N-30D 1 c58356n-30d.txt ANNUAL REPORT 1 LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM) ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED OCTOBER 31, 2000 Seeking growth of capital and of income KEMPER BLUE CHIP FUND "... our intensive stock selection process leads us to some of the most attractive blue-chip stocks from a wide variety of market sectors. ..." [KEMPER FUNDS LOGO] 2 CONTENTS 3 ECONOMIC OVERVIEW 7 PERFORMANCE UPDATE 11 INDUSTRY SECTORS 12 LARGEST HOLDINGS 13 PORTFOLIO OF INVESTMENTS 17 FINANCIAL STATEMENTS 20 FINANCIAL HIGHLIGHTS 22 NOTES TO FINANCIAL STATEMENTS 27 REPORT OF INDEPENDENT AUDITORS KEMPER BLUE CHIP FUND TOTAL RETURNS FOR THE YEAR ENDED OCTOBER 31, 2000 (UNADJUSTED FOR ANY SALES CHARGE) [BAR GRAPH]
KEMPER BLUE CHIP FUND KEMPER BLUE CHIP FUND LIPPER LARGE-CAP VALUE KEMPER BLUE CHIP FUND CLASS A CLASS B CLASS C FUNDS CATEGORY AVERAGE* ----------------------------- --------------------- --------------------- ----------------------- 8.51 7.62 7.72 7.11
PERFORMANCE IS HISTORICAL AND INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH CHANGING MARKET CONDITIONS, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. *LIPPER, 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; IF SALES CHARGES HAD BEEN INCLUDED, RESULTS MAY HAVE BEEN LESS FAVORABLE. NET ASSET VALUE
AS OF AS OF 10/31/00 10/31/99 ........................................................... KEMPER BLUE CHIP FUND CLASS A $21.76 $20.76 ........................................................... KEMPER BLUE CHIP FUND CLASS B $21.30 $20.50 ........................................................... KEMPER BLUE CHIP FUND CLASS C $21.47 $20.64 ...........................................................
KEMPER BLUE CHIP FUND RANKINGS AS OF 10/31/00 COMPARED WITH ALL OTHER FUNDS IN THE LIPPER LARGE-CAP VALUE FUNDS CATEGORY*
CLASS A CLASS B CLASS C .................................................................................... 1-YEAR #142 of 366 funds #171 of 366 funds #166 of 366 funds .................................................................................... 5-YEAR #41 of 166 funds #71 of 166 funds #69 of 166 funds .................................................................................... 10-YEAR #31 of 56 funds N/A N/A ....................................................................................
DIVIDEND REVIEW DURING THE YEAR ENDED OCTOBER 31, 2000, KEMPER BLUE CHIP FUND MADE THE FOLLOWING DISTRIBUTIONS PER SHARE:
CLASS CLASS CLASS A B C ......................................................... LONG-TERM CAPITAL GAIN $0.75 $0.75 $0.75 .........................................................
YOUR FUND'S STYLE MORNINGSTAR EQUITY STYLE BOX(TM) [MORNINGSTAR EQUITY STYLE Source: Morningstar, Inc. Chicago, IL (312) BOX] 696-6000. The Morningstar Equity Style Box(TM) placement is based on two variables: a fund's market capitalization relative to the movements of the market and a fund's valuation, which is calculated by comparing the stocks in the fund's portfolio with the most relevant of the three market-cap groups. PLEASE NOTE THAT STYLE BOXES DO NOT REPRESENT AN EXACT ASSESSMENT OF RISK AND DO NOT REPRESENT FUTURE PERFORMANCE. THE FUND'S PORTFOLIO CHANGES FROM DAY TO DAY. A LONGER-TERM VIEW IS REPRESENTED BY THE FUND'S MORNINGSTAR CATEGORY, WHICH IS BASED ON ITS ACTUAL INVESTMENT STYLE AS MEASURED BY ITS UNDERLYING PORTFOLIO HOLDINGS OVER THE PAST THREE YEARS. MORNINGSTAR HAS PLACED KEMPER BLUE CHIP FUND IN THE LARGE BLEND CATEGORY. PLEASE CONSULT THE PROSPECTUS FOR A DESCRIPTION OF INVESTMENT POLICIES.
BALANCE SHEET A listing of assets and net worth showing the position of a company at a certain time. BENCHMARK A point of comparison for gauging relative performance. A fund's benchmark may be the overall stock market, an index or a peer-group average. To use a given benchmark effectively, it's essential to consider any differences between the benchmark and the fund. GROWTH STOCK A stock in a company that is expected to experience rapid growth resulting from strong sales, talented management and dominant market position. Because growth stocks are typically in demand, they tend to carry relatively high price tags and can also be volatile, based on changing perceptions of the companies' growth. PRICE-TO-EARNINGS (P/E) RATIO The P/E ratio indicates about how much investors are paying for a company's earning power. The higher the P/E ratio, the more investors are paying and the more earnings growth they are expecting. VALUATION A stock's price relative to an underlying measure of worth. 28 TAX INFORMATION AT A GLANCE TERMS TO KNOW 3 ECONOMIC OVERVIEW SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES. DEAR KEMPER FUNDS SHAREHOLDER: Times have been good. During the first half of 2000, the global economy grew faster than it has in over a decade. All regions participated. The United States, of course, was still powering ahead. The growth rate in Europe was nearly 4 percent. Asia fed off an electronics boom and a revitalized China. South America got a boost from an improved credit rating. New money pumped up energy producers from Mexico to the Middle East. Now for the bad news, which is that the best news is probably behind us. Global growth peaked in the spring, and in the United States, at least, the slowdown was abrupt. After 6 percent growth in the year ending June 30, the economy grew at a rate of just 2.43 percent during the summer. It seems that expensive energy, currency volatility and more widespread profit problems are bringing the exuberant global economy, including the United States, to heel. Let's explore these factors in more detail. OIL, OIL, TOIL AND TROUBLE Although oil prices have receded somewhat, everyone's still jittery, and with good reason: Of the seven recessions since World War II, six were preceded by a spike in crude oil prices. Oil prices have already been strong enough for long enough to crimp growth, and they're biting the rest of the world even harder than the United States. But there are two factors working to our advantage. First, oil prices are still historically low. Oil is slightly more than $30 per barrel today, but it peaked at over $75 per barrel back in 1980 (stated in today's dollars). Second, our dependence on oil has decreased: The United States uses only roughly half as much oil to produce a unit of GDP as it did thirty years ago. This gives us hope that the economy can escape recession this time around. What would make us worry more? Outright energy shortages or a political crisis. If either happens, the odds of a recession occurring would rise steeply. People panic or become excessively cautious when they have to fret. Can I fill up my oil tank? Will there be a war? Their loss of confidence can be much more devastating than price increases alone. CURRENCY CONCERNS Currency turmoil is a second danger to the economy. Central bankers have intervened to halt the euro's decline, and they're right that the euro is fundamentally undervalued. But intervention is a hazardous game. Let's hope they don't convince the markets that the euro should rise a lot very quickly. A suddenly weak dollar might make Europeans think about selling all those American stocks and bonds they've been buying, and would greatly complicate the Fed's inflation fight. BUSINESS: BIG PLANS BUT PROFIT DISAPPOINTMENTS Profit warnings escalated late this summer, and we believe there's fire amid that smoke. Sure, businesses have had a voracious appetite for money -- and until very recently, corporate treasurers were finding it easily: Banks increased business lending by 10.8 percent in the past year. Bond markets have suddenly become a lot more picky, especially for low-quality credits, but money is still available for investment grade borrowers. Capital goods orders reflect executives' enthusiasm -- while volatile month-to-month, they have been up an average of 15 to 20 percent compared to a year ago for the past six months. Still, we expect total capital spending to slow, from this year's estimated 14 percent to 12.5 percent in 2001. The reason? A profit squeeze is about to take some of the edge off executives' animal spirits. We've always been more cautious than Wall Street about 2001 profits, and our forecast hasn't changed. Profits are likely to be flat to down next year for several reasons. First, the growth slowdown will make it harder to keep up the productivity gains that have kept labor costs under control. We saw the first evidence of how productivity slows along with economic growth in the third quarter: Productivity gains dipped to just 3.3 percent from the second quarter's remarkable 6.1 percent. Second, interest expense will surge (thanks to higher rates and all that new debt. Third, depreciation costs are escalating. And finally, the excessively weak euro and higher oil costs will sap earnings. 3 4 ECONOMIC OVERVIEW ECONOMIC GUIDEPOSTS ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND SHAREHOLDER DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR DEFLATION, CREDIT EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON MUTUAL FUND PERFORMANCE. THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE 10-YEAR TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES. THE OTHER DATA REPORT YEAR-TO-YEAR PERCENTAGE CHANGES. [BAR GRAPH]
NOW (11/30/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO -------------- ------------ ---------- ----------- 10-year Treasury rate (1) 5.70 6.40 6.00 4.80 Prime rate (2) 9.50 9.25 8.50 8.00 Inflation rate (3)* 3.50 3.10 2.60 1.40 The U.S. dollar (4) 11.10 4.30 -0.70 1.20 Capital goods orders (5)* 7.00 17.10 12.30 -0.60 Industrial production (5)* 5.20 6.50 4.40 4.00 Employment growth (6)* 1.80 2.50 2.30 2.50
