred sales charge under the schedule above is
determined by the length of the period of ownership. Investments are tracked on
a monthly basis. The period of ownership for this purpose begins the first day
of the month in which the order for the investment is received. For example, an
investment made in December, 1996 will be eligible for the 3% charge if redeemed
on or after December 1, 1997. In the event no specific order is requested, the
redemption will be made first from Class B shares representing reinvested
dividends and then from the earliest purchase of Class B shares. KDI receives
any contingent deferred sales charge directly.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features--Systematic Withdrawal Plan" below), (d) for redemptions made pursuant
to any IRA systematic withdrawal based on the shareholder's life expectancy
including, but not limited to, substantially equal periodic payments described
in Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for
redemptions to satisfy required minimum distributions after age 70 1/2 from an
IRA account (with the maximum amount subject to this waiver being based only
upon the shareholder's Kemper IRA accounts). The contingent deferred sales
charge will also be waived in connection with the following redemptions of
shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent: (a) redemptions to satisfy participant loan advances (note that loan
repayments constitute new purchases for purposes of the contingent deferred
sales charge and the conversion privilege), (b) redemptions in connection with
retirement distributions (limited at any one time to 10% of the total value of
plan assets invested in a Fund), (c) redemptions in connection with
distributions qualifying under the hardship provisions of the Internal Revenue
Code and (d) redemptions representing returns of excess contributions to such
plans.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Class A shares of a Fund
or any other Kemper Mutual Fund listed under "Special Features--Class A
Shares--Combined Purchases" (other than shares of the Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
a Fund or of the other listed Kemper Mutual Funds. A shareholder of a Fund or
other Kemper Mutual Fund who redeems Class A shares purchased under the Large
Order NAV Purchase Privilege (see "Purchase of Shares") or Class B shares and
incurs a contingent deferred sales charge may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment, in Class A shares
or Class B shares, as the case may be, of a Fund or of other Kemper Mutual
Funds. The amount of any contingent deferred sales charge also will be
reinvested. These reinvested shares will retain their original cost and purchase
date for purposes of the contingent deferred sales charge. Also, a holder of
Class B shares who has redeemed shares may reinvest up to the full amount
redeemed, less any applicable contingent deferred sales charge that may have
been imposed upon the redemption of such shares, at net asset value in Class A
shares of a Fund or of the other Kemper Mutual Funds listed under "Special
Features--Class A Shares--Combined Purchases." Purchases through the
reinvestment privilege are subject to the minimum investment requirements
applicable to the shares being purchased and may only be made for Kemper Funds
available for sale in the shareholder's state of residence as listed under
"Special Features--Exchange Privilege." The reinvestment privilege can be used
only once as to any specific shares and reinvestment must be effected within six
months of the redemption. If a loss is realized on the redemption of shares of a
Fund, the
38
<PAGE> 43
reinvestment in shares of a Fund may be subject to the "wash sale" rules if made
within 30 days of the redemption, resulting in a postponement of the recognition
of such loss for federal income tax purposes. The reinvestment privilege may be
terminated or modified at any time.
SPECIAL FEATURES
CLASS A SHARES--COMBINED PURCHASES. Each Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Diversified Income Fund,
Kemper High Yield Fund, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Adjustable Rate
U.S. Government Fund, Kemper Blue Chip Fund, Kemper Global Income Fund, Kemper
Target Equity Fund (series are subject to a limited offering period), Kemper
Intermediate Municipal Bond Fund, Kemper Cash Reserves Fund, Kemper U.S.
Mortgage Fund, Kemper Short-Intermediate Government Fund, Kemper Value+Growth
Fund, Kemper-Dreman Fund, Inc., Kemper Quantitative Equity Fund and Kemper
Horizon Fund ("Kemper Mutual Funds"). Except as noted below, there is no
combined purchase credit for direct purchases of shares of Kemper Money Funds,
Cash Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account
Trust, Tax-Exempt New York Money Market Fund or Investors Cash Trust ("Money
Market Funds"), which are not considered "Kemper Mutual Funds" for purposes
hereof. For purposes of the Combined Purchases feature described above as well
as for the Letter of Intent and Cumulative Discount features described below,
employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent may include: (a)
Money Market Funds as "Kemper Mutual Funds", (b) all classes of shares of any
Kemper Mutual Fund and (c) the value of any other plan investment, such as
guaranteed investment contracts and employer stock, maintained on such
subaccount record keeping system.
CLASS A SHARES--LETTER OF INTENT. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Mutual Funds held of record as of the initial purchase date under
the Letter as an "accumulation credit" toward the completion of the Letter, but
no price adjustment will be made on such shares. Only investments in Class A
shares are included in this privilege.
CLASS A SHARES--CUMULATIVE DISCOUNT. Class A shares of a Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of a Fund being purchased, the value of all Class A shares of
the above mentioned Kemper Mutual Funds (computed at the maximum offering price
at the time of the purchase for which the discount is applicable) already owned
by the investor.
CLASS A SHARES--AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales
39
<PAGE> 44
charge is applicable to a purchase. Upon such notification, the investor will
receive the lowest applicable sales charge. Quantity discounts described above
may be modified or terminated at any time.
EXCHANGE PRIVILEGE. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Mutual Funds in accordance with the provisions below.
Class A Shares. Class A shares of the Kemper Mutual Funds and shares of the
Money Market Funds listed under "Special Features--Class A Shares--Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and the Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the Offering Period for such
series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Tax-Exempt New York
Money Market Fund and Investors Cash Trust are available on exchange but only
through a financial services firm having a services agreement with KDI.
Class A shares of a Fund purchased under the Large Order NAV Purchase Privilege
may be exchanged for Class A shares of another Kemper Mutual Fund or a Money
Market Fund under the exchange privilege described above without paying any
contingent deferred sales charge at the time of exchange. If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed in accordance with the foregoing requirements provided that the
shares redeemed will retain their original cost and purchase date for purposes
of the contingent deferred sales charge.
Class B Shares. Class B shares of a Fund and Class B shares of any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset values. Class B
shares may be exchanged without a contingent deferred sales charge being imposed
at the time of exchange. For purposes of the contingent deferred sales charge
that may be imposed upon the redemption of the shares received on exchange,
amounts exchanged retain their original cost and purchase date.
Class C Shares. Class C shares of a Fund and Class C shares of any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset values.
General. Shares purchased by check or through EXPRESS-Transfer or Bank Direct
Deposit may not be exchanged until they have been owned for at least 15 days. In
addition, shares of a Kemper Mutual Fund (except Kemper Cash Reserves Fund)
acquired by exchange from another Kemper Mutual Fund, or from a Money Market
Fund, may not be exchanged thereafter until they have been owned for 15 days.
The total value of shares being exchanged must at least equal the minimum
investment requirement of the fund into which they are being exchanged.
Exchanges are made based on relative dollar values of the shares involved in the
exchange. There is no service fee for an exchange; however, dealers or other
firms may charge for their services in effecting exchange transactions.
Exchanges will be effected by redemption of shares of the fund held and purchase
of shares of the other fund. For federal income tax purposes, any such exchange
constitutes a sale upon which a gain or loss may be realized, depending upon
whether the value of the shares being exchanged is more or less than the
shareholder's adjusted cost basis of such shares. Shareholders interested in
exercising the exchange privilege may obtain prospectuses of the other funds
from dealers, other firms or KDI. Exchanges may be accomplished by a written
request to Kemper Mutual Funds, Attention: Exchange Department, P.O. Box 419557,
Kansas City, Missouri 64141-6557, or by telephone if the shareholder has given
authorization. Once the authorization is on file, the Shareholder Service Agent
will honor requests by telephone at 1-800-621-1048, subject to the limitations
on liability under "Redemption or Repurchase of Shares--General." Any share
certificates must be deposited prior to any exchange of such shares. During
periods when it is difficult to contact the Shareholder Service Agent by
telephone, it may be difficult to use the telephone exchange privilege. The
exchange privilege is not a right and may be suspended, terminated or modified
at any time. Exchanges may only be made for funds that are available for sale in
the shareholder's state of residence.
40
<PAGE> 45
Currently, Tax-Exempt California Money Market Fund is available for sale only in
California and Tax-Exempt New York Money Market Fund is available for sale only
in New York, Connecticut, New Jersey and Pennsylvania. Except as otherwise
permitted by applicable regulations, 60 days' prior written notice of any
termination or material change will be provided.
SYSTEMATIC EXCHANGE PRIVILEGE. The owner of $1,000 or more of any class of the
shares of a Kemper Mutual Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the privilege is terminated by the shareholder or the Kemper
Fund. Exchanges are subject to the terms and conditions described above under
"Exchange Privilege," including the $1,000 minimum investment requirement for
the Kemper Fund acquired on exchange. This privilege may not be used for the
exchange of shares held in certificated form.
EXPRESS-TRANSFER. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $2,500) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in a Fund. Shareholders can also redeem shares (minimum $500 and maximum $2,500)
from their Fund account and transfer the proceeds to their bank, savings and
loan, or credit union checking account. By enrolling in EXPRESS-Transfer, the
shareholder authorizes the Shareholder Service Agent to rely upon telephone
instructions from ANY PERSON to transfer the specified amounts between the
shareholder's Fund account and the predesignated bank, savings and loan or
credit union account, subject to the limitations on liability under "Redemption
or Repurchase of Shares--General." Once enrolled in EXPRESS-Transfer, a
shareholder can initiate a transaction by calling Kemper Shareholder Services
toll free at 1-800-621-1048 Monday through Friday, 8:00 a.m. to 3:00 p.m.
Chicago time. Shareholders may terminate this privilege by sending written
notice to Kemper Service Company, P.O. Box 419415, Kansas City, Missouri
64141-6415. Termination will become effective as soon as the Shareholder Service
Agent has had a reasonable time to act upon the request. EXPRESS-Transfer cannot
be used with passbook savings accounts or for tax-deferred plans such as
Individual Retirement Accounts ("IRAs").
BANK DIRECT DEPOSIT. A shareholder may purchase additional shares of a Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan, monthly investments are made automatically from the shareholder's account
at a bank, savings and loan or credit union into the shareholder's Fund account.
By enrolling in Bank Direct Deposit, the shareholder authorizes the Fund and its
agents to either draw checks or initiate Automated Clearing House debits against
the designated account at a bank or other financial institution. This privilege
may be selected by completing the appropriate section on the Account Application
or by contacting the Shareholder Service Agent for appropriate forms. A
shareholder may terminate his or her Plan by sending written notice to Kemper
Service Company, P.O. Box 419415, Kansas City, Missouri 64141-6415. Termination
by a shareholder will become effective within thirty days after the Shareholder
Service Agent has received the request. A Fund may immediately terminate a
shareholder's Plan in the event that any item is unpaid by the shareholder's
financial institution. The Funds may terminate or modify this privilege at any
time.
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may invest
in a Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in a Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) A Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
SYSTEMATIC WITHDRAWAL PLAN. The owner of $5,000 or more of a class of a Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount to be paid to the owner or a designated
payee monthly, quarterly, semiannually or annually. The $5,000 minimum account
size is not applicable to Individual Retirement Accounts. The minimum periodic
payment is $100. The maximum annual rate at which Class B shares
41
<PAGE> 46
may be redeemed under a systematic withdrawal plan is 10% of the net asset value
of the account. Shares are redeemed so that the payee will receive payment
approximately the first of the month. Any income and capital gain dividends will
be automatically reinvested at net asset value. A sufficient number of full and
fractional shares will be redeemed to make the designated payment. Depending
upon the size of the payments requested and fluctuations in the net asset value
of the shares redeemed, redemptions for the purpose of making such payments may
reduce or even exhaust the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, a Fund will not knowingly permit additional investments of less
than $2,000 if the investor is at the same time making systematic withdrawals.
KDI will waive the contingent deferred sales charge on redemptions of Class B
shares made pursuant to a systematic withdrawal plan. The right is reserved to
amend the systematic withdrawal plan on 30 days' notice. The plan may be
terminated at any time by the investor or the Funds.
TAX-SHELTERED RETIREMENT PLANS. KFS provides retirement plan services and
documents and KDI can establish investor accounts in any of the following types
of retirement plans:
- - Individual Retirement Accounts ("IRAs") trusteed by IFTC. This includes
Simplified Employee Pension Plan ("SEP") IRA accounts and prototype documents.
- - 403(b)(7) Custodial Accounts also trusteed by IFTC. This type of plan is
available to employees of most non-profit organizations.
- - Prototype money purchase pension and profit-sharing plans may be adopted by
employers. The maximum annual contribution per participant is the lesser of
25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans and materials for establishing
them are available from KDI upon request. The brochures for plans trusteed by
IFTC describe the current fees payable to IFTC for its services as trustee.
Investors should consult with their own tax advisers before establishing a
retirement plan.
PERFORMANCE
The Funds may advertise several types of performance information for a class of
shares, including "average annual total return" and "total return." Performance
information will be computed separately for Class A, Class B and Class C shares.
Each of these figures is based upon historical results and is not representative
of the future performance of any class of the Funds.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Fund's
portfolio for the period referenced, assuming the reinvestment of all dividends.
Thus, these figures reflect the change in the value of an investment in a Fund
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter (or
if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Fund for performance purposes). Average annual
total return figures represent the average annual percentage change over the
period in question. Total return figures represent the aggregate percentage or
dollar value change over the period in question.
A Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged equity indexes including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, the Russell 1000(R)
Index, the Russell 1000(R) Growth Index, the Wilshire Large Company Growth
Index, the Wilshire 750 Mid Cap Company Growth Index, the Standard &
Poor's/Barra Value Index, Standard & Poor's/Barra Growth Index and the Russell
1000(R) Value Index. The performance of a Fund such as the Total Return Fund may
also be compared to the combined performance of two indexes, such as a 60%/40%
42
<PAGE> 47
combination of the Standard & Poor's 500 Stock Index and the Lehman Brothers
Government/Corporate Bond Index or for the Value+Growth Fund to a 50%/50%
combination of the Russell 1000(R) Growth Index and the Russell 1000(R) Value
Index. The performance of a Fund may also be compared to the performance of
other mutual funds or mutual fund indexes with similar objectives and policies
as reported by independent mutual fund reporting services such as Lipper
Analytical Services, Inc. ("Lipper"). Lipper performance calculations are based
upon changes in net asset value with all dividends reinvested and do not include
the effect of any sales charges.
Information may be quoted from publications such as Morningstar, Inc., The Wall
Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune,
USA Today, Institutional Investor and Registered Representative. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit, money market funds and U.S. Treasury
obligations. Bank product performance may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) or various certificate of deposit indexes.
Money market fund performance may be based upon, among other things, the
IBC/Donoghue's Money Fund Report(R) or Money Market Insight(R), reporting
services on money market funds. Performance of U.S. Treasury obligations may be
based upon, among other things, various U.S. Treasury bill indexes. Certain of
these alternative investments may offer fixed rates of return and guaranteed
principal and may be insured.
A Fund may depict the historical performance of the securities in which the Fund
may invest over periods reflecting a variety of market or economic conditions
either alone or in comparison with alternative investments, performance indexes
of those investments or economic indicators. A Fund may also describe its
portfolio holdings and depict its size or relative size compared to other mutual
funds, the number and make-up of its shareholder base and other descriptive
factors concerning the Fund. The relative performance of growth stocks versus
value stocks may also be discussed.
Each Fund's Class A shares are sold at net asset value plus a maximum sales
charge of 5.75% of the offering price. While the maximum sales charge is
normally reflected in the Fund's Class A performance figures, certain total
return calculations may not include such charge and those results would be
reduced if it were included. Class B shares and Class C shares are sold at net
asset value. Redemptions of Class B shares within the first six years after
purchase may be subject to a contingent deferred sales charge that ranges from
4% during the first year to 0% after six years. Average annual total return
figures do, and total return figures may, include the effect of the contingent
deferred sales charge for the Class B shares that may be imposed at the end of
the period in question. Performance figures for the Class B shares not including
the effect of the applicable contingent deferred sales charge would be reduced
if it were included.
Each Fund's returns and net asset value will fluctuate. Shares of a Fund are
redeemable by an investor at the then current net asset value, which may be more
or less than original cost. Redemption of Class B shares may be subject to a
contingent deferred sales charge as described above. Additional information
concerning each Fund's performance appears in the Statement of Additional
Information. Additional information about each Fund's performance also appears
in its Annual Report to Shareholders, which is available without charge from the
Fund.
CAPITAL STRUCTURE
The Funds are open-end management investment companies, organized as separate
business trusts under the laws of Massachusetts. The Blue Chip Fund was
organized as a business trust under the laws of Massachusetts on May 28, 1987.
The Growth Fund was organized as a business trust under the laws of
Massachusetts on October 24, 1985 and, effective January 31, 1986, that Fund
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
Growth Fund, Inc., a Maryland corporation organized in 1965. The Small Cap Fund
was organized as a business trust under the laws of Massachusetts on October 24,
1985 and, effective January 31, 1986, that Fund pursuant to a reorganization
succeeded to the assets and liabilities of Kemper Summit Fund, Inc., a Maryland
corporation organized in 1968. Prior to February 1, 1992, the Small Cap Fund
43
<PAGE> 48
was known as "Kemper Summit Fund." The Technology Fund was organized as a
business trust under the laws of Massachusetts on October 24, 1985 as Technology
Fund and changed its name to Kemper Technology Fund effective February 1, 1988.
Effective January 31, 1986, Technology Fund pursuant to a reorganization
succeeded to the assets and liabilities of Technology Fund, Inc., a Maryland
corporation originally organized as a Delaware corporation in 1948. Technology
Fund was known as Television Fund, Inc. until 1950 and as Television-Electronics
Fund, Inc. until 1968. The Total Return Fund was organized as a business trust
under the laws of Massachusetts on October 24, 1985 and, effective January 31,
1986, that Fund pursuant to a reorganization succeeded to the assets and
liabilities of Kemper Total Return Fund, Inc., a Maryland corporation organized
in 1963. The Total Return Fund was known as Balanced Income Fund, Inc. until
1972 and as Supervised Investors Income Fund, Inc. until 1977. The Value+Growth
Fund was organized as a business trust under the laws of Massachusetts on June
14, 1995 under the name Kemper Value Plus Growth Fund and does business as
Kemper Value+Growth Fund. The Quantitative Fund was organized as a business
trust under the laws of Massachusetts on June 12, 1995. The investment manager
invested the "seed money" as the sole shareholder of the Quantitative Fund
before the public offering of its shares and, therefore, controlled that Fund as
of January 26, 1996.
Each Fund may issue an unlimited number of shares of beneficial interest in one
or more series or "Portfolios," all having no par value, which may be divided by
the Board of Trustees into classes of shares. Currently, each Fund offers four
classes of shares. These are Class A, Class B and Class C shares, as well as
Class I shares, which are available for purchase exclusively by the following
investors: (a) tax-exempt retirement plans of KFS and its affiliates; and (b)
the following investment advisory clients of KFS and its investment advisory
affiliates that invest at least $1 million in a Fund: (1) unaffiliated benefit
plans, such as qualified retirement plans (other than individual retirement
accounts and self-directed retirement plans); (2) unaffiliated banks and
insurance companies purchasing for their own accounts; and (3) endowment funds
of unaffiliated non-profit organizations. The Board of Trustees of a Fund may
authorize the issuance of additional classes and additional Portfolios if deemed
desirable, each with its own investment objectives, policies and restrictions.
