<PAGE> 1
Kemper U.S. Government Securities Fund
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED OCTOBER 31, 1995
OFFERING INVESTORS THE OPPORTUNITY FOR HIGH CURRENT INCOME,
LIQUIDITY AND SECURITY OF PRINCIPAL
"The declining interest rates of 1995 made Treasuries an excellent investment
to enhance the fund's performance"
[KEMPER MUTUAL FUNDS LOGO]
<PAGE> 2
Table of
Contents
3
General
Economic Overview
5
Performance Update
7
Terms to Know
9
Portfolio Statistics
10
Portfolio of
Investments
11
Report of
Independent Auditors
12
Financial Statements
14
Notes to
Financial Statements
18
Financial Highlights
At A Glance
Kemper U.S. Government Securities Fund Total Returns for the year ended October
31, 1995 (unadjusted for any sales charge):
[BAR GRAPH]
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C LIPPER
GNMA
BOND FUNDS
CATEGORY
AVERAGE*
<S> <C> <C> <C>
15.24% 14.18% 14.33% 14.07%
</TABLE>
- -----------------------------------------------------------
NET ASSET VALUE
- -----------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
10/31/95 10/31/94
- -----------------------------------------------------------
<S> <C> <C>
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS A $8.92 $8.35
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS B $8.91 $8.34
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS C $8.93 $8.35
</TABLE>
- -----------------------------------------------------------
KEMPER U.S. GOVERNMENT
SECURITIES FUND RANKINGS*
- -----------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER
GNMA BOND FUNDS CATEGORY*
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------
<S> <C> <C> <C>
CLASS A #9 of 49 funds #7 of 27 #2 of 15
CLASS B #27 of 49 funds N/A N/A
CLASS C #24 of 49 funds N/A N/A
</TABLE>
*Lipper Analytical Services, Inc. returns and rankings are based upon changes
in net asset value with all dividends reinvested and do not include the effect
of sales charges and, if they had, results may have been less favorable.
Returns and rankings are historical and do not reflect future performance.
- -----------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- -----------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND
AND YIELD INFORMATION FOR THE FUND AS OF
OCTOBER 31, 1995.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -----------------------------------------------------------
<S> <C> <C> <C>
1 YEAR INCOME: $0.6540 $0.5726 $0.5761
OCTOBER DIVIDEND: $0.0530 $0.0467 $0.0473
ANNUALIZED
DISTRIBUTION RATE+: 7.13% 6.29% 6.36%
SEC YIELD+: 6.16% 5.46% 5.50%
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on October 31, 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 October 31, 1995 shown as an annualized percentage of the maximum
offering price on that date. The SEC yield is computed in accordance with a
standardized method prescribed by the Securities and Exchange Commission.
About Your Report
SHAREHOLDER REPORTS REVISED
Your fund's annual report is the best source for tracking the progress of your
investment. This report includes several changes that have been made in an
effort to provide additional information to you as well as explain significant
changes to the fund over the last fiscal year. In addition, the performance
update includes commentary from your fund's portfolio manager or management
team on what might be expected in the coming months.
Specifically, your report now includes:
- - Terms you need to know related to your fund
- - A look at your fund's portfolio composition and how it has changed
- - The years to maturity and the duration of the fund's underlying
investments
If you have any comments about the revised format or if you have
suggestions for additional changes, please write to:
Kemper Mutual Funds
Shareholder Communications
120 South LaSalle Street
Chicago, IL 60603
<PAGE> 3
General Economic Overview
STEPHEN B. TIMBERS IS CHIEF EXECUTIVE AND CHIEF INVESTMENT
[PHOTO] OFFICER OF KEMPER FINANCIAL SERVICES, INC. (KFS). KFS AND
ITS AFFILIATES MANAGE APPROXIMATELY $63 BILLION IN ASSETS,
INCLUDING $44 BILLION IN RETAIL MUTUAL FUNDS. TIMBERS IS
A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM
HARVARD UNIVERSITY.
DEAR SHAREHOLDER,
Investors enjoyed generally positive performance in both the fixed income and
stock markets in the first 10 months of 1995. At this point in the year, the
returns of most leading securities markets worldwide are significantly higher
than they were at the same time in 1994.
We have an excellent environment for financial assets. After several
quarters of robust growth, the United States economy seems to be growing at a
pace that investors find comfortable. Contrary to isolated reports that caused
some observers to become concerned, the economy is in no jeopardy of recession.
Its health was confirmed with the news that the economy grew (as measured by
real gross domestic product [GDP]) at an annual rate of 4.2% in the third
quarter. This follows much lower growth in the first two quarters, as the
economy was adjusting to the Federal Reserve Board's series of interest rate
increases. The slowdown, in fact, was acknowledged by the Fed when it eased
short-term rates by a small but symbolic 25 basis points in July. Now we know
that the economy was rebounding from July through September.
The economy's continued growth without a corresponding increase in
inflation is very encouraging. Although we are well along in the economic
cycle and at a point when prices often start hiking up, inflationary pressures
have actually been reduced somewhat.
