<PAGE> 1
Kemper U.S. Government
Securities Fund
Semiannual Report to Shareholders
For the Period Ended
April 30, 1995
Offering investors the opportunity for
high current income, liquidity
and security of principal
[KEMPER LOGO]
<PAGE> 2
KEMPER FIXED INCOME FUNDS
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 1, 1994
Kemper Adjustable Rate U.S. Government Fund
Kemper Diversified Income Fund
Kemper U.S. Government Securities Fund
Kemper High Yield Fund
Kemper Income and Capital Preservation Fund
Kemper Portfolios comprised of the following three series:
Kemper Cash Reserves Fund
Kemper U.S. Mortgage Fund
Kemper Short-Intermediate Government Fund
-------------------------
Kemper Corporation, the parent of Kemper Financial Services, Inc. ("KFS,"
the investment manager for the Funds), has entered into an agreement in
principle with an investor group led by Zurich Insurance Company ("Zurich")
pursuant to which Kemper Corporation would be acquired by the investor group in
a merger transaction. As part of the transaction, Zurich or an affiliate would
purchase KFS.
A definitive agreement is expected in early May 1995, subject to the
completion of the investor group's due diligence. Consummation of the
transaction is subject to a number of contingencies, including approval by the
board and stockholders of Kemper Corporation and the Zurich board and regulatory
approvals. Because the transaction would constitute an assignment of the Funds'
investment management agreements with KFS and, where applicable, Rule 12b-1
agreements under the Investment Company Act of 1940, and therefore a termination
of such agreements, the transaction is subject also to approval of new
agreements by Kemper Fund boards and shareholders. If the contingencies are
timely met, the transaction is expected to close early in the fourth quarter of
1995.
After consummation of the transaction, it is anticipated that the KFS
management team and the Kemper Fund portfolio managers would remain in place and
that the Kemper Funds would be operated in the same manner as they are
currently.
Also, Paul F. Sloan has been named the portfolio manager of Kemper U.S.
Government Securities Fund and Kemper U.S. Mortgage Fund and portfolio
co-manager of Kemper Short-Intermediate Government Fund and Kemper Adjustable
Rate U.S. Government Fund replacing J. Patrick Beimford, Jr. Mr. Beimford
continues as Director of Fixed Income Investments at KFS. Prior to joining KFS,
Mr. Sloan was the director of institutional portfolio management at an
investment management company and prior thereto he was a vice president and
investment officer for a regional bank. He received a B.A. in English Literature
from the University of Detroit, Detroit, Michigan, and an M.B.A. in Finance and
Business Economics from Wayne State University, Detroit, Michigan.
In addition, Kemper Diversified Income Fund is now managed by a team of
portfolio managers who are specialists in the basic sectors in which it invests.
Messrs. Robert S. Cessine, Gordon K. Johns, Michael A. McNamara, Harry E. Resis,
Jr., Paul F. Sloan and Jonathan W. Trutter are the members of the team. Mr.
Cessine is senior vice president and director of investment grade corporate and
sovereign bond research at KFS. Prior to joining KFS in January 1993, he was a
senior corporate bond analyst and chairman of the bond selection committee at an
investment management company. He received a masters degree in Finance from the
University of Wisconsin, Madison, Wisconsin, a masters degree in Agricultural
Economics from the University of Maryland, Baltimore/College Park, Maryland, and
a B.S. in Economics from the University of Wisconsin, Madison, Wisconsin. Mr.
Cessine is a Chartered Financial Analyst. Mr. Johns joined Kemper in 1988 and
currently is executive vice president of KFS and managing director of Kemper
Investment Management Company Limited in London. Previously, he was head of
international fixed income fund management at an investment bank in London. He
received a B.A. in law from Balliol College in Oxford, United Kingdom. Mr.
McNamara joined KFS in February 1972 and is currently a senior vice president of
KFS. He received a B.S. in Business Administration from the University of
Missouri, St. Louis, Missouri, and an M.B.A. in Finance from Loyola University,
Chicago, Illinois. Mr. Resis joined KFS in June 1988 and is currently a senior
vice president of KFS. He received a B.A. in Finance from Michigan State
University, East Lansing, Michigan. Mr. Sloan's background is discussed above.
Mr. Trutter is a first vice president of KFS. Before joining KFS in April 1989,
he was a vice president in commercial banking. Mr. Trutter has an A.B. with dual
majors in East Asian Languages and International Relations from University of
Southern California, Los Angeles and an M.B.A. from Kellogg Graduate School of
Management at Northwestern University, Evanston, Illinois. He is also a
Certified Public Accountant.