Since the Funds may offer multiple Portfolios, each is known as a "series
company." Shares of a Fund have equal noncumulative voting rights except that
Class B and Class C shares have separate and exclusive voting rights with
respect to each Fund's Rule 12b-1 Plan. Shares of each class also have equal
rights with respect to dividends, assets and liquidation of such Fund subject to
any preferences (such as resulting from different Rule 12b-1 distribution fees),
rights or privileges of any classes of shares of the Fund. Shares of each Fund
are fully paid and nonassessable when issued, are transferable without
restriction and have no preemptive or conversion rights. The Funds are not
required to hold annual shareholder meetings and do not intend to do so.
However, they will hold special meetings as required or deemed desirable for
such purposes as electing trustees, changing fundamental policies or approving
an investment management agreement. Subject to the Agreement and Declaration of
Trust of each Fund, shareholders may remove trustees. If shares of more than one
Portfolio for any Fund are outstanding, shareholders will vote by Portfolio and
not in the aggregate or by class except when voting in the aggregate is
required, under the Investment Company Act of 1940, such as for the election of
trustees or when voting by class is appropriate.
44
<PAGE> 49
Kemper Distributors, Inc.
120 South LaSalle Street
Chicago, Illinois 60603
KEF-1 2/96 (LOGO)printed on recycled paper
KEMPER
EQUITY
FUNDS
FEBRUARY 1, 1996
KEMPER BLUE CHIP FUND
KEMPER GROWTH FUND
KEMPER QUANTITATIVE EQUITY FUND
KEMPER SMALL CAPITALIZATION EQUITY FUND
KEMPER TECHNOLOGY FUND
KEMPER TOTAL RETURN FUND
KEMPER VALUE+GROWTH FUND
LOGO
KEMPER
<PAGE> 50
KEMPER EQUITY FUNDS
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 1, 1996
KEMPER BLUE CHIP FUND ("BLUE CHIP FUND")
KEMPER GROWTH FUND ("GROWTH FUND")
KEMPER QUANTITATIVE EQUITY FUND ("QUANTITATIVE FUND")*
KEMPER SMALL CAPITALIZATION EQUITY FUND ("SMALL CAP FUND")
KEMPER TECHNOLOGY FUND ("TECHNOLOGY FUND")
KEMPER TOTAL RETURN FUND ("TOTAL RETURN FUND")
KEMPER VALUE PLUS GROWTH FUND ("VALUE+GROWTH FUND")
*THE KEMPER QUANTITATIVE EQUITY FUND WILL NOT
COMMENCE OPERATIONS UNTIL FEBRUARY 15, 1996
120 SOUTH LASALLE STREET, CHICAGO, ILLINOIS 60603
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the combined
Statement of Additional Information for each of the funds (the "Funds") listed
above. It should be read in conjunction with the combined prospectus of the
Funds dated February 1, 1996. The prospectus may be obtained without charge from
the Funds.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Investment Restrictions................................................. B-1
Investment Policies and Techniques...................................... B-9
Portfolio Transactions.................................................. B-15
Investment Manager and Underwriter...................................... B-16
Purchase and Redemption of Shares....................................... B-23
Dividends and Taxes..................................................... B-24
Performance............................................................. B-25
Officers and Trustees................................................... B-39
Shareholder Rights...................................................... B-44
Quantitative Fund -- Report of Independent Auditors (January 4, 1996)... B-45
Quantitative Fund -- Statement of Net Assets (January 4, 1996).......... B-46
Appendix -- Ratings of Fixed Income Investments......................... B-47
</TABLE>
The financial statements appearing in each Fund's 1995 Annual Report to
Shareholders are incorporated herein by reference. The Annual Report for the
Fund for which this Statement of Additional Information is requested accompanies
this document. (The foregoing is not applicable to the Quantitative Fund, which
will commence operations on February 15, 1996.)
KEF-13 2/96 (LOGO) printed on recycled paper
<PAGE> 51
INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental investment restrictions which,
together with the investment objective and fundamental policies of such Fund,
cannot be changed without approval of a majority of its outstanding voting
shares. As defined in the Investment Company Act of 1940, this means the lesser
of the vote of (a) 67% of the shares of the Fund present at a meeting where more
than 50% of the outstanding shares are present in person or by proxy or (b) more
than 50% of the outstanding shares of the Fund.
THE BLUE CHIP FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities) if, as a result,
more than 5% of the total value of the Fund's assets would be invested in
securities of that issuer.
(2) Purchase more than 10% of any class of voting securities of any issuer.
(3) Make loans to others provided that the Fund may purchase debt obligations or
repurchase agreements and it may lend its securities in accordance with its
investment objective and policies.
(4) Borrow money except as a temporary measure for extraordinary or emergency
purposes, and then only in an amount up to one-third of the value of its total
assets, in order to meet redemption requests without immediately selling any
portfolio securities. If, for any reason, the current value of the Fund's total
assets falls below an amount equal to three times the amount of its indebtedness
from money borrowed, the Fund will, within three days (not including Sundays and
holidays), reduce its indebtedness to the extent necessary. The Fund will not
borrow for leverage purposes and will not purchase securities or make
investments while borrowings are outstanding.
(5) Pledge, hypothecate, mortgage or otherwise encumber more than 15% of its
total assets and then only to secure borrowings permitted by restriction number
(4) above. (The collateral arrangements with respect to options, financial
futures and delayed delivery transactions and any margin payments in connection
therewith are not deemed to be pledges or other encumbrances.)
(6) Purchase securities on margin, except to obtain such short-term credits as
may be necessary for the clearance of transactions; however, the Fund may make
margin deposits in connection with options and financial futures transactions.
(7) Make short sales of securities or maintain a short position for the account
of the Fund unless at all times when a short position is open it owns an equal
amount of such securities or owns securities which, without payment of any
further consideration, are convertible into or exchangeable for securities of
the same issue as, and equal in amount to, the securities sold short and unless
not more than 10% of the Fund's total assets is held as collateral for such
sales at any one time.
(8) Write (sell) put or call options, combinations thereof or similar options;
nor may it purchase put or call options if more than 5% of the Fund's net assets
would be invested in premiums on put and call options, combinations thereof or
similar options; however, the Fund may buy or sell options on financial futures
contracts.
(9) Purchase securities (other than securities of the U.S. Government, its
agencies or instrumentalities) if as a result of such purchase 25% or more of
the Fund's total assets would be invested in any one industry.
(10) Invest in commodities or commodity futures contracts, although it may buy
or sell financial futures contracts and options on such contracts, and engage in
foreign currency transactions; or in real estate (including real estate limited
partnership interests), although it may invest in securities which are secured
by real estate and securities of issuers which invest or deal in real estate.
B-1
<PAGE> 52
(11) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(12) Issue senior securities except as permitted under the Investment Company
Act of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 4 in the latest
fiscal year and it has no present intention of borrowing during the current
year. The Fund has adopted the following non-fundamental restrictions, which may
be changed by the Board of Trustees without shareholder approval. The Blue Chip
Fund may not:
(i) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund or its investment adviser owns beneficially
more than 1/2 of 1% of the securities of such issuer and together own more than
5% of the securities of such issuer.
(ii) Invest for the purpose of exercising control or management of another
issuer.
(iii) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the securities of issuers which
invest in or sponsor such programs.
(iv) Purchase securities of other open-end investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
(v) Invest more than 5% of the Fund's total assets in securities of issuers
(other than obligations of, or guaranteed by, the U.S. Government, its agencies
or instrumentalities) which with their predecessors have a record of less than
three years continuous operation and equity securities of issuers which are not
readily marketable.
(vi) Invest more than 15% of its net assets in illiquid securities.
(vii) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of the
Fund's net assets, may be warrants not listed on the New York or American Stock
Exchange. Warrants acquired in units or attached to securities may be deemed to
be without value for such purposes.
(viii) Invest in oil, gas, and other mineral leases.
(ix) Purchase or sell real property (including limited partnership interests but
excluding readily marketable interests in real estate investment trusts and
readily marketable securities of companies which invest in real estate).
(x) Invest more than 5% of its total assets in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid pursuant to
procedures adopted by the Board of Trustees, provided that the total amount of
Fund assets invested in restricted securities and securities of issuers which
with their predecessors have a record of less than three years continuous
operation will not exceed 15% of total assets.
(xi) Invest more than 10% of its total assets in securities of real estate
investment trusts.
THE GROWTH FUND AND THE VALUE+GROWTH FUND, EACH MAY NOT, AS A FUNDAMENTAL
POLICY:
(1) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the Fund's total assets would be invested in securities
of that issuer.
B-2
<PAGE> 53
(2) Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as one class.
(3) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objective and policies are not prohibited and the Fund
may lend its portfolio securities as described under "Investment Objectives and
Policies" in the prospectus.
(4) Borrow money except for temporary or emergency purposes (but not for the
purpose of purchase of investments) and then only in an amount not to exceed 5%
of the Fund's net assets; or pledge the Fund's securities or receivables or
transfer or assign or otherwise encumber them in an amount exceeding the amount
of the borrowing secured thereby.
(5) Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and options transactions.
(6) Write (sell) put or call options, combinations thereof or similar options;
nor may it purchase put or call options if more than 5% of the Fund's net assets
would be invested in premiums on put and call options, combinations thereof or
similar options; however, the Fund may buy or sell options on financial futures
contracts.
(7) Invest 25% or more of its total assets in any one industry. Water,
communications, electric and gas utilities shall each be considered a separate
industry.
(8) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts, and engage in
foreign currency transactions; or in real estate, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
(9) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(10) Issue senior securities except as permitted under the Investment Company
Act of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Growth
Fund did not borrow money as permitted by investment restriction number 4 in the
latest fiscal year and neither Fund has a present intention of borrowing during
the current year. The Fund has adopted the following non-fundamental
restrictions, which may be changed by the Board of Trustees without shareholder
approval. The Growth Fund and the Value+Growth Fund, each may not:
(i) Invest more than 5% of the Fund's total assets in securities of issuers
which with their predecessors have a record of less than three years continuous
operation and equity securities of issuers which are not readily marketable.
(ii) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund or its investment adviser owns beneficially
more than 1/2 of 1% of the securities of such issuer and together own more than
5% of the securities of such issuer.
(iii) Invest for the purpose of exercising control or management of another
issuer.
(iv) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in the securities of issuers which invest in or
sponsor such programs.
B-3
<PAGE> 54
(v) Purchase securities of other investment companies, except in connection with
a merger, consolidation, reorganization or acquisition of assets.
(vi) Invest more than 15% of its net assets in illiquid securities.
(vii) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of the
Fund's net assets, may be warrants not listed on the New York or American Stock
Exchanges. Warrants acquired in units or attached to securities may be deemed to
be without value for such purposes.
(viii) Invest in oil, gas, and other mineral leases.
(ix) Purchase or sell real property (including limited partnership interests but
excluding readily marketable securities in real estate investment trusts and
readily marketable securities of companies which invest in real estate).
(x) Invest more than 5% of its total assets in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid pursuant to
procedures adopted by the Board of Trustees, provided that the total amount of
Fund assets invested in restricted securities and securities of issuers which
with their predecessors have a record of less than three years continuous
operation will not exceed 15% of total assets.
(xi) Invest more than 10% of its total assets in securities of real estate
investment trusts.
THE SMALL CAP FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the Fund's total assets would be invested in securities
of that issuer.
(2) Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as one class.
(3) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objective and policies are not prohibited and the Fund
may lend its portfolio securities as described under "Investment Objectives and
Policies" in the prospectus.
(4) Borrow money except for temporary or emergency purposes (but not for the
purpose of purchase of investments) and then only in an amount not to exceed 5%
of the Fund's net assets; or pledge the Fund's securities or receivables or
transfer or assign or otherwise encumber them in an amount exceeding the amount
of the borrowing secured thereby.
(5) Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and options transactions.
(6) Write (sell) put or call options, combinations thereof or similar options;
nor may it purchase put or call options if more than 5% of the Fund's net assets
would be invested in premiums on put and call options, combinations thereof or
similar options; however, the Fund may buy or sell options on financial futures
contracts.
(7) Invest 25% or more of its total assets in any one industry. Water,
communications, electric and gas utilities shall each be considered a separate
industry.
B-4
<PAGE> 55
(8) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts, and engage in
foreign currency transactions; or in real estate, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
(9) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(10) Issue senior securities except as permitted under the Investment Company
Act of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 4 in the latest
fiscal year and it has no present intention of borrowing during the current
year. The Fund has adopted the following non-fundamental restrictions, which may
be changed by the Board of Trustees without shareholder approval. The Small Cap
Fund may not:
(i) Invest more than 5% of the Fund's total assets in securities of issuers
which with their predecessors have a record of less than three years continuous
operation and equity securities of issuers which are not readily marketable.
(ii) Purchase or retain the securities of any issuer if any of the officers or
trustees of the Fund or its investment adviser owns beneficially more than 1/2
of 1% of the securities of such issuer and together own more than 5% of the
securities of such issuer.
(iii) Invest for the purpose of exercising control or management of another
issuer.
(iv) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in the securities of issuers which invest in or
sponsor such programs.
(v) Purchase securities of other investment companies, except in connection with
a merger, consolidation, reorganization or acquisition of assets.
(vi) Invest more than 15% of its net assets in illiquid securities.
(vii) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of the
Fund's net assets, may be warrants not listed on the New York or American Stock
Exchanges. Warrants acquired in units or attached to securities may be deemed to
be without value for such purposes.
(viii) Invest in oil, gas, and other mineral leases.
(ix) Purchase or sell real property (including limited partnership interests but
excluding readily marketable interests in real estate investment trusts and
readily marketable securities of companies which invest in real estate).
(x) Invest more than 5% of its total assets in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid pursuant to
procedures adopted by the Board of Trustees, provided that the total amount of
Fund assets invested in restricted securities and securities of issuers which
with their predecessors have a record of less than three years continuous
operation will not exceed 15% of total assets.
(xi) Invest more than 10% of its total assets in securities of real estate
investment trusts.
B-5
<PAGE> 56
THE QUANTITATIVE FUND AND THE TECHNOLOGY FUND, EACH MAY NOT, AS A FUNDAMENTAL
POLICY:
(1) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the Fund's total assets would be invested in securities
of that issuer.
(2) Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as one class.
(3) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objective and policies are not prohibited and the Fund
may lend its portfolio securities as described under "Investment Objectives and
Policies" in the prospectus.
(4) Borrow money except for temporary or emergency purposes (but not for the
purpose of purchase of investments) and then only in an amount not to exceed 5%
of the Fund's net assets; or pledge the Fund's securities or receivables or
transfer or assign or otherwise encumber them in an amount exceeding the amount
of the borrowing secured thereby.
(5) Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and options transactions.
(6) Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may it purchase put or call
options if more than 5% of the Fund's net assets would be invested in premiums
on put and call options, combinations thereof or similar options; however, the
Fund may buy or sell options on financial futures contracts.
(7) Invest 25% or more of its total assets in any one industry. Water,
communications, electric and gas utilities shall each be considered a separate
industry.
(8) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts, and engage in
foreign currency transactions; or in real estate, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
(9) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(10) Issue senior securities except as permitted under the Investment Company
Act of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The
Technology Fund did not borrow money as permitted by investment restriction
number 4 in the latest fiscal year and neither Fund has a present intention of
borrowing during the current year. The Quantitative Fund and the Technology Fund
adopted the following non-fundamental restrictions, which may be changed by the
Board of Trustees without shareholder approval. These Funds may not:
(i) Invest more than 5% of the Fund's total assets in securities of issuers
which with their predecessors have a record of less than three years continuous
operation and equity securities of issuers which are not readily marketable.
(ii) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund or its investment adviser owns beneficially
more than 1/2 of 1% of the securities of such issuer and together own more than
5% of the securities of such issuer.
B-6
<PAGE> 57
(iii) Invest for the purpose of exercising control or management of another
issuer.
(iv) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in the securities of issuers which invest in or
sponsor such programs.
(v) Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition or reorganization, or by purchase in the
open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved and only if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by it, (ii) 5% of
its total assets would be invested in any one such company, and (iii) 10% of
total assets would be invested in such securities.
(vi) Invest more than 15% of its net assets in illiquid securities.
(vii) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of the
Fund's net assets, may be warrants not listed on the New York or American Stock
Exchanges. Warrants acquired in units or attached to securities may be deemed to
be without value for such purposes.
(viii) Invest in oil, gas, and other mineral leases.
(ix) Purchase or sell real property (including limited partnership interests but
excluding readily marketable interests in real estate investment trusts and
readily marketable securities of companies which invest in real estate).
(x) Invest more than 5% of its total assets in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid pursuant to
procedures adopted by the Board of Trustees, provided that the total amount of
Fund assets invested in restricted securities and securities of issuers which
with their predecessors have a record of less than three years continuous
operation will not exceed 15% of total assets.
(xi) Invest more than 10% of its total assets in securities of real estate
investment trusts. (The Quantitative Fund currently does not intend to invest
more than 5% of its net assets in securities of real estate investment trusts.)
THE TOTAL RETURN FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the Fund's total assets would be invested in securities
of that issuer.
(2) Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as one class.
(3) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objective and policies are not prohibited and the Fund
may lend its portfolio securities as described under "Investment Objectives and
Policies" in the prospectus.
(4) Borrow money except for temporary or emergency purposes (but not for the
purpose of purchase of investments) and then only in an amount not to exceed 5%
of the Fund's net assets; or pledge the Fund's securities or receivables or
transfer or assign or otherwise encumber them in an amount exceeding the amount
of the borrowings secured thereby.
(5) Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and options transactions.
B-7
<PAGE> 58
(6) Write (sell) put or call options, combinations thereof or similar options;
nor may it purchase put or call options if more than 5% of the Fund's net assets
would be invested in premiums on put and call options, combinations thereof or
similar options; however, the Fund may buy or sell options on financial futures
contracts.
(7) Invest 25% or more of its total assets in any one industry. Water,
communications, electric and gas utilities shall each be considered a separate
industry.
(8) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts, and engage in
foreign currency transactions; or in real estate, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
(9) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(10) Issue senior securities except as permitted under the Investment Company
Act of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 4 in the latest
fiscal year and it has no present intention of borrowing during the current
year. The Fund has adopted the following non-fundamental restrictions, which may
be changed by the Board of Trustees without shareholder approval. The Total
Return Fund may not:
(i) Invest more than 5% of the Fund's total assets in securities of issuers
which with their predecessors have a record of less than three years continuous
operation and in equity securities which are not readily marketable.
(ii) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund or its investment adviser owns beneficially
more than 1/2 of 1% of the securities of such issuer and together own more than
5% of the securities of such issuer.
(iii) Invest for the purpose of exercising control or management of another
issuer.
(iv) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in the securities of issuers which invest in or
sponsor such programs.
(v) Purchase securities of other investment companies, except in connection with
a merger, consolidation, reorganization or acquisition of assets.
(vi) Invest more than 15% of its net assets in illiquid securities.
(vii) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of the
Fund's net assets, may be warrants not listed on the New York or American Stock
Exchanges. Warrants acquired in units or attached to securities may be deemed to
be without value for such purposes.
(viii) Invest in oil, gas, and other mineral leases.
(ix) Purchase or sell real property (including limited partnership interests but
excluding readily marketable interests in real estate investment trusts and
readily marketable securities of companies which invest in real estate).