Will the Federal Reserve Board adjust interest rates again? As of this
date -- which precedes any resolution on the federal budget issue -- we doubt
that the Fed has motivation to either ease or (which would be even less likely)
raise interest rates. Our forecast calls for lower growth ranging between 2% to
3% for the next few quarters, with the momentum likely to come from exports and
non-residential construction.
MARKET OUTLOOK
Slow growth and low inflation is the optimal combination for investors in the
fixed income markets, and we expect them to continue to perform well.
We believe that the opportunities for common stock investors will be
increasingly concentrated in higher quality investments. After hitting new
highs and showing considerable strength for most of the year, the stock market
showed some vulnerability when it took a tumble in the summer. The market
recovered after a brief period and has gained ground since. But such a sudden,
severe mini-correction served to remind investors that the current bull market
will inevitably come to an end someday and that some sectors may even be
overextended today.
As we view the remainder of the year, companies cannot necessarily count
on the economy to provide above-average earnings support. Rather, stocks that
have proven themselves with a pattern of consistent earnings are likely to
attract investor support. Specifically, sectors that produce more consistent
earnings, such as health care, consumer nondurables, selected 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.
International investing continues to be quite complex. After sinking to its
post-World War II low in April, the value of the U.S. dollar has gained
strength against most foreign currencies. While a stronger dollar favors the
U.S. economy because it reduces the cost of American imports and attracts
foreign capital, a strong dollar in relation to a local currency has the effect
of devaluing a foreign investment. The value of the dollar and the
attractiveness of U.S. investments to foreign investors will be key factors in
the next few months.
3
<PAGE> 4
General 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]
<TABLE>
<CAPTION>
Now (10/31/95) 6 months ago 1 year ago 2 years ago
<S> <C> <C> <C> <C>
10-year Treasury rate(1) 6.04 6.63 7.96 5.72
Prime rate(2) 8.75 9.00 8.15 6.00
Inflation(3) 2.74 3.18 2.60 2.74
Dollar(4) -1.05 -10.02 -5.65 1.23
Capital goods orders(5)* 7.60 17.84 13.93 23.75
Industrial production(6) 2.20 3.31 6.58 2.98
Employment growth(7) 1.79 2.30 3.25 2.47
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6%. The low, moderate inflation of the last
few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on corporate profits and equity performance.
(7) An influence on family income and retail sales.
*Data as of September 30, 1995
SOURCE: ECONOMICS DEPARTMENT, KEMPER FINANCIAL SERVICES, INC.
We are in the midst of a global recovery, and the same fundamentals that
have driven markets higher in the U.S. can be found in many foreign countries
currently. However, leading international economies continue to lag the U.S.
Japan and Germany, whose economies typically follow U.S. growth, are not as
robust as in past cycles. Moreover, conditions in emerging market countries
underline the importance of careful research and experience in understanding
how these markets work.
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 been common for incumbents to attempt to stimulate
growth. Given our Republican Congress and Democratic President, however, we do
not consider this as likely this time.
With the rest of the country, we are closely following political
initiatives to produce a balanced federal budget. This is a political wild
card, but we would expect both the stock and fixed-income markets to react
with enthusiasm if progress can be made.
With that as an economic backdrop, we encourage you to read the following
detailed report of your fund, including a question-and-answer interview with
your fund's portfolio manager. Thank you for your continued support. We
appreciate the opportunity to serve your investment needs.
Sincerely,
Stephen B. Timbers
STEPHEN B. TIMBERS
CHIEF INVESTMENT AND EXECUTIVE OFFICER
November 6, 1995
4
<PAGE> 5
Performance Update
J. PATRICK BEIMFORD, JR. JOINED KEMPER FINANCIAL
[PHOTO] SERVICES, INC., IN 1976 AND IS NOW CHIEF INVESTMENT
OFFICER FOR FIXED-INCOME INVESTMENTS. HE HAS
RE-ASSUMED THE ROLE OF PORTFOLIO MANAGER OF KEMPER
U.S. GOVERNMENT SECURITIES FUND. BEIMFORD RECEIVED
HIS BACHELOR OF SCIENCE AND INDUSTRIAL MANAGEMENT
DEGREE FROM PURDUE UNIVERSITY AND RECEIVED HIS
M.B.A. FROM THE UNIVERSITY OF CHICAGO.
KEMPER U.S. GOVERNMENT SECURITIES FUND PROVIDED STRONG RETURNS FOR A PERIOD
THAT OPENED DURING A TURBULENT BOND MARKET AND ENDED IN AN ENVIRONMENT OF
DECLINING INTEREST RATES AND LOW INFLATION. PORTFOLIO MANAGER J. PATRICK
BEIMFORD, JR. EXPLAINS HOW U.S. TREASURIES AND A LONGER AVERAGE DURATION
HEIGHTENED THE FUND'S TOTAL RETURN.