Separately, effective February 1, 1995, KFS transferred all its duties and
responsibilities as principal underwriter, distributor and administrator of the
Funds to Kemper Distributors, Inc., a wholly-owned subsidiary of KFS. KFS
continues to provide investment management services. See "Investment Manager and
Underwriter" in the prospectus.
May 8, 1995
KFIF-1A 5/95
<PAGE> 3
DEAR SHAREHOLDER:
We are pleased to provide you with an overview of the performance of your fund
for the six-month period ended April 30, 1995. In addition, following the
overview is a question and answer interview with your Fund's Portfolio Manager.
- - --------------------------------------------
PERFORMANCE & DIVIDEND REVIEW
<TABLE>
<CAPTION>
- - ----------------------------------------------------------
Total Return Performance*
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1995
(UNADJUSTED FOR ANY SALES CHARGE)
<S> <C>
Kemper U.S. Government Securities Fund A 7.23%
Kemper U.S. Government Securities Fund B 6.62%
Kemper U.S. Government Securities Fund C 6.87%
Lipper GNMA Bond Funds
Category Average** 6.80%
- - ----------------------------------------------------------
</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.
When comparing Kemper U.S. Government Securities Fund A to other GNMA funds in
its Lipper** category for the following time periods ended April 30, 1995, this
fund ranked:
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR 15-YEAR
<S> <C> <C> <C>
29 of 48 9 of 32 2 of 12 2 of 3
</TABLE>
The following table shows dividend and yield information for Kemper Government
Securities Fund as of April 30, 1995.
<TABLE>
- - ---------------------------------------------------------------------
A SHARES B SHARES C SHARES
--------- --------- -------
<S> <C> <C> <C>
APRIL DIVIDEND: $0.0550 $0.0482 $0.0486
NET ASSET VALUE: $8.61 $8.59 $8.62
ANNUALIZED DISTRIBUTION RATE+: 7.67% 6.73% 6.77%
SEC YIELD+: 6.48% 5.88% 5.95%
- - ---------------------------------------------------------------------
</TABLE>
- - ---------------------------------------
GENERAL ECONOMIC OVERVIEW
Comfortable with the pace of economic growth and the level of interest rates,
investors enjoyed generally positive performance in both the fixed-income and
stock markets in the first five months of 1995. But as we enter the summer
months, we are seeing a decided weakening in the economy and heightened
uncertainty.
What effect has the recent economic growth had on price inflation? Have higher
interest rates slowed the economy so much that a recession is now a true
threat--and will the Federal Reserve Board now reverse itself and start to ease
rates? Of course, these are the questions that only time will answer. At Kemper,
we believe that economic growth in the second quarter will be flat or possibly
even negative. Such a scenario is more severe than the press-heralded "soft
landing" and could conceivably set the scene for lower interest rates. At this
point--before the release of second quarter data--we believe we have seen only
signs of a slowdown, not a recession. We think that the Fed is not likely to
alter direction quickly.
Against this backdrop, we believe that the opportunities for investors will be
concentrated in high quality investments. Companies can no longer count on the
economy to provide an above average earnings boost. Rather, stocks that have
proven themselves with a pattern of consistent earnings are likely to attract
investor support. Specifically, industries that produce more consistent
earnings, such as consumer nondurables, technology and selected capital goods
can be expected to do well. Picking the right sectors to invest in will be the
key challenge for equity investors during the next few quarters.
We look for the fixed-income markets to continue their strong performance as
they tend to do well during periods of slow growth and low inflation.
Leading international economies are lagging the U.S. economy. Japan and Germany,
whose economies typically follow U.S. growth, are not as robust as in past
cycles. This phenomenon makes international investing very complex currently.
Moreover, conditions in emerging market countries underline the importance of
careful research and experience in understanding how these markets work.
We are calm about what has been described as a dollar crisis. While it's true
that the dollar has depreciated against the Japanese yen and many European
currencies, we note that the dollar has appreciated in value against the
currency of Canada and Mexico, two of our largest trading partners.
Political leadership also has some bearing on the progress of the economy and
the state of the financial markets. In the months preceding a presidential
election year, it has not been uncommon for incumbents to attempt to stimulate
growth. Given our Republican Congress and Democratic President, however, we do
not consider this a foregone conclusion as we move closer to 1996.
1
<PAGE> 4
With that as an economic backdrop, we encourage you to read the following
detailed report of your fund, including an interview with your fund's portfolio
manager. Thank you for your continued support. We appreciate the opportunity to
serve your investment needs.
