<PAGE> 1
KEMPER
U.S. GOVERNMENT
SECURITIES FUND
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED OCTOBER 31, 1996
Offering investors the opportunity for high current income, liquidity and
security of principal
"This [neutral to defensive
duration] positioning helped the fund as the
market traded in a choppy pattern."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
2
At a Glance
2
Terms to Know
3
Economic Overview
5
Performance Update
8
Portfolio Statistics
9
Portfolio of
Investments
10
Report of
Independent Auditors
11
Financial Statements
13
Notes to
Financial Statements
17
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT
SECURITIES FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31, 1996
(UNADJUSTED FOR ANY SALES CHARGE)
[Bar graph]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 5.36%
CLASS B 4.36%
CLASS C 4.40%
LIPPERGNMA
BOND FUNDS
CATEGORY AVERAGE* 5.55%
- --------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not represent future performances.
Returns and net asset value fluctuate. Shares are redeemable at current net
asset value, which may be more or less than original cost.
*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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
10/31/96 10/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS A $ 8.74 $ 8.92
- --------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS B $ 8.73 $ 8.91
- --------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS C $ 8.75 $ 8.93
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT
SECURITIES FUND RANKINGS*
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER GNMA BOND FUNDS CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #30 OF 49 FUNDS #45 OF #44 OF
49 FUNDS 49 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #21 OF 29 FUNDS N/A N/A
- --------------------------------------------------------------------------------
10-YEAR #9 OF 19 FUNDS N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF OCTOBER 31, 1996.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1 YEAR INCOME: $0.6360 $0.5527 $0.5562
- --------------------------------------------------------------------------------
OCTOBER
DIVIDEND: $0.0530 $0.0459 $0.0460
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 7.28% 6.31% 6.31%
- --------------------------------------------------------------------------------
SEC YIELD+: 6.18% 5.50% 5.52%
- --------------------------------------------------------------------------------
</TABLE>
+Current annualized distribution rate is the latest monthly dividend shown as an
annualized percentage of net asset value on October 31, 1996. 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, 1996, 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.
TERMS TO KNOW
AVERAGE ANNUAL TOTAL RETURN Average annual total return is a fund's total return
expressed as an annualized average, adjusted for the maximum sales charge for
Class A shares or the applicable contingent deferred sales charge in effect at
the end of the period for Class B and C shares.
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.
2
<PAGE> 3
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $76 BILLION IN ASSETS, INCLUDING $42 BILLION IN RETAIL
MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM
HARVARD UNIVERSITY.
DEAR SHAREHOLDER:
As we approach the close of 1996, it's remarkable how eventful the year has been
and yet, economically, we are essentially where we were one year ago.
The fundamentals of the economy are remarkably similar today to what they
were in 1995. Long-term interest rates are approximately 6.5% compared to 6.3%
in November 1995. The economy is growing at a rate of approximately 2.2%.
Inflation continues to be well under control, at about 3.0%.
One significant difference between today and one year ago is that prices of
the stocks are on average up 20%. While price movements were more volatile in
1996 than in the past few years, the patient investor was amply rewarded. The
prime element sending the stock market higher was strong positive cash flows.
This liquidity in an environment of modestly increasing corporate profits and
relatively stable interest rates pushed stocks higher for most of the year.
This higher stock market has caused many market observers to worry. While
we cannot ignore what has happened, we find no reason to be bearish over the
long term. The environment is benign to favorable for financial assets. Given
steady interest rates, moderate economic growth and continued moderate corporate
earnings growth, there are few excesses in the system. In fact, real interest
rates are probably too high considering our outlook for inflation, and we may
see them decline over time.
Naturally, we cannot rule out the possibility of a market correction. But,
in our belief, the downside would appear to be limited to 5% to 8%, which is the
size of a typical correction based on historical data. As we have said in
previous outlooks, three elements tend to move the market:
- EARNINGS. We forecast corporate earnings to range between 0% and 5% on
average for the Standard & Poor's 500* in 1997 -- not as high as in
recent years but positive nonetheless.
- INTEREST RATES. Rates should remain stable, and short-term interest rates
may even decline.
- LIQUIDITY. Investors, through mutual funds, 401(k)s and qualified
contribution plans in particular, will continue to create strong demand
for securities.