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL ASSETS. (2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS. (3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS, INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE LAST FEW YEARS HAS MEANT HIGH REAL RETURNS. (4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE VALUE OF U.S. FIRMS' FOREIGN PROFITS. (5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE. (6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES. *DATA AS OF 10/31/00. SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC. SAVING GRACES: FISCAL POLICY AND CONSUMER SPENDING While growth has peaked and is now slowing, we can be thankful that growth probably won't slow too much, thanks in part to a more stimulative fiscal policy and consumer spending. Fiscal policy is likely to be more stimulative. Of course, most economists agree that the last thing this pumped-up economy needs is another shot of stimulants -- too much stimulus, after all, is widely believed to cause inflation. But economists weren't running for office; politicians were. And inflation risk was about the last thing on the mind of either candidate in the heat of election campaigning. They wanted to win votes, and the time-tested way to do so was to make promises. Although we didn't have the name of the winner as of press time, neither candidate seems to be planning a lot of fiscal restraint -- but the good news is that neither candidate's plan is likely to be enacted until 2002 at the earliest. Second, consumers continue to spend, spend, spend. The personal savings rate keeps falling, from an already low 2.2 percent last year to a nearly invisible 0.1 percent this year. Critics of this admittedly squishy statistic claim it doesn't adequately capture households' growing wealth. As it turns out, however, the average American not only doesn't save much, but he's not getting wealthier in leaps and bounds, either. Net worth for the median family where the head of the household is over 45 (and where thoughts are presumably beginning to turn to retirement), rose less than $13,000 between 1995 and 1998. That's less than a 12 percent gain during the same three years the stock market nearly doubled and the market value of owner-occupied homes jumped 21 percent. Why didn't the average family get richer in that time? Because they were borrowing and spending like crazy. House values were up 21 percent -- but mortgage debt rose even faster, by 25 percent! Consumers' profligacy worries many financial professionals. Some people aren't saving enough for retirement because they have inflated expectations of future investment returns. Other people aren't saving enough for retirement because they don't realize just how much money they'll need. Either way, people aren't saving. Still, no one wants consumers to change their profligate ways too fast. After all, hearty consumer spending is a prime reason America's growth has stayed on a fast track so far. Most economists would like to see shoppers be a bit more moderate -- but only a bit. If Americans suddenly turned thrifty, the economy would lurch into reverse. 4 5 ECONOMIC OVERVIEW Luckily, there's little chance of that happening, unless lenders get cold feet. So far, they're hot to trot. In the past year, mortgage lending by banks rocketed nearly 17 percent while loans to consumers jumped 10 percent. Brokers are selling the loans banks don't want on their balance sheets to mortgage pools and the asset-backed securities market, where eager non-bank lenders are snapping them up. In the past year, these markets provided $625 billion of new credit, a leap of more than 12 percent. With so much money at their disposal, consumers didn't stay out of the shopping centers and restaurants for long. Consumer spending growth jumped up to 4.5 percent in the summer, and we expect it to stay well above 3 percent through 2001. OMINOUS SIGNS? Decelerations are always tricky, to be sure. But barring some unexpected shock, overall economic growth should to pop back into the 3.5 percent to 4 percent range in 2001. Why? Borrowing costs a little more than it did last year, but money is still freely available for good quality borrowers. Capital goods orders are strong, so there's a lot of life left in business spending. Shoppers are a little pickier, but they're still more interested in visiting the mall than in filling their piggy banks. And after the election, no matter who wins, fiscal policy is likely to be more stimulative than it has been for years. The price to pay will likely be a rise in core inflation (inflation excluding food and energy). We expect it to hit 3 percent next year, up from its recent rate of 2.5 percent. We believe we'll make it safely through 2001, but investors should keep their hands on the wheel and their eyes peeled. THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF SCUDDER KEMPER INVESTMENTS, INC. AS OF DECEMBER 6, 2000, AND MAY NOT ACTUALLY COME TO PASS. THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF THIS MATERIAL IS INTENDED AS AN INVESTMENT RECOMMENDATION. TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048. THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. Sincerely, Scudder Kemper Investments, Economics Group 5 6 ECONOMIC OVERVIEW [THIS PAGE INTENTIONALLY LEFT BLANK] 6 7 PERFORMANCE UPDATE [LASTNAME PHOTO] PORTFOLIO MANAGER TRACY MCCORMICK IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC., AND LEAD PORTFOLIO MANAGER OF KEMPER BLUE CHIP FUND. MCCORMICK BRINGS MORE THAN 20 YEARS OF INVESTMENT INDUSTRY EXPERIENCE TO THE FUND. [LASTNAME PHOTO] PORTFOLIO MANAGER GARY A. LANGBAUM, CFA, CONTRIBUTES MORE THAN 30 YEARS OF INVESTMENT INDUSTRY EXPERIENCE TO THE FUND. THE MANAGEMENT TEAM IS SUPPORTED BY SCUDDER KEMPER INVESTMENTS' LARGE STAFF OF ANALYSTS, RESEARCHERS, TRADERS AND ECONOMISTS. THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER CONDITIONS AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION OF ANY PARTICULAR SECURITY. STRONG STOCK SELECTION AND A DIVERSIFIED PORTFOLIO LED TO SOLID RETURNS FOR THE ONE-YEAR PERIOD ENDING OCTOBER 31, 2000. BELOW, LEAD PORTFOLIO MANAGER TRACY MCCORMICK DISCUSSES HOW SHE GUIDED KEMPER BLUE CHIP FUND THROUGH THIS CHALLENGING AND VOLATILE TIME. Q BEFORE YOU DETAIL KEMPER BLUE CHIP FUND'S PERFORMANCE, WILL YOU PROVIDE US WITH AN OVERVIEW OF THE MARKET DURING THE ANNUAL PERIOD? A This has been a unique period characterized by increased volatility. The market ended 1999 on a positive note as high-flying technology issues fueled strong returns. Advances in the tech sector -- specifically semiconductors and wireless communications -- along with an active initial public offering (IPO) market, drove this favorable performance. As Y2K came and went without incident, the technology-dominated market continued its upward momentum even as the Federal Reserve Board continued to raise interest rates. After reaching new highs in February, equity markets made a sharp correction. This downturn was driven by investors retreating from high-P/E technology and Internet-related stocks, and moving into areas with more reasonable valuations. Value stocks gained some ground on growth stocks during this time on the strength of stronger-than-expected corporate earnings, fears about the more aggressive Fed policy and the continued concerns over high valuations of tech stocks. Surprisingly, big discount retail names that historically perform well during this type of market posted disappointing returns on the heels of the correction. But some growth areas did benefit, such as select pharmaceuticals and financial services. Economic data suggest that the Fed has succeeded in slowing the economy. But the market has shown some signs of rebounding. As the annual period ended, the market remained volatile, and performance continued to broaden beyond technology names. Q HOW DID KEMPER BLUE CHIP FUND PERFORM AGAINST THIS BACKDROP? A For the one-year period ending October 31, 2000, Kemper Blue Chip Fund gained 8.51 percent (Class A shares, unadjusted for any sales charge), outperforming its benchmark, the S&P 500 index, which returned 6.08 percent. This outperformance can be attributed to our intensive stock selection process, which leads us to some of the most attractive blue-chip stocks from a wide variety of market sectors. Over the long term, we set our sights on beating our benchmark, as well as outperforming our peers. But when considering the fund's performance relative to the index, it's important to keep in mind that the S&P 500 is "market-cap weighted." This means that the returns of the largest stocks are weighted more heavily than the returns of smaller stocks. Thus, during the period, the large technology issues drove the direction of index returns. The portfolio is more diversified than the S&P 500, though, so when the big tech names dropped, the fund proved more resilient than the index. Q HOW DID RISING INTEREST RATES AFFECT THE FUND? A The most notable impact of rising interest rates on the 7 8 PERFORMANCE UPDATE portfolio was the beneficial effect on select financial stocks. We focused on financial subsectors that are less sensitive to commercial credit dynamics, such as insurance companies, brokerages and diversified financials. Our top-performing financial holdings included Citigroup, AIG and Hartford. Prior to the rate hikes, we were