Sincerely,
[SIG]
Stephen B. Timbers
Chief Investment and Executive Officer
June 13, 1995
<TABLE>
<S> <C>
- - -------------- Stephen Timbers is Chief Executive Officer and
is also Chief Investment Officer of Kemper
Financial Services, Inc. (KFS). KFS and its
PHOTO affiliates manage approximately $60 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.
</TABLE>
* Total return measures net investment income and capital gain or loss from
portfolio investments, assuming reinvestment of all dividends. During the
period 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.
**Lipper Analytical Services, Inc. performance 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. Performance and rankings are historical and do not reflect future
performance.
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on April 30, 1995. Distribution
rate simply measures the level of dividends and is not a complete measure of
performance. The SEC yield is net investment income per share earned over the
month ended April 30, 1995 shown as an annualized percentage of the maximum
offering price on that date.
2
<PAGE> 5
Q&A
AN INTERVIEW
WITH PORTFOLIO
MANAGER
PAUL SLOAN
Paul Sloan joined Kemper Financial Services, Inc. (KFS) in April 1995
and is Senior Vice President of KFS and Vice President and Portfolio
Manager of Kemper U.S. Government Securities Fund. Mr. Sloan comes to
Kemper from Woodbridge Capital Management, the investment management
[PHOTO] subsidiary of Comerica, Inc., where he was the director of
institutional portfolio management. Mr. Sloan graduated from the
University of Detroit and earned his master's of business
administration degree from Wayne State University.
Q: AT THE END OF LAST OCTOBER, THE BOND MARKET WAS IN THE MIDST OF A
DIFFICULT YEAR. HAS THE SCENARIO CHANGED IN THE PAST SIX MONTHS?
A: Yes, the environment for bonds has definitely improved. In 1994,
rising interest rates hurt bond prices, but since mid-November of last year,
interest rates have declined. To give you an idea of the change in rates, the
30-year Treasury dropped from a high of 8.16% in November to 7.34% at the end
of April; 2-year rates fell from a high of 7.73% in December to 6.58% at the
end of April. With this dramatic decline in yields bond prices have risen.
Q: SO WHAT'S BEHIND THE DECLINE IN RATES?
A: Since November, evidence has continued to mount that the economy is
slowing. Remember that slower economic growth is usually positive for bond
prices because it implies that inflation, which erodes the value of fixed
payments, is less likely to be a problem. During the first four months of 1995,
data such as new home sales and retail sales continued to be weak. As these
suggested slower economic growth, yields declined and bond prices rallied.
Q: WHAT WAS YOUR STRATEGY IN THIS ENVIRONMENT?
A: After having a cautious outlook on the market for most of 1994, we
became more positive beginning in December of 1994. With our improved outlook,
we lowered the fund's cash position and increased its duration so that it was
in-line with that of the market on-whole. Duration is essentially a weighted
average term-to maturity, where cash flows are expressed in terms of their
current values. The longer a portfolio's duration, the more its price can be
expected to fluctuate in response to changes in interest rates. From October
31, 1994, to December 31, 1994, we extended the fund's duration from 3.5 years
to 5.1, and lowered its cash position from 17% to 4%. In, February, March and
April, we continued to extend duration so that at the end of the period, it
stood at 5.4 years. Our strategy proved successful, since by staying fully
invested, we were able to participate in the bond market rally.
Q: THE FUND CONTINUED TO BE PREDOMINATELY INVESTED IN MORTGAGE-BACKED
SECURITIES. HOW DID MORTGAGES PERFORM RELATIVE TO U.S. TREASURIES?
A: Mortgages outperformed Treasuries during the past six months
primarily because of favorable technicals. Demand for mortgages was high as
investors sought securities that offered higher levels of income; mortgage
supply stayed moderate. To give you an indication, the Salomon Brothers
Mortgage Index+ rose 7.18%, while the Salomon Brothers Treasury Index++ climbed
6.49%. So as you can see, the fund's high position in mortgages was beneficial.
Q: HOW DID YOU PERFORM RELATIVE TO YOUR PEERS?
A: The fund's class A shares rose 7.24% during the six-month period and
outperformed the average return of 6.80% for its Lipper peer group. Our
strategy of staying fully invested and maintaining durations that were in-line
with the market, helped us outperform our peers who shied away from the market
in early 1995.
3
<PAGE> 6
Q: BECAUSE OF A RECENT INVESTMENT STRATEGY CHANGE, THE FUND WILL NOW
INVEST A LARGER PORTION OF ITS ASSETS IN TREASURIES WHEN MARKET
CONDITIONS WARRANT. WHAT DOES THIS MEAN FOR THE FUND?
