<PAGE> 1
KEMPER TECHNOLOGY FUND
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED OCTOBER 31, 1996
Seeking growth of capital.
" . . . We took advantage of the market's volatility to buy some
favorites at bargain prices."
[KEMPER FUNDS LOGO]
<PAGE> 2
TABLE OF CONTENTS
2
At a Glance
Terms to Know
3
Economic Overview
5
Performance Update
8
Industry Sectors
9
Largest Holdings
10
Portfolio of
Investments
15
Report of
Independent Auditors
16
Financial Statements
18
Notes to
Financial Statements
22
Financial Highlights
AT A GLANCE
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KEMPER TECHNOLOGY FUND
TOTAL RETURNS
- --------------------------------------------------------------------------------
For the year ended October 31, 1996 (unadjusted for any sales charge)
<TABLE>
<CAPTION>
<S> <C>
- --------------------------------------------------------------------------------
CLASS A 7.83%
CLASS B 6.76%
CLASS C 6.88%
LIPPER SCIENCE & TECHNOLOGY
FUNDS CATEGORY AVERAGE* 7.57%
- --------------------------------------------------------------------------------
</TABLE>
Returns are historical and do not represent future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
10/31/96 10/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER TECHNOLOGY FUND CLASS A $13.16 $14.63
- --------------------------------------------------------------------------------
KEMPER TECHNOLOGY FUND CLASS B $12.77 $14.39
- --------------------------------------------------------------------------------
KEMPER TECHNOLOGY FUND CLASS C $12.85 $14.45
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER TECHNOLOGY FUND LIPPER RANKINGS*
- --------------------------------------------------------------------------------
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER SCIENCE & TECHNOLOGY FUNDS CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- ----------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #18 OF #20 OF #19 OF
36 FUNDS 36 FUNDS 36 FUNDS
- ----------------------------------------------------------------
5-YEAR #11 OF N/A N/A
14 FUNDS
- ----------------------------------------------------------------
10-YEAR #10 OF N/A N/A
12 FUNDS
- ----------------------------------------------------------------
</TABLE>
*Lipper Analytical Services, Inc. returns and rankings are based upon changes in
net asset value with all dividends reinvested and do not include the effect of
sales charges and, if they had, results may have been less favorable. Returns
and rankings are historical and do not reflect future performance.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
During the fiscal year, Kemper Technology Fund paid the following dividends:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM CAPITAL
GAIN: $0.70 $0.70 $0.70
- --------------------------------------------------------------------------------
LONG-TERM CAPITAL
GAIN: $1.43 $1.43 $1.43
- --------------------------------------------------------------------------------
</TABLE>
TERMS TO KNOW
BIOTECHNOLOGY The branch of technology involved with living organisms.
INTERNET A cooperative message-forwarding system linking computer networks all
over the world. Users of the Internet can exchange electronic mail, participate
in electronic discussion forums, send files from any computer to another,
retrieve information and, with the appropriate password, even use each other's
computers. The Internet grew out of the ARPAnet, a U.S. Defense Department
experimental network.
MACROECONOMICS Analysis of an economy as a whole, including such aggregate data
as price levels, unemployment, inflation and industrial production.
MICROECONOMICS Study of basic economic units such as a specific company or
industry.
NETWORK A set of computers connected together. A local-area network (LAN)
connects a set of computers located nearby (in the same room or building),
allowing them to share files and devices such as printers. A wide-area network
(WAN) is a set of widely separated computers connected together. The worldwide
airline reservation system is a wide-area network. The Internet is a series of
interconnected wide-area networks.
SEMICONDUCTOR A material that is neither a good conductor of electricity, nor a
good insulator, and whose conduction properties can therefore be manipulated
easily. Semiconductor devices are the essential parts that make it possible to
build small, inexpensive electronic machines.
WORLD WIDE WEB A loosely organized set of computer sites that publish
information that anyone can read via the Internet. Each screen is full of
information that includes menu choices and highlighted words through which users
can call up further information either from the same computer or by linking to
another computer anywhere in the world.
<PAGE> 3
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $76 BILLION IN ASSETS, INCLUDING $42 BILLION IN RETAIL
MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM
HARVARD UNIVERSITY.
DEAR SHAREHOLDER:
As we approach the close of 1996, it's remarkable how eventful the year has been
and yet, economically, we are essentially where we were one year ago.
The fundamentals of the economy are remarkably similar today to what they
were in 1995. Long-term interest rates are approximately 6.5% compared to 6.3%
in November 1995. The economy is growing at a rate of approximately 2.2%.
Inflation continues to be well under control, at about 3.0%.
One significant difference between today and one year ago is that prices of
the stocks are on average up 20%. While price movements were more volatile in
1996 than in the past few years, the patient investor was amply rewarded. The
prime element sending the stock market higher was strong positive cash flows.
This liquidity in an environment of modestly increasing corporate profits and
relatively stable interest rates pushed stocks higher for most of the year.
This higher stock market has caused many market observers to worry. While
we cannot ignore what has happened, we find no reason to be bearish over the
long term. The environment is benign to favorable for financial assets. Given
steady interest rates, moderate economic growth and continued moderate corporate
earnings growth, there are few excesses in the system. In fact, real interest
rates are probably too high considering our outlook for inflation, and we may
see them decline over time.
Naturally, we cannot rule out the possibility of a market correction. But,
in our belief, the downside would appear to be limited to 5% to 8%, which is the
size of a typical correction based on historical data. As we have said in
previous outlooks, three elements tend to move the market:
- EARNINGS. We forecast corporate earnings to range between 0% and 5% on
average for the Standard & Poor's 500* in 1997 -- not as high as in
recent years but positive nonetheless.
- INTEREST RATES. Rates should remain stable, and short-term interest rates
may even decline.
- LIQUIDITY. Investors, through mutual funds, 401(k)s and qualified
contribution plans in particular, will continue to create strong demand
for securities.
In order to move the market more than would be expected in a typical
decline, one or more of these elements will have to turn negative in 1997, and,
while future market conditions cannot be predicted with certainty, we fail to
see what would materially change our outlook. Our outlook going forward is that
1997 should be a lot like 1996.