(x) Invest more than 5% of its total assets in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid pursuant to
procedures adopted by the Board of Trustees, provided that the total amount of
Fund assets invested in
B-8
<PAGE> 59
restricted securities and securities of issuers which with their predecessors
have a record of less than three years continuous operation will not exceed 15%
of total assets.
(xi) Invest more than 10% of its total assets in securities of real estate
investment funds.
INVESTMENT POLICIES AND TECHNIQUES
GENERAL. Each Fund may engage in options transactions and may engage in
financial futures transactions in accordance with its respective investment
objectives and policies. The Blue Chip, Growth, Small Cap, Total Return and
Value+Growth Funds each may invest in put and call options but may not write
(sell) options. The Quantitative and Technology Funds may write (sell) covered
call options and secured put options and may purchase put and call options. Each
such Fund intends to engage in such transactions if it appears to the investment
manager to be advantageous for the Fund to do so in order to pursue its
investment objective and also to hedge against the effects of market risks but
not for speculative purposes. The use of futures and options, and possible
benefits and attendant risks, are discussed below along with information
concerning other investment policies and techniques.
OPTIONS ON SECURITIES. The Quantitative and Technology Funds may write (sell)
"covered" call options on securities as long as the Fund owns the underlying
securities subject to the option or an option to purchase the same underlying
securities, having an exercise price equal to or less than the exercise price of
the "covered" option, or will establish and maintain for the term of the option
a segregated account consisting of cash, U.S. Government securities or other
liquid high-grade debt obligations ("eligible securities") having a value at
least equal to the fluctuating market value of the optioned securities. The
Quantitative and Technology Funds may write "covered" put options provided that,
as long as the Fund is obligated as a writer of a put option, the Fund will own
an option to sell the underlying securities subject to the option, having an
exercise price equal to or greater than the exercise price of the "covered"
option, or it will deposit and maintain in a segregated account eligible
securities having a value equal to or greater than the exercise price of the
option. A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the exercise price during or at
the end of the option period. A put option gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying security at the
exercise price during or at the end of the option period. The premium received
for writing an option will reflect, among other things, the current market price
of the underlying security, the relationship of the exercise price to such
market price, the price volatility of the underlying security, the option
period, supply and demand and interest rates. The Funds may write (for the
Quantitative and Technology Funds) or purchase spread options, which are options
for which the exercise price may be a fixed dollar spread or yield spread
between the security underlying the option and another security that is used as
a bench mark. The exercise price of an option may be below, equal to or above
the current market value of the underlying security at the time the option is
written. The buyer of a put who also owns the related security is protected by
ownership of a put option against any decline in that security's price below the
exercise price less the amount paid for the option. The ability to purchase put
options allows a Fund to protect capital gains in an appreciated security it
owns, without being required to actually sell that security. At times a Fund
would like to establish a position in a security upon which call options are
available. By purchasing a call option, a Fund is able to fix the cost of
acquiring the security, this being the cost of the call plus the exercise price
of the option. This procedure also provides some protection from an unexpected
downturn in the market, because a Fund is only at risk for the amount of the
premium paid for the call option which it can, if it chooses, permit to expire.
During the option period the covered call writer gives up the potential for
capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain in the amount of the premium
B-9
<PAGE> 60
received. If the covered call option writer has to sell the underlying security
because of the exercise of a call option, it realizes a gain or loss from the
sale of the underlying security, with the proceeds being increased by the amount
of the premium.
If a secured put option expires unexercised, the writer realizes a gain from the
amount of the premium, plus the interest income on the eligible securities that
have been segregated. If the secured put writer has to buy the underlying
security because of the exercise of the put option, the secured put writer
incurs an unrealized loss to the extent that the current market value of the
underlying security is less than the exercise price of the put option. However,
this would be offset in whole or in part by gain from the premium received and
any interest income earned on the eligible securities that have been segregated.
OVER-THE-COUNTER OPTIONS. As indicated in the prospectus (see "Investment
Objectives, Policies and Risk Factors"), the Funds may deal in over-the-counter
traded options ("OTC options"). OTC options differ from exchange traded options
in several respects. They are transacted directly with dealers and not with a
clearing corporation, and there is a risk of nonperformance by the dealer as a
result of the insolvency of such dealer or otherwise, in which event a Fund may
experience material losses. However, in writing options the premium is paid in
advance by the dealer. OTC options are available for a greater variety of
securities, and a wider range of expiration dates and exercise prices, than are
exchange traded options. Since there is no exchange, pricing is normally done by
reference to information from market makers, which information is carefully
monitored by the investment manager and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it voluntarily only
by entering into a closing transaction. In the case of OTC options, there can be
no assurance that a continuous liquid secondary market will exist for any
particular option at any specific time. Consequently, a Fund may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it.
Similarly, when a Fund writes an OTC option, it generally can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a purchaser of such put or call option
might also find it difficult to terminate its position on a timely basis in the
absence of a secondary market.
The Funds understand the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. The investment manager
disagrees with this position and has found the dealers with which it engages in
OTC options transactions generally agreeable to and capable of entering into
closing transactions. The Funds have adopted procedures for engaging in OTC
options for the purpose of reducing any potential adverse effect of such
transactions upon the liquidity of the Funds' portfolios. A brief description of
such procedures is set forth below.
A Fund will only engage in OTC options transactions with dealers that have been
specifically approved by the investment manager pursuant to procedures adopted
by the Fund's Board of Trustees. The investment manager believes that the
approved dealers should be able to enter into closing transactions if necessary
and, therefore, present minimal credit risks to a Fund. The investment manager
will monitor the credit-worthiness of the approved dealers on an ongoing basis.
A Fund currently will not engage in OTC options transactions if the amount
invested by the Fund in OTC options, plus (for the Quantitative and Technology
Funds) a "liquidity charge" related to OTC options written by the Fund, plus the
amount invested by the Fund in illiquid securities, would exceed 15% of the
Fund's net assets. The "liquidity charge" referred to above is computed as
described below.
B-10
<PAGE> 61
The Quantitative and Technology Funds anticipate entering into agreements with
dealers to which the Fund sells OTC options. Under these agreements either Fund
would have the absolute right to repurchase the OTC options from the dealer at
any time at a price no greater than a price established under the agreements
(the "Repurchase Price"). The "liquidity charge" referred to above for a
specific OTC option transaction will be the Repurchase Price related to the OTC
option less the intrinsic value of the OTC option. The intrinsic value of an OTC
call option for such purposes will be the amount by which the current market
value of the underlying security exceeds the exercise price. In the case of an
OTC put option, intrinsic value will be the amount by which the exercise price
exceeds the current market value of the underlying security. If there is no such
agreement requiring a dealer to allow either Fund to repurchase a specific OTC
option written by the Fund, the "liquidity charge" will be the current market
value of the assets serving as "cover" for such OTC option.
OPTIONS ON SECURITIES INDICES. The Blue Chip, Growth, Small Cap, Total Return
and Value+Growth Funds may purchase, and the Quantitative and Technology Funds
may purchase and write, call and put options on securities indices in an attempt
to hedge against market conditions affecting the value of securities that the
Fund owns or intends to purchase, and not for speculation. Through the writing
or purchase of index options, a Fund can achieve many of the same objectives as
through the use of options on individual securities. Options on securities
indices are similar to options on a security except that, rather than the right
to take or make delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the securities index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Unlike security options, all
settlements are in cash and gain or loss depends upon price movements in the
market generally (or in a particular industry or segment of the market), rather
than upon price movements in individual securities. Price movements in
securities that the Fund owns or intends to purchase will probably not correlate
perfectly with movements in the level of an index since the prices of such
securities may be affected by somewhat different factors and, therefore, the
Fund bears the risk that a loss on an index option would not be completely
offset by movements in the price of such securities.
When the Quantitative or Technology Fund writes an option on a securities index,
it will segregate, and mark-to-market, eligible securities equal in value to
100% of the exercise price in the case of a put, or the contract value in the
case of a call. In addition, where a Fund writes a call option on a securities
index at a time when the contract value exceeds the exercise price, the Fund
will segregate and mark-to-market, until the option expires or is closed out,
cash or cash equivalents equal in value to such excess.
A Fund may also purchase and sell options on other appropriate indices, as
available, such as foreign currency indices. Options on futures contracts and
index options involve risks similar to those risks relating to transactions in
financial futures contracts described below. Also, an option purchased by a Fund
may expire worthless, in which case the Fund would lose the premium paid
therefor.
FINANCIAL FUTURES CONTRACTS. The Funds may enter into financial futures
contracts for the future delivery of a financial instrument, such as a security,
or an amount of foreign currency or the cash value of a securities index. This
investment technique is designed primarily to hedge (i.e., protect) against
anticipated future changes in market conditions or foreign exchange rates which
otherwise might affect adversely the value of securities or other assets which
the Fund holds or intends to purchase. A "sale" of a futures contract means the
undertaking of a contractual obligation to deliver the securities or the cash
value of an index or foreign currency called for by the contract at a specified
price during a specified delivery period. A "purchase" of a futures contract
means the undertaking of a contractual obligation to acquire the securities or
cash value of an index or foreign currency at a specified price during a
specified delivery period. At the time of delivery, in the case of fixed income
securities pursuant to the contract, adjustments are made to recognize
differences in value arising from the delivery of securities with a different
interest rate than that specified in the contract. In some cases, securities
called for by a futures contract may not have been issued at the time the
contract was written.
B-11
<PAGE> 62
Although some futures contracts by their terms call for the actual delivery or
acquisition of securities or other assets, in most cases a party will close out
the contractual commitment before delivery without having to make or take
delivery of the underlying assets by purchasing (or selling, as the case may be)
on a commodities exchange an identical futures contract calling for delivery in
the same month. Such a transaction, if effected through a member of an exchange,
cancels the obligation to make or take delivery of the underlying securities or
other assets. All transactions in the futures market are made, offset or
fulfilled through a clearing house associated with the exchange on which the
contracts are traded. A Fund will incur brokerage fees when it purchases or
sells contracts, and will be required to maintain margin deposits. At the time a
Fund enters into a futures contract, it is required to deposit with its
custodian, on behalf of the broker, a specified amount of cash or eligible
securities, called "initial margin." The initial margin required for a futures
contract is set by the exchange on which the contract is traded. Subsequent
payments, called "variation margin," to and from the broker are made on a daily
basis as the market price of the futures contract fluctuates. The costs incurred
in connection with futures transactions could reduce a Fund's return. Futures
contracts entail risks. If the investment manager's judgment about the general
direction of markets or exchange rates is wrong, the overall performance may be
poorer than if no such contracts had been entered into.
There may be an imperfect correlation between movements in prices of futures
contracts and portfolio assets being hedged. In addition, the market prices of
futures contracts may be affected by certain factors. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the assets and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities or other assets rather than engage in
closing transactions because of the resultant reduction in the liquidity of the
futures market. In addition, because, from the point of view of speculators, the
margin requirements in the futures markets are less onerous than margin
requirements in the cash market, increased participation by speculators in the
futures market could cause temporary price distortions. Due to the possibility
of price distortions in the futures market and because of the imperfect
correlation between movements in the prices of securities or other assets and
movements in the prices of futures contracts, a correct forecast of market
trends by the investment manager may still not result in a successful hedging
transaction. If any of these events should occur, the Fund could lose money on
the financial futures contracts and also on the value of its portfolio assets.
OPTIONS ON FINANCIAL FUTURES CONTRACTS. A Fund may purchase and write call and
put options on financial futures contracts. An option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time during
the period of the option. Upon exercise, the writer of the option delivers the
futures contract to the holder at the exercise price. A Fund would be required
to deposit with its custodian initial margin and maintenance margin with respect
to put and call options on futures contracts written by it. A Fund will
establish segregated accounts or will provide cover with respect to written
options on financial futures contracts in a manner similar to that described
under "Options on Securities." Options on futures contracts involve risks
similar to those risks relating to transactions in financial futures contracts
described above. Also, an option purchased by a Fund may expire worthless, in
which case the Fund would lose the premium paid therefor.
REGULATORY RESTRICTIONS. To the extent required to comply with SEC Release No.
IC-10666, when purchasing a futures contract, writing a put option or entering
into a forward currency exchange purchase, a Fund will maintain in a segregated
account cash, U.S. Government securities or liquid high-grade debt obligations
equal to the value of such contracts. A Fund will use cover in connection with
selling a futures contract.
A Fund will not engage in transactions in financial futures contracts or options
thereon for speculation, but only in an attempt to hedge against changes in
interest rates or market conditions affecting the value of securities which the
Fund holds or intends to purchase.
B-12
<PAGE> 63
FOREIGN CURRENCY OPTIONS. The Funds may engage in foreign currency options
transactions. A foreign currency option provides the option buyer with the right
to buy or sell a stated amount of foreign currency at the exercise price at a
specified date or during the option period. A call option gives its owner the
right, but not the obligation, to buy the currency, while a put option gives its
owner the right, but not the obligation, to sell the currency. The option seller
(writer) is obligated to fulfill the terms of the option sold if it is
exercised. However, either seller or buyer may close its position during the
option period in the secondary market for such options any time prior to
expiration.
A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect the Fund against an adverse movement in the
value of a foreign currency, it does not limit the gain which might result from
a favorable movement in the value of such currency. For example, if a Fund were
holding securities denominated in an appreciating foreign currency and had
purchased a foreign currency put to hedge against a decline in the value of the
currency, it would not have to exercise its put. Similarly, if the Fund had
entered into a contract to purchase a security denominated in a foreign currency
and had purchased a foreign currency call to hedge against a rise in value of
the currency but instead the currency had depreciated in value between the date
of purchase and the settlement date, the Fund would not have to exercise its
call but could acquire in the spot market the amount of foreign currency needed
for settlement.
FOREIGN CURRENCY FUTURES TRANSACTIONS. As part of their financial futures
transactions (see "Financial Futures Contracts" and "Options on Financial
Futures Contracts" above), the Funds may use foreign currency futures contracts
and options on such futures contracts. Through the purchase or sale of such
contracts, a Fund may be able to achieve many of the same objectives as through
forward foreign currency exchange contracts more effectively and possibly at a
lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized as
to amount and delivery period and are traded on boards of trade and commodities
exchanges. It is anticipated that such contracts may provide greater liquidity
and lower cost than forward foreign currency exchange contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days ("term") from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are traded directly between currency traders (usually large
commercial banks) and their customers. The investment manager believes that it
is important to have the flexibility to enter into such forward contracts when
it determines that to do so is in the best interests of a Fund. A Fund will not
speculate in foreign currency exchange.
If a Fund retains the portfolio security and engages in an offsetting
transaction with respect to a forward contract, the Fund will incur a gain or a
loss (as described below) to the extent that there has been movement in forward
contract prices. If the Fund engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline during the period between a Fund's entering into a
forward contract for the sale of foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund would
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund would suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Although such contracts tend to minimize the risk of loss due to
a decline in the value of the hedged currency, they also tend to limit any
potential gain that might result should the value of such currency increase. A
Fund may have to convert its holdings of foreign currencies into U.S. Dollars
from time to time in order to meet such needs as Fund expenses and redemption
requests. Although foreign exchange dealers do not charge a fee for conversion,
they do realize a profit based on the difference (the "spread") between the
prices at which they are buying and selling various currencies.
B-13
<PAGE> 64
A Fund will not enter into forward contracts or maintain a net exposure in such
contracts when the Fund would be obligated to deliver an amount of foreign
currency in excess of the value of the Fund's securities or other assets
denominated in that currency. A Fund segregates cash or liquid high-grade
securities in an amount not less than the value of the Fund's total assets
committed to forward foreign currency exchange contracts entered into for the
purchase of a foreign currency. If the value of the securities segregated
declines, additional cash or securities is added so that the segregated amount
is not less than the amount of the Fund's commitments with respect to such
contracts. A Fund generally does not enter into a forward contract with a term
longer than one year.
REPURCHASE AGREEMENTS. A Fund may invest in repurchase agreements, which are
instruments under which the Fund acquires ownership of a security from a
broker-dealer or bank that agrees to repurchase the security at a mutually
agreed upon time and price (which price is higher than the purchase price),
thereby determining the yield during the Fund's holding period. In the event of
a bankruptcy or other default of a seller of a repurchase agreement, the Fund
might incur expenses in enforcing its rights, and could experience losses,
including a decline in the value of the underlying securities and loss of
income. The securities underlying a repurchase agreement will be
marked-to-market every business day so that the value of such securities is at
least equal to the investment value of the repurchase agreement, including any
accrued interest thereon. No Fund currently intends to invest more than 5% of
its net assets in repurchase agreements during the current year.
SHORT SALES AGAINST-THE-BOX. The Blue Chip Fund may make short sales
against-the-box for the purpose of deferring realization of gain or loss for
federal income tax purposes. A short sale "against-the-box" is a short sale in
which the Fund owns at least an equal amount of the securities sold short or
securities convertible into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and at least equal in amount to,
the securities sold short. The Fund may engage in such short sales only to the
extent that not more than 10% of the Fund's total assets (determined at the time
of the short sale) is held as collateral for such sales. The Fund does not
currently intend, however, to engage in such short sales to the extent that more
than 5% of its net assets will be held as collateral therefor during the current
year.
OTHER CONSIDERATIONS--HIGH YIELD (HIGH RISK) BONDS. As reflected in the
prospectus, the Total Return Fund may invest a portion of its assets in fixed
income securities that are in the lower rating categories of recognized rating
agencies or are non-rated. These lower rated or non-rated fixed income
securities are considered, on balance, as predominantly speculative with respect
to capacity to pay interest and repay principal in accordance with the terms of
the obligation and generally will involve more credit risk than securities in
the higher rating categories.
The market values of such securities tend to reflect individual corporate
developments to a greater extent than do those of higher rated securities, which
react primarily to fluctuations in the general level of interest rates. Such
lower rated securities also tend to be more sensitive to economic conditions
than are higher rated securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, regarding lower rated bonds may
depress the prices for such securities. These and other factors adversely
affecting the market value of high yield securities will adversely affect the
Fund's net asset value. Although some risk is inherent in all securities
ownership, holders of fixed income securities have a claim on the assets of the
issuer prior to the holders of common stock. Therefore, an investment in fixed
income securities generally entails less risk than an investment in common stock
of the same issuer.
High yield securities frequently are issued by corporations in the growth stage
of their development. They may also be issued in connection with a corporate
reorganization or a corporate takeover. Companies that issue such high yielding
securities often are highly leveraged and may not have available to them more
traditional methods of financing. Therefore, the risk associated with acquiring
the securities of such issuers generally is greater than is the case with higher
rated securities. For example, during an economic downturn or recession, highly
leveraged issuers of high yield securities may experience financial stress.
During such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
or the issuer's inability to meet
B-14
<PAGE> 65
specific projected business forecasts, or the unavailability of additional
financing. The risk of loss from default by the issuer is significantly greater
for the holders of high yielding securities because such securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Zero coupon securities and pay-in-kind bonds involve additional special
considerations. Zero coupon securities are debt obligations that do not entitle
the holder to any periodic payments of interest prior to maturity or a specified
cash payment date when the securities begin paying current interest (the "cash
payment date") and therefore are issued and traded at a discount from their face
amount or par value. The market prices of zero coupon securities are generally
more volatile than the market prices of securities that pay interest
periodically and are likely to respond to changes in interest rates to a greater
degree than do securities paying interest currently with similar maturities and
credit quality. Zero coupon, pay-in-kind or deferred interest bonds carry
additional risk in that unlike bonds that pay interest throughout the period to
maturity, the Fund will realize no cash until the cash payment date unless a
portion of such securities is sold and, if the issuer defaults, the Fund may
obtain no return at all on its investment.