underweight in regional banks. These stocks tend to be more sensitive to higher interest rates, as investors fear that the banks' loan business will fall off in a higher-rate environment amid concern over credit risk. So, when bank stock performance slipped, the fund was not adversely affected, because we had already reduced these issues. Q HOW DID THE MARKET CORRECTION IN MARCH AFFECT THE FUND'S TECHNOLOGY HOLDINGS? A Virtually all technology stocks took a nosedive during the correction. Fortunately, the fund's focus on quality companies with solid earnings and proven track records helped mitigate losses. These types of large, established technology names generally declined less than their smaller, unproven, Internet-related counterparts. We were not invested in the more speculative Internet companies that have been slow to recover. Since March, the technology sector has been quite volatile, and our semiconductor holdings have struggled. Semiconductor companies make computer hardware and chips that are the building blocks for cellular and wireless communications, computers and calculators, as well as a host of other goods. A significant portion of our technology position was in semiconductors. But despite the recent downturn, we believe semiconductors still have long-term growth potential because they are such an integral part of the industry. In comparison with the S&P 500 benchmark, we are slightly underweighted in the tech sector. As of October 31, we had 23 percent invested in technology, compared with the S&P 500 weighting of 28 percent. This is a direct result of our more conservative approach, which involves intensive stock analysis and a disciplined selection process. We continue to look for fast-growing technology companies where we have conviction about their dynamics, business model, attractive valuation and management. Right now we are seeking the right entry points. Q HOW DID THE RECENT LEGAL PROCEEDINGS INVOLVING MICROSOFT, ONE OF THE FUND'S TOP HOLDINGS, IMPACT PORTFOLIO PERFORMANCE? A This spring, in an antitrust lawsuit, Microsoft was ordered by a federal court to break up its operations. Although the case was appealed, the litigation created anxiety among investors. We saw that anxiety reflected in the volatility of the company's short-term stock price. We had hoped that the legal proceedings would not be a major issue and looked forward to a resolution with the government. When that didn't come, the stock reacted adversely. We believe the market overreacted, and we took advantage of that by adding to our position in Microsoft. Since that time, the stock price has rebounded, and we expect more gains as Microsoft's fundamentals continue to improve. Our analysis of Microsoft's business prospects shows that the company is well positioned to expand sales and earnings in the coming months. It is making great strides in developing products that will help it compete in the new Web-enabled technology market. We believe Microsoft will win its appeal in court. However, even if it doesn't win and is split in two, we believe there is enough value to compensate investors. Q WHAT HELPED PORTFOLIO PERFORMANCE? A Besides the previously mentioned technology and financial sectors, both health care and energy were among the fund's best performing areas. Pharmaceutical companies boosted fund performance as investors fled high-priced technology issues for established names with more reasonable valuations and growth potential. New products and good pipelines helped propel top holdings, such as Abbott Labs, during the period. Although we're pleased with the sector's strong performance, we're also cautiously optimistic. We expect the industry to remain volatile at least until the new president assumes office. Based on this uncertainty, health care is a sector we will continue to examine closely. We still like the long-term outlook for this sector, though, and continue to seek out opportunities in companies with acceptable valuations. The energy sector came back to life, thanks to higher oil prices. These higher prices helped the fund's investments in oil service companies to enjoy strong gains. Companies involved in this subsector of oil benefited as the large, integrated oil companies such as Exxon Mobil increased their drilling and exploration operations. Even though oil prices have begun to stabilize, we still see more growth ahead for these companies. 8 9 PERFORMANCE UPDATE Another area that produced positive returns, at least during the first half of the period, was media stocks. CBS, which merged with Viacom, was among our best performers. Some of our biggest names in this sector have "buried" Internet holdings -- subsidiaries or divisions directly involved in the Internet business -- that had previously enhanced portfolio performance. But our media stocks took a downward turn late in the period. This was a direct result of investor concern over the business plans of some of the spin-off companies in the "buried" Internet start-ups, as well as concern that advertising would weaken in a rising-interest-rate environment. We view this as a temporary setback and believe Viacom will regain its momentum. Q WHAT WERE SOME AREAS THAT WERE DISAPPOINTING FOR KEMPER BLUE CHIP FUND? A Some of our retail holdings have been a disappointment. These types of consumer stocks were hurt by rising interest rates as investors became increasingly concerned about the slowing economy. We're invested in discount retailers such as Target and Wal-Mart, which typically fare better than other retailers as interest rates rise because of the value they represent for consumers. However, these holdings have struggled amid concerns of an increased economic slowdown. We believe this underperformance is just a temporary situation. Looking ahead, we see demographics continuing to favor growth in the labor force, which would create more income and likely result in increased consumer discretionary spending. We believe rates have peaked and expect to see improved performance from these retailers, which are quality companies with strong long-term earnings track records. In fact, we believe we'll see continued growth in the labor force, which would create more income and increased discretionary spending. Dominant retailers, such as those we hold in the fund, should do well. The communication services sector also did not perform as well as we had anticipated. Some of the top names posted disappointing returns, which were mainly the result of increased competition. Our holdings in Communication Services were reduced by approximately 50 percent from last year. This represents a 50 percent slash in our position since last year. Thus, even though this area hurt fund performance, our decision to reduce exposure to communication service names helped limit the impact. Q CAN YOU TELL US ABOUT YOUR BUY AND SELL PROCESS? A Successful stock selection is about the quality of information, and about using the most relevant facts in the most appropriate way. We use a rigorous, "growth-at-a-reasonable-price" discipline. We seek to uncover quality large-cap stocks that are trading at attractive prices relative to their growth potential. Intensive, proprietary research is key to our process. We don't make our decisions based on the Wall Street crowd, unsubstantiated rumors or wishful thinking. We evaluate companies' balance sheets, management and product lines, as well as industry trends and competitive positioning. Here, our goal is to find a catalyst for excellent long-term growth. These catalysts come from a variety of sources, including innovative product development, cost-cutting strategies and management changes, to name just a few. Our investment process is grounded in discipline. That's true for both our buy and sell strategies. We begin to put an exit strategy into play when a stock reaches our preestablished price targets or when we see signs of potential deterioration in fundamentals or earnings growth. Q WHAT IS YOUR OUTLOOK FOR THE COMING MONTHS? A The market may indeed be poised for a rally -- inflation is in check, the Fed appears to be done raising rates, and despite the slowdown, the economy is still strong overall. We believe this economic slowdown has been fundamentally sound and good for the market as a whole. But if the slowdown continues, fears of a recession could cause additional weakness in equity markets. Despite volatility in the technology sector, these issues are becoming more attractive as their prices drop down to more reasonable levels and growth rates look good. Overall, however, the market lacks notable trends, and investors are looking ahead for signs of where to move next. We will continue to enhance the quality of the portfolio by adding growth companies that have excellent long-term potential and superior fundamentals. 9 10 PERFORMANCE UPDATE AVERAGE ANNUAL TOTAL RETURNS* FOR PERIODS ENDED OCTOBER 31, 2000 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS ---------------------------------------------------------------------------------------------- KEMPER BLUE CHIP FUND CLASS A 2.26% 17.77% 15.71% 13.08% (since 11/23/87) .............................................................................................. KEMPER BLUE CHIP FUND CLASS B 4.62 18.09 n/a 17.52 (since 5/31/94) .............................................................................................. KEMPER BLUE CHIP FUND CLASS C 7.72 18.26 n/a 17.66 (since 5/31/94) ..............................................................................................