While the economy continued along a relatively consistent path, the United
States took some politically significant steps in 1996. First, of course,
President Bill Clinton and a Republican Congress were re-elected by the voters.
In the first few days after the general election, especially, investors
demonstrated their support for such a balance in our leadership. But of much
greater long-term significance is the expressed commitment by both parties to
balance the federal budget and address certain entitlement programs. The first
year after an election can be a fertile time to accomplish major initiatives,
and we are hopeful that progress can be made.
The future of the Social Security system, which many experts believe will
run out of money about 20 years from now, will be a subject in which you can
expect Zurich Kemper Investments, Inc. to play a leadership role. The possible
solutions for "fixing Social Security" are finite: raise Social Security taxes,
reduce benefits, raise the retirement age, change inflation assumptions or
pursue a higher rate of return on assets contributed by workers. We believe that
a bipartisan solution will be worked out, which will include giving individuals
the option of investing a portion of their Social Security contributions in an
account earmarked for them. This change is needed to return credibility to the
system, which many Americans have lost faith in.
What to do with Social Security is a debate that spans generations and
promises to occupy much attention in the coming years. As we hope to help
advance constructive debate, we'll be advocating partial privatization for this
federal program while maintaining a safety net for many low-wage earners and
providing a seamless transition for seniors near or in retirement.
3
<PAGE> 4
ECONOMIC OVERVIEW
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ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The 10-year
Treasury rate and the prime rate are prevailing interest rates. The other data
report year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (11/30/96) 6 MONTHS AGO 1 YEAR AGO 2 YEAR AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.2 6.91 5.71 7.81
PRIME RATE(2) 8.25 8.25 8.65 8.5
INFLATION RATE(3) 3.19 2.75 2.6 2.67
THE U.S. DOLLAR(4) 3.46 9.15 -2.58 -4.52
CAPITAL GOODS ORDERS(5)* 7.61 3.93 11.3 12.38
INDUSTRIAL PRODUCTION(5)* 3.6 3.35 1.71 6.58
EMPLOYMENT GROWTH(6) 2.11 2.08 1.92 3.4
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6%. The low, moderate inflation of the last
few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and
the value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of October 31, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this letter as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
December 10, 1996
*THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
4
<PAGE> 5
PERFORMANCE UPDATE
[KORTH PHOTO]
Frank Korth is senior vice president of Zurich Kemper Investments, Inc. and
portfolio manager of Kemper Technology Fund. Korth received his B.A. degree from
Mankato State University of Minnesota in mathematics and his masters of business
in finance from Bernard M. Baruch College.
The views expressed in this report reflect those of the portfolio manager only
through the end of the period of the report, as stated on the cover. The
manager's views are subject to change at any time, based
on market and other conditions.
Q THE STOCK MARKETS HAVE POSTED SOME REMARKABLE GAINS DURING THE PAST YEAR.
HOW HAVE TECHNOLOGY STOCKS FARED?
A There were several specific factors that influenced performance within
the technology universe:
- - A slowdown in personal computer sales and in demand for semiconductors
led to a broad-based sell-off in November and December of 1995.
- - It became apparent that growth in the European markets, which account for a
significant portion of sales for technology companies, was slowing.
Investors became concerned about companies maintaining their levels of
business.
- - Momentum investors -- those who jump on the bandwagon when a sector
looks "hot" and jump off when the sector appears to have peaked -- began
to bail out.
- - A modest rise in interest rates, which has a negative connotation for
growth stocks, caused some concern that profits would come under pressure.
- - Companies that announced disappointing earnings were punished severely.
In a few cases, it didn't even take a weak quarter to pull a stock down.
U.S. Robotics -- one of our top 10 holdings -- fell in July after
announcing earnings that actually met industry analysts' estimates.
When looking at technology versus the broad market, it's important to
realize that technology stocks are driven more by product cycles and
competitive positions than by broad, macroeconomic issues. It's true that the
broad market has been rising on generally good economic news. The economy is
growing, inflation hasn't really been a concern and interest rates have been
fairly benign. Yet a microeconomic factor -- inventory levels -- played the
major role in driving semiconductor stocks down and then up.
All-in-all, it's been an extremely volatile year for technology. We've seen
moves of 30 to 70 percent on the downside for some stocks, while others have
risen anywhere from 20 to 100 percent. Crosscurrents within sectors have been
especially challenging. For example, in health care we own a company named
Medtronic, Inc. It's a major manufacturer of implantable heart devices whose
stock has been a strong performer for us. On the other hand, the fund also owns
Guidant Corporation, another quality company in the same field. It sold off
sharply. In this kind of environment, where quality companies in the same
business are moving in different directions, it becomes very difficult to select
the "right" stocks.
Q HOW DID THIS ENVIRONMENT INFLUENCE YOUR TRADING DECISIONS?
A We remained fully invested and took advantage of the market's volatility
to buy some favorites at bargain prices. The short-term corrections that
occurred in late 1995 and during the summer of 1996 created opportunities
to buy good quality stocks, particularly selected disk storage, semiconductor
and wireless communication companies. Meanwhile, we cut some laggards -- most
of which were positions in small companies -- that weren't working for us. We
put the assets into larger companies that we expected to bounce. This also
allowed us to take some losses to offset some of the capital gains we had taken
earlier in the period.
5
<PAGE> 6
PERFORMANCE UPDATE
Q DO YOU ANTICIPATE A SIGNIFICANT CAPITAL GAIN DISTRIBUTION FOR 1996?
A We anticipate a long-term capital gain distribution of around $2.10. Last
year, the fund distributed $0.70 in short-term capital gains and $1.43 in
long-term capital gains.
Q WERE THERE ANY PARTICULAR SECTORS THAT HURT PERFORMANCE?
A When a correction occurred across all technology sectors in June and July,
several of the fund's larger positions suffered double-digit declines.
Fortunately, we were well-positioned for the recovery that began in late
July. And since the end of the fiscal year we've seen improvement in
semiconductor stocks, which has boosted performance.
In terms of sectors, biotechnology was probably the most disappointing area
for the portfolio this year. While there have been short-term rallies in the
group, it has been difficult to sustain the gains. Fundamentally, the news is
the most bullish we have seen since the group began some 20 years ago. The whole
drug discovery industry is moving in the direction of biotechnology. The number
of biotech approvals for new therapies has multiplied significantly, and many
more are in the pipeline. Despite these positive events, investors are waiting
for solid results in the marketplace.