A: It's important to note that this new strategy is not a change in the
fund's objective, since the fund has always been able to invest in Treasuries.
What the new strategy does provide for is a greater emphasis on Treasuries
resulting in shifting the fund's assets between mortgages and Treasuries. Since
Treasuries provide greater price appreciation under some market conditions,
this new policy should enable us to take greater advantage of these
opportunities when they arise. You should also know that Treasuries generally
yield less than mortgages, so this may result in less income for the fund at
times.
Q: WHAT ABOUT GOING FORWARD? WHAT'S YOUR FORECAST FOR THE NEXT SEVERAL
MONTHS?
A: We think that the bond market will continue to be favorable. The
pervasiveness of slower economic data is compelling and we think it supports
the theory that the slowdown in growth is not merely a pause but a trend
reversal from last year. Slower economic growth, which keeps inflation tame,
would be positive for the government bond market, since lower inflation helps
preserve the value of fixed-income payments.
If we continue to expect the market to rally, we would keep the fund's duration
neutral and cash positions low relative to the market. We may also increase our
weighting in Treasuries, which can offer greater price appreciation under
certain market conditions.
+ Salomon Brothers Mortgage Index is an unmanaged index comprising of 30- and
15-year Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC)
pass-throughs, and FNMA and FHLMC balloon mortgages. Source is Bloomberg.
++ Salomon Brothers 30-year U.S. Treasury Benchmark (On-The-Run) Index is
based on the current on-the-run Treasury Bond that has been in existence for
the entire month. Source is Bloomberg.
4
<PAGE> 7
PORTFOLIO OF INVESTMENTS April 30, 1995
(in thousands)
<TABLE>
<CAPTION>
Coupon Principal
Rate Maturity Amount Value
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS
- - ----------------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION-3.2%
(Cost: $146,795)
- - ---------------------------------------------------------------------------------------------------------------------------------
Pass-through Certificates 8.00% 2022-2024 $ 150,805 $ 150,428
- - ---------------------------------------------------------------------------------------------------------------------------------
Collateralized Mortgage Obligation zero coupon 2017 114 82
- - ---------------------------------------------------------------------------------------------------------------------------------
150,510
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-86.3%
(Cost: $4,078,960)
- - ---------------------------------------------------------------------------------------------------------------------------------
Pass-through Certificates 6.50 2023-2025 644,523 589,738
- - ---------------------------------------------------------------------------------------------------------------------------------
7.00 2022-2025 1,090,641 1,032,361
- - ---------------------------------------------------------------------------------------------------------------------------------
7.50 2007-2025 1,006,349 981,501
- - ---------------------------------------------------------------------------------------------------------------------------------
8.00 2016-2025 594,163 593,791
- - ---------------------------------------------------------------------------------------------------------------------------------
8.50 2013-2025 535,034 545,622
- - ---------------------------------------------------------------------------------------------------------------------------------
9.00 2005-2025 153,407 159,112
- - ---------------------------------------------------------------------------------------------------------------------------------
9.50 2009-2023 74,411 78,270
- - ---------------------------------------------------------------------------------------------------------------------------------
10.00 2009-2022 98,082 97,786
- - ---------------------------------------------------------------------------------------------------------------------------------
10.50 2013-2021 36,616 39,844
- - ---------------------------------------------------------------------------------------------------------------------------------
4,118,025
U.S. TREASURY SECURITIES-16.5%
(Cost: $831,944)
- - ---------------------------------------------------------------------------------------------------------------------------------
Notes 10.50-11.25 1995 489,000 492,058
- - ---------------------------------------------------------------------------------------------------------------------------------
9.25-9.375 1996 169,000 173,395
- - ---------------------------------------------------------------------------------------------------------------------------------
7.875 2004 28,000 29,544
- - ---------------------------------------------------------------------------------------------------------------------------------
7.50 2005 70,000 72,177
- - ---------------------------------------------------------------------------------------------------------------------------------
Bonds 10.375 1995 21,000 21,036
- - ---------------------------------------------------------------------------------------------------------------------------------
788,210
TOTAL U.S. GOVERNMENT OBLIGATIONS-106.0%
(Cost: $5,057,699) 5,056,745
- - ---------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
COLLATERALIZED BY U.S. TREASURY SECURITIES AND
U.S. GOVERNMENT AGENCY SECURITIES
- - ---------------------------------------------------------------------------------------------------------------------------------
Yield-5.95% to 6.05%
Dated-April 1995
Due-May 1995
- - ---------------------------------------------------------------------------------------------------------------------------------
Bear Stearns Companies Inc. 62,000 62,000
- - ---------------------------------------------------------------------------------------------------------------------------------
First Boston Corporation (held at Chemical Bank) 100,000 100,000
- - ---------------------------------------------------------------------------------------------------------------------------------
Nikko Securities International (held at the Bank
of New York) 221,000 221,000
- - ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS-8.0%
(Cost $383,000) 383,000
- - ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS-114.0%
(Cost: $5,440,699) 5,439,745
- - ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES LESS OTHER ASSETS-(14.0%) (666,961)
- - ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS-100% $4,772,784
- - ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $5,440,699,000 for federal income tax
purposes at April 30, 1995, the aggregate gross unrealized appreciation was
$95,200,000 the aggregate gross unrealized depreciation was $96,154,000 and the
net unrealized depreciation of investments was $954,000.