KEMPER BLUE CHIP FUND CLASS A Growth of an assumed $10,000 investment in Class A shares from 11/30/87 to 10/31/2000 [LINE GRAPH]
KEMPER BLUE CHIP FUND CLASS A1 S&P 500 STOCK INDEX+ ------------------------------ -------------------- 11/30/87 9424 10000 9518 10729 8886 12059 11308 15345 12/31/90 11581 14339 16726 18111 16526 18919 17157 20254 16273 19942 12/31/95 21435 26745 27372 32164 34546 42138 39520 53375 49827 63797 10/31/00 49105 62067
KEMPER BLUE CHIP FUND CLASS B Growth of an assumed $10,000 investment in Class B shares from 05/31/94 to 10/31/2000 [LINE GRAPH]
KEMPER BLUE CHIP FUND CLASS B1 S&P 500 STOCK INDEX+ ------------------------------ -------------------- 5/31/94 10000 10000 9576 9732 9928 10136 9809 10061 10591 10968 11444 11933 12219 12802 12828 13492 3/31/96 13799 14140 14349 14691 15303 15057 16232 16227 16374 16585 18666 19390 20323 20751 20319 21258 3/31/98 22505 24135 22317 24838 19370 22278 23094 26927 24066 28179 26150 30070 24488 28099 28820 32185 29257 32828 28489 31864 28569 31468 10/31/00 28211 31312
KEMPER BLUE CHIP FUND CLASS C Growth of an assumed $10,000 investment in Class C shares from 05/31/94 to 10/31/2000 [LINE GRAPH]
KEMPER BLUE CHIP FUND CLASS C1 S&P 500 STOCK INDEX+ ------------------------------ -------------------- 5/31/94 10000 10000 9577 9732 9944 10136 9838 10061 10637 10968 11493 11933 12277 12802 12890 13492 3/31/96 13853 14140 14404 14691 15376 15057 16310 16227 16464 16585 18762 19390 20430 20751 20432 21258 3/31/98 22630 24135 22443 24838 19496 22278 23207 26927 24191 28179 26314 30070 24703 28099 29036 32185 29460 32828 28705 31864 28771 31468 10/31/00 28427 31312
PERFORMANCE IS HISTORICAL AND INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH CHANGING MARKET CONDITIONS, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. *THE MAXIMUM SALES CHARGE FOR CLASS A SHARES IS 5.75%. FOR CLASS B SHARES, THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) IS 4%. CLASS C SHARES HAVE NO SALES CHARGE ADJUSTMENT, BUT REDEMPTIONS WITHIN ONE YEAR OF PURCHASE MAY BE SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE OF 1%. SHARE CLASSES INVEST IN THE SAME UNDERLYING PORTFOLIO. DURING THE PERIODS NOTED, SECURITIES PRICES FLUCTUATED. FOR ADDITIONAL INFORMATION, SEE THE PROSPECTUS, STATEMENT OF ADDITIONAL INFORMATION AND THE FINANCIAL HIGHLIGHTS AT THE END OF THIS REPORT. (1)PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS AND ADJUSTMENT FOR THE MAXIMUM SALES CHARGE FOR CLASS A SHARES AND THE CONTINGENT DEFERRED SALES CHARGE IN EFFECT AT THE END OF THE PERIOD FOR CLASS B SHARES. IN COMPARING KEMPER BLUE CHIP FUND CLASS A SHARES WITH 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 INDEX. ++THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY REPRESENTATIVE OF THE U.S. STOCK MARKET. SOURCE IS WIESENBERGER. 10 11 INDUSTRY SECTORS A YEAR-TO-YEAR COMPARISON Data shows the percentage of the common stocks in the portfolio that each sector represented on October 31, 2000, and on October 31, 1999. [BAR GRAPH]
KEMPER BLUE CHIP FUND ON KEMPER BLUE CHIP FUND ON 10/31/00 10/31/99 ------------------------ ------------------------ Technology 24.10 18.60 Finance 19.90 14.90 Health care 17.80 12.90 Consumer non-durables 12.30 19.40 Communication services 8.60 16.10 Capital goods 7.90 8.80 Energy 6.20 5.60 Basic materials 3.20 2.90 Transportation 0.00 0.80
A COMPARISON WITH THE STANDARD & POOR'S 500 STOCK INDEX* Data shows the percentage of the common stocks in the portfolio that each sector of Kemper Blue Chip Fund represented on October 31, 2000, compared with the industry sectors that make up the fund's benchmark, the S&P 500 Stock index. [BAR GRAPH]
KEMPER BLUE CHIP FUND ON S&P 500 STOCK INDEX ON 10/31/00 10/31/00 ------------------------ ---------------------- Technology 24.1 29.5 Finance 19.9 15.7 Health care 17.8 11.4 Consumer non-durables 12.3 17.1 Communication services 8.6 6.3 Capital goods 7.9 8.6 Energy 6.2 5.9 Basic materials 3.2 1.7 Transportation 0 0.5 Utilities 0 3.3
* THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY REPRESENTATIVE OF THE U.S. STOCK MARKET. 11 12 LARGEST HOLDINGS LARGEST EQUITY HOLDINGS Representing 24.8 percent of Kemper Blue Chip Fund's total net assets on October 31, 2000
COMPANY DESCRIPTION % ------------------------------------------------------------------------------------ 1. GENERAL ELECTRIC A broadly diversified company with 3.6% major business in power generators, appliances, lighting, plastics, medical systems, aircraft engines, financial services and broadcasting ------------------------------------------------------------------------------------ 2. CISCO SYSTEMS Large, comprehensive supplier of 2.8% routing software and related systems that direct the flow of data between local networks ------------------------------------------------------------------------------------ 3. PEPSICO One of the largest international 2.8% soft drink and snack food producers ------------------------------------------------------------------------------------ 4. PFIZER A research-based pharmaceutical 2.6% company involved in the discovery, development, manufacturing and marketing of medicines for humans and animals ------------------------------------------------------------------------------------ 5. MICROSOFT Develops, markets and supports a 2.4% variety of microcomputer software, operating systems, language and application programs, related books and peripheral devices ------------------------------------------------------------------------------------ 6. AMERICAN A holding company engaged in 2.2% INTERNATIONAL insurance and insurance-related GROUP activities in the U.S. and abroad. AIG's primary activities are general insurance and life insurance operations ------------------------------------------------------------------------------------ 7. INTEL Engaged in the design, 2.2% development, manufacture and sale of advanced microcomputer components ------------------------------------------------------------------------------------ 8. ABBOTT Develops, manufactures and markets 2.1% LABORATORIES pharmaceutical and nutritional products and services that improve diagnostic, therapeutic and nutritional practices ------------------------------------------------------------------------------------ 9. BAXTER An international market-leader in 2.1% INTERNATIONAL health care that develops, manufactures and distributes a diversified line of products, systems and services for hospitals, clinical and medical research laboratories, blood and dialysis centers, rehabilitation centers and nursing homes ------------------------------------------------------------------------------------ 10. EXXON MOBIL Engaged in the exploration, 2.0% production, manufacture, transportation and sale of crude oil, natural gas and petroleum products ------------------------------------------------------------------------------------
*Portfolio composition and holdings are subject to change. 12 13 PORTFOLIO OF INVESTMENTS KEMPER BLUE CHIP FUND Portfolio of Investments at October 31, 2000
REPURCHASE AGREEMENT--0.1% PRINCIPAL AMOUNT VALUE State Street Bank and Trust Company, 6.550% to be repurchased at $100,018 on 11/01/200 (a) (Cost $100,000) $ 100,000 $ 100,000 ---------------------------------------------------------------------------- COMMERCIAL PAPER--4.9% COMMUNICATIONS--2.2% TELEPHONE/COMMUNICATIONS AT&T Corp., 6.560%, 11/10/2000 14,000,000 13,977,040 Lucent Technologies, Inc., 6.480%, 11/01/2000 12,000,000 12,000,000 ---------------------------------------------------------------------------- 25,977,040 FINANCIAL--0.3% OTHER FINANCIAL COMPANIES Merrill Lynch & Co., Inc., 6.480%, 11/13/2000 3,500,000 3,492,417 ---------------------------------------------------------------------------- ENERGY--1.2% OIL & GAS PRODUCTION Enron Corp., 6.600%, 11/06/2000 15,000,000 14,986,250 ---------------------------------------------------------------------------- MISCELLANEOUS--1.2% MISCELLANEOUS Countrywide Home Loan, 6.540%, 11/02/2000 14,000,000 13,997,464 ---------------------------------------------------------------------------- TOTAL COMMERCIAL PAPER (Cost $58,453,171) 58,453,171 ---------------------------------------------------------------------------- COMMON STOCKS--95.0% SHARES CONSUMER DISCRETIONARY--4.6% DEPARTMENT & CHAIN STORES Home Depot, Inc. 337,000 14,491,000 Kohl's Corp.* 230,000 12,463,125 Target Corp. 360,000 9,945,000 Wal-Mart Stores, Inc. 390,600 17,723,475 ---------------------------------------------------------------------------- 54,622,600 ------------------------------------------------------------------------------------------------------------------------- CONSUMER STAPLES--7.7% FOOD & BEVERAGE--4.8% Coca-Cola Co. 150,000 9,056,250 H.J. Heinz Co. 376,700 15,797,856 PepsiCo, Inc. 680,000 32,937,500 ---------------------------------------------------------------------------- 57,791,606 PACKAGE GOODS/COSMETICS--2.9% Clorox Co. 248,500 11,089,312 Colgate-Palmolive Co. 220,000 12,927,200 Procter & Gamble Co. 150,000 10,715,625 ---------------------------------------------------------------------------- 34,732,137
The accompanying notes are an integral part of the financial statements. 13 14 PORTFOLIO OF INVESTMENTS