Q WHAT SECTORS DO YOU CURRENTLY FAVOR?
A As of October 31, networking stocks accounted for about 25 percent of
Kemper Technology Fund's portfolio. This sector continues to charge along with
strong growth rates. We're in the middle of an upgrade cycle in modem speeds.
With increased activity on the Internet and more intranet activity in the
corporate market, the demand for increased bandwidth -- the capability
for devices like personal computers and computer networks to communicate at
high speeds -- is exploding. Cisco Systems, 3Com Corporation and U.S. Robotics
are leaders in this area, and among the fund's top holdings. We've recently
been reducing the fund's exposure in this area to take profits on certain
stocks and using the proceeds to increase our exposure to semiconductors.
Through most of the year, semiconductor companies have experienced bloated
inventories; we had to suffer through liquidation and pricing problems that
began about a year ago. We probably have not seen a complete shake-out yet.
There is still some excess capacity, but it does not appear to be hurting the
market like it did last spring. We are gradually adding positions such as Intel
Corp., Texas Instruments and Micron Technology, Inc. As I mentioned earlier,
we've seen some improvement in this area in recent weeks.
Q DO YOU STILL LIKE PERSONAL COMPUTERS AND SOFTWARE?
A Personal computers are still doing very well on the whole. Corporate
demand is strong, and that is generally for high-end systems, while U.S. retail
activity is weak. Foreign business, particularly in Asia, is excellent.
Microsoft, Compaq, Dell and Gateway 2000 are among the fund's top holdings.
Enterprise software is strong. We are in a transition to client/server
architecture and leaders in this movement -- BMC Software and Computer
Associates International -- are doing well. On the other hand, games and
educational software, the "sweet spot" of the PC consumer, have been less than
spectacular. Perhaps people are showing a preference for the Internet, "surfing"
and downloading material from the Internet instead of buying "shrinkwrapped"
software games. Clearly the PC business is transforming, but we do not yet
know where it will end up. That uncertainty makes it difficult to discern the
companies that will be the key players. We expect the picture to become clearer
during 1997.
Q TWO SPECIFIC AREAS -- WIRELESS COMMUNICATIONS AND THE
INTERNET-- ARE GETTING TREMENDOUS ATTENTION IN THE MEDIA. ADVERTISING ON
TELEVISION AND IN PRINT IS FULL OF REFERENCES TO PAGERS, CELLULAR PHONES AND
"THE WEB." WHAT ARE YOUR THOUGHTS ON THESE STOCKS?
A Wireless communications is an area that shows a lot of promise. In the
third world especially, where the infrastructure isn't in place for traditional
copper wire, cellular technology can be much cheaper and easier to install. The
potential is certainly there, although Kemper Technology Fund's exposure is
relatively low at this point. In this area we prefer equipment suppliers like
L.M. Ericsson Telephone Co. over the local service providers, which are going
to come under increasing pressure as competition increases. As for the
Internet, there is no question that it should be a growth sector for some time
to come. We continue to favor companies that build the infrastructure rather
than the content providers.
Q HAS YOUR OUTLOOK CHANGED?
A No. As a long-term investment, technology continues to offer some of the
most exciting growth potential to be found in the market. In the short term,
we should see continued volatility, however fundamentals appear to be strong
in most cases.
6
<PAGE> 7
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
- -------------------------------------------------------------------------------
For periods ended October 31, 1996 (adjusted for the maximum sales charge)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR 5-YEAR 10-YEAR CLASS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER TECHNOLOGY FUND CLASS A 1.64% 16.01 % 14.00% 13.07% (since 9/7/48)
- --------------------------------------------------------------------------------------------------------------------
KEMPER TECHNOLOGY FUND CLASS B 4.10% N/A N/A 26.08% (since 5/31/94)
- --------------------------------------------------------------------------------------------------------------------
KEMPER TECHNOLOGY FUND CLASS C 6.88% N/A N/A 27.24% (since 5/31/94)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
[Line Graph]
- -------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper Technology Fund Class A from 1/1/79 through 10/31/96
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1/1/79 12/31/85 12/31/90 10/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER TECHNOLOGY FUND CLASS A(1) 10,000 27,937 44,144 126,190
RUSSELL 1000 GROWTH INDEX + 10,000 28,186 51,642 129,577
STANDARD & POOR'S 500 STOCK INDEX ++ 10,000 31,047 57,529 143,989
</TABLE>
[Line Graph]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper Technology Fund Class B from 5/31/94 through 10/31/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 10/31/96
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER TECHNOLOGY FUND CLASS B(1) 10000 11276 15924 17522
RUSSELL 1000 GROWTH INDEX + 10000 10529 14445 16872
STANDARD & POOR'S 500 STOCK INDEX ++ 10000 10284 14135 16456
</TABLE>
[Line Graph]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper Technology Fund Class C from 5/31/94 through 10/31/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 10/31/96
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER TECHNOLOGY FUND CLASS C(1) 10,000 11286 16004 17914
RUSSELL 1000 GROWTH INDEX + 10,000 10529 14445 16872
STANDARD & POOR'S 500 STOCK INDEX ++ 10,000 10284 14135 16456
</TABLE>
Returns are historical and do not represent future performance. Returns and
net asset value fluctuate. Shares are redeemable at current net asset value,
which may be more or less than original cost.
* Average annual total return measures net investment income and capital
gain or loss from portfolio investments, assuming reinvestment of all dividends
and for Class A shares adjustment for the maximum sales charge of 5.75%, for
Class B shares adjustment for the applicable contingent deferred sales charge
(CDSC) of 3% and for Class C shares no adjustment for sales charge. The maximum
B share CDSC is 4%. For C shares purchased on or after April 1, 1996, there is a
1% CDSC on certain redemptions within the first year of purchase. During the
periods noted, securities prices fluctuated. For additional information, see the
Prospectus and Statement of Additional Information and the Financial Highlights
at the end of this report.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for A shares and the contingent deferred sales charge in
effect at the end of the period for B shares. When reviewing the performance
chart, please note that the inception date for the Russell 1000 Growth Index is
January 1, 1979. As a result, we are not able to illustrate the life of fund
performance (since September 7, 1948) for Kemper Technology Fund Class A shares.