In order to move the market more than would be expected in a typical
decline, one or more of these elements will have to turn negative in 1997, and,
while future market conditions cannot be predicted with certainty, we fail to
see what would materially change our outlook. Our outlook going forward is that
1997 should be a lot like 1996.
While the economy continued along a relatively consistent path, the United
States took some politically significant steps in 1996. First, of course,
President Bill Clinton and a Republican Congress were re-elected by the voters.
In the first few days after the general election, especially, investors
demonstrated their support for such a balance in our leadership. But of much
greater long-term significance is the expressed commitment by both parties to
balance the federal budget and address certain entitlement programs. The first
year after an election can be a fertile time to accomplish major initiatives,
and we are hopeful that progress can be made.
The future of the Social Security system, which many experts believe will
run out of money about 20 years from now, will be a subject in which you can
expect Zurich Kemper Investments, Inc. to play a leadership role. The possible
solutions for "fixing Social Security" are finite: raise Social Security taxes,
reduce benefits, raise the retirement age, change inflation assumptions or
pursue a higher rate of return on assets contributed by workers. We believe that
a bipartisan solution will be worked out, which will include giving individuals
the option of investing a portion of their Social Security contributions in an
account earmarked for them. This change is needed to return credibility to the
system, which many Americans have lost faith in.
What to do with Social Security is a debate that spans generations and
promises to occupy much attention in the coming years. As we hope to help
advance constructive debate, we'll be advocating partial privatization for this
federal program while maintaining a safety net for many low-wage earners and
providing a seamless transition for seniors near or in retirement.
3
<PAGE> 4
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The 10-year
Treasury rate and the prime rate are prevailing interest rates. The other data
report year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (11/30/96) 6 MONTHS AGO 1 YEAR AGO 2 YEAR AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.2 6.91 5.71 7.81
PRIME RATE(2) 8.25 8.25 8.65 8.5
INFLATION RATE(3) 3.19 2.75 2.6 2.67
THE U.S. DOLLAR(4) 3.46 9.15 -2.58 -4.52
CAPITAL GOODS ORDERS(5)* 7.61 3.93 11.3 12.38
INDUSTRIAL PRODUCTION(5)* 3.6 3.35 1.71 6.58
EMPLOYMENT GROWTH(6) 2.11 2.08 1.92 3.4
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6%. The low, moderate inflation of the last
few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and
the value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of October 31, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this letter as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
December 10, 1996
*THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
4
<PAGE> 5
PERFORMANCE UPDATE
[BEIMFORD PHOTO]
J. PATRICK BEIMFORD, JR., JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN 1976.
HE IS EXECUTIVE VICE PRESIDENT AND CHIEF INVESTMENT OFFICER FOR FIXED-INCOME
INVESTMENTS. MR. BEIMFORD IS ALSO PORTFOLIO CO-MANAGER FOR KEMPER U.S.
GOVERNMENT SECURITIES FUND. HE RECEIVED A BACHELOR OF SCIENCE AND INDUSTRIAL
MANAGEMENT DEGREE FROM PURDUE UNIVERSITY AND RECEIVED AN M.B.A. FROM THE
UNIVERSITY OF CHICAGO.
[VANDENBERG PHOTO]
RICHARD VANDENBERG JOINED ZKI IN MARCH 1996, AS SENIOR VICE PRESIDENT OF ZKI AND
PORTFOLIO CO-MANAGER OF KEMPER U.S. GOVERNMENT SECURITIES FUND. VANDENBERG HAS
MORE THAN 22 YEARS OF FIXED-INCOME PORTFOLIO MANAGEMENT EXPERIENCE. HE RECEIVED
BOTH A BACHELORS DEGREE AND M.B.A. FROM THE UNIVERSITY OF WISCONSIN.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
FEARS OF A STRONGER ECONOMY AND HIGHER INFLATION CHARACTERIZED KEMPER U.S.
GOVERNMENT SECURITIES FUND'S FISCAL YEAR. PORTFOLIO CO-MANAGERS PATRICK
BEIMFORD AND RICHARD VANDENBERG DISCUSS HOW THEY ALTERED THE FUND'S DURATION
AND ITS PORTFOLIO COMPOSITION IN RESPONSE TO THE PERIOD'S HIGHER INTEREST RATE
ENVIRONMENT.