SHARES VALUE HEALTH--17.8% BIOTECHNOLOGY--2.5% Genzyme Corporation-General Division* 100,000 $ 7,100,000 Immunex Corp.* 130,000 5,533,125 PE Corp-PE Biosystems Group 145,000 16,965,000 ---------------------------------------------------------------------------- 29,598,125 HOSPITAL MANAGEMENT--0.5% Tenet Healthcare Corp. 150,000 5,896,875 ---------------------------------------------------------------------------- MEDICAL SUPPLY & SPECIALTY--4.2% Baxter International, Inc. 300,000 24,656,250 Becton, Dickinson & Co. 464,000 15,544,000 Guidant Corp.* 190,000 10,058,125 ---------------------------------------------------------------------------- 50,258,375 PHARMACEUTICALS--10.6% Abbott Laboratories 470,000 24,821,875 Allergan, Inc. 147,800 12,424,437 Alza Corp. 200,000 16,187,500 American Home Products Corp. 240,000 15,240,000 Eli Lilly & Co. 125,000 11,171,875 Merck & Co., Inc. 175,000 15,739,063 Pfizer, Inc. 722,500 31,202,969 ---------------------------------------------------------------------------- 126,787,719 ------------------------------------------------------------------------------------------------------------------------- COMMUNICATIONS--3.7% TELEPHONE/COMMUNICATIONS BroadWing, Inc.* 456,600 12,898,950 Qwest Communications International, Inc.* 300,000 14,587,500 SBC Communications, Inc. 300,000 17,306,250 ---------------------------------------------------------------------------- 44,792,700 ------------------------------------------------------------------------------------------------------------------------- FINANCIAL--18.4% BANKS--4.7% Citigroup, Inc. 406,666 21,400,798 FleetBoston Financial Corp. 330,000 12,540,000 Washington Mutual, Inc. 220,000 9,680,000 Wells Fargo Co. 265,000 12,272,813 ---------------------------------------------------------------------------- 55,893,611 INSURANCE--8.5% Allstate Corp. 150,000 6,037,500 American International Group, Inc. 268,562 26,319,076 Aon Corp. 282,900 11,722,668 Cigna Corp. 107,900 13,158,405 Hartford Financial Services Group, Inc. 244,200 18,177,638 Jefferson Pilot Corp. 148,150 10,185,313 St. Paul Companies, Inc. 306,000 15,682,500 ---------------------------------------------------------------------------- 101,283,100 CONSUMER FINANCE--3.9% American Express Co. 296,000 17,760,000 Capital One Finance Corp. 185,000 11,678,125 Household International, Inc. 358,916 18,057,961 ---------------------------------------------------------------------------- 47,496,086 OTHER FINANCIAL COMPANIES--1.3% Marsh & McLennan Companies, Inc. 120,000 15,690,000 ---------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- MEDIA--3.5% BROADCASTING & ENTERTAINMENT--2.7% Infinity Broadcasting Corp. "A"* 198,801 6,610,160 The Walt Disney Co. 340,000 12,176,250 Viacom, Inc "B"* 239,749 13,635,724 ---------------------------------------------------------------------------- 32,422,134 CABLE TELEVISION--0.8% AT&T Corp.--Liberty Media Group "A"* 545,000 9,810,000 ----------------------------------------------------------------------------
14 The accompanying notes are an integral part of the financial statements. 15 PORTFOLIO OF INVESTMENTS
SHARES VALUE SERVICE INDUSTRIES--3.2% ENVIRONMENTAL SERVICES--0.9% Transocean Sedo Forex, Inc. 204,460 $ 10,836,380 ---------------------------------------------------------------------------- INVESTMENT--1.1% Merrill Lynch & Co., Inc. 180,000 12,600,000 ---------------------------------------------------------------------------- MISCELLANEOUS COMMERCIAL--0.5% Siebel Systems, Inc.* 65,000 6,820,938 ---------------------------------------------------------------------------- PRINTING/PUBLISHING--0.7% McGraw-Hill, Inc. 128,700 8,260,931 ---------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- DURABLES--3.3% AEROSPACE Boeing Co. 255,000 17,292,187 United Technologies Corp. 320,000 22,340,000 ---------------------------------------------------------------------------- 39,632,187 ------------------------------------------------------------------------------------------------------------------------- MANUFACTURING--4.6% DIVERSIFIED MANUFACTURING General Electric Co. 778,400 42,666,050 Tyco International Ltd. 209,744 11,889,863 ---------------------------------------------------------------------------- 54,555,913 ------------------------------------------------------------------------------------------------------------------------- TECHNOLOGY--23.3% COMPUTER SOFTWARE--5.7% America Online, Inc.* 230,000 11,598,900 Intuit, Inc.* 165,000 10,137,188 Microsoft Corp.* 405,000 27,894,375 Oracle Corp.* 582,600 19,225,800 ---------------------------------------------------------------------------- 68,856,263 DIVERSE ELECTRONIC PRODUCTS--4.3% Applied Materials, Inc.* 153,600 8,160,000 General Motors Corp. "H" (New)* 470,000 15,228,000 Motorola Inc. 470,000 11,720,625 Solectron Corp.* 364,000 16,016,000 ---------------------------------------------------------------------------- 51,124,625 EDP PERIPHERALS--1.5% EMC Corp.* 100,000 8,906,250 VERITAS Software Corp.* 67,000 9,448,047 ---------------------------------------------------------------------------- 18,354,297 ELECTRONIC COMPONENTS--3.7% Analog Devices, Inc.* 95,000 6,175,000 Cisco Systems, Inc.* 612,400 32,993,050 Juniper Networks, Inc.* 27,000 5,265,000 ---------------------------------------------------------------------------- 44,433,050 ELECTRONIC DATA PROCESSING--4.2% International Business Machines Corp. 170,000 16,745,000 Radioshack Corp 215,000 12,819,375 Sun Microsystems, Inc.* 184,000 20,401,000 ---------------------------------------------------------------------------- 49,965,375 SEMICONDUCTORS--3.9% Intel Corp. 566,800 25,506,000 Texas Instruments, Inc. 275,000 13,492,188 Xilinx, Inc.* 102,600 7,432,088 ---------------------------------------------------------------------------- 46,430,276
The accompanying notes are an integral part of the financial statements. 15 16 PORTFOLIO OF INVESTMENTS
SHARES VALUE ENERGY--4.9% OIL & GAS PRODUCTION--3.6% Exxon Mobil Corp. 267,443 $ 23,852,572 Nabors Industries, Inc. 125,000 6,362,500 Royal Dutch Petroleum Co. (New York shares) 210,000 12,468,750 ---------------------------------------------------------------------------- 42,683,822 OILFIELD SERVICES--1.3% Schlumberger Ltd. 213,000 16,214,625 ---------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $897,527,496) 1,137,843,750 ---------------------------------------------------------------------------- TOTAL INVESTMENT PORTFOLIO--100.0% (Cost $956,080,667)(b) $1,196,396,921 ----------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS * Non-income producing security (a) Repurchase agreement is fully collateralized by U.S. Treasury or Government agency securities. (b) The cost for federal income tax purposes was $959,237,713. At October 31, 2000, the net unrealized appreciation for all securities based on tax cost was $237,159,208. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess market value over tax cost of $263,205,351 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over market value of $26,046,143. 16 The accompanying notes are an integral part of the financial statements. 17 FINANCIAL STATEMENTS STATEMENT OF ASSETS & LIABILITIES October 31, 2000 ASSETS Investments in securities, at value, (cost $956,080,667) $1,196,396,921 ------------------------------------------------------------------------------ Cash 629 ------------------------------------------------------------------------------ Receivable for investments sold 4,657,504 ------------------------------------------------------------------------------ Dividends receivable 535,256 ------------------------------------------------------------------------------ Interest receivable 18 ------------------------------------------------------------------------------ Receivable for Fund shares sold 2,383,758 ------------------------------------------------------------------------------ TOTAL ASSETS 1,203,974,086 ------------------------------------------------------------------------------ LIABILITIES Payable for investments purchased 10,587,895 ------------------------------------------------------------------------------ Payable for Fund shares redeemed 1,590,414 ------------------------------------------------------------------------------ Accrued management fee 544,254 ------------------------------------------------------------------------------ Other payables and accrued expenses 1,351,250 ------------------------------------------------------------------------------ Total liabilities 14,073,813 ------------------------------------------------------------------------------ NET ASSETS, AT VALUE $1,189,900,273 ------------------------------------------------------------------------------ NET ASSETS Net assets consist of: Net unrealized appreciation (depreciation) on investment securities $ 240,316,254 ------------------------------------------------------------------------------ Accumulated net realized gain (loss) 29,596,268 ------------------------------------------------------------------------------ Paid-in capital 919,987,751 ------------------------------------------------------------------------------ NET ASSETS, AT VALUE $1,189,900,273 ------------------------------------------------------------------------------ NET ASSETS VALUE CLASS A SHARES Net asset value and redemption price per share ($650,881,347 / 29,909,730 shares outstanding of beneficial interest, $.01 par value, unlimited number of shares authorized) $21.76 ------------------------------------------------------------------------------ Maximum offering price per share (100/94.25 of $21.76) $23.09 ------------------------------------------------------------------------------ CLASS B SHARES Net asset value, offering and redemption price (subject to contingent deferred sales charge) per share ($453,924,087 / 21,310,597 shares outstanding of beneficial interest, $.01 par value, unlimited number of shares authorized) $21.30 ------------------------------------------------------------------------------ CLASS C SHARES Net asset value, offering and redemption price (subject to contingent deferred sales charge) per share ($75,076,436 / 3,496,444 shares outstanding of beneficial interest, $.01 par value, unlimited number of shares authorized) $21.47 ------------------------------------------------------------------------------ CLASS I SHARES Net asset value, offering and redemption price ($10,018,403 / 453,031 shares outstanding of beneficial interest, $.01 par value, unlimited number of shares authorized) $22.11 ------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 17 18 FINANCIAL STATEMENTS STATEMENT OF OPERATIONS Year ended October 31, 2000 INVESTMENT INCOME Dividends (net of foreign taxes withheld of $64,531) $ 8,418,900 --------------------------------------------------------------------------- Interest 