<PAGE> 1
KEMPER
U.S. GOVERNMENT
SECURITIES FUND
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED OCTOBER 31, 1997
Offering investors the opportunity for high current income, liquidity and
security of principal
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
"... We believe our shortened duration
and increase in mortgage holdings
supported the fund's performance through
the Fed's tightening. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
8
PORTFOLIO STATISTICS
9
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, 1997
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 8.41%
CLASS B 7.40%
CLASS C 7.42%
LIPPER GNMA BOND FUNDS CATEGORY AVERAGE* 8.60%
- --------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not represent future performance.
Returns, rankings 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
10/31/97 10/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS A $8.81 $8.74
- --------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS B $8.80 $8.73
- --------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS C $8.82 $8.75
- --------------------------------------------------------------------------------
</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 #29 of 53 funds #48 of 53 funds #46 of 53 funds
- --------------------------------------------------------------------------------
5-YEAR #18 of 30 funds N/A N/A
- --------------------------------------------------------------------------------
10-YEAR #14 of 24 funds N/A N/A
- --------------------------------------------------------------------------------
15-YEAR #2 of 5 funds N/A N/A
- --------------------------------------------------------------------------------
20-YEAR #1 of 3 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, 1997.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.6330 $0.5511 $0.5539
- --------------------------------------------------------------------------------
OCTOBER DIVIDEND: $0.0500 $0.0432 $0.0433
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 6.81% 5.89% 5.89%
- --------------------------------------------------------------------------------
SEC YIELD+: 6.11% 5.44% 5.48%
- --------------------------------------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown
as an annualized percentage of net asset value on October 31, 1997.
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, 1997, shown as an annual-ized
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
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR FIXED-INCOME STYLE BOX
- --------------------------------------------------------------------------------
Source: Morningstar, Inc., Chicago, IL (312) 696-6000. (Morningstar
Style Box is based on a portfolio date as of October 31, 1997.) The
Fixed-Income Style Box placement is based on a fund's average effective
maturity or duration and the average credit rating of the bond portfolio.
Please note that style boxes do not represent an exact assessment of risk and
do not represent future performance. Please consult the prospectus for a
description of investment policies.
DURATION Duration is a measure of the interest rate sensitivity of a
fixed-income investment or portfolio. The longer the duration, 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. Total return assumes the
reinvestment of all dividends and 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.
<PAGE> 3
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
Stephen B. Timbers is president, chief executive and chief investment officer of
Zurich Kemper Investments, Inc. (ZKI). ZKI and its affiliates manage
approximately $86 billion in assets, including $49 billion in retail mutual
funds. Timbers is a graduate of Yale University and holds an M.B.A. from
Harvard University.
DEAR SHAREHOLDERS,
Once again, investors experienced extreme market volatility in the month of
October. Unlike the October corrections of 1987 and 1989, this year's market
drop occurred at a time when the United States economy is remarkably healthy and
resilient. As we have noted, the U.S. economy has been moving forward for
several years with an alternating fast/slow pace that has proven successful in
removing whatever excesses build from quarter to quarter. As a consequence,
interest rates and the rate of inflation are both low and stable. Moreover, the
federal budget deficit has been reduced to such an extent that discussion has
now turned to what the government should do with a projected surplus in 1998.
Fortunately, no part of our strong economic foundation was shaken by the
market correction. If anything, the correction provided a short-lived and
relatively painless lesson about the vulnerability of a highly valued market.
When markets are high, everything -- economic news, corporate earnings and
liquidity -- must go right. When markets are high -- as our equity market was
for most of this year -- they are vulnerable to relatively minor
disappointments.
As you have read, of course, the direct source of the October correction was
Southeast Asia, where the world's highest growth economies had been stumbling
since the summer. These economies had become overextended, banks ran into
trouble with bad loans and the local governments failed to take prompt action.
The result was a domino effect of competitive devaluations of currencies,
crashing markets and political chaos.
But while Southeast Asia produced the event that led to the mini-panic in the
U.S. equity market -- resulting in a 7 percent loss on October 27 -- the world
quickly looked to the U.S. for solutions. When the U.S. market quickly
rebounded, other markets became less volatile. Considering U.S. economic
fundamentals and the relatively small effect that Southeast Asian problems have
on U.S. companies as a whole, rational investors had to expect our market to
bounce back. In fact, if the U.S. equity market had not been so highly valued,
we would have expected the market's reaction to the Asian problems to be quite
muted. For instance, if the Dow Jones Industrial Average had been closer to 7000
than to 8000, we would have expected that the market would have dropped only
slightly.