Q: THE FUND'S FISCAL YEAR -- NOVEMBER 1, 1994, THROUGH OCTOBER 31, 1995 -- WAS
A PERIOD WHERE WE SAW BOTH RISING AND FALLING INTEREST RATES AND A SLOWING OF
ECONOMIC GROWTH. HOW DID THIS ENVIRONMENT IMPACT THE PERFORMANCE OF GOVERNMENT
SECURITIES?
A: The change in interest rate direction and the slowing of economic growth
was the basis for all of our adjustments to the fund. Essentially, we altered
duration and the level of investment in mortgages and U.S. Treasuries as our
outlook for the economy changed. Here's what happened in detail.
At the start of the fiscal year, 83 percent of the portfolio was invested
in mortgages and the fund had a relatively short duration of 3.5 years. This is
considered a defensive position, which was appropriate because the economy was
expanding and interest rates were rising. Duration is a measurement of a
portfolio's sensitivity to interest rates. The shorter the duration, the less
sensitive the portfolio is to interest rate changes. And the fund's
shorter-duration holdings, although they declined in price, held their value
better than longer-duration investments that fell dramatically in price as
interest rates rose.
Economic data released in December indicated that growth was beginning to
slow and that inflation would not be problematic. In anticipation of declining
interest rates that we expected would follow, we increased the fund's duration
to 5.1 years. This was accomplished by purchasing discounted 30-year Government
National Mortgage Association (GNMA) mortgage-backed securities, which are long
duration assets that tend to perform well when interest rates fall. We also
began to sell our shorter duration Federal National Mortgage Association (FNMA)
and Federal Home Loan Mortgage Corporation (FHLMC) bonds. Our move to extend
duration was well ahead of the market, which was still favoring short duration
investments at the start of 1995.
This strategy also positioned the fund to benefit from a government bond
rally that occurred in May. During the rally, we extended the fund's duration
even further and reduced our mortgage holdings to invest in U.S. Treasuries.
As a result of the market rally and our early move to extend duration, the fund
outperformed the average return of its peers for four out of the first five
months of 1995.
We increased mortgage holdings by five percent in July to a level of 93
percent of the portfolio and offset this increase by a five percent reduction
in Treasuries. The shift was prompted by the relative underperformance of
5
<PAGE> 6
Performance Update
mortgages compared to Treasuries and our expectation that mortgages would
increase in value if interest rates began to stabilize. And at that time, the
price of mortgages had dropped to a point where the risk and reward of owning
them versus Treasuries was extremely attractive. The fund benefited as
mortgages outperformed Treasuries in July and during part of August when the
market reacted to economic data suggesting that economic growth was beginning
to accelerate. By late August, economic data had come in weaker than expected,
and we increased Treasuries back to 12 percent of the portfolio. This
diversification into Treasuries enhanced the fund's overall performance as they
appreciated in price.
Q: THE FUND'S FISCAL YEAR INCLUDES TWO MONTHS OF 1994 -- ONE OF THE WORST
YEARS IN THE HISTORY OF THE BOND MARKET. YET THE BOND MARKET MORE THAN
RECOVERED IN THE FIRST SEVERAL MONTHS OF 1995. WHAT, IF ANYTHING, DID YOU
LEARN FROM THESE TWO PERIODS?
A: More than anything, perhaps, the last 12 months have demonstrated the
importance of being flexible. For example, the declining interest rates of 1995
made Treasuries an excellent investment to enhance the fund's performance -- so
we shifted funds out of mortgages and into Treasuries. Previously, our
instinct may have been to remain with the higher-yielding mortgages, but in a
rallying market, Treasuries tend to outperform mortgages. In fact, at the
height of the rally in May, our mortgage holdings were at their lowest --
representing 84 percent of the portfolio -- and Treasuries represented 12
percent. This shift to Treasuries contributed to the fund's superior May
performance. And Treasuries continued to perform well throughout the rest of
the fiscal year.
SEVERAL MARKET FORCES INFLUENCED INVESTORS
IN U.S. GOVERNMENT SECURITIES
FROM NOVEMBER 1994 THROUGH OCTOBER 1995
- ---------------------------
A. ECONOMIC GROWTH SLOWED
AND THEN ACCELERATED...
- ---------------------------
Economic growth, as measured by quarterly changes in the U.S. economy's gross
domestic product (GDP), was robust throughout 1994, fell dramatically by
mid-1995 and gained momentum during the third quarter of 1995.
[BAR GRAPH]
<TABLE>
<S> <C>
4Q94 5.10
1Q95 2.70
2Q95 1.30
3Q95 4.20
</TABLE>
Source: Bloomberg
- -----------------------------
B. IN RESPONSE TO RISING
SHORT-TERM INTEREST RATES...
- -----------------------------
The Federal Reserve Board continued its series of interest rate hikes until
early July 1995, when it announced a modest interest rate cut. This line tracks
the Fed's changes to the federal funds rate (the interest rate that banks
charge each other for overnight loans), which is a measure of short-term
interest rates.