In comparing the fund to the Russell 1000 Growth Index and the Standard &
Poor's 500 Stock Index, you should also note that the fund's performance
reflects the maximum sales charge, while no such charges are reflected in the
performance of the indices.
+ The Russell 1000 Growth Index is an unmanaged index comprised of common
stocks of larger U.S. companies with greater than average growth orientation and
represents the universe of stocks from which "earnings/growth" money managers
typically select.
++ The Standard & Poor's 500 Stock Index is an unmanaged index generally
representative of the U.S. stock market. Source is Towers Data Systems.
7
<PAGE> 8
INDUSTRY SECTORS
A YEAR-TO-YEAR COMPARISON
Data show the percentage of the common stocks in the portfolio that each sector
represented on October 31, 1996, and on October 31, 1995.
[Year-to-Year Comparison Bar Graph]
<TABLE>
<CAPTION>
KEMPER TEHNOLOGY FUND KEMPER TECHNOLOGY FUND
AS OF 10/31/96 AS OF 10/31/95
<S> <C> <C>
COMMUNICATIONS 25.7% 19.7%
LIFE SCIENCES 21.8% 14.7%
SYSTEMS, SOFTWARE & SERVICES 20.9% 16.7%
PERSONAL COMPUTING 14.2% 14.6%
ELECTRONIC PARTS 12.9% 30.1%
INDUSTRIAL TECHNOLOGY/MISC. 4.5% 4.2%
</TABLE>
A COMPARISON WITH THE HAMBRECHT & QUIST INDEX
Data show the percentage of the common stocks in the portfolio that each sector
of Kemper Technology Fund represented on October 31, 1996, compared with the
industry sectors that make up the Hambrecht & Quist (H&Q) Technology Index. In
contrast with broader indexes such as the Russell 1000 Growth Index or the S&P
500 Stock Index, the H&Q is comprised only of technology stocks and, as such, is
used by management of Kemper Technology Fund as an internal performance
benchmark.
[Hambrecht & Quist Comparison Bar Graph]
<TABLE>
<CAPTION>
KEMPER TEHNOLOGY FUND H & Q TECHNOLOGY INDEX
AS OF 10/31/96 AS OF 10/31/96
<S> <C> <C>
COMMUNICATIONS 25.7% 24.3%
LIFE SCIENCES 21.8% 17.2%
SYSTEMS, SOFTWARE & SERVICES 20.9% 27.8%
PERSONAL COMPUTING 14.2% 14.4%
ELECTRONIC PARTS 12.9% 14.9%
INDUSTRIAL TECHNOLOGY/MISC. 4.5% 1.4%
</TABLE>
8
<PAGE> 9
LARGEST HOLDINGS
THE FUND'S 10 LARGEST HOLDINGS*
Representing 33% of the fund's total common stock holdings on October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
HOLDINGS PERCENT
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1. CISCO Largest, most comprehensive supplier of routing 5.7%
SYSTEMS software and related systems that direct the flow of
data between local area networks. A play on the
explosive growth of the Internet.
- --------------------------------------------------------------------------------
2. INTEL In microprocessors for personal computers, Intel is 4.0%
CORP. dominant and has gotten even stronger over the past
year. A new opportunity is in larger computer systems
using multiple Pentium or Pentium Pro chips.
- --------------------------------------------------------------------------------
3. SUN Provides high performance workstations. 3.4%
MICROSYSTEMS
- --------------------------------------------------------------------------------
4. MICROSOFT The other overwhelming beneficiary of personal 3.3%
CORP. computer growth. Its Windows 95 operating system seems
to be selling well. Additional potential over the next
few years will be in more capable systems for
corporations and in on-line networking.
- --------------------------------------------------------------------------------
5. 3COM Pioneer of the data networking industry; offers a 3.3%
CORPORATION broad range of global networking solutions such as
routers, hubs, LAN switches and adapters.
- --------------------------------------------------------------------------------
6. COMPAQ Leading personal computer vendor worldwide. It has the 3.2%
COMPUTER advantages of scale, an increasingly efficient
CORP. manufacturing operation and the better margins that
come with its upscale computer "server" business.
- --------------------------------------------------------------------------------
7. DELL World's largest direct marketer of PCs and a major 3.1%
COMPUTER manufacturer of them as well. The focus on direct
CORP. distribution leads to low costs and the ability to
react quickly to changing market conditions.
Management has been strengthened in recent years.
- --------------------------------------------------------------------------------
8. COMPUTER Largest independent supplier of enterprise software. 2.6%
ASSOCIATES Its products have historically been used in computer
INTERNATIONAL mainframes.
- --------------------------------------------------------------------------------
9. U.S. Designs, markets and supports high performance data 2.2%
ROBOTICS communications products and systems targeted to
business and professional users. Product line includes
dial-up modems, network management systems and data
communications software.
- --------------------------------------------------------------------------------
10. GATEWAY Along with Dell, a major direct marketer of personal 2.2%
2000 computers.