See accompanying Notes to Financial Statements.
5
<PAGE> 8
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1995
(in thousands)
<TABLE>
<CAPTION>
ASSETS
- - ------------------------------------------------------
<S> <C>
Investments, excluding repurchase
agreements, at value
(Cost: $5,057,699) $5,056,745
- - ------------------------------------------------------
Repurchase agreements, at value
(Cost: $383,000) 383,000
- - ------------------------------------------------------
Receivable for:
Fund shares sold 1,059
- - ------------------------------------------------------
Investments sold 9,584
- - ------------------------------------------------------
Interest 48,684
- - ------------------------------------------------------
Total assets 5,499,072
- - ------------------------------------------------------
LIABILITIES AND NET ASSETS
- - ------------------------------------------------------
Cash overdraft 2,132
- - ------------------------------------------------------
Payable for:
Fund shares redeemed 4,588
- - ------------------------------------------------------
Investments purchased 717,084
- - ------------------------------------------------------
Management fee 1,637
- - ------------------------------------------------------
Administrative services fee 647
- - ------------------------------------------------------
Custodian and transfer agent
fees and related expenses 35
- - ------------------------------------------------------
Other 165
- - ------------------------------------------------------
Total liabilities 726,288
- - ------------------------------------------------------
Net assets $4,772,784
======================================================
ANALYSIS OF NET ASSETS
- - ------------------------------------------------------
Excess of amounts received from
issuance of shares over amounts paid
on redemptions of shares on
account of capital $5,235,983
- - ------------------------------------------------------
Accumulated net realized loss on sales of
investments (633,143)
- - ------------------------------------------------------
Unrealized depreciation of investments (954)
- - ------------------------------------------------------
Undistributed net investment income 170,898
- - ------------------------------------------------------
Net assets applicable to shares
outstanding $4,772,784
======================================================
THE PRICING OF SHARES
- - ------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price
per share ($4,730,067 + 549,553 shares
outstanding) $8.61
- - ------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net
asset value or 4.50% of offering price) $9.02
- - ------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales
charge) per share
($40,681 + 4,734 shares outstanding) $8.59
- - ------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
per share ($2,036 + 236 shares
outstanding) $8.62
- - ------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
STATEMENT OF OPERATIONS
Six months ended April 30, 1995
(in thousands)
<TABLE>
<S> <C>
INTEREST INCOME $ 209,295
- - ------------------------------------------------------
EXPENSES
- - ------------------------------------------------------
Management fee 9,851
- - ------------------------------------------------------
Distribution services fee 100
- - ------------------------------------------------------
Administrative services fee 3,873
- - ------------------------------------------------------
Custodian and transfer agent fees
and related expenses 717
- - ------------------------------------------------------
Professional fees 38
- - ------------------------------------------------------
Reports to shareholders 328
- - ------------------------------------------------------
Trustees' fees and other 56
- - ------------------------------------------------------
Total expenses 14,963
- - ------------------------------------------------------
Net investment income 194,332
- - ------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
- - ------------------------------------------------------
Net realized loss on sales of investments (63,202)
- - ------------------------------------------------------
Net realized loss from futures
transactions (12,911)
- - ------------------------------------------------------
Net realized loss (76,113)
- - ------------------------------------------------------
Net change in balance of unrealized
depreciation of investments 213,339
- - ------------------------------------------------------
Net gain on investments 137,226
- - ------------------------------------------------------
Net increase in net assets resulting
from operations $ 331,558
- - ------------------------------------------------------
</TABLE>
6
<PAGE> 9
STATEMENT OF CHANGES IN NET ASSETS
(in thousands)
<TABLE>
<CAPTION>
Six months Year
ended ended
April 30, October 31,
1995 1994
---------- -----------
<S> <C> <C>
OPERATIONS
- - ---------------------------------------------------------
Net investment income $ 194,332 438,479
- - ---------------------------------------------------------
Net realized loss on
sales of investments (76,113) (483,792)
- - ---------------------------------------------------------
Net change in unrealized
depreciation 213,339 (150,576)
- - ---------------------------------------------------------
Net (decrease) increase in
net assets resulting from