[BAR GRAPH]
<TABLE>
<S> <C>
START OF
FISCAL
YEAR 4.80
11/15 5.50
2/1 6.00
7/6/95 5.80
</TABLE>
Source: Investment Company Institute (ICI) Mutual Fund 1995 Fact Book and The
Wall Street Journal
- ---------------------------------
C. BUT INFLATION POSED NO THREAT
- ---------------------------------
Despite worries that the strong growth in 1994 would result in increased price
inflation, the Consumer Price Index (CPI) never significantly accelerated
during the period.
[BAR GRAPH]
<TABLE>
<S> <C>
4Q94 .60
1Q95 .80
2Q95 .80
3Q95* .48
</TABLE>
Source: Bureau of Labor Statistics
*KFS Forecast
6
<PAGE> 7
Performance Update
Q: ISN'T THERE A PRICE TO PAY WHEN YOU FAVOR TREASURIES FOR AS LONG AS YOU DID
DURING THE YEAR?
A: Treasuries provide lower yields than mortgages but the trade-off we made
was for a higher total return. In August, the dividend distribution was reduced.
However, the primary reason for the reduction was 1995's declining interest
rates. Yields from Treasuries and mortgages both fell as interest rates
declined. And since Treasuries generally provide lower yields, the fund's
potential for current income was further reduced. But it made sense to
sacrifice some current income to gain the Treasuries' higher total return.
Q: DO YOU EXPECT THAT INTEREST RATES WILL CONTINUE TO FALL? IF SO, WHAT EFFECT
WILL RATES HAVE ON THE FUND'S PERFORMANCE?
A: Yes, we believe that interest rates will continue to fall even though we
anticipate continued slow to moderate economic growth. Our optimism is, in
part, based on our expectation that a meaningful balanced federal budget
agreement will be reached. If that happens, it is likely that interest rates
may move even lower during 1996. And that could be a very positive environment
for fixed-income investments.
Q: WHAT COULD THREATEN YOUR OUTLOOK -- AND RESULT IN AN ADJUSTMENT OF YOUR
PORTFOLIO MANAGEMENT STRATEGY?
A: Our risks are fairly obvious. If strong economic growth resumes, our
interest rate outlook will be wrong, and we'd have to shift our strategy
accordingly -- probably by shortening the fund's duration and reducing our
level of Treasury holdings. But currently we don't see that happening. We
expect a continued slow-growth, low-inflation environment, which is positive
for shareholders of the fund.
Terms To Know
DURATION Duration is a measure of the interest rate sensitivity of a
fixed-income portfolio incorporating time to maturity and coupon size. The
larger the duration number, the greater the interest rate risk.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period, assuming the
reinvestment of all dividends. It represents the aggregate percentage or dollar
value change over the period.
YIELD A fund's yield is a measure of the net investment income per share earned
over a specific one month or 30-day period expressed as a percentage of the
maximum offering price of the fund's shares at the end of the period.
7
<PAGE> 8
Performance Update
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- -------------------------------------------------------------------------------
FOR PERIODS ENDED OCTOBER 31, 1995 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR 5-YEAR 10-YEAR CLASS
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS A 10.10% 7.82% 8.79% 9.26% (SINCE 10/1/79)
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS B 11.18 N/A N/A 6.85 (SINCE 5/31/94)
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS C 14.33 N/A N/A 9.11 (SINCE 5/31/94)
</TABLE>
- -------------------------------------------------------------------------------
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS A
FROM 10/1/79 THROUGH 10/31/95
- -------------------------------------------------------------------------------
[LINE GRAPH]
<TABLE>
<CAPTION>
10/1/79 12/31/83 12/31/87 12/31/91 10/31/95
<S> <C> <C> <C> <C> <C>
Kemper U.S. Government Securities Fund Class A(1) $10,000 $13,142 $21,535 $33,575 $41,530
Salomon Brothers 30-Year GNMA Index+ $10,000 $15,312 $25,991 $42,094 $54,703
Consumer Price Index++ $10,000 $13,579 $15,469 $18,485 $20,603
</TABLE>
- -------------------------------------------------------------------------------
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS B
FROM 5/31/94 THROUGH 10/31/95
- -------------------------------------------------------------------------------
[LINE GRAPH]
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Kemper U.S. Government Securities Fund Class B(1) $10,000 $ 9,903 $10,986
Salomon Brothers 30-Year GNMA Index+ $10,000 $10,116 $11,542
Consumer Price Index++ $10,000 $10,149 $10,420
</TABLE>
- -------------------------------------------------------------------------------
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS C
FROM 5/31/94 THROUGH 10/31/95
- -------------------------------------------------------------------------------
[LINE GRAPH]
<TABLE>
<CAPTION>
5/31/94 12/31/94 10/31/95
<S> <C> <C> <C>
Kemper U.S. Government Securities Fund Class C(1) $10,000 $ 9,930 $11,317
Salomon Brothers 30-Year GNMA Index+ $10,000 $10,116 $11,542
Consumer Price Index++ $10,000 $10,149 $10,420
</TABLE>
Past performance is not predictive of future performance. Returns and net asset
value fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
* Average annual total return measures net investment income and capital
gain or loss from portfolio investments, assuming reinvestment of all dividends
and for A Shares adjustment for the maximum sales charge of 4.5% and for B
Shares adjustment for the applicable contingent deferred sales charge as
follows: 1-year, 3%; 5-year, 1%; since inception, 0%. During the periods noted,
securities prices fluctuated. For additional information, see the Prospectus
and Statement of Additional Information and the Financial Highlights at the end
of this report.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for A Shares and the contingent deferred sales charge in
effect at the end of the period for B Shares. In comparing the Kemper
U.S. Government Securities Fund performance to the Salomon Brothers 30-year
GNMA Index, you should also note that the fund's performance reflects the
applicable sales charge, while no such charges are reflected in the performance
of the index.