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER TECHNOLOGY FUND
Portfolio of Investments at October 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
COMMON STOCKS NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ELECTRONIC COMPONENTS--12.5% (b)Altera Corp. 75,000 $ 4,650
(b)Analog Devices 535,000 13,910
(b)C-Cube Microsystems 75,000 2,906
(b)Chips & Technologies 100,000 1,987
(b)Dupont Photomasks Inc. 110,000 4,015
(b)ESS Technology, Inc. 100,000 1,600
Intel Corp. 375,000 41,203
Linear Technology Corp. 80,000 2,680
MRV Communications 220,000 4,785
(b)Microchip Technology 400,000 14,500
Micron Technology, Inc. 250,000 6,344
(b)National Semiconductor Corp. 200,000 3,850
(b)SGS-Thomson Microelectronics 150,000 7,856
(b)Sipex Corp. 100,000 2,638
(b)Technology Modeling Associates 100,000 1,069
Texas Instruments 335,000 16,122
(b)TranSwitch Corp. 175,511 812
(b)Vitesse Semiconductor Corp. 65,000 2,072
----------------------------------------------------------------------------
132,999
- -------------------------------------------------------------------------------------------------------------
PERSONAL COMPUTING--13.8% Canon Inc. 45,000 862
(b)Compaq Computer Corp. 475,000 33,072
(b)Dell Computer Corp. 395,524 32,185
(b)Gateway 2000 475,000 22,355
Ingram Micro Inc. 78,100 1,406
(b)Micron Electronics 150,000 2,231
(b)Microsoft Corp. 250,000 34,313
(b)Novell 100,000 925
(b)Seagate Technology 200,000 13,350
(b)S3 Incorporated 300,000 5,663
----------------------------------------------------------------------------
146,362
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(Dollars in thousands)
<TABLE>
<Capiton>
- --------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS--24.9% (b)Adtran 155,000 $ 5,657
(b)Ascend Communications, Inc. 300,000 19,612
(b)Aspect Telecommunications Corp. 35,000 2,082
CCC Information Services 100,000 1,875
(b)Cascade Communications 50,000 3,631
(b)Cisco Systems 950,000 58,781
(b)Connect Inc. 150,000 1,275
L.M. Ericsson Telephone Co.
American Depositary Receipts 300,000 8,287
Common "B" shares 69,870 1,895
(b)FORE Systems, Inc. 400,000 15,900
Globalstar Telecommunications,
convertible preferred 250,000 11,500
Lucent Technology Corp. 50,000 2,350
(b)Netcom On-Line Communications Services 8,427 129
(b)Netscape Communications Corp. 225,000 9,956
(b)Newbridge Networks Corp. 660,000 20,873
(b)PairGain Technologies, Inc. 115,000 7,921
(a)(b)Socket Communications, Inc. 134,756 287
Telefonica Nacional de Espana S.A. 59,530 1,196
(b)Tellabs Operations 258,000 21,962
(b)Teltrend 175,000 5,775
(b)3Com Corporation 500,000 33,813
(b)U.S. Robotics 365,000 22,949
(b)Worldcom 235,000 5,728
(b)Xylan Corp. 43,679 1,747
-----------------------------------------------------------------------------
265,181
- --------------------------------------------------------------------------------------------------------------
SYSTEMS, SOFTWARE Ansys, Inc. 100,000 1,225
AND SERVICES--20.3% (b)BMC Software 50,000 4,150
(b)Baan Company N.V. 41,730 1,550
(b)Cadence Design Systems 525,000 19,162
(b)Checkfree Corp. 150,000 2,737
Computer Associates International 450,000 26,606
(b)Computer Sciences Corporation 200,000 14,850
(b)Electronic Arts 300,000 11,250
Electronic Data Systems 250,000 11,250
First Data Corporation 125,942 10,044
(b)GT Interactive Software 300,000 5,737
(b)Industri Matematik 154,000 1,502
(b)Informix Corp. 200,000 4,438
(b)Integrated Systems 108,000 2,916
(b)Logic Works 27,638 159
(b)META Group 165,000 5,198
(b)Metatools 150,000 2,888
(b)Onewave Inc. 75,000 1,050
(b)Oracle Corp. 500,000 21,156
(b)Parametric Technology Corp. 420,000 20,528
(b)Rational Software 50,000 1,919
SAP AG 12,130 1,643
(b)Sun Microsystems 575,000 35,075
SystemSoft 10,000 283
(b)Tietotehdas Oy 23,400 1,568
(b)Versant Object Technology 200,000 3,900
(b)Wind River Systems, Inc. 65,000 2,763
-----------------------------------------------------------------------------
215,547
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(Dollars in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LIFE SCIENCES--21.1% (b)Algos Pharmaceutical 125,000 $ 1,562
(b)Amgen, Inc. 330,000 20,233
(b)Angeion Corporation 600,000 2,550
(b)Arris Pharmaceutical Corp. 150,000 1,856
(b)Biochem International 300,000 12,787
(b)Boston Scientific Corp. 125,000 6,797
(b)British Biotech PLC 258,750 954
Celgene Corp. 100,000 862
(b)Centocor, Inc. 350,000 10,281
(b)Cephalon, Inc. 50,000 1,119
Ciba Geigy AG, ADR 85,500 5,237
ClinTrials 100,000 3,712
(b)GelTex Pharmaceuticals 110,000 2,090
(b)Genzyme Corp. 125,000 2,875
(b)Gilead Sciences 210,000 4,909
Glaxo Wellcome 125,235 1,966
Guidant Corporation 150,663 6,949
(b)IBAH, Inc. 100,000 662
(b)ImmuLogic Pharmaceutical Corporation 100,000 837
(b)Incyte Pharmaceuticals, Inc. 35,000 1,418
(b)Interneuron Pharmaceuticals 200,000 4,950
(b)Isis Pharmaceuticals 125,692 2,042
(b)Lifecore Biomedical 315,000 5,316
(b)Ligand Pharmeceutical Inc. 400,000 4,950
(b)Magainin Pharmaceuticals 100,000 1,113
(b)Martek Biosciences Corp. 200,000 4,300
(a)(b)Med Venture Associates II, L.P.,
6.1% limited partnership interest -- 579
Medtronic, Inc. 225,000 14,484
(b)Myriad Genetics 140,000 3,465
(b)North American Vaccine 250,000 5,563
(b)Novoste Corp. 95,000 1,354
Pfizer Inc. 150,000 12,413
(b)Pharmos Corporation 411,349 540
(b)Physician Computer Network 250,000 2,234
(b)Sano Corp. 75,000 1,294
(b)Selfcare, Inc. 150,000 2,250
(b)SEQUUS Pharmaceuticals 300,000 4,219
(b)Steris Corp. 200,000 7,550
(b)Sugen, Inc. 50,000 600
(a)(b)Survivalink Corporation with warrants