3,102,232 --------------------------------------------------------------------------- Total income 11,521,132 --------------------------------------------------------------------------- Expenses: Management fee 6,221,014 --------------------------------------------------------------------------- Services to shareholders 3,623,508 --------------------------------------------------------------------------- Custodian fees 40,962 --------------------------------------------------------------------------- Distribution services fees 3,651,963 --------------------------------------------------------------------------- Administrative service fees 2,714,425 --------------------------------------------------------------------------- Auditing 36,074 --------------------------------------------------------------------------- Legal 17,424 --------------------------------------------------------------------------- Trustees' fees and expenses 21,799 --------------------------------------------------------------------------- Reports to shareholders 530,172 --------------------------------------------------------------------------- Registration fees 163,217 --------------------------------------------------------------------------- Other 31,426 --------------------------------------------------------------------------- Total expenses before expense reductions 17,051,984 --------------------------------------------------------------------------- Expense reductions (81,003) --------------------------------------------------------------------------- Total expenses, after expense reductions 16,970,981 --------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) (5,449,849) --------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS Net realized gain (loss) from: Investments 30,909,429 --------------------------------------------------------------------------- Foreign currency related transactions 346 --------------------------------------------------------------------------- 30,909,775 --------------------------------------------------------------------------- Net unrealized appreciation (depreciation) during the period on investments 53,432,133 --------------------------------------------------------------------------- Net gain (loss) on investment transactions 84,341,908 --------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $78,892,059 ---------------------------------------------------------------------------
18 The accompanying notes are an integral part of the financial statements. 19 FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED OCTOBER 31, -------------------------------------- 2000 1999 INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income (loss) $ (5,449,849) (1,348,906) ------------------------------------------------------------------------------------------------------ Net realized gain (loss) 30,909,775 35,072,714 ------------------------------------------------------------------------------------------------------ Net unrealized appreciation (depreciation) on investment transactions during the period 53,432,133 138,413,121 ------------------------------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations 78,892,059 172,136,929 ------------------------------------------------------------------------------------------------------ Distributions to shareholders: From net investment income ------------------------------------------------------------------------------------------------------ From net realized gains Class A (20,180,311) (9,482,133) ------------------------------------------------------------------------------------------------------ Class B (12,653,899) (4,421,632) ------------------------------------------------------------------------------------------------------ Class C (1,821,374) (590,807) ------------------------------------------------------------------------------------------------------ Class I (354,023) (115,367) ------------------------------------------------------------------------------------------------------ Fund share transactions: Proceeds from shares sold 780,761,798 508,285,929 ------------------------------------------------------------------------------------------------------ Reinvestment of distributions 33,068,135 13,913,535 ------------------------------------------------------------------------------------------------------ Cost of shares redeemed (582,820,955) (346,488,611) ------------------------------------------------------------------------------------------------------ Net increase (decrease) in net assets from Fund share transactions 231,008,978 175,710,853 ------------------------------------------------------------------------------------------------------ Increase (decrease) in net assets 274,891,430 333,237,843 ------------------------------------------------------------------------------------------------------ Net assets at beginning of period 915,008,843 581,771,000 ------------------------------------------------------------------------------------------------------ NET ASSETS AT END OF PERIOD $1,189,900,273 915,008,843 ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 19 20 FINANCIAL HIGHLIGHTS THE FOLLOWING TABLES INCLUDE SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
CLASS A YEARS ENDED OCTOBER 31, ----------------------------------------------- 2000 1999 1998 1997 1996 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $20.76 16.61 17.68 17.14 14.87 --------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (a) (.03) .02 .11 .18 .22 --------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investment transactions 1.78 4.55 1.17 3.70 3.45 --------------------------------------------------------------------------------------------------- Total from investment operations 1.75 4.57 1.28 3.88 3.67 --------------------------------------------------------------------------------------------------- Less distributions from: Net investment income -- -- (.16) (.21) (.20) --------------------------------------------------------------------------------------------------- Net realized gain on investment transactions (.75) (.42) (2.19) (3.13) (1.20) --------------------------------------------------------------------------------------------------- Total distributions (.75) (.42) (2.35) (3.34) (1.40) --------------------------------------------------------------------------------------------------- Net asset value, end of year $21.76 20.76 16.61 17.68 17.14 --------------------------------------------------------------------------------------------------- TOTAL RETURN % (B) 8.51 27.96 7.80 26.78 26.72 RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA Net assets, end of period ($ in thousands) 650,881 547,027 378,450 307,726 198,968 --------------------------------------------------------------------------------------------------- Ratio of expenses before expense reductions (%) 1.17 1.19 1.29 1.19 1.26 --------------------------------------------------------------------------------------------------- Ratio of expenses after expense reductions (%) 1.16 1.19 1.29 1.19 1.26 --------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) (%) (.14) .13 .62 1.07 1.40 --------------------------------------------------------------------------------------------------- Portfolio turnover rate (%) 89 75 157 183 166 ---------------------------------------------------------------------------------------------------
CLASS B YEARS ENDED OCTOBER 31, ----------------------------------------------- 2000 1999 1998 1997 1996 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $20.50 16.55 17.61 17.09 14.82 --------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (a) (.20) (.14) (.03) .04 .10 --------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investment transactions 1.75 4.51 1.17 3.67 3.45 --------------------------------------------------------------------------------------------------- Total from investment operations 1.55 4.37 1.14 3.71 3.55 --------------------------------------------------------------------------------------------------- Less distributions from: Net investment income -- -- (.01) (.06) (.08) --------------------------------------------------------------------------------------------------- Net realized gain on investment transactions (.75) (.42) (2.19) (3.13) (1.20) --------------------------------------------------------------------------------------------------- Total distributions (.75) (.42) (2.20) (3.19) (1.28) --------------------------------------------------------------------------------------------------- Net asset value, end of year $21.30 20.50 16.55 17.61 17.09 --------------------------------------------------------------------------------------------------- TOTAL RETURN % (B) 7.62 26.83 6.96 25.62 25.82 RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA Net assets, end of period ($ in thousands) 453,924 314,154 174,475 123,449 54,085 --------------------------------------------------------------------------------------------------- Ratio of expenses before expense reductions (%) 1.98 2.07 2.10 2.06 2.08 --------------------------------------------------------------------------------------------------- Ratio of expenses after expense reductions (%) 1.97 2.07 2.10 2.06 2.08 --------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) (%) (.95) (.75) (.19) .20 .58 --------------------------------------------------------------------------------------------------- Portfolio turnover rate (%) 89 75 157 183 166 ---------------------------------------------------------------------------------------------------
20 21 FINANCIAL HIGHLIGHTS