+ The Salomon Brothers 30-Year GNMA Index is unmanaged, is on a total return
basis with all dividends reinvested and is comprised of GNMA 30-year pass
throughs of single family and graduated payment mortgages. In order for a GNMA
coupon to be included in the index, it must have at least $200 million of
outstanding coupon product. Source is Salomon Brothers Inc.
++ The Consumer Price Index is a statistical measure of change, over
time, in the prices of goods and services in major expenditure groups for all
urban consumers. Source is Towers Data Systems.
8
<PAGE> 9
Portfolio Statistics
PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
- --------------------------------------------------------------
ON 10/31/95 ON 10/31/94
- --------------------------------------------------------------
<S> <C> <C>
MORTGAGE-BACKED GNMA 80% 58%
LONG-TERM GOVERNMENTS 17 --
OTHER 3 25
CASH AND EQUIVALENT -- 17
100% 100%
[PIE CHART]
ON 10/31/95 ON 10/31/94
</TABLE>
- - MORTGAGE-BACKED GNMA
- - OTHER
- - LONG-TERM GOVERNMENTS
- - CASH AND EQUIVALENT
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------
ON 10/31/95 ON 10/31/94
- --------------------------------------------------------------
<S> <C> <C>
LESS THAN 4 7% 25%
4-10 YEARS 37 --
10-20 YEARS 43 55
20+ YEARS 13 20
100% 100%
[PIE CHART]
ON 10/31/95 ON 10/31/94
</TABLE>
- - LESS THAN 4
- - 4-10 YEARS
- - 10-20 YEARS
- - 20+ YEARS
DURATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------
ON 10/31/95 ON 10/31/94
- --------------------------------------------------------------
<S> <C> <C>
DURATION 5.3 YEARS 3.5 YEARS
</TABLE>
9
<PAGE> 10
Portfolio of Investments
KEMPER U.S. GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
COUPON PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GOVERNMENT NATIONAL Pass-through 6.50% 2023-2025 $ 605,030 $ 588,013
MORTGAGE ASSOCIATION - Certificates 7.00 2022-2026 1,230,392 1,220,730
80.1% 7.50 2007-2026 1,181,275 1,196,301
(Cost: $3,636,670) 8.00 2016-2025 415,434 427,378
8.50 2016-2025 70,026 72,903
9.00 2005-2023 91,145 95,788
9.50 2009-2023 67,776 72,351
10.00 2009-2022 81,480 88,890
10.50 2013-2021 32,701 35,900
=============================================================================================================
3,798,254
U.S. TREASURY SECURITIES - Notes 8.875-9.375 1996 378,000 383,883
27.0% 6.50-8.50 1997 37,900 39,335
(Cost: $1,273,185) 9.00 1998 42,000 45,268
8.875-9.125 1999 67,000 73,952
6.75 2000 4,900 5,076
Bonds 12.375 2004 28,000 39,659
12.75 2010 58,050 86,349
7.25 2016 229,000 250,505
7.875 2021 50,085 558,858
7.25 2022 127,000 139,998
6.875-7.625 2025 141,000 154,417
=============================================================================================================
1,277,300
FEDERAL NATIONAL MORTGAGE Pass-through 6.50 2025 130,103 126,176
ASSOCIATION - 2.9% Certificates 8.00 2024 10,302 210,553
(Cost: $135,991)
=============================================================================================================
136,729
=============================================================================================================
TOTAL U.S. GOVERNMENT OBLIGATIONS-110.0%
(Cost: $5,045,846) 5,212,283
=============================================================================================================
REPURCHASE
AGREEMENTS (a) - 2.8% Yield-5.75% to 5.95%, Dated October 1995,
Due November 1995
Bear, Stearns & Company $ 31,403 $ 31,403
First Boston Corporation 26,500 26,500
(held at Chemical Bank)
Nikko Securities International 26,000 26,000
(held at the Bank of New York)
</TABLE>
10
<PAGE> 11
Portfolio of Investments
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------
COUPON PRINCIPAL
TYPE RATE AMOUNT VALUE
- -------------------------------------------------------------------------
<S> <C> <C>
Salomon Brothers $50,000 $50,002
(held at the Bank of New York)
=========================================================================
TOTAL REPURCHASE AGREEMENTS
(Cost: $133,903) 133,905
=========================================================================
TOTAL INVESTMENTS--112.8%
(Cost: $5,179,749) 5,346,188
=========================================================================
LIABILITIES, LESS CASH AND OTHER
ASSETS--(12.8%) (607,773)
=========================================================================
NET ASSETS--100% $4,738,415
=========================================================================
</TABLE>
- -------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
(a) Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities. All collateral is held at the Fund's custodian
bank, Investors Fiduciary Trust Company, or at subcustodian banks, as
indicated. The collateral is monitored daily by the Fund so that its market
value exceeds the carrying value of the repurchase agreement.