Q HOW WOULD YOU CHARACTERIZE THE ECONOMIC ENVIRONMENT OVER THE LAST 12
MONTHS, AND HOW DID GOVERNMENT SECURITIES FARE?
A The investment climate changed dramatically over the past 12 months. At
the start of the fiscal year, investors were optimistic about the government
market. It was expected that the economy would continue to grow slowly,
inflation would remain low, and that perhaps the Federal Reserve Board (the Fed)
would lower short-term interest rates. (The Fed did move in December 1995 and
January 1996, to lower interest rates.) The market was also hopeful that the
negotiations underway in Washington, D.C., in late 1995 would lead to a balanced
budget agreement with a solid plan for reducing the federal budget deficit. All
of these events were positive for government securities because they supported a
slow-growth, benign inflation environment. As a result, market interest rates
(yields) of government securities fell and their prices increased.
By February 1996, political and economic events caused investors to
re-evaluate whether the economy could continue on its slow growth, low inflation
path. This uncertainty moved market interest rates higher and prices of
government securities lower. Most of the adjustment in interest rates occurred
in the first quarter of 1996, but yields remained at higher levels.
Q WHAT WERE THE EVENTS THAT CAUSED THE CHANGE IN INTEREST RATE DIRECTION?
A Initially, the collapse of federal budget negotiations caused market
yields to rise. Additionally, columnist Patrick Buchanan's strong early showing
in the presidential primaries added concern as the market viewed many of his
proposals as potentially inflationary. Further, in his testimony before
Congress, Fed Chairman Alan Greenspan intimated that the pace of economic growth
was improving. This caused some investors to conclude that another reduction in
interest rates was not imminent. These events prompted investors to sell, and
interest rates rose.
However, the most dramatic rise in market rates during the period
occurred in early March, when the U.S. Labor Department reported an
unanticipated and dramatic increase in employment growth. Many bond investors
saw this data as evidence that the economy was gaining more momentum than
previously anticipated. The news caused a sell-off in the market. This is
because more rapid economic growth is associated with higher inflation, which
erodes the value of fixed- income investments. Fears of inflation and a
potential rate hike by the Fed continued to impact the market until late
September.
5
<PAGE> 6
PERFORMANCE UPDATE
Q WAS THE FUND'S PERFORMANCE IMPACTED BY RISING INTEREST RATES?
A When interest rates rise, the prices of bonds fall. Therefore, the
government bond market and Kemper U.S. Government Securities Fund were both
adversely impacted by the rise in interest rates that began occurring in early
1996.
During the first few months of the fiscal year, we had expected interest
rates to decline and had positioned the fund with a longer than average
duration. Duration is a measurement of a fund's sensitivity to interest rates.
The longer the duration, the more sensitive it is to interest rate changes. Our
outlook on rates, however, began to change in January so we reduced the fund's
duration believing that the yields would not continue their precipitous decline.
We reduced duration again in early March and positioned the fund for a more
stable interest rate environment.
Unfortunately, the employment release in March caused the market to trade
down sharply, which hurt the fund's performance -- even with its shortened
duration.
From that point forward we maintained a neutral to defensive duration
positioning for the fund. This means that we reduced the portfolio's duration to
a length similar to that of the market or shorter. This positioning helped the
fund as the market traded in a choppy pattern throughout the rest of the period.
Q WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE PORTFOLIO TO ALTER THE
FUND'S DURATION?
A To adjust duration, we altered our level of mortgages versus Treasuries.
When interest rates were falling during the first three months of the period, we
added Treasuries to the portfolio. This enabled the fund to benefit from the
market's rally, as Treasuries offer better price appreciation potential when
interest rates decline. It also reduced the fund's exposure to mortgage
prepayment risk. The risk of prepayments is always more prevalent when rates
fall because borrowers are likely to refinance into lower-rate mortgages. As
this happens, mortgages with higher interest rates are paid off early and the
proceeds are reinvested at lower market rates. Although mortgages generally
provide higher yields, Treasuries offered the potential for a higher total
return early in the fiscal year. Total return, remember, includes both income on
the investments and price change.