Additional information concerning high yield securities appears under
"Appendix--Ratings of Fixed Income Investments."
PORTFOLIO TRANSACTIONS
KFS is the investment manager for the Kemper Funds and KFS and its affiliates
also furnish investment management services to other clients including Kemper
Corporation and the Kemper insurance companies. KFS is the sole shareholder of
Zurich Investment Management, Inc. and Zurich Investment Management, Limited.
These three entities share some common research and trading facilities. DVA is
the investment manager for Kemper-Dreman Fund, Inc. and the sub-adviser for the
Value+Growth Fund. At times investment decisions may be made to purchase or sell
the same investment securities for a Fund and for one or more of the other
clients managed by KFS or DVA. When two or more of such clients are
simultaneously engaged in the purchase or sale of the same security through the
same trading facility, the transactions are allocated as to amount and price in
a manner considered equitable to each.
National securities exchanges have established limitations governing the maximum
number of options in each class which may be written by a single investor or
group of investors acting in concert. An exchange may order the liquidation of
positions found to be in violation of these limits, and it may impose certain
other sanctions. These position limits may restrict the number of options a Fund
will be able to write on a particular security.
The above mentioned factors may have a detrimental effect on the quantities or
prices of securities, options or futures contracts available to a Fund. On the
other hand, the ability of a Fund to participate in volume transactions may
produce better executions for a Fund in some cases. The Board of Trustees of
each Fund believes that the benefits of KFS's and DVA's organization outweigh
any limitations that may arise from simultaneous transactions or position
limitations.
KFS and DVA, in effecting purchases and sales of portfolio securities for the
account of a Fund, will implement each Fund's policy of seeking best execution
of orders, which includes best net prices, except to the extent that KFS and DVA
may be permitted to pay higher brokerage commissions for research services as
described below. Consistent with this policy, orders for portfolio transactions
are placed with broker-dealer firms giving consideration to the quality,
quantity and nature of each firm's professional services, which include
execution, clearance procedures, wire service quotations and statistical and
other research information provided to a Fund and KFS or DVA. Any research
benefits derived are available for all clients, including clients of affiliated
companies. Since it is only supplementary to KFS's and DVA's own research
efforts and must be analyzed and reviewed by KFS' and DVA's staff, the receipt
of research information is not expected to materially reduce expenses. In
selecting among firms believed to meet the criteria for handling a particular
transaction, KFS and DVA may give consideration to those firms that have sold or
are selling shares of the Funds and of other funds
B-15
<PAGE> 66
managed by KFS and DVA, as well as to those firms that provide market,
statistical and other research information to a Fund and KFS and DVA, although
neither KFS nor DVA is authorized to pay higher commissions or, in the case of
principal trades, higher prices to firms that provide such services, except as
described below.
KFS and DVA may in certain instances be permitted to pay higher brokerage
commissions (not including principal trades) solely for receipt of market,
statistical and other research services. Subject to Section 28(e) of the
Securities Exchange Act of 1934 and procedures that may be adopted by the Board
of Trustees of each Fund, a Fund could pay a firm that provides research
services to KFS or DVA commissions for effecting a securities transaction for
the Fund in excess of the amount other firms would have charged for the
transaction if KFS or DVA determines in good faith that the greater commission
is reasonable in relation to the value of the research services provided by the
executing firm viewed in terms either of a particular transaction or KFS's or
DVA's overall responsibilities to the Fund or other clients. Not all of such
research services may be useful or of value in advising a particular Fund.
Research benefits will be available for all clients of KFS and its subsidiaries.
The investment management fee paid by a Fund to KFS is not reduced because KFS
or DVA receives these research services.
The table below shows total brokerage commissions paid by each Fund for the last
three fiscal years and for the most recent fiscal year, the percentage thereof
that was allocated to firms based upon research information provided or sales of
Kemper Fund shares (except for the Quantitative Fund, which will commence
operations on February 15, 1996.
<TABLE>
<CAPTION>
ALLOCATED TO FIRMS
BASED ON
RESEARCH/SALES OF
KEMPER FUND SHARES
FUND FISCAL 1995 IN FISCAL 1995 FISCAL 1994 FISCAL 1993
- ------------------------------------------ ----------- ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Blue Chip................................. $ 506,000 90% $ 565,000 $ 1,128,000
Growth.................................... $ 6,470,000 81% $ 7,110,000 $ 8,100,000
Small Cap................................. $ 5,975,000 63% $ 2,782,000 $ 2,740,000
Technology................................ $ 3,504,000 75% $ 1,644,000 $ 3,279,000
Total Return.............................. $ 8,309,000 68% $ 7,705,000 $ 6,884,000
Value+Growth*............................. $ 6,000 17% N.A. N.A.
</TABLE>
- ---------------
* For the period October 16, 1995 to November 30, 1995.
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Kemper Financial Services, Inc. (to be named Zurich Kemper
Investments, Inc. on or about March 1, 1996) ("KFS"), 120 South LaSalle Street,
Chicago, Illinois 60603, is each Fund's investment manager. KFS is owned by KFS
Holding Corp. KFS Holding Corp. is a more than 90% owned subsidiary of Zurich
Holding Company of America, Inc., which is a wholly-owned subsidiary of Zurich
Insurance Company, an internationally recognized company providing services in
life and non-life insurance, reinsurance and asset management. Pursuant to
investment management agreements, KFS acts as each Fund's investment adviser,
manages its investments, administers its business affairs, furnishes office
facilities and equipment, provides clerical, bookkeeping and administrative
services, and permits any of its officers or employees to serve without
compensation as trustees or officers of a Fund if elected to such positions.
Each investment management agreement provides that each Fund pays the charges
and expenses of its operations, including the fees and expenses of the trustees
(except those who are officers or employees of KFS), independent auditors,
counsel, custodian and transfer agent and the cost of share certificates,
reports and notices to shareholders, brokerage commissions or transaction costs,
costs of calculating net asset value, taxes and
B-16
<PAGE> 67
membership dues. Each Fund bears the expenses of registration of its shares with
the Securities and Exchange Commission, while Kemper Distributors, Inc. ("KDI"),
as principal underwriter, pays the cost of qualifying and maintaining the
qualification of each Fund's shares for sale under the securities laws of the
various states. KFS has agreed to reimburse each Fund to the extent required by
applicable state expense limitations should all operating expenses of each Fund,
including the investment management fees of KFS but excluding taxes, interest,
distribution fees, extraordinary expenses, brokerage commissions or transaction
costs and any other properly excludable expenses, exceed the applicable state
expense limitations. The Funds believe that the most restrictive state expense
limitation currently in effect would require that such operating expenses not
exceed 2.5% of the first $30 million of average daily net assets, 2% of the next
$70 million and 1.5% of average daily net assets over $100 million. Under such
state expense limitation, custodian costs attributable to foreign securities
that are in excess of similar domestic custodian costs are excluded from
operating expenses.
The investment management agreements provide that KFS shall not be liable for
any error of judgment or of law, or for any loss suffered by a Fund in
connection with the matters to which the agreements relate, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
KFS in the performance of its obligations and duties, or by reason of its
reckless disregard of its obligations and duties under each agreement.
Each Fund's investment management agreement continues in effect from year to
year so long as its continuation is approved at least annually (a) by a majority
of the trustees who are not parties to such agreement or interested persons of
any such party except in their capacity as trustees of the Fund and (b) by the
shareholders or the Board of Trustees of the Fund. The agreements for the
Quantitative and Value+Growth Funds have initial terms ending March 1, 1997.
Each Fund's investment management agreement may be terminated at any time upon
60 days notice by either party, or by a majority vote of the outstanding shares
of the Fund, and will terminate automatically upon assignment. If additional
Fund's become subject to an investment management agreement, the provisions
concerning continuation, amendment and termination shall be on a Fund by Fund
basis. Additional Funds may be subject to a different agreement.
The current investment management fee rates paid by the Funds are in the
prospectus, see "Investment Manager and Underwriter." The investment management
fees paid by each Fund for its last three fiscal years are shown in the table
below (except for the Quantitative Fund, which will not commence operations
until February 15, 1996).
<TABLE>
<CAPTION>
FUND FISCAL 1995 FISCAL 1994 FISCAL 1993
- ------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Blue Chip............................................. $ 903,000 1,072,000 1,298,000
Growth................................................ $12,349,000 9,634,000 8,320,000
Small Cap............................................. $ 3,273,000+ 3,746,000++ 2,290,000+++
Technology............................................ $ 4,542,000 3,296,000 3,074,000
Total Return.......................................... $15,147,000 10,997,000 6,837,000
Value+Growth*......................................... $ 1,000 N.A. N.A.
</TABLE>
- ---------------
* For the period October 16, 1995 to November 30, 1995.
+ Fee was decreased $766,000 from $4,039,000 base fee.
++ Fee was increased $499,000 from $3,247,000 base fee.
+++ Fee was decreased $102,000 from $2,392,000 base fee.
The Small Cap Fund pays a base annual investment management fee, payable
monthly, at the rate of .65 of 1% of the average daily net assets of the Fund.
This base fee is subject to upward or downward adjustment on the basis of the
investment performance of the Class A shares of the Fund as compared with the
performance of the Standard & Poor's 500 Stock Index (the "Index"). The Small
Cap Fund will pay an additional monthly fee at an annual rate of .05% of such
average daily net assets for each percentage point (fractions to be prorated) by
which the performance of the Class A shares of the Fund exceeds that of the
Index for the immediately
B-17
<PAGE> 68
preceding twelve months; provided that such additional monthly fee shall not
exceed 1/12 of .30% of the average daily net assets. Conversely, the
compensation payable by the Small Cap Fund will be reduced by an annual rate of
.05% of such average daily net assets for each percentage point (fractions to be
prorated) by which the performance of the Class A shares of the Fund falls below
that of the Index, provided that such reduction in the monthly fee shall not
exceed 1/12 of .30% of the average net assets. The total fee on an annual basis
can range from .35% to .95% of average daily net assets. The Small Cap Fund's
investment performance during any twelve month period is measured by the
percentage difference between (a) the opening net asset value of one Class A
share of the Fund and (b) the sum of the closing net asset value of one Class A
share of the Fund plus the value of any income and capital gain dividends on
such share during the period treated as if reinvested in Class A shares of the
Fund at the time of distribution. The performance of the Index is measured by
the percentage change in the Index between the beginning and the end of the
twelve month period with cash distributions on the securities which comprise the
Index being treated as reinvested in the Index at the end of each month
following the payment of the dividend. Each monthly calculation of the incentive
portion of the fee may be illustrated as follows: if over the preceding twelve
month period the Small Cap Fund's adjusted net asset value applicable to one
Class A share went from $10.00 to $11.00 (10% appreciation), and the Index,
after adjustment, went from 100 to 104 (or only 4%), the entire incentive
compensation would have been earned by KFS. On the other hand, if the Index rose
from 100 to 110 (10%), no incentive fee would have been payable. A rise in the
Index from 100 to 116 (16%) would have resulted in the minimum monthly fee of
1/12 of .35%. Since the computation is not cumulative from year to year, an
additional management fee may be payable with respect to a particular year,
although the Small Cap Fund's performance over some longer period of time may be
less favorable than that of the Index. Conversely, a lower management fee may be
payable in a year in which the performance of the Fund's Class A shares' is less
favorable than that of the Index, although the performance of the Fund's Class A
shares over a longer period of time might be better than that of the Index.
Prior to May 31, 1994, the Blue Chip Fund paid KFS an investment management fee,
payable monthly, at the annual rate of .65% of average daily net assets of the
Fund. Prior to May 31, 1994, the Growth Fund and the Total Return Fund each paid
KFS an investment management fee, payable monthly, at the annual rate of .65% of
the first $200 million of average daily net assets, .55% of the next $300
million of average daily net assets and .45% of average daily net assets over
$500 million. Prior to May 31, 1994, the Technology Fund paid KFS an investment
management fee, payable monthly, at the annual rate of .60% of the first $200
million of average daily net assets, .50% of the next $300 million of average
daily net assets and .401% of average daily net assets over $500 million.
VALUE+GROWTH FUND SUB-ADVISER. Dreman Value Advisors, Inc. ("DVA"), 10 Exchange
Place, Jersey City, New Jersey 07302, is the sub-adviser for the value portion
of the Value+Growth Fund. DVA is a wholly owned subsidiary of KFS. DVA will act
as sub-adviser pursuant to the terms of a Sub-Advisory Agreement between it and
KFS.
Under the terms of the Sub-Advisory Agreement, DVA will manage the value portion
of the Value+Growth Fund's portfolio and will provide such investment advice,
research and assistance as KFS may, from time to time, reasonably request. DVA
may, under the terms of the Sub-Advisory Agreement, render similar services to
others including other investment companies. For its services, DVA will receive
from KFS a monthly fee at the annual rate of .25% of the Fund's average daily
net assets. DVA permits any of its officers or employees to serve without
compensation as trustees or officers of the Value+Growth Fund if elected to such
positions.
The Sub-Advisory Agreement provides that DVA will not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Sub-Advisory Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
DVA in the performance of its duties or from reckless disregard by DVA of its
obligations and duties under the Sub-Advisory Agreement.
B-18
<PAGE> 69
The Sub-Advisory Agreement has an initial term ending March 1, 1997 and
continues by its terms from year to year if such continuance is specifically
approved at least annually (a) by a majority of the trustees who are not parties
to such agreement or interested persons of any such party except in their
capacity as trustees of the Fund, and (b) by the shareholders or the Board of
Trustees of the Fund. The Sub-Advisory Agreement may be terminated at any time
upon 60 days' notice by KFS, DVA or by the Board of Trustees of the Fund or by
majority vote of the outstanding shares of the Fund, and will terminate
automatically upon assignment or upon termination of the Fund's investment
management agreement.
PRINCIPAL UNDERWRITER. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), a wholly owned subsidiary of KFS, is the principal underwriter and
distributor for the shares of each Fund and acts as agent of each Fund in the
continuous offering of its shares. KDI bears all its expenses of providing
services pursuant to the distribution agreements, including the payment of any
commissions. Each Fund pays the cost for the prospectus and shareholder reports
to be set in type and printed for existing shareholders, and KDI, as principal
underwriter, pays for the printing and distribution of copies thereof used in
connection with the offering of shares to prospective investors. KDI also pays
for supplementary sales literature and advertising costs. Before February 1,
1995, KFS was the principal underwriter and distributor.
Each distribution agreement continues in effect from year to year so long as
such continuance is approved for each class at least annually by a vote of the
Board of Trustees of the Fund, including the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
agreement. Each agreement automatically terminates in the event of its
assignment and may be terminated for a class at any time without penalty by a
Fund or by KDI upon 60 days' notice. Termination by a Fund with respect to a
class may be by vote of a majority of the Board of Trustees, or a majority of
the Trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the agreement, or a "majority of the
outstanding voting securities" of the class of the Fund, as defined under the
Investment Company Act of 1940. The agreement may not be amended for a class to
increase the fee to be paid by a Fund with respect to such class without
approval by a majority of the outstanding voting securities of such class of the
Fund and all material amendments must in any event be approved by the Board of
Trustees in the manner described above with respect to the continuation of the
agreement. The provisions concerning the continuation, amendment and termination
of the distribution agreement are on a Fund by Fund basis and for each Fund on a
class by class basis.
B-19
<PAGE> 70
CLASS A SHARES. The following information concerns the underwriting commissions
paid in connection with the distribution of each Fund's Class A shares for the
fiscal years noted (except for the Quantitative Fund, which will not commence
operations until February 15, 1996.
<TABLE>
<CAPTION>
COMMISSIONS
COMMISSIONS PAID TO KEMPER
COMMISSIONS RETAINED UNDERWRITER AFFILIATED
FUND FISCAL YEAR BY UNDERWRITER PAID TO ALL FIRMS FIRMS
- ----------------------------- ----------- -------------------- ----------------- --------------
<S> <C> <C> <C> <C>
Blue Chip.................... 1995 $ 33,000 225,000 29,000
1994 $ 64,000 398,000 68,000
1993 $ 130,000 1,022,000 214,000
Growth....................... 1995 $ 266,000 2,130,000 326,000
1994 $ 489,000 3,861,000 591,000
1993 $1,404,000 12,057,000 1,622,000
Small Cap.................... 1995 $ 105,000 798,000 133,000
1994 $ 182,000 1,264,000 243,000
1993 $ 224,000 4,669,000 1,148,000
Technology................... 1995 $ 116,000 840,000 218,000
1994 $ 43,000 218,000 38,000
1993 $ 65,000 250,000 37,000
Total Return................. 1995 $ 206,000 1,642,000 218,000
1994 $ 523,000 4,036,000 693,000
1993 $ 620,000 5,144,000 746,000
Value+Growth*................ 1995 $ 0 48,000 3,000
1994 $ N.A. N.A. N.A.
1993 $ N.A. N.A. N.A.
</TABLE>
- ---------------
* For the period October 16, 1995 to November 30, 1995.
CLASS B SHARES AND CLASS C SHARES. Since the distribution agreement provides for
fees charged to Class B and Class C shares that are used by KDI to pay for
distribution services (see the prospectus under "Investment Manager and
Underwriter"), the agreement (the "Plan") is approved and renewed separately for
the Class B and Class C shares in accordance with Rule 12b-1 under the
Investment Company Act of 1940, which regulates the manner in which an
investment company may, directly or indirectly, bear expenses of distributing
its shares. Expenses of the Funds and of KDI (and KFS as its predecessor until
February 1, 1995), in connection with the Rule 12b-1 Plans for the Class B and
Class C Shares are set forth below (except for the Quantitative Fund, which will
not commence operations until February 15, 1996). A portion of the marketing,
sales and operating expenses shown below could be considered overhead expense.
<TABLE>
<CAPTION>
OTHER DISTRIBUTION EXPENSES PAID
BY UNDERWRITER
DISTRIBUTION CONTINGENT TOTAL ----------------------------------
FEES PAID DEFERRED COMMISSIONS COMMISSIONS ADVERTISING MARKETING
FUND CLASS B FISCAL BY FUND TO SALES CHARGES PAID BY UNDERWRITER PAID BY UNDERWRITER AND PROSPECTUS AND SALES
SHARES YEAR UNDERWRITER TO UNDERWRITER TO FIRMS TO AFFILIATED FIRMS LITERATURE PRINTING EXPENSES
- --------------- ------ ----------- -------------- ------------------- ------------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Blue Chip...... 1995 $ 59,000 29,000 183,000 25,000 18,000 6,000 77,000
Growth......... 1995 $ 5,249,000 2,368,000 3,296,000 335,000 322,000 59,000 1,872,000
Small Cap...... 1995 $ 1,341,000 518,000 1,188,000 142,000 117,000 22,000 666,000
Technology..... 1995 $ 168,000 56,000 654,000 151,000 53,000 14,000 239,000
Total Return... 1995 $ 8,303,000 3,318,000 3,751,000 371,000 416,000 62,000 2,277,000
Value+
Growth*...... 1995 $ 1,000 0 75,000 2,000 2,000 0 9,000
<CAPTION>
MISC.