operations 331,558 (195,889)
- - ---------------------------------------------------------
Net equalization charges (12,760) (38,562)
- - ---------------------------------------------------------
Distribution from net
investment income (188,082) (417,164)
- - ---------------------------------------------------------
Net decrease from capital
share transactions (299,383) (1,093,669)
- - ---------------------------------------------------------
Total decrease in net
assets (168,667) (1,745,284)
- - ---------------------------------------------------------
NET ASSETS
- - ---------------------------------------------------------
Beginning of period 4,941,451 6,686,735
- - ---------------------------------------------------------
End of period (including
undistributed net
investment income of
$170,898 in 1995 and
$177,408 in 1994) $4,772,784 4,941,451
=========================================================
</TABLE>
See Accompanying Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE FUND
Kemper U.S. Government Securities Fund currently offers three 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 or
a contingent deferred sales charge but are subject to higher ongoing expenses
than Class A shares and do not convert into another class. The Fund may offer,
to a limited group of investors, Class I shares (none sold through April 30,
1995), which are not subject to initial or contingent deferred sales charges and
have lower ongoing expenses than other classes. Each share represents an
identical interest in the investments of the Fund and has the same rights.
2. SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION
Investments are stated at value. 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. Exchange traded options
are valued at the last sale price unless there is no sale price, in which event
prices provided by market makers are used. Over-the-counter traded options are
valued based upon prices provided by market makers. Financial futures and
options thereon are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. Other securities and assets
are valued at fair value as determined in good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME
Investment transactions are accounted for on the trade date (date the order to
buy or sell is executed). Interest income is recorded on the accrual basis and
includes premium and discount amortization of money market instruments and
mortgage-backed securities; it also includes original issue and market discount
amortization on long-term fixed income securities. Realized gains and losses
from investment transactions are reported on an identified cost basis. Realized
and unrealized gains and losses on financial futures and options are included in
net realized and unrealized gain (loss) on investments, as appropriate.
The Fund may purchase securities with delivery or payment to occur at a later
date. At the time the Fund enters into a commitment to purchase a security, the
transaction is recorded and the value of the security is reflected in the net
asset value. The value of the security may vary with market fluctuations. No
interest accrues to the Fund until payment takes place. At the time the
7
<PAGE> 10
Fund enters into this type of transaction it is required to designate cash or
other liquid assets equal to the value of the securities purchased. At April 30,
1995 the Fund had $663,000,000 in purchase commitments outstanding (13.9% of net
assets) with a corresponding amount of assets designated.
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). Proceeds payable on
redemption of Class B 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 AND DIVIDENDS TO SHAREHOLDERS
The Fund has complied with the special provisions of the Internal Revenue Code
available to investment companies for the six months ended April 30, 1995. The
accumulated net realized loss on sales of investments for federal income tax
purposes at April 30, 1995, amounting to approximately $633,133,000, is
available to offset future taxable gains. If not applied, the loss carryover
expires during the period 1998 through 2003.
On May 17, 1995, the following per share dividends were declared, payable May
31, 1995 to shareholders of record on May 18, 1995.
<TABLE>
<CAPTION>
Class A Class B Class C
- - ----------------------------------------------------------------
<S> <C> <C> <C>
Income $.0550 .0481 .0484
- - ----------------------------------------------------------------
</TABLE>
The Fund declares and pays dividends on a monthly basis. Net realized capital
gains, if any, reduced by capital loss carryovers, will be distributed at least
annually. Differences in dividends per share are due to different class
expenses. Dividends payable to its shareholders are recorded by the Fund on the
ex-dividend date.
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.
Distributions are determined in accordance with income tax principles which may
treat certain transactions differently from generally accepted accounting
principles.
REPURCHASE AGREEMENTS
The Fund has a significant portion of its investments in repurchase agreements.
All repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities. All collateral is held through the Fund's
custodian or subcustodian bank and is monitored daily by the Fund to ensure that
its market value exceeds the carrying value of the repurchase agreement.