In January 1996, we began selling Treasuries to reduce the fund's duration
and to increase its investment in mortgages. We made this adjustment because we
expected that rates would begin to stabilize or move somewhat higher. In a
higher interest rate environment, mortgages tend to outperform Treasuries. We
also wanted to align the fund's portfolio more closely to the defensive
positioning favored by our peers. By May, 96 percent of the fund's portfolio was
invested in mortgages. The allocation to mortgages was kept at or near that
level throughout the remainder of the fiscal period.
When we did invest in Treasuries, it was primarily in short-term
securities, which was part of our neutral to defensive strategy. However, in
late September, yields began to fall so we purchased some intermediate-term
Treasuries (about 3 percent of the portfolio). We made this purchase because
economic growth seemed to be moderating and fears of an interest rate
tightening by the Fed were beginning to abate. This addition of longer-term
securities, although somewhat bullish, kept the fund's duration at a neutral
level.
Q WHAT TYPES OF MORTGAGE SECURITIES DID THE FUND FAVOR DURING THE PERIOD?
A For the most part, the fund was invested in Government National Mortgage
Association (GNMA) 30-year mortgage-backed securities as well as a small
percentage in Federal National Mortgage Association (FNMA) 30-year
mortgage-backed securities. We favored 7 1/2 to 8 percent coupons, which tend to
outperform in stable to slightly higher interest rate environments. Also, we
accumulated some seasoned 6 1/2 to 7 percent coupon securities, which offered
slightly shorter durations. These coupons performed very well during the period.
Q WHAT'S YOUR OUTLOOK FOR THE GOVERNMENT MARKET AND KEMPER U.S. GOVERNMENT
SECURITIES FUND IN PARTICULAR?
A We don't expect to see any more significant increases in interest rates.
In fact, given the current economic environment and the low level of inflation,
rates should remain somewhat stable and could possibly move lower. A stable
environment is generally positive for mortgage investments, which is the fund's
primary investment. When rates are falling, Treasuries generally outperform
mortgages. There would need to be a major change in economic fundamentals to
move rates drastically one way or another. But at this point, we don't
anticipate that happening.
6
<PAGE> 7
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED OCTOBER 31, 1996 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR 5-YEAR 10-YEAR CLASS
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS A 0.62% 5.51% 7.32% 9.02% (since 10/1/79)
- -------------------------------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS B 1.43 N/A N/A 5.86 (since 5/31/94)
- -------------------------------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS C 4.40 N/A N/A 7.14 (since 5/31/94)
- -------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper U.S. Government Securities Fund Class A FROM 10/1/79 THROUGH 10/31/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
10/1/79 12/31/85 12/31/90 10/31/96
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper U.S. Government Securities Fund Class A(1) 10000 18043 28634 43756
Salomon Brothers 30 Year GNMA Index+ 10000 22210 36305 56944
Consumer Price Index++ 10000 14651 17936 21220
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper U.S. Government Securities Fund Class B FROM 5/31/94 THROUGH 10/31/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 10/31/96
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper U.S. Government Securities Fund Class B(1) 10000 9904 11628 11479
Salomon Brothers 30 Year GNMA Index+ 10000 10116 11829 12078
Consumer Price Index++ 10000 10149 10407 10732
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper U.S. Government Securities Fund Class C FROM 5/31/94 THROUGH 10/31/96
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 10/31/96
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper U.S. Government Securities Fund Class C(1) 10000 9930 11661 11815
Salomon Brothers 30 Year GNMA+ 10000 10116 11829 12078
Consumer Price Index++ 10000 10149 10407 10732
</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% and for C shares no
adjustment for sales charge. The maximum B share CDSC is 4%. For C shares
purchased on or after April 1, 1996, there is a 1% CDSC on certain redemptions
within the first year of purchase. During the periods noted, securities prices
fluctuated. For additional information, see the Prospectus and Statement of