FUND CLASS B OPERATING INTEREST
SHARES EXPENSES EXPENSES
- --------------- --------- --------
<S> <C> <C>
Blue Chip...... 26,000 22,000
Growth......... 239,000 277,000
Small Cap...... 98,000 317,000
Technology..... 55,000 54,000
Total Return... 277,000 809,000
Value+
Growth*...... 3,000 1,000
</TABLE>
- ---------------
* For the period October 16, 1995 to November 30, 1995.
B-20
<PAGE> 71
<TABLE>
<CAPTION>
OTHER DISTRIBUTION EXPENSES PAID BY
TOTAL DISTRIBUTION UNDERWRITER
DISTRIBUTION DISTRIBUTION FEES PAID --------------------------------------
FEES PAID FEES PAID BY UNDERWRITER ADVERTISING MARKETING
FUND CLASS C BY FUND BY UNDERWRITER TO AFFILIATED AND PROSPECTUS AND SALES
SHARES FISCAL YEAR TO UNDERWRITER TO FIRMS FIRMS LITERATURE PRINTING EXPENSES
- ------------------ ----------- -------------- -------------- -------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Blue Chip......... 1995 $ 5,000 5,000 0 3,000 1,000 13,000
Growth............ 1995 $ 23,000 22,000 6,000 12,000 2,000 70,000
Small Cap......... 1995 $ 13,000 13,000 4,000 6,000 1,000 36,000
Technology........ 1995 $ 5,000 4,000 1,000 4,000 1,000 19,000
Total Return...... 1995 $ 26,000 25,000 5,000 13,000 2,000 72,000
Value+Growth...... 1995 $ 0 0 0 1,000 0 1,000
<CAPTION>
OTHER DISTRIBUTION EXPENSES PAID BY
UNDERWRITER
--------------------------------------
MISC.
FUND CLASS C OPERATING INTEREST
SHARES EXPENSES EXPENSES
- ------------------ --------- --------
<S> <C> <C>
Blue Chip......... 8,000 2,000
Growth............ 15,000 7,000
Small Cap......... 14,000 4,000
Technology........ 10,000 2,000
Total Return...... 15,000 9,000
Value+Growth...... 1,000 0
</TABLE>
ADMINISTRATIVE SERVICES. Administrative services are provided to each Fund under
an administrative services agreement ("administrative agreement") with KDI. KDI
bears all its expenses of providing services pursuant to the administrative
agreement between KDI and each Fund, including the payment of service fees. Each
Fund pays KDI an administrative services fee, payable monthly, at an annual rate
of up to .25% of average daily net assets of Class A, B and C shares of each
Fund. Before February 1, 1995, KFS was the administrator.
KDI has entered into related arrangements with various financial services firms,
such as broker-dealers or banks ("firms"), that provide services and facilities
for their customers or clients who are shareholders of a Fund. The firms provide
such office space and equipment, telephone facilities and personnel as is
necessary or beneficial for providing information and services to their clients.
Such services and assistance may include, but are not limited to, establishing
and maintaining shareholder accounts and records, processing purchase and
redemption transactions, answering routine inquiries regarding the Fund,
assistance to clients in changing dividend and investment options, account
designations and addresses and such other services as may be agreed upon from
time to time and permitted by applicable statute, rule or regulation. KDI pays
each firm a service fee, payable quarterly, at an annual rate of up to .25% of
the net assets in Fund accounts that it maintains and services attributable to
Class A, Class B and Class C shares, respectively, in each case commencing with
the month after investment (month of investment for Class C shares); provided,
however, KDI may advance the first year service fee as described in the
prospectus under "Investment Manager and Underwriter." Firms to which service
fees may be paid include broker-dealers affiliated with KDI.
B-21
<PAGE> 72
The following information concerns the administrative services fee paid by each
Fund (except for the Quantitative Fund, which will not commence operations until
February 15, 1996.
<TABLE>
<CAPTION>
ADMINISTRATIVE SERVICE FEES
PAID BY FUND SERVICE FEES SERVICE FEES
---------------------------------- PAID BY ADMINISTRATOR PAID BY ADMINISTRATOR
FUND FISCAL YEAR CLASS A CLASS B CLASS C TO FIRMS TO AFFILIATED FIRMS
- ------------------- ----------- ---------- --------- ------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Blue Chip.......... 1995 $ 361,000 19,000 2,000 386,000 69,000
1994* $ 407,000 2,000 -- 413,000 92,000
1993 $ 476,000 N.A. N.A. 476,000 129,000
Growth............. 1995 $3,633,000 1,721,000 8,000 5,301,000 693,000
1994* $3,628,000 553,000 1,000 4,347,000 618,000
1993 $3,740,000 N.A. N.A. 3,740,000 627,000
Small Cap.......... 1995 $1,141,000 442,000 4,000 1,579,000 334,000
1994* $1,066,000 124,000 -- 1,212,000 321,000
1993 $ 935,000 N.A. N.A. 935,000 292,000
Technology......... 1995 $1,187,000 56,000 2,000 1,269,000 116,000
1994* $ 873,000 1,000 -- 885,000 83,000
1993 $ 820,000 N.A. N.A. 820,000 81,000
Total Return....... 1995 $4,047,000 2,710,000 9,000 6,685,000 1,010,000
1994* $3,635,000 1,212,000 1,000 5,063,000 959,000
1993 $3,159,000 N.A. N.A. 3,159,000 869,000
Value+Growth**..... 1995 $ 0 0 0 5,000 0
1994 $ N.A. N.A. N.A. N.A. N.A.
1993 $ N.A. N.A. N.A. N.A. N.A.
</TABLE>
- ---------------
* Class B and Class C shares were first offered on May 31, 1994.
** For the period October 16, 1995 to November 30, 1995.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for a Fund. Currently, the
administrative services fee payable to KDI is based only upon Fund assets in
accounts for which there is a firm listed on the Fund's records and it is
intended that KDI will pay all the administrative services fee that it receives
from a Fund to firms in the form of service fees. The effective administrative
services fee rate to be charged against all assets of a Fund while this
procedure is in effect will depend upon the proportion of Fund assets that is in
accounts for which there is a firm of record. The Board of Trustees of a Fund,
in its discretion, may approve basing the fee to KDI on all Fund assets in the
future.
Certain trustees or officers of a Fund are also directors or officers of KFS or
KDI as indicated under "Officers and Trustees."
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary
Trust Company ("IFTC"), 127 West 10th Street, Kansas City, Missouri 64105, as
custodian and State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as sub-custodian, have custody of all securities and cash
of each Fund maintained in the United States. The Chase Manhattan Bank, N.A.,
Chase MetroTech Center, Brooklyn, New York 11245, as custodian, has custody of
all securities and cash of each Fund held outside of the United States. They
attend to the collection of principal and income, and payment for and collection
of proceeds of securities bought and sold by each Fund. IFTC is also each Fund's
transfer agent and dividend-paying agent. Pursuant to a services agreement with
IFTC, Kemper Service Company ("KSvC"), an affiliate of KFS, serves as
"Shareholder Service Agent." IFTC receives as transfer agent, and pays to KSvC,
annual account fees of $6 per account plus account set up, transaction and
maintenance charges, annual fees associated with the contingent deferred sales
charge (Class B only) and out-of-pocket expense reimbursement. IFTC's fee is
reduced by certain earnings credits in favor of the Fund. The following shows
for each Fund's
B-22
<PAGE> 73
1995 fiscal year (except Quantitative Fund), the shareholder service fees IFTC
remitted to KSvC. As noted previously, the Quantitative Fund will not commence
operations until February 15, 1996.
<TABLE>
<CAPTION>
FEES IFTC
FUND PAID TO KSVC
------------
<S> <C>
Blue Chip........................................................................... $ 557,000
Growth.............................................................................. $ 7,474,000
Small Cap........................................................................... $ 2,512,000
Technology.......................................................................... $ 724,000
Total Return........................................................................ $ 7,970,000
Value+Growth*....................................................................... $ 0
</TABLE>
- ---------------
* For the period October 16, 1995 to November 30, 1995.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Funds' independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the Funds' annual financial statements, review certain
regulatory reports and the Funds' federal income tax returns, and perform other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Funds. Shareholders will receive annual audited financial statements
and semi-annual unaudited financial statements.
PURCHASE AND REDEMPTION OF SHARES
As described in the Funds' prospectus, shares of a Fund are sold at their public
offering price, which is the net asset value per share of the Fund next
determined after an order is received in proper form plus, with respect to Class
A shares, an initial sales charge. The minimum initial investment is $1,000 and
the minimum subsequent investment is $100 but such minimum amounts may be
changed at any time. See the prospectus for certain exceptions to these
minimums. An order for the purchase of shares that is accompanied by a check
drawn on a foreign bank (other than a check drawn on a Canadian bank in U.S.
Dollars) will not be considered in proper form and will not be processed unless
and until the Fund determines that it has received payment of the proceeds of
the check. The time required for such a determination will vary and cannot be
determined in advance.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of a Fund will be redeemed by the Fund at the applicable net asset value
per share of such Fund as described in the Funds' prospectus. The redemption
within one year of Class A shares purchased at net asset value under the Large
Order NAV Purchase Privilege described in the prospectus may be subject to a 1%
contingent deferred sales charge (see "Purchase of Shares" in the prospectus).
Redemption of Class B shares may be subject to a contingent deferred sales
charge. When a Fund is asked to redeem shares for which it may not yet have
received good payment, it may delay the mailing of a redemption check until it
has determined that collected funds have been received for the purchase of such
shares, which will be up to 15 days.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemptions of Class B shares by certain classes of persons or through certain
types of transactions as described in the prospectus is provided because of
anticipated economies in sales and sales related efforts.
A Fund may suspend the right of redemption or delay payment more than seven days
(a) during any period when the New York Stock Exchange (the "Exchange") is
closed other than customary weekend and holiday closings or during any period in
which trading on the Exchange is restricted, (b) during any period when an
emergency exists as a result of which (i) disposal of a Fund's investments is
not reasonably practicable, or (ii) it is not reasonably practicable for the
Fund to determine the value of its net assets, or (c) for such other periods as
the Securities and Exchange Commission may by order permit for the protection of
a Fund's shareholders.
B-23
<PAGE> 74
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to each Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B shares would occur, and shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described in the prospectus.
DIVIDENDS AND TAXES
DIVIDENDS. Each Fund normally distributes dividends of net investment income as
follows: annually for the Growth, Quantitative, Small Cap, Technology and
Value+Growth Funds; semi-annually for the Blue Chip Fund; and quarterly for the
Total Return Fund. Each Fund distributes any net realized short-term and
long-term capital gains at least annually. The quarterly distribution to
shareholders of the Total Return Fund may include short-term capital gains.
A Fund may at any time vary its foregoing dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income and its net short-term and long-
term capital gains as the Board of Trustees of the Fund determines appropriate
under the then current circumstances. In particular, and without limiting the
foregoing, a Fund may make additional distributions of net investment income or
capital gain net income in order to satisfy the minimum distribution
requirements contained in the Internal Revenue Code (the "Code"). Dividends will
be reinvested in shares of the Fund paying such dividends unless shareholders
indicate in writing that they wish to receive them in cash or in shares of other
Kemper Funds as described in the prospectus.
The level of income dividends per share (as a percentage of net asset value)
will be lower for Class B and Class C shares than for Class A shares primarily
as a result of the distribution services fee applicable to Class B and Class C
shares. Distributions of capital gains, if any, will be paid in the same amount
for each class.
TAXES. Each Fund intends to continue to qualify (or, for the Quantitative Fund,
intends to qualify) as a regulated investment company under Subchapter M of the
Code and, if so qualified, will not be liable for federal income taxes to the
extent its earnings are distributed. One of the Subchapter M requirements to be
satisfied is that less than 30% of a Fund's gross income during its fiscal year
must be derived from gains (not reduced by losses) from the sale or other
disposition of securities and certain other investments held for less than three
months. A Fund may be limited in its options, futures and foreign currency
transactions in order to prevent recognition of such gains.
A Fund's options, futures and foreign currency transactions are subject to
special tax provisions that may accelerate or defer recognition of certain gains
or losses, change the character of certain gains or losses, or alter the holding
periods of certain of the Fund's securities.
The mark-to-market rules of the Code may require a Fund to recognize unrealized
gains and losses on certain options and futures held by the Fund at the end of
the fiscal year. Under these provisions, 60% of any capital gain net income or
loss recognized will generally be treated as long-term and 40% as short-term.
However, although certain forward contracts and futures contracts on foreign
currency are marked-to-market, the gain or loss is generally ordinary under
Section 988 of the Code. In addition, the straddle rules of the Code would
require deferral of certain losses realized on positions of a straddle to the
extent that the Fund had unrealized gains in offsetting positions at year end.
Gains and losses attributable to fluctuations in the value of foreign currencies
will be characterized generally as ordinary gain or loss under Section 988 of
the Code. For example, if a Fund sold a foreign bond and part of the
B-24
<PAGE> 75
gain or loss on the sale was attributable to an increase or decrease in the
value of a foreign currency, then the currency gain or loss may be treated as
ordinary income or loss. If such transactions result in greater net ordinary
income, the dividends paid by the Fund will be increased; if the result of such
transactions is lower net ordinary income, a portion of dividends paid could be
classified as a return of capital.
A 4% excise tax is imposed on the excess of the required distribution for a
calendar year over the distributed amount for such calendar year. The required
distribution is the sum of 98% of a Fund's net investment income for the
calendar year plus 98% of its capital gain net income for the one-year period
ending October 31, plus any undistributed net investment income from the prior
calendar year, plus any undistributed capital gain net income from the one year
period ended October 31 of the prior calendar year, minus any overdistribution
in the prior calendar year. For purposes of calculating the required
distribution, foreign currency gains or losses occurring after October 31 are
taken into account in the following calendar year. Each Fund intends to declare
or distribute dividends during the appropriate periods of an amount sufficient
to prevent imposition of the 4% excise tax.
A shareholder who redeems shares of a Fund will recognize capital gain or loss
for federal income tax purposes measured by the difference between the value of
the shares redeemed and the adjusted cost basis of the shares. Any loss
recognized on the redemption of Fund shares held six months or less will be
treated as long-term capital loss to the extent that the shareholder has
received any long-term capital gain dividends on such shares. A shareholder who
has redeemed shares of a Fund or other Kemper Mutual Fund listed in the
prospectus under "Special Features--Class A Shares--Combined Purchases" (other
than shares of Kemper Cash Reserves Fund not acquired by exchange from another
Kemper Mutual Fund) may reinvest the amount redeemed at net asset value at the
time of the reinvestment in shares of any Fund or in shares of a Kemper Mutual
Fund within six months of the redemption as described in the prospectus under
"Redemption or Repurchase of Shares-- Reinvestment Privilege." If a shareholder
realized a loss on the redemption or exchange of a Fund's shares and reinvests
in shares of the same Fund 30 days before or after the redemption or exchange,
the transactions may be subject to the wash sale rules resulting in a
postponement of the recognition of such loss for federal income tax purposes. An
exchange of a Fund's shares for shares of another fund is treated as a
redemption and reinvestment for federal income tax purposes upon which gain or
loss may be recognized.
A Fund's investment income derived from foreign securities may be subject to
foreign income taxes withheld at the source. Because the amount of a Fund's
investments in various countries will change from time to time, it is not
possible to determine the effective rate of such taxes in advance.
Shareholders who are non-resident aliens are subject to U.S. withholding tax on
ordinary income dividends (whether received in cash or shares) at a rate of 30%
or such lower rate as prescribed by any applicable tax treaty.
PERFORMANCE
As described in the prospectus, each Fund's historical performance or return for
a class of shares may be shown in the form of "average annual total return" and
"total return" figures. These various measures of performance are described
below. Performance information will be computed separately for each class.
Each Fund's average annual total return quotation is computed in accordance with
a standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a Fund for a specific period is
found by first taking a hypothetical $1,000 investment ("initial investment") in
the Fund's shares on the first day of the period, adjusting to deduct the
maximum sales charge (in the case of Class A shares), and computing the
"redeemable value" of that investment at the end of the period. The redeemable
value in the case of Class B shares includes the effect of the applicable
contingent deferred sales charge that may be imposed at the end of the period.
The redeemable value is then divided by the initial investment, and this
quotient is taken to the Nth root (N representing the number of years in the
period) and 1 is subtracted from the
B-25
<PAGE> 76
result, which is then expressed as a percentage. The calculation assumes that
all income and capital gains dividends paid by the Fund have been reinvested at
net asset value on the reinvestment dates during the period. Average annual
total return may also be calculated without deducting the maximum sales charge.
Calculation of a Fund's total return is not subject to a standardized formula,
except when calculated for purposes of the Fund's "Financial Highlights" table
in the Fund's financial statements and prospectus. Total return performance for
a specific period is calculated by first taking an investment (assumed below to
be $10,000) ("initial investment") in a Fund's shares on the first day of the
period, either adjusting or not adjusting to deduct the maximum sales charge (in
the case of Class A shares), and computing the "ending value" of that investment
at the end of the period. The total return percentage is then determined by
subtracting the initial investment from the ending value and dividing the
remainder by the initial investment and expressing the result as a percentage.
The ending value in the case of Class B shares may or may not include the effect
of the applicable contingent deferred sales charge that may be imposed at the
end of the period. The calculation assumes that all income and capital gains
dividends paid by the Fund have been reinvested at net asset value on the
reinvestment dates during the period. Total return may also be shown as the
increased dollar value of the hypothetical investment over the period. Total
return calculations that do not include the effect of the sales charge for Class
A shares or the contingent deferred sales charge for Class B shares would be
reduced if such charge were included. Total return figures for Class A shares
for various periods are set forth in the tables below.
A Fund's performance figures are based upon historical results and are not
representative of future performance. Each Fund's Class A shares are sold at net
asset value plus a maximum sales charge of 5.75% of the offering price. Class B
shares and Class C shares are sold at net asset value. Redemptions of Class B
shares may be subject to a contingent deferred sales charge that is 4% in the
first year following the purchase, declines by a specified percentage thereafter
and becomes zero after six years. Returns and net asset value will fluctuate.
Factors affecting each Fund's performance include general market conditions,
operating expenses and investment management. Any additional fees charged by a
dealer or other financial services firm would reduce the returns described in
this section. Shares of each Fund are redeemable at the then current net asset
value, which may be more or less than original cost.
The figures below show performance information for various periods. Comparative
information for certain indices is also included. Please note the differences
and similarities between the investments which a Fund may purchase and the
investments measured by the applicable indices. The net asset values and returns
of each class of shares of the Funds will also fluctuate. No adjustment has been
made for taxes payable on dividends. The periods indicated were ones of
fluctuating securities prices and interest rates. As indicated previously, the
Quantitative Fund will not commence operations until February 15, 1996.