expiring 2001 260,000 945
(b)Thermedics, Inc. 175,000 3,631
Thermo Electron Corp. 532,500 19,436
(b)ThermoLase Corporation 200,000 3,925
(b)Total Renal Care Holdings 160,000 6,240
(a)(b)Trex Medical 60,000 615
(b)Trex Medical 125,000 2,203
U.S. Surgical Corp. 250,000 10,468
(b)Ventritex Inc. 200,000 4,563
(b)VidaMed, Inc. 300,000 3,188
----------------------------------------------------------------------------
224,086
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(Dollars in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INDUSTRIAL TECHNOLOGY AND (b)AES Corporation, warrants expiring 2000 13,656 $ 287
MISCELLANEOUS--4.4% (a)(b)Advanced Technology Ventures II, L.P.,
17.9% limited partnership interest -- 480
(b)Alyn Corp. 100,000 1,375
Ashland Coal 35,000 827
(a)(b)Asset Management Associates 1996, L.P.,
2.5% limited partnership interest CAE Inc. -- 175
205,700 1,727
(a)(b)Crosspoint Venture Partners 1993, L.P.,
3.1% limited partnership interest -- 2,505
(a)(b)GEO Capital III, L.P.,
5.0% limited partnership interest -- 1,574
(a)(b)GEO Capital IV, L.P.,
2.9% limited partnership interest -- 265
Kyocera Corp. 27,000 1,783
Mabuchi Motor Co., Ltd. 12,100 617
Matsushita Electric Industrial Co., Ltd. 116,000 1,856
Murata Manufacturing 47,000 1,512
Olympus Optical Co., Ltd. 94,000 843
(b)Sanmina Corp. 300,000 13,725
(a)(b)Sevin Rosen Fund V, L.P.,
2.7% limited partnership interest -- 797
(b)Solectron Corp. 45,000 2,408
(b)Sterling Commerce, Inc. 250,000 7,031
(b)Thermo Instrument Systems 154,000 4,659
(b)Thermo Optek Corp. 75,000 900
(b)Thermo Sentron 80,600 907
-------------------------------------------------------------------------
46,253
-------------------------------------------------------------------------
TOTAL COMMON STOCKS--97.0%
(Cost: $747,675) 1,030,428
- ----------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--5.29% to 5.36%
INSTRUMENTS--1.5%
Due--November 1996
(Cost: $16,590) $16,600 16,590
-------------------------------------------------------------------------
TOTAL INVESTMENTS--98.5%
(Cost: $764,265) 1,047,018
-------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.5% 15,795
-------------------------------------------------------------------------
NET ASSETS--100% $1,062,813
-------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Portfolio of Investments.
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The following securities may require registration under the Securities Act
of 1933 or an exemption therefrom in order to effect sale in the ordinary
course of business; they were valued at cost on the dates of acquisition. No
market quotations were available for unrestricted securities of the same
class on the dates of acquisition or on October 31, 1996, with the exception
of Socket Communications, Inc., which was valued at 85% of current market
value. These securities are valued at fair value as determined in good faith
by the Board of Trustees of the Fund. At October 31, 1996, the value of the
Fund's restricted securities was $8,222,000, which represented .77% of net
assets.
<TABLE>
<CAPTION>
DATE OF NUMBER
SECURITY DESCRIPTION ACQUISITION OF SHARES COST
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
17.9% limited
Advanced Technology Ventures II, L.P. December 1994 partnership interest $1,687,908
---------------------------------------------------------------------------------------------------------------------
2.5% limited
Asset Management Associates 1996, L.P. June 1996 partnership interest 200,000
---------------------------------------------------------------------------------------------------------------------
October 1994
to 3.1% limited
Crosspoint Venture Partners 1993, L.P. July 1996 partnership interest 1,488,231
---------------------------------------------------------------------------------------------------------------------
October 1994
to 5.0% limited
GEO Capital III, L.P. September 1996 partnership interest 1,778,377
---------------------------------------------------------------------------------------------------------------------
2.9% limited
GEO Capital IV, L.P. April 1996 partnership interest 300,000
---------------------------------------------------------------------------------------------------------------------
May 1996
to 6.1% limited
Med Venture Associates II, L.P. October 1996 partnership interest 700,000
---------------------------------------------------------------------------------------------------------------------
April 1996
to 2.7% limited
Sevin Rosen Fund V, L.P. October 1996 partnership interest 821,934
---------------------------------------------------------------------------------------------------------------------
May 1994
to
Socket Communications, Inc. December 1994 134,756 shs. 4.62 per share
---------------------------------------------------------------------------------------------------------------------
December 1995
to
Survivalink Corporation with warrants expiring 2001 October 1996 260,000 3.63 per share
---------------------------------------------------------------------------------------------------------------------
Trex Medical November 1995 60,000 10.25 per share
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) Non-income producing security.
Based on the cost of investments of $764,265,000 for federal income tax
purposes at October 31, 1996, the gross unrealized appreciation was
$305,948,000, the gross unrealized depreciation was $23,195,000 and the net
unrealized appreciation on investments was $282,753,000.
See accompanying Notes to Financial Statements.