Based on the cost of investments of $5,179,749,000 for federal income tax
purposes at October 31, 1995, the aggregate gross unrealized appreciation was
$188,547,000, the aggregate gross unrealized depreciation was $22,108,000 and
the net unrealized appreciation of investments was $166,439,000.
See accompanying Notes to Financial Statements.
Report of Independent Auditors
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER U.S. GOVERNMENT SECURITIES FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of the Kemper U.S. Government
Securities Fund as of October 31, 1995, and 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 1991. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
October 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Kemper U.S. Government Securities Fund at October 31, 1995, 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 1991, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 28, 1995
11
<PAGE> 12
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------
ASSETS
- ------------------------------------------------------------
<S> <C>
Investments, at value
(Cost: $5,179,749) $5,346,188
Cash 41,983
Receivable for:
Fund shares sold 3,629
Investments sold 321
Interest 48,445
TOTAL ASSETS 5,440,566
============================================================
- ------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------
Payable for:
Fund shares redeemed 5,749
Investments purchased 692,938
Management fee 1,624
Administrative services fee 704
Custodian and transfer agent
fees and related expenses 946
Other 190
Total liabilities 702,151
NET ASSETS $4,738,415
============================================================
- ------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------
Paid-in capital $5,038,295
Accumulated net realized loss on investments (628,104)
Net unrealized appreciation on investments 166,439
Undistributed net investment income 161,785
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $4,738,415
============================================================
- ------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($4,672,301 divided by 523,810 shares outstanding) $8.92
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $9.34
============================================================
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge)
per share ($53,409 divided by 5,992 shares
outstanding) $8.91
============================================================
CLASS C SHARES
Net asset value and redemption price per share
($4,833 divided by 541 shares outstanding) $8.93
============================================================
CLASS I SHARES
Net asset value and redemption price per share
($7,872 divided by 883 shares outstanding) $8.92
============================================================
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 13
Financial Statements
STATEMENT OF OPERATIONS
Year ended October 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
NET INVESTMENT INCOME
- ---------------------------------------------------------------------------
<S> <C>
Interest income $403,338
Expenses:
Management fee 19,681
Administrative services fee 7,921
Distribution services fee 273
Custodian and transfer agent fees and related expenses 6,029
Professional fees 90
Reports to shareholders 750
Trustees' fees and other 211
Total expenses 34,955
NET INVESTMENT INCOME 368,383
===========================================================================
- ---------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ---------------------------------------------------------------------------
Net realized loss on sales of investments
(including options purchased) (67,114)
Net realized loss from futures transactions (3,914)
Net realized loss (71,028)
Change in net unrealized depreciation on investments 380,732
Net gain on investments 309,704
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $678,087
===========================================================================
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<CAPTION>
YEAR ENDED OCTOBER 31,
1995 1994
- ---------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 368,383 438,479
Net realized loss (71,028) (483,792)
Change in net unrealized depreciation 380,732 (150,576)
Net increase (decrease) in net assets
resulting from operations 678,087 (195,889)
Net equalization charges (21,081) (38,562)
Distribution from net investment income (362,971) (417,164)
Net decrease from capital share transactions (497,071) (1,093,669)
TOTAL DECREASE IN NET ASSETS (203,036) (1,745,284)
===========================================================================
- ---------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------
Beginning of year 4,941,451 6,686,735
END OF YEAR (INCLUDING UNDISTRIBUTED
NET INVESTMENT INCOME OF $161,785
AND $177,408, RESPECTIVELY) $4,738,415 4,941,451
===========================================================================
</TABLE>
See accompanying Notes to Financial Statements.
13
<PAGE> 14
Notes to Financial Statements
1 DESCRIPTION OF THE FUND Kemper U.S. Government Securities Fund is an
open-end management investment company organized
as a business trust under the laws of
Massachusetts. The Fund offers four classes of
shares. Class A shares are sold to investors
subject to an initial sales charge. Class B
shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred
sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A
shares six years after issuance. Class C shares
are sold without an initial or a contingent
deferred sales charge but are subject to higher
ongoing expenses than Class A shares and do not
convert into another class. Class I shares, which
are sold to a limited group of investors, are not
subject to initial or contingent deferred sales
charges and have lower ongoing expenses than other
classes. 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 on 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.