B-26
<PAGE> 77
BLUE CHIP FUND -- OCTOBER 31, 1995
<TABLE>
<CAPTION>
Initial Income Ending Percentage
TOTAL $10,000 Capital Gain Dividends Ending Percentage Value Increase Dow Jones
RETURN Investment Dividends Reinvested Value Increase (unadjusted) (unadjusted) Industrial
TABLE (1) Reinvested (2) (adjusted)(1) (adjusted)(1) (1) (1) Average(3)
- -------------------- ---------- ------------ ---------- ------------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 15,570 $1,334 $3,516 $20,420 104.2% $ 21,668 116.7% 237.5%
Five Years 14,521 1,169 2,211 17,901 79.0 18,996 90.0 125.6
One Year 11,368 19 183 11,570 15.7 12,274 22.7 24.9
Year to Date 11,764 0 60 11,824 18.2 12,549 25.5 26.4
CLASS B SHARES
Life of Fund(++) $ 12,049 $ 20 $ 158 $11,927 19.3% $ 12,227 22.3% 31.7%
One Year 12,059 20 97 11,876 18.8 12,176 21.8 24.9
Year to Date 12,443 0 23 12,066 20.7 12,466 24.7 26.4
CLASS C SHARES
Life of Fund(++) $ 12,098 $ 20 $ 168 $ NA NA% $ 12,286 22.9% 31.7%
One Year 12,078 20 106 NA NA 12,204 22.0 24.9
Year to Date 12,462 0 26 NA NA 12,488 24.9 26.4
<CAPTION>
Russell Lipper U.S.
TOTAL Standard Consumer 1000(R) Growth Treasury
RETURN & Poor's Price Growth and Income Bill
TABLE 500(4) Index(5) Index(6) Fund(7) Index(8)
- -------------------- -------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Life of Fund(+) 224.5% 33.2% 238.5% 189.2% 56.0%
Five Years 121.3 15.1 127.2 115.0 25.5
One Year 26.4 2.8 29.2 20.0 5.9
Year to Date 29.0 2.7 31.3 23.7 2.7
Life of Fund(++) 32.7% 4.2% 38.3% 23.8% 8.3%
One Year 26.4 2.8 29.2 20.0 5.9
Year to Date 29.0 2.7 31.3 23.7 2.7
Life of Fund(++) 32.7% 4.2% 38.3% 23.8% 8.3%
One Year 26.4 2.8 29.2 20.0 5.9
Year to Date 29.0 2.7 31.3 23.7 2.7
</TABLE>
<TABLE>
<CAPTION>
Lipper
Russell Growth U.S.
AVERAGE ANNUAL Fund Fund Fund Dow Jones Standard Consumer 1000(R) and Treasury
TOTAL RETURN Class A Class B Class C Industrial & Poor's Price Growth Income Bill
TABLE Shares Shares Shares Average(3) 500(4) Index(5) Index(6) Fund(7) Index(8)
----------------- ------- ------- ------- --------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 9.4% NA% NA% 16.6% 16.0% 3.7% 16.7% 14.4% 5.8%
Life of Fund(++) NA 13.2 15.6 21.4 22.0 2.9 25.7 16.3 5.8
Five Years 12.4 NA NA 17.7 17.2 2.9 17.8 16.6 4.7
One Year 15.7 18.8 22.0 24.9 26.4 2.8 29.2 20.0 5.9
</TABLE>
- ---------------
(+) Since November 23, 1987 for Class A shares.
(++) Since May 31, 1994 for Class B and Class C shares.
NA--Not Available.
B-27
<PAGE> 78
GROWTH FUND -- SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Initial Capital Income Ending Percentage Ending Percentage
TOTAL $10,000 Gain Dividends Value Increase Value Increase Dow Jones
RETURN Investment Dividends Reinvested (adjusted) (adjusted) (unadjusted) (unadjusted) Industrial
TABLE (1) Reinvested (2) (1) (1) (1) (1) Average(3)
- ----------------- ---------- ---------- ---------- ---------- ---------- ------------ ------------ ---------
CLASS A SHARES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) $ 30,037 $ 194,881 $ 92,487 $ 317,405 3,074.1% $336,927 3,269.3% 1,695.1%
Fifteen Years 12,287 36,937 16,852 66,076 560.8 70,095 601.0 835.9
Ten Years 12,323 18,148 8,265 38,736 287.4 41,000 311.0 402.6
Five Years 16,828 2,803 965 20,596 106.0 21,854 118.5 126.2
One Year 11,713 168 0 11,881 18.8 12,607 26.1 27.9
Year to Date 11,948 0 0 11,948 19.5 12,674 26.7 27.3
CLASS B SHARES
Life of Fund(++) $ 12,099 $ 175 $ 0 $ 11,974 19.7% $ 12,274 22.7% 32.7%
One Year 12,306 177 0 12,183 21.8 12,483 24.8 27.9
Year to Date 12,569 0 0 12,169 21.7 12,569 25.7 27.3
CLASS C SHARES
Life of Fund(++) $ 12,124 $ 175 $ 0 $ NA NA% $ 12,299 23.0% 32.7%
One Year 12,321 178 0 NA NA 12,499 25.0 27.9
Year to Date 12,585 0 0 NA NA 12,585 25.9 27.3
<CAPTION>
Russell U.S.
TOTAL Standard Consumer 1000(R) Lipper Treasury
RETURN & Poor's Price Growth Growth Bill
TABLE 500(4) Index(5) Index(6) Fund(9) Index(8)
- ----------------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Life of Fund(+) 1,926.7 % 377.3% NA% 1,787.7% 627.5%
Fifteen Years 714.2 82.4 583.5 567.4 194.1
Ten Years 340.2 41.5 348.7 295.7 76.4
Five Years 120.9 15.5 128.0 127.0 25.5
One Year 29.6 2.5 32.2 28.0 5.9
Year to Date 29.7 2.3 31.2 29.5 2.7
Life of Fund(++) 33.4 % 3.9% 38.2% 29.7% 8.3%
One Year 29.6 2.5 32.2 28.0 5.9
Year to Date 29.7 2.3 31.2 29.5 2.7
Life of Fund(++) 33.4 % 3.9% 38.2% 29.7% 8.3%
One Year 29.6 2.5 32.2 28.0 5.9
Year to Date 29.7 2.3 31.2 29.5 2.7
</TABLE>
<TABLE>
<CAPTION>
Dow Russell
AVERAGE ANNUAL Fund Fund Fund Jones Standard Consumer 1000(R) Lipper
TOTAL RETURN Class A Class B Class C Industrial & Poor's Price Growth Growth
TABLE Shares Shares Shares Average(3) 500(4) Index(5) Index(6) Fund(9)
---------------- ------- ------- ------- ---------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 12.4% NA% NA% 10.3% 10.7% 5.4% NA% 10.5%
Life of
Fund(++) NA 14.4 16.7 23.5 24.0 2.9 27.4 21.6
Fifteen Years 13.4 NA NA 16.1 15.0 4.1 13.7 13.5
Ten Years 14.5 NA NA 17.5 16.0 3.5 16.2 14.8
Five Years 15.6 NA NA 17.7 17.2 2.9 17.9 17.8
One Year 18.8 21.8 25.0 27.9 29.6 2.5 32.2 28.0
<CAPTION>
U.S.
AVERAGE ANNUAL Treasury
TOTAL RETURN Bill
TABLE Index(8)
---------------- --------
<S> <C>
Life of Fund(+) 7.0%
Life of
Fund(++) 6.1
Fifteen Years 7.5
Ten Years 5.8
Five Years 4.7
One Year 5.9
</TABLE>
- ---------------
(+) Since April 4, 1966 for Class A shares.
(++) Since May 31, 1994 for Class B and Class C shares.
NA--Not Available.
B-28
<PAGE> 79
SMALL CAP FUND -- SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Initial Income Ending Percentage Ending Percentage
TOTAL $10,000 Capital Gain Dividends Value Increase Value Increase Dow Jones
RETURN Investment Dividends Reinvested (adjusted) (adjusted) (unadjusted) (unadjusted) Industrial
TABLE (1) Reinvested (2) (1) (1) (1) (1) Average(3)
- ---------------------------- ------------ ---------- ---------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 33,679 $149,628 $ 50,129 $233,436 2,234.4% $247,442 2,374.4% 1,561.9%
Fifteen Years 17,850 43,600 12,425 73,875 638.8 78,423 684.2 835.9
Ten Years 13,653 21,621 5,072 40,346 303.5 42,818 328.2 402.6
Five Years 17,762 7,486 1,045 26,293 162.9 27,888 178.9 126.2
One Year 11,590 754 0 12,344 23.4 13,088 30.9 27.9
Year to Date 12,417 0 0 12,417 24.2 13,173 31.7 27.3
CLASS B SHARES
Life of Fund(++) $ 12,443 $ 815 $ 0 $ 12,958 29.6% $ 13,258 32.6% 32.7%
One Year 12,162 797 0 12,659 26.6 12,959 29.6 27.9
Year to Date 13,067 0 0 12,667 26.7 13,067 30.7 27.3
CLASS C SHARES
Life of Fund(++) $ 12,424 $ 816 $ 0 $ NA NA% $ 13,240 32.4% 32.7%
One Year 12,166 799 0 NA NA 12,965 29.7 27.9
Year to Date 13,073 0 0 NA NA 13,073 30.7 27.3
<CAPTION>
Russell
TOTAL Standard Consumer Wilshire 1000(R)
RETURN & Poor's Price Mid Cap Growth
TABLE 500(4) Index(5) Growth(10) Index(6)
- ------------------ -------- -------- ---------- --------
<S> <C> <C> <C> <C>
Life of Fund(+) 1,586.0 % 327.9% NA% NA%
Fifteen Years 714.2 82.4 699.1 583.5
Ten Years 340.2 41.5 304.2 348.7
Five Years 120.9 15.5 184.6 128.0
One Year 29.6 2.5 34.6 32.2
Year to Date 29.7 2.3 38.6 31.2
Life of Fund(++) 33.4 % 3.9% 40.0% 38.2%
One Year 29.6 2.5 34.6 32.2
Year to Date 29.7 2.3 38.6 31.2
Life of Fund(++) 33.4 % 3.9% 40.0% 38.2%
One Year 29.6 2.5 34.6 32.2
Year to Date 29.7 2.3 38.6 31.2
</TABLE>
<TABLE>
<CAPTION>
Dow Russell
AVERAGE ANNUAL Fund Fund Fund Jones Standard Consumer Wilshire 1000(R)
TOTAL RETURN Class A Class B Class C Industrial & Poor's Price Mid Cap Growth
TABLE Shares Shares Shares Average(3) 500(4) Index(5) Growth(10) Index(6)
- ------------------------------ ------- ------- ---------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 12.6% NA% NA% 11.1% 11.2% 5.6% NA% NA%
Life of Fund(++) NA 21.3 23.3 23.5 24.0 2.9 26.8 27.4
Fifteen Years 14.3 NA NA 16.1 15.0 4.1 14.8 13.7
Ten Years 15.0 NA NA 17.5 16.0 3.5 14.9 16.2
Five Years 21.3 NA NA 17.7 17.2 2.9 22.8 17.9
One Year 23.4 26.6 29.7 27.9 29.6 2.5 31.6 32.2
</TABLE>
- ---------------
(+) Since February 20, 1969 for Class A shares.
(++) Since May 31, 1994 for Class B and Class C shares.
NA--Not Available.
B-29
<PAGE> 80
TECHNOLOGY FUND -- OCTOBER 31, 1995
<TABLE>
<CAPTION>
Initial Income Ending Percentage Ending Percentage
TOTAL $10,000 Capital Gain Dividends Value Increase Value Increase
RETURN Investment Dividends Reinvested (adjusted) (adjusted) (unadjusted) (unadjusted)
TABLE (1) Reinvested (2) (1) (1) (1) (1)
- ----------------- ---------- ------------ ---------- ---------- ---------- ------------ ------------
CLASS A SHARES
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) $ 61,730 $ 2,864,501 $ 517,422 $3,443,653 34,336.5% $ 3,651,657 36,416.6%
Twenty-five Years 21,610 170,905 28,095 220,610 2,106.1 234,095 2,241.0
Fifteen Years 10,302 49,566 6,109 65,977 559.8 70,021 600.2
Ten Years 12,042 29,749 2,810 44,601 346.0 47,327 373.3
Five Years 14,719 11,890 410 27,019 170.2 28,662 186.6
One Year 11,992 1,893 0 13,885 38.9 14,730 47.3
Year to Date 14,081 0 0 14,081 40.8 14,944 49.4
CLASS B SHARES
Life of Fund(++) $ 14,404 $ 2,289 $ 0 $ 16,393 63.9% $ 16,693 66.9%
One Year 12,568 1,997 0 14,265 42.7 14,565 45.7
Year to Date 14,805 0 0 14,405 44.1 14,805 48.1
CLASS C SHARES
Life of Fund(++) $ 14,464 $ 2,296 $ 0 $ NA NA% $ 16,760 67.6%
One Year 12,620 2,003 0 NA NA 14,623 46.2
Year to Date 14,851 0 0 NA NA 14,851 48.5
<CAPTION>
Russell
TOTAL Dow Jones Standard Consumer 1000(R)
RETURN Industrial & Poor's Price Growth
TABLE Average(3) 500(4) Index(5) Index(6)
- ----------------- ---------- -------- -------- --------
CLASS A SHARES
<S> <C> <C> <C> <C>
Life of Fund(+) 20,647.5% 24,835.4% 527.3% NA%
Twenty-five Years 1,741.9 1,758.9 290.1 NA
Fifteen Years 837.3 697.4 81.2 561.6
Ten Years 382.5 320.2 41.4 330.4
Five Years 125.6 121.3 15.1 127.2
One Year 24.9 26.4 2.8 29.2
Year to Date 26.4 29.0 2.7 31.3
CLASS B SHARES
Life of Fund(++) 31.7% 32.7% 4.2% 38.3%
One Year 24.9 26.4 2.8 29.2
Year to Date 26.4 29.0 2.7 31.3
CLASS C SHARES
Life of Fund(++) 31.7% 32.7% 4.2% 38.3%
One Year 24.9 26.4 2.8 29.2
Year to Date 26.4 29.0 2.7 31.3
</TABLE>
<TABLE>
<CAPTION>
Russell
AVERAGE ANNUAL Fund Fund Fund Dow Jones Standard Consumer 1000(R)
TOTAL RETURN Class A Class B Class C Industrial & Poor's Price Growth
TABLE Shares Shares Shares Average(3) 500(4) Index(5) Index(6)
- ----------------- ------- ------- ------- --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 13.2% NA% NA% 12.0% 12.4% 4.0% NA%
Life of Fund(++) NA 41.6 43.9 21.4 22.0 2.9 25.7
Twenty-five Years 13.2 NA NA 12.4 12.4 5.6 NA
Fifteen Years 13.4 NA NA 16.1 14.8 4.0 13.4
Ten Years 16.1 NA NA 17.0 15.4 3.5 15.7
Five Years 22.0 NA NA 17.7 17.2 2.9 17.8
One Year 38.9 42.7 46.2 24.9 26.4 2.8 29.2
</TABLE>
- ---------------
(+) Since September 7, 1948 for Class A shares.
(++) Since May 31, 1994 for Class B and Class C shares.
NA--Not Available.
B-30
<PAGE> 81
TOTAL RETURN FUND -- OCTOBER 31, 1995
<TABLE>
<CAPTION>
Initial Capital Income Ending Percentage Ending Percentage Dow
TOTAL $10,000 Gain Dividends Value Increase Value Increase Jones
RETURN Investment Dividends Reinvested (adjusted) (adjusted) (unadjusted) (unadjusted) Industrial
TABLE (1) Reinvested (2) (1) (1) (1) (1) Average(3)
- --------------------- -------- --------- --------- --------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 25,119 $ 110,176 $ 178,506 $ 313,801 3,038.0% $ 333,142 3,231.4% 2,122.4%
Twenty-five Years 25,238 69,342 111,389 205,969 1,959.7 218,452 2,084.5 1,741.9
Fifteen Years 14,930 15,259 22,901 53,090 430.9 56,343 463.4 837.3
Ten Years 13,730 6,308 8,632 28,670 186.7 30,403 204.0 382.5
Five Years 12,848 2,384 2,746 17,978 79.8 19,064 90.6 125.6
One Year 10,973 0 281 11,254 12.5 11,946 19.5 24.9
Year to Date 11,325 0 211 11,536 15.4 12,242 22.4 26.4
CLASS B SHARES
Life of Fund(++) $ 11,461 $ 0 $ 256 $ 11,417 14.2% $ 11,717 17.2% 31.7%
One Year 11,650 0 192 11,542 15.4 11,842 18.4 24.9
Year to Date 12,007 0 142 11,749 17.5 12,149 21.5 26.4
CLASS C SHARES
Life of Fund(++) $ 11,483 $ 0 $ 268 $ NA NA% $ 11,751 17.5% 31.7%
One Year 11,673 0 203 NA NA 11,876 18.8 24.9
Year to Date 12,029 0 153 NA NA 12,182 21.8 26.4
<CAPTION>
Standard Russell
TOTAL & Consumer 1000(R) Lipper Lehman Bros.
RETURN Poor's Price Growth Balanced Gov't/Corp.
TABLE 500(4) Index(5) Index(6) Fund(11) Index(12)
- --------------------- ------- ----- ----- ------- ------------
<S> <C> <C> <C> <C> <C>
Life of Fund(+) 2,376.1% 397.4% NA% NA% NA%
Twenty-five Years 1,758.9 290.1 NA 1,333.0 NA
Fifteen Years 697.4 81.2 561.6 565.3 436.9
Ten Years 320.2 41.4 330.4 217.5 160.6
Five Years 121.3 15.1 127.2 87.8 62.8
One Year 26.4 2.8 29.2 17.4 16.6
Year to Date 29.0 2.7 31.3 19.3 16.1
Life of Fund(++) 32.7% 4.2% 38.3% 19.0% 16.8%
One Year 26.4 2.8 29.2 17.4 16.6
Year to Date 29.0 2.7 31.3 19.3 16.1
Life of Fund(++) 32.7% 4.2% 38.3% 19.0 16.8%
One Year 26.4 2.8 29.2 17.4 16.6
Year to Date 29.0 2.7 31.3 19.3 16.1
</TABLE>
<TABLE>
<CAPTION>
AVERAGE Russell
ANNUAL Fund Fund Fund Dow Jones Standard Consumer 1000(R) Lipper
TOTAL RETURN Class A Class B Class C Industrial & Poor's Price Growth Balanced
TABLE Shares Shares Shares Average(3) 500(4) Index(5) Index(6) Fund(11)
- ------------------ ------- ------- ------- --------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 11.5% NA% NA% 10.3% 10.7% 5.2% NA% NA%
Life of Fund(++) NA 9.8 12.0 21.4 22.0 2.9 25.7 13.1
Twenty-five Years 12.9 NA NA 12.4 12.4 5.6 NA 11.2
Fifteen Years 11.8 NA NA 16.1 14.8 4.0 13.4 13.5
Ten Years 11.1 NA NA 17.0 15.4 3.5 15.7 12.3
Five Years 12.5 NA NA 17.7 17.2 2.9 17.8 13.4
One Year 12.5 15.4 18.8 24.9 26.4 2.8 29.2 17.4
<CAPTION>
AVERAGE
ANNUAL Lehman Bros.
TOTAL RETURN Gov't/Corp.
TABLE Index(12)
- ------------------ ------------
<S> <C>
Life of Fund(+) NA%
Life of Fund(++) 11.6
Twenty-five Years NA
Fifteen Years 11.9
Ten Years 10.1
Five Years 10.2
One Year 16.6
</TABLE>
- ---------------
(+) Since March 2, 1964 for Class A shares.