14
<PAGE> 15
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER TECHNOLOGY FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Technology Fund, as of October
31, 1996, the related statements of operations for the year then ended and
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the fiscal periods since 1992. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
October 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Technology Fund at October 31, 1996, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the fiscal periods
since 1992, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 17, 1996
15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
(in thousands)
ASSETS
<TABLE>
<S> <C>
Investments, at value
(Cost: $764,265) $1,047,018
- -------------------------------------------------------------------------------------------------------
Cash 3,413
- -------------------------------------------------------------------------------------------------------
Receivable for:
Investments sold 31,683
- -------------------------------------------------------------------------------------------------------
Fund shares sold 964
- -------------------------------------------------------------------------------------------------------
Dividends 86
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS 1,083,164
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------------------------------------
Payable for:
Investments purchased 18,603
- -------------------------------------------------------------------------------------------------------
Fund shares redeemed 682
- -------------------------------------------------------------------------------------------------------
Management fee 511
- -------------------------------------------------------------------------------------------------------
Distribution services fee 49
- -------------------------------------------------------------------------------------------------------
Administrative services fee 164
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 252
- -------------------------------------------------------------------------------------------------------
Trustees' fees 90
- -------------------------------------------------------------------------------------------------------
Total liabilities 20,351
- -------------------------------------------------------------------------------------------------------
NET ASSETS $1,062,813
- -------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------------------------------------
Paid-in capital $ 630,500
- -------------------------------------------------------------------------------------------------------
Undistributed net realized gain on investments 149,560
- -------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 282,753
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $1,062,813
- -------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- -------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($971,140 divided by 73,767 shares outstanding) $13.16
- -------------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering price) $13.96
- -------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($69,712 divided by 5,458 shares outstanding) $12.77
- -------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($4,127 divided by 321 shares outstanding) $12.85
- -------------------------------------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($17,834 divided by 1,351 shares outstanding) $13.20
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
16
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended October 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------
Dividends $ 1,966
- -------------------------------------------------------------------------------------------------------
Interest 675
- -------------------------------------------------------------------------------------------------------
Total investment income 2,641
- -------------------------------------------------------------------------------------------------------
Expenses:
Management fee 5,582
- -------------------------------------------------------------------------------------------------------
Distribution services fee 434
- -------------------------------------------------------------------------------------------------------
Administrative services fee 1,605
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 1,531
- -------------------------------------------------------------------------------------------------------
Professional fees 67
- -------------------------------------------------------------------------------------------------------
Reports to shareholders 135
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 52
- -------------------------------------------------------------------------------------------------------
Total expenses 9,406
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS (6,765)
- -------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Net realized gain on sales of investments and foreign currency transactions 171,891
- -------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments (92,784)
- -------------------------------------------------------------------------------------------------------
Net gain on investments 79,107
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 72,342
- -------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
Net investment loss $ (6,765) (2,018)
- ---------------------------------------------------------------------------------------------------------
Net realized gain 171,891 127,806
- ---------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (92,784) 196,817
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 72,342 322,605
- ---------------------------------------------------------------------------------------------------------
Net equalization credits 38 114
- ---------------------------------------------------------------------------------------------------------
Distribution from net realized gain (148,702) (92,581)
- ---------------------------------------------------------------------------------------------------------
Net increase from capital share transactions 121,180 74,163
- ---------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 44,858 304,301
- ---------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------
Beginning of year 1,017,955 713,654
- ---------------------------------------------------------------------------------------------------------
END OF YEAR (including undistributed net investment income
of $3,649 in 1995) $1,062,813 1,017,955
- ---------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Technology Fund is an open-end management
investment company organized as a business trust
under the laws of Massachusetts. The Fund currently
offers four classes of shares. Class A shares are
sold to investors subject to an initial sales
charge. Class B shares are sold without an initial
sales charge but are subject to higher ongoing
expenses than Class A shares and a contingent
deferred sales charge payable upon certain
redemptions. Class B shares automatically convert
to Class A shares six years after issuance. Class C
shares are sold without an initial sales charge but
are subject to higher ongoing expenses than Class A
shares and, for shares sold on or after April 1,
1996, a contingent deferred sales charge payable
upon certain redemptions within one year of
purchase. Class C shares do not convert into
another class. Class I shares are sold to a limited
group of investors, are not subject to initial or
contingent deferred sales charges and have lower
ongoing expenses than other classes. Differences in
class expenses will result in the payment of
different per share income dividends by class. All
shares of the Fund have equal rights with respect
to voting, dividends and assets, subject to class
specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Portfolio securities that are traded on a
domestic securities exchange or securities listed
on the NASDAQ National Market are valued at the
last sale price on the exchange or market where
primarily traded or listed or, if there is no
recent sale, at the last current bid quotation.
Portfolio securities that are primarily traded on
foreign securities exchanges are generally valued
at the preceding closing values of such securities
on their respective exchanges where primarily
traded. Securities not so traded or listed are
valued at the last current bid quotation if market
quotations are available. Fixed income securities
are valued by using market quotations, or
independent pricing services that use prices
provided by market makers or estimates of market
values obtained from yield data relating to
instruments or securities with similar
characteristics. Equity options are valued at the
last sale price unless the bid price is higher or
the asked price is lower, in which event such bid
or asked price is used. Financial futures and
options thereon are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Forward foreign
currency contracts are valued at the forward rates
prevailing on the day of valuation. Other
securities and assets are valued at fair value as
determined in good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Dividend income is recorded on the
ex-dividend date, and interest income is recorded
on the accrual basis and includes discount
amortization on money market instruments. Realized
gains and losses from investment transactions are
reported on an identified cost basis.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
shares will be reduced by the amount of any
applicable contingent deferred sales charge. On
each day the New York Stock Exchange is open for
trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class by dividing the Fund's net assets
attributable to that class by the number of shares
of the class outstanding.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies and therefore no
federal income tax provision is required.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income and net
realized capital gains annually, which are recorded
on the ex-dividend date. Dividends are determined
in accordance with income tax principles which may
treat certain transactions differently from
generally accepted accounting principles.