CLASS C YEARS ENDED OCTOBER 31, ----------------------------------------------- 2000 1999 1998 1997 1996 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $20.64 16.65 17.69 17.15 14.88 -------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (a) (.20) (.13) (.01) .03 .10 -------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investment transactions 1.78 4.54 1.18 3.71 3.45 -------------------------------------------------------------------------------------------------------- Total from investment operations 1.58 4.41 1.17 3.74 3.55 -------------------------------------------------------------------------------------------------------- Less distributions from: Net investment income -- -- (.02) (.07) (.08) -------------------------------------------------------------------------------------------------------- Net realized gain on investment transactions (.75) (.42) (2.19) (3.13) (1.20) -------------------------------------------------------------------------------------------------------- Total distributions (.75) (.42) (2.21) (3.20) (1.28) -------------------------------------------------------------------------------------------------------- Net asset value, end of year $21.47 20.64 16.65 17.69 17.15 -------------------------------------------------------------------------------------------------------- TOTAL RETURN % (B) 7.72 26.91 7.08 25.71 25.75 RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA Net assets, end of period ($ in thousands) 75,076 44,158 22,745 10,609 3,105 -------------------------------------------------------------------------------------------------------- Ratio of expenses before expense reductions (%) 1.93 1.98 2.03 2.00 2.05 -------------------------------------------------------------------------------------------------------- Ratio of expenses after expense reductions (%) 1.93 1.97 2.03 2.00 2.05 -------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) (%) (.91) (.65) (.12) .26 .61 -------------------------------------------------------------------------------------------------------- Portfolio turnover rate (%) 89 75 157 183 166 --------------------------------------------------------------------------------------------------------
CLASS I NOVEMBER 22 YEARS ENDED OCTOBER 31, 1995 TO ------------------------------ OCTOBER 31, 2000 1999 1998 1997 1996 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $20.99 16.68 17.72 17.18 15.30 --------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) (a) .08 .13 .21 .32 .36 --------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investment transactions 1.79 4.60 1.19 3.58 2.96 --------------------------------------------------------------------------------------------------------- Total from investment operations 1.87 4.73 1.40 3.90 3.32 --------------------------------------------------------------------------------------------------------- Less distributions from: Net investment income -- -- (.25) (.23) (.24) --------------------------------------------------------------------------------------------------------- Net realized gain on investment transactions (.75) (.42) (2.19) (3.13) (1.20) --------------------------------------------------------------------------------------------------------- Total distributions (.75) (.42) (2.44) (3.36) (1.44) --------------------------------------------------------------------------------------------------------- Net asset value, end of year $22.11 20.99 16.68 17.72 17.18 --------------------------------------------------------------------------------------------------------- TOTAL RETURN % (B) 9.01 28.81 8.53 26.89 21.89* RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA Net assets, end of period ($ in thousands) 10,018 9,669 5,600 5,107 14 --------------------------------------------------------------------------------------------------------- Ratio of expenses before expense reductions (%) .69 .72 .68 .70 1.31** --------------------------------------------------------------------------------------------------------- Ratio of expenses after expense reductions (%) .68 .72 .68 .70 1.31** --------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) (%) .34 .60 1.23 1.56 1.33** --------------------------------------------------------------------------------------------------------- Portfolio turnover rate (%) 89 75 157 183 166 ---------------------------------------------------------------------------------------------------------
* Not annualized ** Annualized (a) Based on monthly average shares outstanding during the period. (b) Total return does not reflect the effect of sales charge. 21 22 NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1 SIGNIFICANT ACCOUNTING POLICIES Kemper Blue Chip Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end, diversified management investment company organized as a Massachusetts business trust. The Fund offers multiple classes of shares. Class A shares are offered to investors subject to an initial sales charge. Class B shares are offered 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 offered without an initial sales charge but are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions within one year of purchase. Class C shares do not convert into another class. Class I shares are offered to a limited group of investors, are not subject to initial or contingent deferred sales charges and have lower ongoing expenses than other classes. Investment income, realized and unrealized gains and losses, and certain fund-level expenses and expense reductions, if any, are borne pro rata on the basis of relative net assets by the holders of all classes of shares except that each class bears certain expenses unique to that class such as distribution services, shareholder services, administrative services and certain other class specific expenses. Differences in class expenses may result in payment of different per share dividends by class. All shares of the Fund have equal rights with respect to voting subject to class specific arrangements. The Fund's financial statements are prepared in accordance with accounting principles generally accepted in the United States which require the use of management estimates. The policies described below are followed consistently by the Fund in the preparation of its financial statements. SECURITY VALUATION. Investments are stated at value determined as of the close of regular trading on the New York Stock Exchange. Securities which are traded on U.S. or foreign stock exchanges are valued at the most recent sale price reported on the exchange on which the security is traded most extensively. If no sale occurred, the security is then valued at the calculated mean between the most recent bid and asked quotations. If there are no such bid and asked quotations, the most recent bid quotation is used. Securities quoted on the Nasdaq Stock market ("Nasdaq"), for which there have been sales, are valued at the most recent sale price reported. If there are no such sales, the value is the most recent bid quotation. Securities which are not quoted on Nasdaq but are traded in another over-the-counter market are valued at the most recent sale price, or if no sale occurred, at the calculated mean between the most recent bid and asked quotations on such market. If there are no such bid and asked quotations, the most recent bid quotation shall be used. Money market instruments purchased with an original maturity of sixty days or less are valued at amortized cost. All other securities are valued at their fair value as determined in good faith by the Valuation Committee of the Board of Trustees. FOREIGN CURRENCY TRANSLATIONS. The books and records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the 22 23 NOTES TO FINANCIAL STATEMENTS prevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses are translated into U.S. dollars at the prevailing exchange rates on the respective dates of the transactions. Net realized and unrealized gains and losses on foreign currency transactions represent net gains and losses between trade and settlement dates on securities transactions, the disposition of forward foreign currency exchange contracts and foreign currencies, and the difference between the amount of net investment income accrued and the U.S. dollar amount actually received. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed but is included with net realized and unrealized gains and losses on investment securities. REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund, through its custodian or sub-custodian bank, receives delivery of the underlying securities, the amount of which at the time of purchase and each subsequent business day is required to be maintained at such a level that the market value is equal to at least the principal amount of the repurchase price plus accrued interest. FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code, as amended, which are applicable to regulated investment companies and to distribute all of its taxable income to its shareholders. Accordingly, the Fund paid no federal income taxes and no federal income tax provision was required. DISTRIBUTION OF INCOME AND GAINS. Distributions of net investment income, if any, are made semiannually. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed, and, therefore, will be distributed to shareholders at least annually. The timing and characterization of certain income and capital gains distributions are determined annually in accordance with federal tax regulations which may differ from generally accepted accounting principles. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME. Investment transactions are accounted for on the trade date. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Certain dividends from foreign securities may be recorded subsequent to the ex-dividend date as soon as the Fund is informed of such dividends. Realized gains and losses from investment transactions are recorded on an identified cost basis. All discounts are accreted for both tax and financial reporting purposes. -------------------------------------------------------------------------------- 2 TRANSACTIONS WITH AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management agreement with Scudder Kemper Investments, Inc. (Scudder Kemper) and pays a monthly investment management fee of 1/12 of the annual rate of 0.58% of the first $250 million of average daily net assets declining to 0.42% of average daily net 23 24 NOTES TO FINANCIAL STATEMENTS assets in excess of $12.5 billion. The Fund incurred a management fee of $6,221,014 for the year ended October 31, 2000 which is equivalent to an annualized effective rate of .55%. UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT. The Fund has an underwriting and distribution services agreement with Kemper Distributors, Inc. (KDI). Underwriting commissions retained by KDI in connection with the distribution of Class A shares for the year ended October 31, 2000 are $190,719. For services under the distribution services agreement, the Fund pays KDI a fee of 0.75% of average daily net assets of the Class B and Class C shares pursuant to separate Rule 12b-1 plans for 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 CDSC received by KDI for the year ended October 31, 2000 are $4,790,071 of which $328,345 is unpaid at October 31, 2000. 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 0.25% 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 paid by the Fund to KDI for the year ended October 31, 2000 are $2,714,425 of which $243,655 was unpaid at October 31, 2000, and of which $3,847 was paid to KDI affiliates. SHAREHOLDER SERVICE 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 $2,811,568 for the year ended October 31, 2000 of which $523,213 is unpaid at October 31, 2000. OFFICERS AND TRUSTEES. Certain officers or trustees of the Fund are also officers or directors of Scudder Kemper. For the year ended October 31, 2000, the Fund made no payments to its officers and incurred trustees fees of $21,799 to independent trustees. -------------------------------------------------------------------------------- 3 INVESTMENT TRANSACTIONS For the year ended October 31, 2000, investment transactions (excluding short-term instruments) are as follows: Purchases $1,116,699,301 Proceeds from sales 954,709,066 24 25 NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 4 CAPITAL SHARE TRANSACTIONS The following table summarizes the activity in capital shares of the Fund:
YEAR ENDED YEAR ENDED OCTOBER 31, 2000 OCTOBER 31, 1999 ------------------------------ ------------------------------ SHARES AMOUNT SHARES AMOUNT SHARES SOLD Class A 20,925,009 $ 453,359,979 14,128,703 $ 272,091,695 ----------------------------------------------------------------------------------------- Class B 12,084,997 256,660,809 9,082,693 173,986,763 ----------------------------------------------------------------------------------------- Class C 2,571,117 54,940,426 1,551,314 29,889,535 ----------------------------------------------------------------------------------------- Class I 245,812 5,443,016 242,600 4,717,775 ----------------------------------------------------------------------------------------- SHARES ISSUED IN REINVESTMENT OF DIVIDENDS Class A 903,118 19,209,226 513,215 9,053,120 ----------------------------------------------------------------------------------------- Class B 562,070 11,786,584 237,981 4,181,337 ----------------------------------------------------------------------------------------- Class C 81,359 1,718,306 31,920 563,712 ----------------------------------------------------------------------------------------- Class I 16,443 354,019 6,474 115,366 ----------------------------------------------------------------------------------------- SHARES REDEEMED Class A (18,749,225) (407,630,597) (12,065,224) (232,506,262) ----------------------------------------------------------------------------------------- Class B (6,176,446) (131,261,047) (4,168,565) (79,247,862) ----------------------------------------------------------------------------------------- Class C (1,295,015) (27,656,672) (894,470) (17,299,123) ----------------------------------------------------------------------------------------- Class I (269,884) (5,915,071) (240,192) (4,557,203) ----------------------------------------------------------------------------------------- CONVERSION OF SHARES Class A 478,806 10,357,568 670,452 12,878,161 ----------------------------------------------------------------------------------------- Class B (487,010) (10,357,568) (677,251) (12,878,161) ----------------------------------------------------------------------------------------- SHARES ISSUED IN ACQUISITION (SEE NOTE 8) Class A -- -- 324,000 5,950,000 ----------------------------------------------------------------------------------------- Class B -- -- 277,000 5,074,000 ----------------------------------------------------------------------------------------- Class C -- -- 84,000 1,540,000 ----------------------------------------------------------------------------------------- Class I -- -- 116,000 2,158,000 ----------------------------------------------------------------------------------------- NET INCREASE (DECREASE) FROM CAPITAL SHARE TRANSACTIONS $ 231,008,978 $ 175,710,853 -----------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 5 EXPENSE OFF-SET ARRANGEMENTS The Fund has entered into arrangements with its custodian and transfer agent whereby credits realized as a result of uninvested cash balances were used to reduce a portion of the Fund's expenses. During the year ended, the Fund's custodian fees and transfer agent fees were reduced by $3,541 and $77,462, respectively, under these arrangements. -------------------------------------------------------------------------------- 6 LINE OF CREDIT The Fund and several Kemper funds (the "Participants") share in a $750 million revolving credit facility with Chase Manhattan Bank, for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Participants are charged an annual commitment fee which is allocated pro rata among each of the Participants. Interest is calculated based on the market rates at the time of the borrowing. The Fund may borrow up to a maximum of 33 percent of its net assets under the agreement. 25 26 NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 7 ACQUISITION OF ASSETS On February 5, 1999, the Fund acquired all the net assets of Kemper Quantitative Equity Fund pursuant to a plan of reorganization approved by shareholders on September 18, 1998. The acquisition was accomplished by tax-free exchanges of 324,000, 277,000, 84,000 and 116,000 shares of Class A, Class B, Class C and Class I respectively, of the Fund (valued at $5,950,000, $5,074,000, $1,540,000 and $2,158,000) for 430,000, 376,000, 114,000 and 155,000 shares of Class A, Class B, Class C and Class I, respectively, of Kemper Quantitative Equity Fund outstanding on February 5, 1999. Kemper Quantitative Equity Fund's net assets at the date ($14,722,000), including $3,618,000 of unrealized appreciation, were combined with those of the Fund. The aggregate net assets of the Fund immediately before the acquisition were $666,287,000. The combined net assets of the Fund immediately following the acquisition were $681,009,000. 26 27 REPORT OF INDEPENDENT AUDITORS THE BOARD OF TRUSTEES AND SHAREHOLDERS KEMPER BLUE CHIP FUND We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Kemper Blue Chip Fund as of October 31, 2000, 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 1996. 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 auditing standards generally accepted in the United States. 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, 2000, by correspondence with the custodian or other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Kemper Blue Chip Fund at October 31, 2000, 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 1996, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LOGO Chicago, Illinois December 15, 2000 27 28 TAX INFORMATION TAX INFORMATION (UNAUDITED) The Fund paid distributions of $0.75 per share from net long-term capital gains during its year ended 10/31/2000, of which 100% represents 20% rate gains. Pursuant to Section 852 of the Internal Revenue Code, the Fund designates $34,886,000 as capital gain dividends for its year ended 10/31/2000, of which 100% represents 20% rate gains. Please consult a tax adviser if you have questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please call 1-800-621-1048. 28 29 NOTES 29 30 NOTES 30 31 NOTES 31 32 TRUSTEES OFFICERS JOHN W. BALLANTINE MARK S. CASADY LINDA J. WONDRACK Trustee President Vice President LEWIS A. BURNHAM PHILIP J. COLLORA MAUREEN E. KANE Trustee Vice President and Assistant Secretary Secretary DONALD L. DUNAWAY CAROLINE PEARSON Trustee JOHN R. HEBBLE Assistant Secretary Treasurer ROBERT B. HOFFMAN BRENDA LYONS Trustee TRACY MCCORMICK Assistant Treasurer Vice President DONALD R. JONES Trustee KATHRYN L. QUIRK Vice President THOMAS W. LITTAUER Chairman, Trustee and WILLIAM F. TRUSCOTT Vice President Vice President SHIRLEY D. PETERSON Trustee WILLIAM T. SOMMERS Trustee
............................................................................................. LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ 222 North LaSalle Street Chicago, IL 60601 ............................................................................................. SHAREHOLDER KEMPER SERVICE COMPANY SERVICE AGENT P.O. Box 219557 Kansas City, MO 64121 ............................................................................................. CUSTODIAN AND STATE STREET BANK AND TRUST COMPANY TRANSFER AGENT 225 Franklin Street Boston, MA 02110 ............................................................................................. INDEPENDENT AUDITORS ERNST & YOUNG LLP 233 South Wacker Drive Chicago, IL 60606 ............................................................................................. PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC. 222 South Riverside Plaza Chicago, IL 60606 www.kemper.com
TRUSTEES&OFFICERS [KEMPER FUNDS LOGO] Long-term investing in a short-term world(SM) Printed on recycled paper in the U.S.A. This report is not to be distributed unless preceded or accompanied by a Kemper Equity Fund/Growth Style prospectus. KBCF - 2 (12/22/00) 4793 LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)