(++) Since May 31, 1994 for Class B and Class C shares.
NA--Not Available.
B-31
<PAGE> 82
VALUE+GROWTH FUND -- NOVEMBER 30, 1995
<TABLE>
<CAPTION>
Initial Capital Income Ending Percentage Ending Percentage
TOTAL $10,000 Gain Dividends Value Increase Value Increase Dow Jones
RETURN Investment Dividends Reinvested (adjusted) (adjusted) (unadjusted) (unadjusted) Industrial
TABLE (1) Reinvested (2) (1) (1) (1) (1) Average(3)
- ----------------- ---------- ---------- ---------- ---------- ---------- ------------ ------------ ---------
CLASS A SHARES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) $ 9,940 $0 $0 $ 9,940 (.6)% $ 10,547 5.5% 6.0%
CLASS B SHARES
Life of Fund(+) $ 10,547 $0 $0 $ 10,147 1.5% $ 10,547 5.5% 6.0%
CLASS C SHARES
Life of Fund(+) $ 10,537 $0 $0 $ NA NA% $ 10,537 5.4% 6.0%
<CAPTION>
Russell U.S.
TOTAL Standard Consumer 1000(R) Lipper Treasury
RETURN & Poor's Price Growth Growth Bill
TABLE 500(4) Index(5) Index(6) Fund(9) Index(8)
- ----------------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Life of Fund(+) 3.4% 0.3% 3.9% 3.0% 0.0%
Life of Fund(+) 3.4% 0.3% 3.9% 3.0% 0.0%
Life of Fund(+) 3.4% 0.3% 3.9% 3.0% 0.0%
</TABLE>
<TABLE>
<CAPTION>
Dow Russell U.S.
AVERAGE ANNUAL Fund Fund Fund Jones Standard Consumer 1000(R) Lipper Treasury
TOTAL RETURN Class A Class B Class C Industrial & Poor's Price Growth Growth Bill
TABLE Shares Shares Shares Average(3) 500(4) Index(5) Index(6) Fund(9) Index(8)
- ---------------- ------- ------- ------- ---------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) --% --% --% 56.1% 31.1% 2.0% NA% NA% 0.0%
</TABLE>
- ---------------
(+) Since October 16, 1995 for Class A, B and C shares. Average annual total
return not shown for Class A, B and C shares.
NA--Not Available.
FOOTNOTES FOR ALL FUNDS
(1) The Initial Investment and adjusted amounts for Class A shares were adjusted
for the maximum initial sales charge at the beginning of the period, which is
5.75%. The Initial Investment for Class B and Class C shares was not adjusted.
Amounts were adjusted for Class B shares for the contingent deferred sales
charge that may be imposed at the end of the period based upon the schedule for
shares sold currently, see "Redemption or Repurchase of Shares" in the
prospectus. No adjustments were made to Class C shares since they do not have an
initial or contingent deferred sales charge.
(2) Includes short-term capital gain dividends, if any.
(3) The Dow Jones Industrial Average is an unmanaged weighted average of thirty
blue chip industrial corporations listed on the New York Stock Exchange. Assumes
reinvestment of dividends. Source is Towers Data Systems.
(4) The Standard & Poor's 500 Stock Index is an unmanaged unweighted average of
500 stocks, over 95% of which are listed on the New York Stock Exchange. Assumes
reinvestment of dividends. Source is Towers Data Systems.
(5) The Consumer Price Index is a statistical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. Source is Towers Data Systems.
(6) The Russell 1000(R) 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. Assumes reinvestment of dividends. Source is Lipper Analytical
Services, Inc.
(7) The Lipper Growth and Income Fund Index is a net asset value weighted index
of the performance of certain mutual funds tracked by Lipper Analytical
Services, Inc. The largest mutual funds within the Lipper "growth and income
investment" objective category are included in the index. Performance is based
on changes in net asset value with all dividends reinvested and with no
adjustment for sales charges.
(8) The U.S. Treasury Bill Index is an unmanaged index based on the average
monthly yield of Treasury Bills maturing in 6 months. Source is Towers Data
Systems.
(9) The Lipper Growth Fund Index is a net asset value weighted index of the
performance of certain mutual funds tracked by Lipper Analytical Services, Inc.
The largest mutual funds within the Lipper "growth investment" objective
category are included in the index. Performance is based on changes in net asset
value with all dividends reinvested and with no adjustment for sales changes.
(10) The Wilshire Mid Cap Growth Index is a market capitalization-weighted index
including domestic equity securities chosen from the Wilshire Mid-Cap 750 which
exhibit growth characteristics. Assumes reinvestment of dividends. Source is
Wilshire Associates Incorporated.
(11) The Lipper Balanced Fund Index is a net asset value weighted index of the
performance of certain mutual funds tracked by Lipper Analytical Services, Inc.,
New York, New York. The largest mutual funds within the Lipper "balanced
investment" objective category are included in the index. Performance is based
on changes in net asset value with all dividends reinvested and with no
adjustment for sales charges.
(12) The Lehman Brothers Government/Corporate Bond Index is on a total return
basis and is comprised of all publicly issued, non-convertible, domestic debt of
the U.S. Government or any agency thereof, quasi-federal corporation, or
corporate debt guaranteed by the U.S. Government and all publicly issued,
fixed-rate, non-convertible, domestic debt of the three major corporate
classifications: industrial, utility, and financial. Only notes and bonds with a
minimum outstanding principal amount of $1,000,000 and a minimum of one year to
maturity are included. Bonds included must have a rating of at least Baa by
Moody's Investors Service, Inc., BBB by Standard & Poor's Corporation or in the
case of bank bonds not rated by either Moody's or S&P, BBB by Fitch Investors
Service. This index is unmanaged. Source is Towers Data Systems.
B-32
<PAGE> 83
Investors may want to compare the performance of a Fund to certificates of
deposit issued by banks and other depository institutions. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution.
Information regarding bank products may be based upon, among other things, the
BANK RATE MONITOR National IndexTM for certificates of deposit, which is an
unmanaged index and is based on stated rates and the annual effective yields of
certificates of deposit in the ten largest banking markets in the United States,
or the CDA Investment Technologies, Inc. Certificate of Deposit Index, which is
an unmanaged index based on the average monthly yields of certificates of
deposit.
Investors also may want to compare the performance of a Fund to that of U.S.
Treasury bills, notes or bonds. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Information regarding the performance of Treasury obligations may be
based upon, among other things, the Towers Data Systems U.S. Treasury Bill
index, which is an unmanaged index based on the average monthly yield of
treasury bills maturing in six months. Due to their short maturities, Treasury
bills generally experience very low market value volatility.
Investors may want to compare the performance of a Fund, such as the Total
Return Fund, to the performance of a hypothetical portfolio weighted 60% in the
Standard & Poor's 500 Stock Index (an unmanaged index generally representative
of the U.S. stock market) and 40% in the Lehman Brothers Government/Corporate
Bond Index (an unmanaged index generally representative of intermediate and
long-term government and investment grade corporate debt securities). See the
footnotes above for a more complete description of these indexes. The Total
Return Fund may invest in both equity and fixed income securities. The
percentage of assets invested in each type of security will vary from time to
time in the discretion of the Fund's investment manager and will not necessarily
approximate the 60%/40% weighting of this hypothetical index.
Investors may want to compare the performance of a Fund to that of money market
funds. Money market funds seek to maintain a stable net asset value and yield
fluctuates. Information regarding the performance of money market funds may be
based upon, among other things, IBC/Donoghue's Money Fund Averages(R) (All
Taxable). As reported by IBC/Donoghue's, all investment results represent total
return (annualized results for the period net of management fees and expenses)
and one year investment results are effective annual yields assuming
reinvestment of dividends.
B-33
<PAGE> 84
The following tables illustrate an assumed $10,000 investment in Class A shares
of each Fund (except the Quantitative Fund), which includes the current maximum
sales charge of 5.75%, with income and capital gain dividends reinvested in
additional shares. Each table covers the period from commencement of operations
of the Fund to December 31, 1995.
BLUE CHIP FUND (11/23/87)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL ANNUAL REINVESTED
YEAR INCOME CAPITAL REINVESTED CAPITAL
ENDED DIVIDENDS GAIN DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1987 $ 0 $ 0 $ 9,519 $ 0 $ 0 $ 9,519
1988 339 0 8,545 342 0 8,887
1989 220 0 10,650 659 0 11,309
1990 134 0 10,776 806 0 11,582
1991 531 712 14,284 1,657 786 16,727
1992 185 0 13,949 1,810 768 16,527
1993 897 374 13,392 2,647 1,118 17,157
1994 269 27 12,472 2,733 1,068 16,273
1995 1,201 714 14,932 4,497 2,006 21,435
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
GROWTH FUND (4/4/66)
<TABLE>
<CAPTION>
CUMULATIVE VALUE OF SHARES ACQUIRED
DIVIDENDS ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1966 $ 0 $ 0 $ 8,920 $ 0 $ 0 $ 8,916
1967 75 954 13,165 77 984 14,220
1968 121 1,278 15,103 211 2,371 17,684
1969 242 836 12,897 410 2,862 16,168
1970 306 0 12,137 726 2,692 15,548
1971 313 652 13,794 1,143 3,757 18,692
1972 280 765 13,907 1,419 4,544 19,876
1973 322 0 11,089 1,471 3,622 16,174
1974 384 0 7,779 1,383 2,541 11,698
1975 368 0 10,809 2,295 3,530 16,626
1976 376 0 13,689 3,303 4,471 21,452
1977 383 0 13,757 3,715 4,495 21,963
1978 661 572 15,439 4,827 5,613 25,879
1979 852 3,998 18,775 6,772 10,900 36,439
1980 1,097 5,842 23,439 9,656 19,407 52,502
1981 1,053 2,201 19,253 8,955 18,257 46,465
1982 1,364 1,691 23,346 12,515 24,081 59,942
1983 4,257 5,471 25,476 17,849 31,659 74,984
1984 1,772 6,113 20,973 16,409 32,242 69,624
1985 2,313 8,923 22,822 20,376 45,166 88,364
1986 3,785 22,963 18,803 20,481 60,930 100,214
1987 12,643 22,692 13,065 26,916 65,975 105,956
1988 3,977 0 13,963 32,949 70,505 117,417
1989 2,844 0 17,907 45,201 90,420 153,528
1990 2,898 6,132 17,495 47,095 94,866 159,456
1991 7,496 5,963 27,552 82,490 156,017 266,059
1992 542 542 27,009 81,412 153,492 261,913
1993 1,631 16,494 25,552 78,674 161,958 266,184
1994 0 3,505 23,701 72,977 153,770 250,448
1995 8,987 24,887 27,981 95,333 206,954 330,268
- -----------------------------------------------------------------------------------------
</TABLE>
B-34
<PAGE> 85
- --------------------------------------------------------------------------------
SMALL CAP FUND (2/20/69)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1969 $ 94 $ 0 $ 9,179 $ 95 $ 0 $ 9,274
1970 172 0 8,924 275 0 9,199
1971 117 243 10,868 463 267 11,598
1972 121 634 10,925 583 890 12,398
1973 193 0 7,745 615 631 8,991
1974 197 0 4,953 585 403 5,941
1975 192 0 7,585 1,096 618 9,299
1976 162 0 9,915 1,605 808 12,328
1977 223 0 10,981 2,007 895 13,883
1978 358 1,527 11,548 2,469 2,471 16,488
1979 1,455 1,845 14,009 4,521 4,932 23,462
1980 1,770 1,232 18,670 7,745 7,771 34,186
1981 829 1,607 16,916 7,931 8,811 33,658
1982 657 1,201 20,472 10,389 12,108 42,969
1983 1,386 3,307 23,170 13,087 16,875 53,132
1984 1,082 0 20,934 12,916 15,247 49,097
1985 1,217 1,482 25,386 17,035 20,161 62,582
1986 581 11,279 24,104 16,782 30,928 71,814
1987 5,059 17,848 15,990 16,510 39,485 71,985
1988 1,062 0 16,982 18,656 41,931 77,569
1989 2,370 0 20,896 25,344 51,599 97,839
1990 1,325 6,405 18,019 23,288 51,425 92,732
1991 4,370 7,283 27,925 40,971 87,829 156,725
1992 0 12,972 25,613 37,580 93,726 156,919
1993 578 9,825 28,161 41,914 113,195 183,270
1994 0 10,437 25,566 38,053 113,583 177,202
1995 7,520 26,809 28,303 50,068 154,057 232,428
- ----------------------------------------------------------------------------------------
</TABLE>
B-35
<PAGE> 86
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
TECHNOLOGY FUND (9/7/48)
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1948 $ 0 $ 0 $ 10,127 $ 0 $ 0 $ 10,127
1949 305 112 10,907 354 125 11,386
1950 618 510 12,490 1,046 659 14,195
1951 722 569 13,608 1,870 1,312 16,790
1952 700 303 15,158 2,854 1,779 19,791
1953 812 595 14,325 3,494 2,292 20,111
1954 962 1,308 22,406 6,656 5,050 34,112
1955 1,129 1,681 24,367 8,426 7,310 40,103
1956 1,286 1,973 24,873 9,890 9,466 44,229
1957 1,362 2,109 20,485 9,344 9,912 39,741
1958 1,356 1,883 29,557 15,178 16,404 61,139
1959 1,430 2,771 34,283 19,144 22,002 75,429
1960 1,591 3,018 32,615 19,858 24,191 76,664
1961 1,498 3,620 37,426 24,332 31,506 93,264
1962 1,482 2,766 29,367 20,530 27,753 77,650
1963 1,686 3,388 32,152 24,207 33,809 90,168
1964 2,026 3,949 34,220 27,804 39,936 101,960
1965 2,279 5,209 41,983 36,626 54,459 133,068
1966 2,421 7,556 36,878 34,531 56,060 127,469
1967 2,347 16,506 43,123 42,726 83,106 168,955
1968 2,661 29,453 38,354 40,541 104,411 183,306
1969 4,067 15,134 30,970 36,388 98,699 166,057
1970 4,576 2,306 29,156 39,278 95,450 163,884
1971 4,307 7,228 31,519 46,839 111,044 189,402
1972 3,573 9,256 32,320 51,550 123,411 207,281
1973 4,092 0 26,202 45,665 100,050 171,917
1974 5,036 0 19,704 38,853 75,239 133,796
1975 5,503 0 26,160 57,435 99,889 183,484
1976 5,671 0 31,983 76,277 122,122 230,382
1977 6,134 3,081 30,127 78,198 118,387 226,712
1978 8,346 6,127 34,852 99,253 143,347 277,452
1979 8,825 14,677 42,911 132,292 192,861 368,064
1980 11,331 22,789 59,831 198,060 293,649 551,540
1981 12,949 29,973 46,878 166,926 259,055 472,859
1982 15,945 18,664 53,122 207,300 312,576 572,998
1983 22,078 88,219 53,165 228,712 402,902 684,779
1984 18,122 67,505 44,050 206,394 401,017 651,461
1985 11,304 43,186 51,561 253,748 516,719 822,028
1986 11,483 185,857 46,920 240,583 653,079 940,582
1987 28,099 200,645 38,481 222,331 744,271 1,005,083
1988 25,656 56,631 36,414 236,256 763,523 1,036,193
1989 35,011 36,281 42,828 314,484 935,927 1,293,237
1990 25,588 29,491 41,138 327,604 930,196 1,298,939
1991 18,709 328,427 47,131 395,051 1,432,891 1,875,073
1992 0 216,548 41,055 344,122 1,467,648 1,852,825
1993 0 127,584 42,953 360,038 1,666,453 2,069,449
1994 0 304,928 41,308 346,245 1,916,846 2,304,399
1995 164,768 336,598 49,199 591,597 2,649,098 3,289,894
- ------------------------------------------------------------------------------------------------
</TABLE>
B-36
<PAGE> 87
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
TOTAL RETURN FUND (3/2/64)
DIVIDENDS
ANNUAL CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1964 $ 286 $ 36 $ 9,775 $ 280 $ 35 $ 10,090
1965 485 75 10,249 788 113 11,150
1966 498 133 9,337 1,195 238 10,770
1967 528 533 10,367 1,854 821 13,042
1968 576 934 11,552 2,685 1,869 16,106
1969 705 186 9,608 2,880 1,734 14,222
1970 787 91 9,977 3,851 1,899 15,727
1971 798 308 10,806 4,991 2,382 18,179
1972 913 475 11,102 6,040 2,937 20,079
1973 1,095 0 9,502 6,202 2,514 18,218
1974 1,164 0 7,370 5,841 1,950 15,161
1975 1,251 0 9,324 8,721 2,467 20,512
1976 1,412 0 11,920 12,712 3,153 27,785
1977 1,580 689 11,517 13,873 3,777 29,167
1978 1,997 2,026 11,173 15,386 5,733 32,292
1979 2,493 3,239 12,547 19,958 9,982 42,487
1980 3,872 2,955 15,545 29,058 15,524 60,127
1981 2,893 2,272 14,278 29,458 16,532 60,268
1982 4,254 2,803 15,771 37,194 21,076 74,041
1983 8,825 3,719 16,256 47,149 25,542 88,947
1984 4,093 1,005 15,142 48,081 24,798 87,961
1985 5,472 2,977 17,891 62,603 32,510 113,004
1986 6,471 12,816 18,069 69,383 45,459 132,911
1987 5,213 3,478 16,564 67,975 45,219 129,758
1988 7,763 0 16,991 77,756 46,384 141,131
1989 7,619 0 19,432 96,645 53,047 169,124
1990 10,289 0 19,029 105,091 51,947 176,067
1991 8,001 6,055 24,999 146,974 74,795 246,768
1992 6,616 9,754 23,957 147,512 81,449 252,918
1993 10,120 22,863 23,578 155,228 103,420 282,226
1994 6,437 0 20,901 143,755 91,675 256,331
1995 12,811 11,545 24,265 179,922 118,210 322,467
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VALUE+GROWTH FUND (10/16/95)
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL ANNUAL REINVESTED
YEAR INCOME CAPITAL GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 $ 0 $0 $ 10,030 $0 $0 $10,030
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Includes short-term capital gain dividends.
B-37
<PAGE> 88
The following tables compare the performance of the Class A shares of the Funds
over various periods with that of other mutual funds within the categories
described below according to data reported by Lipper Analytical Services, Inc.
("Lipper"), New York, New York, which is a mutual fund reporting service. Lipper
performance figures are based on changes in net asset value, with all income and
capital gain dividends reinvested. Such calculations do not include the effect
of any sales charges. Future performance cannot be guaranteed. Lipper publishes
performance analyses on a regular basis. Each category includes funds with a
variety of objectives, policies and market and credit risks that should be
considered in reviewing these rankings.
BLUE CHIP FUND
<TABLE>
<CAPTION>
Lipper Mutual Fund
Performance
Analysis
------------------
Growth & Income
Funds
------------------
<S> <C>
Five Year (Period ended 12/31/95)............................................. 161 of 192
One Year (Period ended 12/31/95).............................................. 207 of 438
</TABLE>
The Lipper Growth & Income Funds category includes funds which combine a growth
of earnings orientation and an income requirement for level and/or rising
dividends.