3. TRANSACTIONS WITH AFFILIATES
MANAGEMENT AGREEMENT
The Fund has a management agreement with Kemper Financial Services, Inc. (KFS)
and pays a management fee at an annual rate of .45% of the first $250 million of
average daily net assets declining gradually to .32% of average daily net assets
in excess of $12.5 billion. The Fund incurred a management fee of $9,851,000 for
the six months ended April 30, 1995.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT
The Fund has an underwriting and distribution services agreement with Kemper
Distributors, Inc. (KDI). Before February 1, 1995, KFS was the Fund's principal
underwriter and distributor. As principal underwriter for the Fund, KDI (as
successor to KFS) retained commissions of $202,000 for the six months ended
April 30, 1995 for sales of Class A shares after allowing $1,178,000 as
commissions to firms, of which $160,000 was paid to firms affiliated with KDI.
For distribution services, 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 that provide
distribution services to investors. KDI compensates these firms at various rates
for sales of Class B and Class C shares. During the six months ended April 30,
1995, the Fund incurred a distribution services fee for Class B and Class C
shares of $100,000, and KDI paid $789,000 for commissions and distribution fees
to firms, including $101,000 to firms affiliated with KDI. In addition, KDI
received $30,000 of contingent deferred sales charges.
ADMINISTRATIVE SERVICES AGREEMENT
The Fund has an administrative services agreement with KDI. Before February 1,
1995, KFS was the Fund's administrator. For providing information and
administrative services to shareholders, the Fund pays KDI a fee at an annual
rate of up to .25% of average daily net assets. 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. For the six
months ended April 30, 1995, the Fund incurred an administrative services fee of
$3,873,000 and KDI (as successor to KFS) paid
8
<PAGE> 11
$3,941,000 to firms including $620,000 that was paid to firms affiliated with
KDI.
CUSTODIAN AND TRANSFER AGENT AGREEMENT
The Fund has a custodian agreement and a transfer agent agreement with Investors
Fiduciary Trust Company (IFTC), which was 50% owned by KFS until January 31,
1995, when KFS completed the sale of IFTC to a third party. For the six months
ended April 30, 1995, the Fund incurred custodian and transfer agent fees of
$511,000 (excluding related expenses). Pursuant to a services agreement with
IFTC, Kemper Service Company (KSvC), an affiliate of KFS, is the shareholder
service agent of the Fund. For the six months ended April 30, 1995, IFTC
remitted shareholder service fees of $588,000 to KSvC.
OFFICERS AND TRUSTEES
Certain officers or trustees of the Fund are also officers or directors of KFS.
During the six months ended April 30, 1995, the Fund made no direct payments to
its officers and incurred trustees' fees of $23,000 to independent trustees.
4. INVESTMENT TRANSACTIONS
For the six months ended April 30, 1995, investment transactions (excluding
temporary short-term investments) are as follows (in thousands):
<TABLE>
<S> <C>
Purchases $9,673,193
- - --------------------------------------------------------------------------------
Proceeds from sales 10,244,615
- - --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Contracts Premiums
--------- --------
<S> <C> <C>
Options written:
Options outstanding at
beginning of period 550 $100
- - -------------------------------------------------------
Option contracts repurchased 550 100
- - -------------------------------------------------------
Options outstanding at end of
period -- --
- - -------------------------------------------------------
</TABLE>
5. CAPITAL SHARE TRANSACTIONS
The following table summarizes the activity in capital shares of the Fund (in
thousands):
<TABLE>
<CAPTION>
Six months ended Year ended
April 30, October 31,
1995 1994
------------------- ----------------------
Shares Amount Shares Amount
------- --------- -------- -----------
<S> <C> <C> <C> <C>
Shares sold:
Class A 11,718 $ 91,015 34,477 $ 298,197
- - -----------------------------------------------------------------
Class B 4,648 38,800 1,609 13,670
- - -----------------------------------------------------------------
Class C 455 3,794 107 901
- - -----------------------------------------------------------------
Shares issued in
reinvestment
of dividends:
Class A 13,279 111,304 28,109 247,765
- - -----------------------------------------------------------------
Class B 62 524 16 133
- - -----------------------------------------------------------------
Class C 8 66 1 7
- - -----------------------------------------------------------------
Shares redeemed:
Class A (65,934) (532,432) (192,185) (1,650,717)
- - -----------------------------------------------------------------
Class B (1,150) (9,633) (433) (3,618)
- - -----------------------------------------------------------------
Class C (333) (2,821) (1) (7)
- - -----------------------------------------------------------------
Conversion of
shares:
Class A 15 129 3 22
- - -----------------------------------------------------------------
Class B (15) (129) (3) (22)
- - -----------------------------------------------------------------
Net decrease from
capital share transactions $(299,383) $(1,093,669)
=================================================================
</TABLE>
6. FINANCIAL FUTURES CONTRACTS
In order to protect itself against future changes in market conditions which
otherwise might affect adversely the value of securities the Fund holds, the
Fund has entered into exchange traded financial futures contracts as described
below. The Fund bears the market risk that arises from changes in the value of
these financial instruments.