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 Fund enters into this type of transaction it
is required to segregate cash or other liquid
assets equal to the value of the securities
purchased. At October 31, 1995 the Fund had
$692,938,000 in purchase commitments outstanding
(14.6% of net assets) with a corresponding amount
of assets segregated.
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
14
<PAGE> 15
Notes to Financial Statements
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 and therefore no federal income tax
provision is required. The accumulated net realized
loss on sales of investments for federal income tax
purposes at October 31, 1995, amounting to
approximately $628,047,000, is available to offset
future taxable gains. If not applied, the loss
carryover expires during the period 1998 through 2003.
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.
Dividends are determined in accordance with
income tax principles which may treat certain
transactions differently from generally accepted
accounting principles.
EQUALIZATION ACCOUNTING. A portion of proceeds
from sales and cost of redemptions of Fund shares is
credited or charged to undistributed net investment
income so that income per share available for
distribution is not affected by sales or redemptions
of shares.
3 TRANSACTIONS MANAGEMENT AGREEMENT. The Fund has a management
WITH AFFILLIATES 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 $19,681,000 for the
year ended October 31, 1995.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
paid in connection with the distribution of Class A
shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS
COMMISSIONS ALLOWED BY KDI PAID TO
RETAINED TO RETAIL FIRMS AFFILIATES
BY KDI (INCLUDING AFFILIATES) OF KDI
------- -------------------- ------
<S> <C> <C> <C>
Year ended October 31, 1995 $380,000 2,427,000 325,000
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of average
daily net assets of the Class B and Class C shares.
Pursuant to the agreement, KDI enters into related
selling group
15
<PAGE> 16
Notes to Financial Statements
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 shares. Distribution fees
and commissions paid in connection with the sale of
Class B and Class C shares and the CDSC received in
connection with the redemption of Class B shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS
DISTRIBUTION AND DISTRIBUTION AMOUNTS
FEES AND FEES PAID BY PAID TO
CDSC RECEIVED KDI TO FIRMS AFFILIATES
BY KDI (INCLUDING AFFILIATES) OF KDI
------------- ----------------------- ----------
<S> <C> <C> <C>
Year ended October 31, 1995 $364,000 1,514,000 202,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For providing
information and administrative services to Class A,
Class B and Class C shareholders, the Fund pays KDI
a fee at an annual rate of up to .25% of average daily
net assets of each class. KDI in turn has various
agreements with financial services firms that provide
these services and pays these firms based on assets of
Fund accounts the firms service. Administrative services
fees (ASF) paid are as follows:
<TABLE>
<CAPTION>
ASF
ASF PAID BY ASF
PAID BY THE KDI TO FIRMS PAID TO
FUND TO KDI (INCLUDING AFFILIATES) AFFILIATES OF KDI
----------- ---------------------- -----------------
<S> <C> <C> <C>
Year ended October 31, 1995 $7,921,000 7,965,000 1,161,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a services
agreement with the Fund's transfer agent, Kemper Service
Company (KSvC) is the shareholder service agent of
the Fund. For the year ended October 31, 1995, the
transfer agent remitted shareholder service fees to KSvC
of $4,925,000.
OFFICERS AND TRUSTEES. Certain officers or trustees of
the Fund are also officers or directors of KFS.
During the year ended October 31, 1995, the Fund made no
direct payments to its officers and incurred trustees'
fees of $58,000 to independent trustees.
4 INVESTMENT
TRANSACTIONS
For the year ended October 31, 1995, investment
transactions (excluding temporary short-term
investments) are as follows (dollars in thousands):
<TABLE>
<S> <C>
Purchases $17,478,026
Proceeds from sales 18,057,389
</TABLE>
<TABLE>
<CAPTION>
OPTIONS WRITTEN: CONTRACTS PREMIUMS
---------------- --------- --------
<S> <C> <C>
Options outstanding at beginning of year 550 $100
Option contracts repurchased 550 100
Options outstanding at end of year -- --
</TABLE>
16
<PAGE> 17
Notes to Financial Statements
5 CAPTIAL SHARE TRANSACTIONS
The following table summarizes the activity in capital shares of the Fund (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1995 1994
-------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------
SHARES SOLD
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 23,085 $ 184,675 34,477 $ 298,197
Class B 7,843 66,852 1,609 13,670
Class C 842 7,173 107 901
Class I 939 8,333 -- --
- ---------------------------------------------------------------------
SHARES ISSUED IN
REINVESTMENT OF DIVIDENDS
- ---------------------------------------------------------------------
Class A 24,837 213,222 28,109 247,765
Class B 168 1,462 16 133
Class C 16 135 1 7
Class I 14 122 -- --
- ---------------------------------------------------------------------
SHARES REDEEMED
- ---------------------------------------------------------------------
Class A (114,637) (947,816) (192,185) (1,650,717)
Class B (3,157) (27,011) (433) (3,618)
Class C (424) (3,604) (1) (7)
Class I (70) (614) -- --
- ---------------------------------------------------------------------