Additional Information and the Financial Highlights at the end of this report.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for A shares and the contingent deferred sales charge in
effect at the end of the period for B shares. In comparing 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.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/96 ON 10/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE-BACKED
GNMA 77% 80%
- --------------------------------------------------------------------------------
OTHER 12 3
- --------------------------------------------------------------------------------
SHORT-TERM GOVERNMENTS 8 --
- --------------------------------------------------------------------------------
INTERMEDIATE-TERM 3 --
- --------------------------------------------------------------------------------
LONG-TERM GOVERNMENTS -- 17
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/96 ON 10/31/95
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/96 ON 10/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
LESS THAN 5 18% 7%
- ----------------------------------------------------------------------------
5-10 YEARS 31 37
- ----------------------------------------------------------------------------
10-20 YEARS 50 43
- ----------------------------------------------------------------------------
20+ YEARS 1 13
- ----------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/96 ON 10/31/95
AVERAGE MATURITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 10/31/96 ON 10/31/95
- -------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 8.7 YEARS 11.7 YEARS
- ----------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMEMTS
KEMPER U.S. GOVERNMENT SECURITIES FUND
Portfolio of Investments at October 31, 1996
(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 6.00% 2023-2026 $ 3,890 $ 3,624
MORTGAGE ASSOCIATION Certificates 6.50 2023-2024 528,205 508,316
- - 76.5% 7.00 2022-2026 813,051 800,271
(Cost: $3,063,078) 7.50 2007-2025 615,213 619,162
8.00 2016-2026 601,134 616,353
8.50 2016-2026 342,116 355,539
9.00 2005-2026 123,698 131,751
9.50 2017-2021 52,581 57,045
10.00 2009-2021 62,763 68,804
10.50 2013-2021 25,336 27,932
----------------------------------------------------------------------------
3,188,797
- -------------------------------------------------------------------------------------------------------------------
U.S. TREASURY Notes 8.75-8.875 1997 284,000 292,799
SECURITIES - 21.5% 8.125-9.00 1998 290,000 302,615
(Cost: $899,814) 6.75 2000 4,900 5,017
6.875 2006 20,425 21,156
Bonds 11.875 2003 23,640 31,109
12.375 2004 28,000 38,106
12.75 2010 38,500 54,947
14.00 2011 59,650 92,504
9.125 2018 15,080 19,158
6.00 2026 43,000 39,231
----------------------------------------------------------------------------
896,642
- -------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Pass-through 6.50 2026 560 536
MORTGAGE ASSOCIATION Certificates 7.00 2025 63,781 62,605
- - 12.0% 7.50 2026 116,000 115,474
(Cost: $495,285) 8.00 2024 9,057 9,235
8.50 2026 154,000 159,294
9.00 2024-2026 144,357 151,933
----------------------------------------------------------------------------
499,077
----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--110.0%
(Cost: $4,458,177) 4,584,516
----------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
REPURCHASE Dated October, 1996. Collateralized by Federal National Mortgage Association
AGREEMENT - 5.0% securities which are monitored daily to ensure their market value exceeds
(Cost: $207,000) the carrying value of the repurchase agreement.
Lehman Government Securities Inc. 207,000 207,000
(held at The Chase Manhattan Bank, N.A.,
subcustodian)
5.28%-5.62%, 11/1/96 and 11/4/96
----------------------------------------------------------------------------
LONG CALL OPTIONS - .1%
U.S. Treasury Bonds
December '96, 101.25
(Cost: $473) 680cts 733
----------------------------------------------------------------------------
TOTAL INVESTMENTS--115.1%
(Cost: $4,665,650) 4,792,249
----------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(15.1%) (629,092)
----------------------------------------------------------------------------
NET ASSETS--100% $4,163,157
----------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
Based on the cost of investments of $4,665,650,000 for federal income tax
purposes at October 31, 1996, the gross unrealized appreciation was
$140,412,000, the gross unrealized depreciation was $13,813,000 and the net
unrealized appreciation of investments was $126,599,000.
See accompanying Notes to Financial Statements.