EQUALIZATION ACCOUNTING. A portion of proceeds from
sales and cost of redemptions of Fund shares is
credited or charged to undistributed net investment
income so that income per share available for
distribution is not affected by sales or
redemptions of shares.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI) and pays a management fee at an annual rate
of .58% of the first $250 million of average daily
net assets declining to .42% of average daily net
assets in excess of $12.5 billion. The Fund
incurred a management fee of $5,582,000 for the
year ended October 31, 1996.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS ------------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- -------------- -------------
<S> <C> <C> <C>
Year ended
October 31, 1996 $ 198,000 869,000 37,000
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, KDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees and
commissions paid in connection with the sale of
Class B
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
and Class C shares and the CDSC received in
connection with the redemption of such shares are
as follows:
<TABLE>
<CAPTION>
COMMISSIONS AND
DISTRIBUTION FEES
DISTRIBUTION FEES PAID BY KDI
AND CDSC RECEIVED ------------------------------
BY KDI TO ALL FIRMS TO AFFILIATES
----------------- -------------- -------------
<S> <C> <C> <C>
Year ended
October 31, 1996 $ 537,000 1,006,000 28,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of Fund accounts the firms
service. Administrative services fees (ASF) paid
are as follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY ------------------------------
THE FUND TO KDI TO ALL FIRMS TO AFFILIATES
---------------- -------------- -------------
<S> <C> <C> <C>
Year ended
October 31, 1996 $1,605,000 1,607,000 15,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of $984,000
for the year ended October 31, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the year ended October 31, 1996, the Fund
made no payments to its officers and incurred
trustees' fees of $30,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended October 31, 1996, investment
transactions (excluding short-term instruments) are
as follows (dollars in thousands):
Purchases $1,239,814
Proceeds from sales 1,298,346
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995
---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------
SHARES SOLD
------------------------------------------------------------------------------
Class A 6,779 $ 84,646 8,774 $ 104,886
------------------------------------------------------------------------------
Class B 4,430 55,798 4,556 54,618
------------------------------------------------------------------------------
Class C 403 5,168 123 1,490
------------------------------------------------------------------------------
Class I 947 11,854 1,586 20,709
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
------------------------------------------------------------------------------
Class A 10,245 109,842 7,693 73,098
------------------------------------------------------------------------------
Class B 650 6,818 114 1,080
------------------------------------------------------------------------------
Class C 25 262 3 33
------------------------------------------------------------------------------
Class I 244 2,616 -- --
------------------------------------------------------------------------------
SHARES REDEEMED
------------------------------------------------------------------------------
Class A (8,858) (111,018) (12,664) (149,299)
------------------------------------------------------------------------------
Class B (2,317) (28,675) (2,221) (26,954)
------------------------------------------------------------------------------
Class C (216) (2,686) (28) (335)
------------------------------------------------------------------------------
Class I (1,054) (13,445) (372) (5,163)
------------------------------------------------------------------------------
CONVERSION OF SHARES
------------------------------------------------------------------------------
Class A 151 1,900 46 574
------------------------------------------------------------------------------
Class B (156) (1,900) (47) (574)
------------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL SHARE
TRANSACTIONS $ 121,180 $ 74,163
------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------------
CLASS A
--------------------------------------------------
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------
Net asset value, beginning of year $14.63 11.50 10.68 9.95 12.42
- -------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.08) (.03) -- (.01) .01
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain .74 4.66 1.49 2.03 .04
- -------------------------------------------------------------------------------------------------
Total from investment operations .66 4.63 1.49 2.02 .05
- -------------------------------------------------------------------------------------------------
Less dividends
Distribution from net investment income -- -- -- -- .03
- -------------------------------------------------------------------------------------------------
Distribution from net realized gain 2.13 1.50 .67 1.29 2.49
- -------------------------------------------------------------------------------------------------
Total dividends 2.13 1.50 .67 1.29 2.52
- -------------------------------------------------------------------------------------------------
Net asset value, end of year $13.16 14.63 11.50 10.68 9.95
- -------------------------------------------------------------------------------------------------
TOTAL RETURN 7.83% 47.30 14.95 21.76 .32
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------------
Expenses .89% .88 .89 .81 .82
- -------------------------------------------------------------------------------------------------
Net investment income (loss) (.62)% (.23) .05 (.06) .07
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------
CLASS B
--------------------------------
YEAR ENDED MAY 31 TO
OCTOBER 31, OCTOBER 31,
1996 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------
Net asset value, beginning of period $14.39 11.45 9.99
- ------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (.19) (.15) (.05)
- ------------------------------------------------------------------------------
Net realized and unrealized gain .70 4.59 1.51
- ------------------------------------------------------------------------------
Total from investment operations .51 4.44 1.46
- ------------------------------------------------------------------------------
Less distribution from net realized gain 2.13 1.50 --
- ------------------------------------------------------------------------------
Net asset value, end of period $12.77 14.39 11.45
- ------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 6.76% 45.65 14.61
- ------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------
Expenses 1.87% 1.82 1.99
- ------------------------------------------------------------------------------
Net investment loss (1.60)% (1.17) (1.08)
- ------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------ ---------------------------
CLASS C CLASS I
------------------------------ ---------------------------
YEAR ENDED MAY 31 TO YEAR ENDED JULY 3 TO
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995 1994 1996 1995
- ----------------------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------- --------------------------
Net asset value, beginning of period $14.45 11.45 9.99 14.64 12.72
- ----------------------------------------------------------------------------- --------------------------
Income from investment operations:
Net investment loss (.18) (.15) (.05) (.07) (.02)
- ----------------------------------------------------------------------------- --------------------------
Net realized and unrealized gain .71 4.65 1.51 .76 1.94
- ----------------------------------------------------------------------------- --------------------------
Total from investment operations .53 4.50 1.46 .69 1.92
- ----------------------------------------------------------------------------- --------------------------
Less distribution from net realized gain 2.13 1.50 -- 2.13 --
- ----------------------------------------------------------------------------- --------------------------
Net asset value, end of period $12.85 14.45 11.45 13.20 14.64
- ----------------------------------------------------------------------------- --------------------------
TOTAL RETURN (NOT ANNUALIZED) 6.88% 46.23 14.61 8.06 15.09
- ----------------------------------------------------------------------------- --------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------- --------------------------
Expenses 1.82% 1.76 1.83 .76 .65
- ----------------------------------------------------------------------------- --------------------------
Net investment loss (1.55)% (1.11) (.92) (.49) (.33)
- ----------------------------------------------------------------------------- --------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $1,062,813 1,017,955 713,654 612,604 559,279
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 121% 105 81 95 95
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Average commission rate paid per share on stock transactions for the year ended
1996 was October 31, 1996 was $.0558.
- --------------------------------------------------------------------------------
NOTES: Total return does not reflect the effect of any sales charges. Per share
data for 1996 and 1995 were determined based on average shares outstanding.
23
<PAGE> 24
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS FRANK D. KORTH
President and Trustee Vice President
DAVID W. BELIN CHARLES R. MANZONI, JR.
Trustee Vice President
LEWIS A. BURNHAM JOHN E. NEAL
Trustee Vice President
DONALD L. DUNAWAY STEVEN H. REYNOLDS
Trustee Vice President
ROBERT B. HOFFMAN PHILIP J. COLLORA
Trustee Vice President
and Secretary
DONALD R. JONES
Trustee
DOMINIQUE P. MORAX JEROME L. DUFFY
Trustee Treasurer
SHIRLEY D. PETERSON ELIZABETH C. WERTH
Trustee ASSISTANT SECRETARY
WILLIAM P. SOMMERS
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
1-800-621-1048
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
http://www.kemper.com
(RECYCLE LOGO)
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This report is not to be distributed
unless preceded or accompanied by a
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KTEC - 2 (12/96)
KEMPER FUNDS LOGO
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