CONVERSION OF SHARES
- ---------------------------------------------------------------------
Class A 52 450 3 22
Class B (51) (450) (3) (22)
NET DECREASE FROM CAPITAL
SHARE TRANSACTIONS $(497,071) $(1,093,669)
=====================================================================
</TABLE>
6 FINANCIAL FUTURES CONTRACTS
In order to take advantage of anticipated market conditions, 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 October 31, 1995, the market value of investments
pledged by the Fund to cover margin requirements for open futures positions was
$17,376,000. At October 31, 1995, the Fund had outstanding financial futures
contracts as follows (in thousands):
<TABLE>
<CAPTION>
FACE EXPIRATION GAIN AT
TYPE AMOUNT POSITION MONTH 10/31/95
---- ------ -------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury
Securities $114,100 Long December $5,835
</TABLE>
17
<PAGE> 18
Financial Highlights
<TABLE>
<CAPTION>
-----------------------------------------------------------
CLASS A
-----------------------------------------------------------
YEAR ENDED OCTOBER 31,
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 8.35 9.29 9.30 9.32 8.71
Income from investment operations:
Net investment income .66 .67 .69 .78 .84
Net realized and unrealized gain (loss) .56 (.97) (.01) (.02) .61
Total from investment operations 1.22 (.30) .68 .76 1.45
Less distribution from net investment income .65 .64 .69 .78 .84
Net asset value, end of year $ 8.92 8.35 9.29 9.30 9.32
==========================================================================================================
TOTAL RETURN 15.24% (3.37) 7.60 8.44 17.41
- ----------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------------------
Expenses .72% .75 .65 .64 .63
Net investment income 7.68 7.58 7.36 8.31 9.24
<CAPTION>
--------------------- -------------------- -------
CLASS B CLASS C CLASS I
--------------------- -------------------- -------
YEAR MAY 31, YEAR MAY 31, JULY 3,
ENDED 1994 TO ENDED 1994 TO 1995 TO
OCT. 31, OCT. 31, OCT. 31, OCT. 31, OCT. 31,
1995 1994 1995 1994 1995
- ----------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.34 8.67 8.35 8.67 8.88
Income from investment operations:
Net investment income .58 .28 .60 .29 .22
Net realized and unrealized gain (loss) .56 (.38) .56 (.38) .04
Total from investment operations 1.14 (.10) 1.16 (.09) .26
Less distribution from net investment income .57 .23 .58 .23 .22
Net asset value, end of period $ 8.91 8.34 8.93 8.35 8.92
==========================================================================================================
TOTAL RETURN (NOT ANNUALIZED) 14.18% (1.15) 14.33 (1.01) 3.02
- ----------------------------------------------------------------------------------------------------------
ANNUALIZED RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------------------
Expenses 1.69% 1.71 1.64 1.68 .53
Net investment income 6.71 7.09 6.76 7.12 7.07
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED OCTOBER 31,
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $4,738,415 4,941,451 6,686,735 6,683,092 5,544,095
Portfolio turnover rate 362% 1,000 550 569 695
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
18
<PAGE> 19
Shareholders' Meeting
SPECIAL SHAREHOLDERS' MEETING
On September 19, 1995, a special shareholders' meeting was held. Kemper U.S.
Government Securities Fund shareholders were asked to vote on four separate
issues: election of nine Trustees to the Board of Trustees, ratification of
Ernst & Young LLP as independent auditors, approval of a new investment
management agreement with Kemper Financial Services, Inc. or its successor on
the same terms as the current agreement and for Class B and Class C
shareholders only, approval of a new 12b-1 distribution plan with Kemper
Distributors, Inc. or its successor on the same terms as the current plan. We
are pleased to report that all nominees were elected and all other items were
approved. Following are the results for each issue:
- - Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
David W. Belin 352,049,074 10,738,513
Lewis A. Burnham 352,339,304 10,448,283
Donald L. Dunaway 352,303,026 10,484,561
Robert B. Hoffman 352,339,304 10,448,283
Donald R. Jones 352,121,632 10,665,955
David B. Mathis 352,049,074 10,738,513
Shirley D. Peterson 351,903,959 10,883,628
William P. Sommers 352,230,468 10,557,119
Stephen B. Timbers 352,303,026 10,484,561
</TABLE>
- - Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
344,332,398 4,281,587 14,183,602
</TABLE>
- - Approval of new investment management agreement
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
335,414,438 4,914,025 19,459,124
</TABLE>
- - Approval of new 12b-1 distribution plan
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
Class B
Shares 2,547,288 30,947 142,751
Class C
Shares 141,327 8 9,324
</TABLE>
19
<PAGE> 20
Trustees and Officers
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 PHILIP J. COLLORA
Trustee Vice President
and Secretary
DONALD L. DUNAWAY
Trustee CHARLES F. CUSTER
Vice President and
ROBERT B. HOFFMAN Assistant Secretary
Trustee
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 VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
1-800-621-1048
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
INVESTMENT MANAGER KEMPER FINANCIAL SERVICES, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
120 South LaSalle Street
Chicago, IL 60603
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