9
<PAGE> 10
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, 1996, the related statements of operations for the year
then ended and changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the fiscal periods since
1992. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
October 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
U.S. Government Securities Fund at October 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the fiscal periods since 1992, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 17, 1996
10
<PAGE> 11
REPORT OF INDEPENDENT AUDITORS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------
Investments, at value
(Cost: $4,665,650) $4,792,249
- -------------------------------------------------------------------------------------------------------
Cash 288
- -------------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 732
- -------------------------------------------------------------------------------------------------------
Investments sold 93,293
- -------------------------------------------------------------------------------------------------------
Interest 46,817
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS 4,933,379
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------------------------------------
Payable for:
Fund shares redeemed 5,614
- -------------------------------------------------------------------------------------------------------
Investments purchased 761,208
- -------------------------------------------------------------------------------------------------------
Management fee 1,421
- -------------------------------------------------------------------------------------------------------
Administrative services fee 658
- -------------------------------------------------------------------------------------------------------
Distribution services fee 49
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 1,249
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 23
- -------------------------------------------------------------------------------------------------------
Total liabilities 770,222
- -------------------------------------------------------------------------------------------------------
NET ASSETS $4,163,157
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------------------------------------
Paid-in capital $4,575,647
- -------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (680,071)
- -------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 126,599
- -------------------------------------------------------------------------------------------------------
Undistributed net investment income 140,982
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $4,163,157
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- -------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($4,079,522 / 466,908 shares outstanding) $8.74
- -------------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net asset value or 4.50% of offering price) $9.15
- -------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to contingent deferred sales charge) per
share
($70,426 / 8,067 shares outstanding) $8.73
- -------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to contingent deferred sale charge) per
share
($7,905 / 904 shares outstanding) $8.75
- -------------------------------------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($5,304 / 607 shares outstanding) $8.74
- -------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------
Interest income $350,442
- -------------------------------------------------------------------------------------------------------
Expenses:
Management fee 18,159
- -------------------------------------------------------------------------------------------------------
Administrative services fee 7,716
- -------------------------------------------------------------------------------------------------------
Distribution services fee 526
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 7,041
- -------------------------------------------------------------------------------------------------------
Professional fees 69
- -------------------------------------------------------------------------------------------------------
Reports to shareholders 767
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 185
- -------------------------------------------------------------------------------------------------------
Total expenses 34,463
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 315,979
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Net realized loss on sales of investments (including options purchased) (40,947)
- -------------------------------------------------------------------------------------------------------
Net realized loss from futures transactions (10,997)
- -------------------------------------------------------------------------------------------------------
Net realized loss (51,944)
- -------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments (39,840)
- -------------------------------------------------------------------------------------------------------
Net loss on investments (91,784)
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $224,195
- -------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 315,979 368,383
- ---------------------------------------------------------------------------------------------------------
Net realized loss (51,944) (71,028)
- ---------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation (39,840) 380,732
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 224,195 678,087
- ---------------------------------------------------------------------------------------------------------
Net equalization charges (17,437) (21,081)
- ---------------------------------------------------------------------------------------------------------
Distribution from net investment income (319,368) (362,971)
- ---------------------------------------------------------------------------------------------------------
Net decrease from capital share transactions (462,648) (497,071)
- ---------------------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (575,258) (203,036)
- ---------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------------------
Beginning of year 4,738,415 4,941,451
- ---------------------------------------------------------------------------------------------------------
END OF YEAR
(including undistributed net investment income of
$140,982 and $161,785, respectively) $4,163,157 4,738,415
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 13
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 sales
charge but are subject to higher ongoing expenses
than Class A shares and, for shares sold on or
after April 1, 1996, a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares are sold to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
Differences in class expenses will result in the
payment of different per share income dividends by
class. All shares of the Fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. 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 fixed
income 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 discount amortization on
all fixed income securities and premium
amortization on mortgage-backed securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
The Fund may purchase securities with delivery or
payments 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, 1996 the Fund had $760,535,000 in
purchase commitments outstanding (18% of net
assets) with a corresponding amount of assets
segregated.
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class by dividing the Fund's net assets
attributable to that class by the number of shares
of the class outstanding.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies and therefore no
federal income tax provision is required. The
accumulated net realized loss on sales of
investments for federal income tax purposes at
October 31, 1996, amounting to approximately
$679,991,000, is available to offset future taxable
gains. If not applied, the loss carryover expires
during the period 1998 through 2004.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income monthly and
any net realized capital gains annually, which are
recorded on the ex-dividend date. Dividends are
determined in accordance with income tax principles
which may treat certain transactions differently
from generally accepted accounting principles.