GROWTH FUND
<TABLE>
<CAPTION>
Lipper Mutual Fund
Performance
Analysis
------------------
Growth Funds
------------------
<S> <C>
Fifteen Years (Period ended 12/31/95)......................................... 56 of 109
Ten Years (Period ended 12/31/95)............................................. 50 of 153
Five Years (Period ended 12/31/95)............................................ 122 of 237
One Year (Period ended 12/31/95).............................................. 270 of 572
</TABLE>
The Lipper Growth Funds category includes funds which normally invest in
companies whose long-term earnings are expected to grow significantly faster
than the earnings of the stocks represented in the major unmanaged stock
indices.
SMALL CAP FUND
<TABLE>
<CAPTION>
Lipper Mutual Fund
Performance
Analysis
------------------
Small Cap Company
Growth Funds
------------------
<S> <C>
Fifteen Years (Period ended 12/31/95)......................................... 3 of 12
Ten Years (Period ended 12/31/95)............................................. 16 of 37
Five Years (Period ended 12/31/95)............................................ 44 of 81
One Year (Period ended 12/31/95).............................................. 143 of 305
</TABLE>
The Lipper Mid Cap Company Growth Fund category includes funds which by
prospectus or portfolio practice limit their investments to companies on the
basis of the size of the company.
B-38
<PAGE> 89
TECHNOLOGY FUND
<TABLE>
<CAPTION>
Lipper Mutual Fund
Performance
Analysis
------------------
Science &
Technology Funds
------------------
<S> <C>
Fifteen Years (Period ended 12/31/95)......................................... 2 of 3
Ten Years (Period ended 12/31/95)............................................. 8 of 13
Five Years (Period ended 12/31/95)............................................ 13 of 15
One Year (Period ended 12/31/95).............................................. 19 of 35
</TABLE>
The Lipper Science & Technology Funds category includes funds which invest 65%
of their equity portfolio in science and technology stocks.
TOTAL RETURN FUND
<TABLE>
<CAPTION>
Lipper Mutual Fund
Performance
Analysis
------------------
Balanced Funds
------------------
<S> <C>
Fifteen Years (Period ended 12/31/95)......................................... 22 of 24
Ten Years (Period ended 12/31/95)............................................. 17 of 31
Five Years (Period ended 12/31/95)............................................ 33 of 61
One Year (Period ended 12/31/95).............................................. 98 of 220
</TABLE>
The Lipper Balanced Fund category includes funds whose primary objectives are to
conserve principal by maintaining at all times a balanced portfolio of both
stock and bonds. Typically, the stock/bond ratio ranges around 60% to 40%.
OFFICERS AND TRUSTEES
The officers and trustees of the Funds, their birthdates, their principal
occupations and their affiliations, if any, with KFS, the investment manager,
DVA, the sub-adviser, and KDI, the principal underwriter, are as follows (The
number following each person's title is the number of investment companies
managed by KFS and its affiliates for which he or she holds similar positions.):
ALL FUNDS:
DAVID W. BELIN (6/20/28), Trustee (23), 2000 Financial Center, 7th and Walnut,
Des Moines, Iowa; Member, Belin Harris Lamson McCormick, P.C. (attorneys).
LEWIS A. BURNHAM (1/8/33), Trustee (23), 16410 Avila Boulevard, Tampa, Florida;
Director, Management Consulting Services, McNulty & Company; formerly, Executive
Vice President, Anchor Glass Container Corporation.
DONALD L. DUNAWAY (3/8/37), Trustee (23), 7515 Pelican Bay Boulevard, Naples,
Florida; Retired; formerly, Executive Vice President, A. O. Smith Corporation
(diversified manufacturer).
ROBERT B. HOFFMAN (12/11/36), Trustee (23), 800 North Lindbergh Boulevard, St.
Louis, Missouri; Senior Vice President and Chief Financial Officer, Monsanto
Company (chemical products); prior thereto, Vice President, FMC Corporation
(manufacturer of machinery and chemicals); prior thereto, Director, Executive
Vice President and Chief Financial Officer, Staley Continental, Inc. (food
products).
DONALD R. JONES (1/17/30), Trustee (23), 23 Flagship Lane, Hilton Head, South
Carolina; Retired; Director, Motorola, Inc. (manufacturer of electronic
equipment and components); formerly, Executive Vice President and Chief
Financial Officer, Motorola, Inc.
B-39
<PAGE> 90
SHIRLEY D. PETERSON (9/3/41), Trustee (23), 401 Rosemont Avenue, Frederick,
Maryland; President, Hood College; prior thereto, partner, Steptoe & Johnson
(attorneys); prior thereto, Commissioner, Internal Revenue Service; prior
thereto, Assistant Attorney General, U.S. Department of Justice.
WILLIAM P. SOMMERS (7/22/33), Trustee (23), 333 Ravenswood Avenue, Menlo Park,
California; President and Chief Executive Officer, SRI International (research
and development); prior thereto, Executive Vice President, Iameter (medical
information and educational service provider), prior thereto, Senior Vice
President and Director, Booz, Allen & Hamilton, Inc. (management consulting
firm) (retired); Director, Rohr, Inc., Therapeutic Discovery Corp. and Litton
Industries.
STEPHEN B. TIMBERS (8/8/44), President and Trustee* (35), 120 South LaSalle
Street, Chicago, Illinois; President, Chief Executive Officer, Chief Investment
Officer and Director, KFS; Director, KDI, DVA and LTV Corporation.
JOHN E. NEAL (3/9/50), Vice President* (35), 120 South LaSalle Street, Chicago,
Illinois; President, Kemper Funds Group, a unit of KFS; Director, KFS, DVA and
KDI.
JOHN E. PETERS (11/4/47), Vice President* (35), 120 South LaSalle Street,
Chicago, Illinois; Senior Executive Vice President, KFS; President and Director,
KDI; Director, DVA.
STEVEN H. REYNOLDS (9/11/43), Vice President* (12), 120 South LaSalle Street,
Chicago, Illinois; Executive Vice President and Chief Investment
Officer -- Equities, KFS.
CHARLES F. CUSTER (8/19/28), Vice President and Assistant Secretary* (35), 222
North LaSalle Street, Chicago, Illinois; Partner, Vedder, Price, Kaufman &
Kammholz (attorneys), Legal Counsel to the Fund.
JEROME L. DUFFY (6/29/36), Treasurer* (35), 120 South LaSalle Street, Chicago,
Illinois; Senior Vice President, KFS.
PHILIP J. COLLORA (11/15/45), Vice President and Secretary* (35), 120 South
LaSalle Street, Chicago, Illinois; Attorney, Senior Vice President and Assistant
Secretary, KFS.
ELIZABETH C. WERTH (10/1/47), Assistant Secretary* (27), 120 South LaSalle
Street, Chicago, Illinois; Vice President, KFS; Vice President and Director of
State Registrations, KDI.
BLUE CHIP FUND:
TRACY McCORMICK CHESTER (9/27/54), Vice President* (3), 120 South LaSalle
Street, Chicago, Illinois; Senior Vice President, KFS; formerly, Portfolio
Manager for Fiduciary Management; prior thereto, independent consultant managing
private accounts.
QUANTITATIVE FUND:
DANIEL J. BUKOWSKI (5/6/63), Vice President* (2), 120 South LaSalle Street,
Chicago, Illinois; Senior Vice President and Director of Quantitative Research,
KFS.
TECHNOLOGY FUND:
RICHARD A. GOERS (6/20/44), Vice President* (1), 120 South LaSalle Street,
Chicago, Illinois; Senior Vice President, KFS.
FRANK D. KORTH (7/11/45), Vice President* (1), 120 South LaSalle Street,
Chicago, Illinois; Senior Vice President, KFS.; formerly, President, Value Line
Fund.
B-40
<PAGE> 91
TOTAL RETURN FUND:
GARY A. LANGBAUM (12/16/48), Vice President* (2), 120 South LaSalle Street,
Chicago, Illinois; Executive Vice President, KFS.
VALUE+GROWTH FUND:
DANIEL J. BUKOWSKI (5/6/63), Vice President* (2), 120 South LaSalle Street,
Chicago, Illinois; Senior Vice President and Director of Quantitative Research,
KFS.
DAVID N. DREMAN (5/6/36), Vice President* (2), 10 Exchange Place, Suite 2050,
Jersey City, New Jersey, Chairman and Director, DVA.
* Interested persons of the Fund as defined in the Investment Company Act of
1940.
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Funds, except that Mr. Custer's law firm
receives fees from the Funds as counsel to the Funds. The table below shows
amounts paid or accrued to those trustees who are not designated "interested
persons" during each Fund's 1995 fiscal year except that the information in the
last column is for calendar year 1995.
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
AGGREGATE COMPENSATION FROM FUND RETIREMENT FROM FUND AND
------------------------------------------ BENEFITS KEMPER FUND
BLUE SMALL TOTAL ACCRUED AS PART OF COMPLEX
NAME OF TRUSTEE CHIP GROWTH CAP TECH RETURN FUND EXPENSES PAID TO TRUSTEES**
- ------------------------------------------- ------ ------ ------ ------ ------ ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
David W. Belin*............................ $2,300 $7,800 $4,600 $5,600 $9,100 $ 0 $149,700
Lewis A. Burnham........................... $2,100 $6,150 $3,500 $3,700 $6,900 $ 0 $111,000
Donald L. Dunaway*......................... $2,600 $7,700 $4,400 $5,400 $9,300 $ 0 $151,000
Robert B. Hoffman.......................... $2,000 $5,700 $3,200 $3,500 $6,400 $ 0 $105,500
Donald R. Jones............................ $2,100 $5,900 $3,400 $3,700 $6,800 $ 0 $110,700
Shirley D. Peterson***..................... $ 700 $1,700 $ 800 $1,200 $2,000 $ 0 $ 44,500
William P. Sommers......................... $1,900 $5,500 $3,100 $3,400 $6,200 $ 0 $100,700
</TABLE>
- ---------------
* Includes deferred fees and interest thereon pursuant to deferred
compensation agreements with the Funds. Deferred amounts accrue interest
monthly at a rate equal to the yield of Kemper Money Funds -- Kemper Money
Market Fund. Total deferred fees and interest accrued for the latest and
prior fiscal years are $9,500, $48,100, $30,600, $44,100 and $58,300 for Mr.
Belin and $10,600, $39,800, $23,300, $33,300 and $48,900 for Mr. Dunaway
from the Blue Chip, Growth, Small Cap, Tech and Total Return Funds,
respectively.
** Includes compensation for service as a trustee on twenty-three fund boards.
Also includes amounts for new funds estimated as if they had existed at the
beginning of the year, except for Quantitative and Value+Growth Funds since
no fee schedule has been established for those Funds.
*** Appointed a trustee on June 15, 1995.
B-41
<PAGE> 92
As of January 4, 1996, the officers and trustees of the Funds, as a group, owned
less than 1% of the then outstanding shares of each Fund and no person owned of
record 5% or more of the outstanding shares of any class of any Fund, except the
persons indicated in the chart below and KFS owned all the shares of
Quantitative Fund.
<TABLE>
<CAPTION>
NAME AND ADDRESS % OWNED FUND CLASS
- -------------------------------------------------------------------- ------- ------------ -----
<S> <C> <C> <C>
Forrest H. Scott.................................................... 9.06 Value+Growth A
5912 Trenton Franklin Rd.
Middleton, OH
John E. and Cheryl M. Neal.......................................... 5.76 Value+Growth A
309 Sterling Rd.
Kenilworth, IL
Everen Clearing Corp................................................ 5.75 Value+Growth A
111 E. Kilbourn Ave.
Milwaukee, WI
Harold K. and Charlotte C. Geyer.................................... 9.57 Value+Growth B
260 S. Chestnut
Platteville, WI
Alex. Brown and Sons Incorp......................................... 7.51 Value+Growth B
375 West Padonia Road
Baltimore, MD
Joseph J. and Marian G. Briscuso,................................... 21.88 Value+Growth C
707 Stevenson Ln.
Baltimore, MD
Jerome L. Greeley Jr.,.............................................. 21.45 Value+Growth C
6239 Fernway
Baltimore, MD
Shirley B. Schleunes................................................ 12.52 Value+Growth C
1005 Saxon Hill Dr.
Cockeysville, MD
Mary T. Shean....................................................... 9.66 Value+Growth C
112 4th Avenue
Haddon Heights, NJ
Alton P. and Mona W. Stephenson..................................... 9.20 Value+Growth C
P.O. Box 87
Pylesville, MD
Kemper Financial Services, Inc...................................... 5.47 Value+Growth C
120 S. LaSalle
Chicago, IL
Kenneth Mach........................................................ 8.41 Total Return C
908 N. Michigan Ave.
Chicago, IL
Kemper Financial Services, Inc...................................... 49.20 Total Return I
Profit Sharing Plan
120 S. LaSalle
Chicago, IL
Economy Employee Savings Plan....................................... 15.46 Total Return I
120 S. LaSalle
Chicago, IL
</TABLE>
B-42
<PAGE> 93
<TABLE>
<CAPTION>
NAME AND ADDRESS % OWNED FUND CLASS
- -------------------------------------------------------------------- ------- ------------ -----
<S> <C> <C> <C>
Kemper Service Company.............................................. 6.24 Total Return I
Profit Sharing Plan
811 Main Street
Kansas City, MO
Investors Fiduciary Trust Company-Trustee FBO
William J. Ralph.................................................... 8.46 Blue Chip C
14641 S. Lavergne
Midlothian, IL
Invest Financial Corp............................................... 99.00 Blue Chip I
120 S. LaSalle
Chicago, IL
Kemper Financial Services, Inc...................................... 52.99 Technology I
Profit Sharing Plan
120 S. LaSalle
Chicago IL
Kemper Service Company.............................................. 12.10 Technology I
Profit Sharing Plan
811 Main Street
Kansas City, MO
Economy Employee Savings Plan....................................... 12.98 Technology I
120 S. LaSalle
Chicago, IL
Kemper Group Plans.................................................. 5.79 Technology I
Profit Sharing Plan
120 S. LaSalle
Chicago, IL
Kemper Financial Services, Inc...................................... 60.42 Growth I
Profit Sharing Plan
120 S. LaSalle
Chicago, IL
Kemper Group Plans.................................................. 8.12 Growth I
Profit Sharing Plan
120 S. LaSalle
Chicago, IL
Kemper Service Company.............................................. 5.72 Growth I
Profit Sharing Plan
811 Main Street
Kansas City, MO
Kemper Financial Services, Inc...................................... 68.70 Small Cap I
Profit Sharing Plan
120 S. LaSalle
Chicago, IL
Kemper Group Plans.................................................. 8.88 Small Cap I
Profit Sharing Plan
120 S. LaSalle
Chicago, IL
</TABLE>
B-43
<PAGE> 94
SHAREHOLDER RIGHTS
The Funds generally are not required to hold meetings of their shareholders.
Under the Agreement and Declaration of Trust of each Fund ("Declaration of
Trust"), however, shareholder meetings will be held in connection with the
following matters: (a) the election or removal of trustees if a meeting is
called for such purpose; (b) the adoption of any contract for which shareholder
approval is required by the Investment Company Act of 1940 ("1940 Act"); (c) any
termination of the Fund or a class to the extent and as provided in the
Declaration of Trust; (d) any amendment of the Declaration of Trust (other than
amendments changing the name of the Fund, supplying any omission, curing any
ambiguity or curing, correcting or supplementing any defective or inconsistent
provision thereof); and (e) such additional matters as may be required by law,
the Declaration of Trust, the By-laws of the Fund, or any registration of the
Fund with the Securities and Exchange Commission or any state, or as the
trustees may consider necessary or desirable. The shareholders also would vote
upon changes in fundamental investment objectives, policies or restrictions.
Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) each Fund will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
Trustees may be removed from office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of the
outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of a Fund stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a trustee, each
Fund has undertaken to disseminate appropriate materials at the expense of the
requesting shareholders.
Each Fund's Declaration of Trust provides that the presence at a shareholder
meeting in person or by proxy of at least 30% of the shares entitled to vote on
a matter shall constitute a quorum. Thus, a meeting of shareholders of a Fund
could take place even if less than a majority of the shareholders were
represented on its scheduled date. Shareholders would in such a case be
permitted to take action which does not require a larger vote than a majority of
a quorum, such as the election of trustees and ratification of the selection of
auditors. Some matters requiring a larger vote under the Declaration of Trust,
such as termination or reorganization of a Fund and certain amendments of the
Declaration of Trust, would not be affected by this provision; nor would matters
which under the 1940 Act require the vote of a "majority of the outstanding
voting securities" as defined in the 1940 Act.
Each Fund's Declaration of Trust specifically authorizes the Board of Trustees
to terminate the Fund or any Portfolio or class by notice to the shareholders
without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of a
Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of each Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by a
Fund or the Fund's trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder held personally liable for the obligations of a Fund and each Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by KFS remote and not
material, since it is limited to circumstances in which a disclaimer is
inoperative and such Fund itself is unable to meet its obligations.
B-44
<PAGE> 95
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder
Kemper Quantitative Equity Fund
We have audited the accompanying statement of net assets of Kemper Quantitative
Equity Fund as of January 4, 1996. This statement of net assets is the
responsibility of the Trust's management. Our responsibility is to express an
opinion on this statement of net assets based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of net assets is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement of net assets. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall statement of net assets
presentation. We believe that our audit of the statement of net assets provides
a reasonable basis for our opinion.
In our opinion, the statement of net assets referred to above presents fairly,
in all material respects, the financial position of Kemper Quantitative Equity
Fund at January 4, 1996 in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Chicago, Illinois
January 4, 1996
B-45
<PAGE> 96
KEMPER QUANTITATIVE EQUITY FUND
STATEMENT OF NET ASSETS--JANUARY 4, 1996
<TABLE>
<S> <C>
ASSETS
Cash.................................................................................. $100,000
=========
NET ASSETS
Net assets, applicable to shares of beneficial interest (unlimited number of shares
authorized, no par value) outstanding as follows:
Class A--3,473.684
Class B--3,473.684
Class C--3,578.947.................................................................. $100,000
=========
THE PRICING OF SHARES
Net asset value and redemption price per share
Class A ($33,000 / 3,473.684 shares outstanding).................................... $ 9.50
Class B* ($33,000 / 3,473.684 shares outstanding)................................... $ 9.50
Class C ($34,000 / 3,578.947 shares outstanding).................................... $ 9.50
Maximum offering price per share
Class A (net asset value, plus 6.10% of net asset value or 5.75% of offering
price)........................................................................... $ 10.08
Class B (net asset value)........................................................... $ 9.50
Class C (net asset value)........................................................... $ 9.50
</TABLE>
- ---------------
* Subject to contingent deferred sales charge.
NOTES:
Kemper Quantitative Equity Fund (the "Trust"), was organized as a business trust
under the laws of The Commonwealth of Massachusetts on June 12, 1995. All Class
A, Class B and Class C shares of beneficial interest of the Trust were issued to
Kemper Financial Services, Inc. ("KFS"), the investment manager for such series,
on January 4, 1996. The Trust may establish multiple series; currently one
series has been established.
The costs of organization of the Fund will be paid by KFS.
B-46
<PAGE> 97
APPENDIX--RATINGS OF FIXED INCOME INVESTMENTS
STANDARD & POOR'S CORPORATION BOND RATINGS
AAA. Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. BOND RATINGS
AAA. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B-47
<PAGE> 98
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
B-48