At the time the Fund enters into a futures contract, it is required to make a
margin deposit with its custodian of a specified amount of cash or eligible
securities. Subsequently, gain or loss is recognized and payments are made on a
daily basis between the Fund and the broker as the market price of the futures
contract fluctuates. At April 30, 1995, the market value of investments pledged
by the Fund to cover margin requirements for open futures positions was
$9,814,000. At April 30, 1995, the Fund had outstanding financial futures
contracts as follows:
<TABLE>
<CAPTION>
Notional Expiration Loss at
Type Amount Position Month 4/30/95
- - ------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury
Bonds $166,500,000 Long June $36,000
- - ------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Class A
------------------------------------------------
Six months
ended
April 30, Year ended October 31,
1995 1994 1993 1992 1991
---------- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.35 9.29 9.30 9.32 8.71
- - -----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .34 .67 .69 .78 .84
- - -----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .25 (.97) (.01) (.02) .61
- - -----------------------------------------------------------------------------------------------------------------------
Total from investment operations .59 (.30) .68 .76 1.45
- - -----------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .33 .64 .69 .78 .84
- - -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.61 8.35 9.29 9.30 9.32
=======================================================================================================================
TOTAL RETURN (%): 7.23 (3.37) 7.60 8.44 17.41
- - -----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (%):
Expenses .66 .75 .65 .64 .63
- - -----------------------------------------------------------------------------------------------------------------------
Net investment income 8.02 7.58 7.36 8.31 9.24
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Class B Class C
------------------------- -------------------------
Six months May 31, Six months May 31,
ended 1994 to ended 1994 to
April 30, October 31, April 30, October 31,
1995 1994 1995 1994
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.34 8.67 8.35 8.67
- - ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .29 .28 .31 .29
- - ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .25 (.38) .25 (.38)
- - ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .54 (.10) .56 (.09)
- - ---------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .29 .23 .29 .23
- - ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.59 8.34 8.62 8.35
===========================================================================================================================
TOTAL RETURN (%): 6.62 (1.15) 6.87 (1.01)
- - ---------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (%):
Expenses 1.59 1.71 1.56 1.68
- - ---------------------------------------------------------------------------------------------------------------------------
Net investment income 7.09 7.09 7.12 7.12
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Six months
ended
April 30, Year ended October 31,
1995 1994 1993 1992 1991
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA FOR ALL CLASSES:
Net assets at end of period (in thousands) $4,772,784 4,941,451 6,686,735 6,683,092 5,544,095
- - ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 415 1,000 550 569 695
========================================================================================================================
</TABLE>
NOTE: Ratios have been determined on an annualized basis. Total return is not
annualized and does not reflect the effect of any sales charges.
10
<PAGE> 13
[KEMPER LOGO]
KEMPER FINANCIAL SERVICES, INC.
120 SOUTH LASALLE STREET
CHICAGO, IL 60603
KEMPER U.S. GOVERNMENT SECURITIES FUND
Trustees Officers
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR.
President and Trustee Vice President
DAVID W. BELIN JOHN E. PETERS
Trustee Vice President
LEWIS A. BURNHAM PAUL F. SLOAN
Trustee Vice President
DONALD L. DUNAWAY PHILIP J. COLLORA
Trustee Vice President and
Secretary
ROBERT B. HOFFMAN CHARLES F. CUSTER
Trustee Vice President and
Assistant Secretary
DONALD R. JONES JEROME L. DUFFY
Trustee Treasurer
DAVID B. MATHIS ELIZABETH C. WERTH
Trustee Assistant Secretary
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
- - -----------------------------------------------------------
Legal Counsel Custodian and Transfer Agent
VEDDER, PRICE, KAUFMAN INVESTORS FIDUCIARY TRUST
& KAMMHOLZ COMPANY
222 North LaSalle Street 127 West 10th Street
Chicago, IL 60601 Kansas City, MO 64105
Shareholder Service Agent
KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
800-621-1048
Investment Manager
KEMPER FINANCIAL SERVICES, INC.
Principal Underwriter
KEMPER DISTRIBUTORS, INC.
120 South LaSalle Street
Chicago, IL 60603
[RECYCLE LOGO]
PRINTED ON RECYCLED PAPER.
This report is not to be distributed unless preceded 239720
KGSF-3 (6/95) or accompanied by a Kemper Fixed Income Funds prospectus. Printed
in the
U.S.A.