EQUALIZATION ACCOUNTING. A portion of proceeds from
sales and cost of redemptions of Fund shares is
credited or charged to undistributed net investment
income so that income per share available for
distribution is not affected by sales or
redemptions of shares.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI), and pays a management fee at an annual rate
of .45% of the first $250 million of average daily
net assets declining to .32% of average daily net
assets in excess of $12.5 billion. The Fund
incurred a management fee of $18,159,000 for the
year ended October 31, 1996.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS -----------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------- -------------
<S> <C> <C> <C>
Year ended October 31, 1996 $ 330,000 2,024,000 91,000
</TABLE>
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, KDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees and
commissions paid in connection with the sale of
Class B and Class C shares and the CDSC received in
connection with the redemption of such shares are
as follows:
<TABLE>
<CAPTION>
COMMISSIONS AND
DISTRIBUTION FEES
DISTRIBUTION FEES PAID BY KDI
AND CDSC ------------------------------
RECEIVED BY KDI TO ALL FIRMS TO AFFILIATES
----------------- ------------- --------------
<S> <C> <C> <C>
Year ended October 31, 1996 $ 708,000 1,266,000 34,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of Fund accounts the firms
service. Administrative services fees (ASF) paid
are as follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY ------------------------------
THE FUND TO KDI TO ALL FIRMS TO AFFILIATES
---------------- ------------- --------------
<S> <C> <C> <C>
Year ended October 31, 1996 $7,716,000 7,728,000 329,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of
$4,139,000 for the year ended October 31, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
For the year ended October 31, 1996, the Fund made
no direct payments to its officers and incurred
trustees' fees of $65,000 to independent trustees.
- --------------------------------------------------------------------------------
4
INVESTMENT
TRANSACTIONS For the year ended October 31, 1996, investment
transactions (excluding short-term investments) are
as follows (in thousands):
Purchases $18,750,094
Proceeds from sales 19,296,343
In addition, the Fund had a covered short call
option open at October 31, 1996, against its
investment in FNMA 7.50%. The premium received
($471,000) and the value ($743,000) of the short
option were netted against the cost and value,
respectively, of the underlying position shown in
the Portfolio of Investments. This contract expires
in January 1997.
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995
----------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------
SHARES SOLD
Class A 17,046 $ 139,065 23,085 $ 184,675
-----------------------------------------------------------------------------
Class B 4,933 43,005 7,843 66,852
-----------------------------------------------------------------------------
Class C 584 5,086 842 7,173
-----------------------------------------------------------------------------
Class I 520 4,565 939 8,333
-----------------------------------------------------------------------------
----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 21,176 184,996 24,837 213,222
-----------------------------------------------------------------------------
Class B 316 2,751 168 1,462
-----------------------------------------------------------------------------
Class C 41 356 16 135
-----------------------------------------------------------------------------
Class I 57 497 14 122
-----------------------------------------------------------------------------
----------------------------------------------------------------------------
SHARES REDEEMED
Class A (95,205) (806,232) (114,637) (947,816)
-----------------------------------------------------------------------------
Class B (3,093) (26,978) (3,157) (27,011)
-----------------------------------------------------------------------------
Class C (262) (2,252) (424) (3,604)
-----------------------------------------------------------------------------
Class I (853) (7,507) (70) (614)
-----------------------------------------------------------------------------
----------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 81 710 52 450
-----------------------------------------------------------------------------
Class B (81) (710) (51) (450)
-----------------------------------------------------------------------------
NET DECREASE
FROM CAPITAL
SHARE TRANSACTIONS $(462,648) $(497,071)
-----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The Fund has entered into exchange traded financial
futures contracts in order to help protect it from
anticipated market conditions and, as such, bears
the risk that arises from entering into these
contracts.
At the time the Fund enters into a futures
contract, it is required to make a margin deposit
with its custodian. Subsequently, gain or loss is
recognized and payments are made on a daily basis
between the Fund and its broker as the market value
of the futures contract fluctuates. At October 31,
1996, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $17,908,000. The Fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures position open
at October 31, 1996 (in thousands):
<TABLE>
<CAPTION>
FACE EXPIRATION LOSS AT
TYPE AMOUNT MONTH 10/31/96
-------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Securities $181,441 December '96 $(4,574)
</TABLE>
16
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------------
CLASS A
------------------------------------------------
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------
Net asset value, beginning of year $8.92 8.35 9.29 9.30 9.32
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .63 .66 .67 .69 .78
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.17) .56 (.97) (.01) (.02)
- ----------------------------------------------------------------------------------------------
Total from investment operations .46 1.22 (.30) .68 .76
- ----------------------------------------------------------------------------------------------
Less distribution from net investment
income .64 .65 .64 .69 .78
- ----------------------------------------------------------------------------------------------
Net asset value, end of year $8.74 8.92 8.35 9.29 9.30
- ----------------------------------------------------------------------------------------------
TOTAL RETURN 5.36% 15.24 (3.37) 7.60 8.44
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------
Expenses .77% .72 .75 .65 .64
- ----------------------------------------------------------------------------------------------
Net investment income 7.17 7.68 7.58 7.36 8.31
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------
CLASS B
-------------------------------
YEAR ENDED MAY 31 TO
OCTOBER 31, OCTOBER 31,
1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------
Net asset value, beginning of period $8.91 8.34 8.67
- -----------------------------------------------------------------------------
Income from investment operations:
Net investment income .54 .58 .28
- -----------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.17) .56 (.38)
- -----------------------------------------------------------------------------
Total from investment operations .37 1.14 (.10)
- -----------------------------------------------------------------------------
Less distribution from net investment
income .55 .57 .23
- -----------------------------------------------------------------------------
Net asset value, end of period $8.73 8.91 8.34
- -----------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.36% 14.18 (1.15)
- -----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------
Expenses 1.73% 1.69 1.71
- -----------------------------------------------------------------------------
Net investment income 6.21 6.71 7.09
- -----------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------- -----------------------------
CLASS C CLASS I
-------------------------------- -----------------------------
YEAR ENDED MAY 31 TO YEAR ENDED JULY 3 TO
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995 1994 1996 1995
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------- ---------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------- ---------------------------
Net asset value, beginning of period $8.93 8.35 8.67 8.92 8.88
- ----------------------------------------------------------------------------------- ---------------------------
Income from investment operations:
Net investment income .55 .60 .29 .64 .22
- ----------------------------------------------------------------------------------- ---------------------------
Net realized and unrealized gain (loss) (.17) .56 (.38) (.17) .04
- ----------------------------------------------------------------------------------- ---------------------------
Total from investment operations .38 1.16 (.09) .47 .26
- ----------------------------------------------------------------------------------- ---------------------------
Less distribution from net investment income .56 .58 .23 .65 .22
- ----------------------------------------------------------------------------------- ---------------------------
Net asset value, end of period $8.75 8.93 8.35 8.74 8.92
- ----------------------------------------------------------------------------------- ---------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.40% 14.33 (1.01) 5.56 3.02
- ----------------------------------------------------------------------------------- ---------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------- ---------------------------
Expenses 1.70% 1.64 1.68 .59 .53
- ----------------------------------------------------------------------------------- ---------------------------
Net investment income 6.24 6.76 7.12 7.35 7.07
- ----------------------------------------------------------------------------------- ---------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $4,163,157 4,738,415 4,941,451 6,686,735 6,683,092
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 391% 362 1,000 550 569
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR.
President and Trustee Vice President
DAVID W. BELIN CHARLES R. MANZONI, JR.
Trustee Vice President
LEWIS A. BURNHAM JOHN E. NEAL
Trustee Vice President
DONALD L. DUNAWAY RICHARD L. VANDENBERG
Trustee Vice President
ROBERT B. HOFFMAN PHILIP J. COLLORA
Trustee Vice President
and Secretary
DONALD R. JONES JEROME L. DUFFY
Trustee Treasurer
DOMINIQUE P. MORAX 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 ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 Riverside Plaza Chicago, IL 60606
http://www.kemper.com
Printed on recycled paper.
This report is not to be distributed unless preceded
or accompanied by a Kemper Fixed Income
Funds prospectus.
KGSF - 2 (12/96) 1026020
Printed in the U.S.A. KEMPER LOGO