But as we have said before, today's markets move very fast. We experienced in
one day the kind of correction that we used to experience over a six-month
period. By Wednesday, November 19, the Dow Jones Industrial Average had climbed
back to where it was before Gray Monday, October 27, 1997. It took only 26 days
to recoup -- contrast that with the 463 days needed to recoup from Black Monday.
The market did not recover from its 22.6 percent October 19, 1987, market
correction until January 24, 1989. At this writing, the U.S. equity market
remains very volatile. We expect that condition to continue, as volatility is a
factor of higher valued markets. Despite what the last few years may have
suggested, markets do not go in just one direction.
Our recent experience supported many of the basic tenets of investing:
- Invest for the long term and don't react to the short-term noise. Investors
who got hurt in the October correction were those who had borrowed the
money they invested and were forced to sell at low prices. Investors who
were able to remain invested and did, lost only some of their
above-average gain for the year.
- Diversification helps reduce overall portfolio risk. Government securities
investors, for example, found the bond market to be a safe haven as the
bond market rallied during the stock market correction.
- Investing abroad is complex and requires expert advice. Currency
valuations, in particular, can have a significant effect on investment
returns.
Our forecast for the next several months calls for moderate economic growth,
stable interest rates and controlled inflation. While we cannot rule out the
possibility of another market event that would add to the excitement of equity
investing, we would expect the U.S. market to again demonstrate its resiliency.
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 (11/30/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 5.88 6.49 6.3 5.71
PRIME RATE(2) 8.5 8.5 8.25 8.65
INFLATION RATE(3)* 2.08 2.3 3.25 2.6
THE U.S. DOLLAR(4) 9.65 5.52 4.36 -2.58
CAPITAL GOODS ORDERS(5)* 9.92 7.16 3.3 8.09
INDUSTRIAL PRODUCTION(5)* 5.51 4.23 4.33 3.4
EMPLOYMENT GROWTH(6) 2.52 2.13 2.15 1.91
</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 percent. The low, moderate inflation of
the last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of October 31, 1997.
Sources: Economics Department, Zurich Kemper Investments, Inc.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT AND CHIEF INVESTMENT OFFICER
ZURICH KEMPER INVESTMENTS INC.
December 4, 1997
4
<PAGE> 5
PERFORMANCE UPDATE
[VANDENBERG PHOTO]
Richard Vandenberg joined Zurich Kemper Investments in March 1996, as senior
vice president of ZKI and portfolio manager of Kemper U.S. Government Securities
Fund. Vandenberg has more than 22 years of fixed- income portfolio management
experience. He received both a bachelor's degree and an M.B.A. from the
University of Wisconsin.
The views expressed in this report reflect those of the portfolio manager only
through the end of the period of the report, as stated on the cover. The
manager's views are subject to change at any time, based on market and other
conditions.
THE YEAR ENDED OCTOBER 31, 1997, WAS POSITIVE FOR GOVERNMENT BONDS.
BELOW, PORTFOLIO MANAGER RICHARD VANDENBERG EXPLAINS THE FACTORS CONTRIBUTING
TO THE MARKET'S STRONG PERFORMANCE, EVEN IN LIGHT OF A FEDERAL RESERVE BOARD
INTEREST RATE INCREASE.
Q DURING THE FUND'S FISCAL YEAR, THE FEDERAL RESERVE BOARD (THE FED) RAISED
SHORT-TERM INTEREST RATES. HOW DID THAT AND OTHER ECONOMIC EVENTS IMPACT THE
PERFORMANCE OF GOVERNMENT BONDS DURING THE YEAR?
A Government bonds and mortgage securities in particular performed well
during the year. The Fed did raise interest rates but the impact of the
tightening on the market was brief and relatively minimal. Here's a look at that
and other major events which shaped the market's performance.
At the start of the fiscal year political uncertainty began to creep
into the market about the potential outcome of the upcoming
presidential and congressional elections. Investors feared the Republican party
might lose control of Congress and reduce the likelihood of a balanced budget
agreement in 1997. Investment markets rallied in November, however, with news
that Republicans maintained control of Congress. Some market participants
intimated that the election outcome was evidence of the public's desire for a
true "checks and balances" government.
The bullish environment began to change in December, when Federal Reserve
Board Chairman Alan Greenspan implied in passing that financial assets might be
overvalued. This shook the market and caused yields to rise and security prices
to fall. Early in 1997, strong economic reports surfaced and Greenspan
reiterated his concern about the values of securities and about the potential
for a rise in wage inflation. In what was considered to be a preemptive move at
keeping inflation in check, the Fed tightened short-term rates by 0.25 percent
in late March.
While economic growth remained somewhat strong, even after the Fed
tightening, inflation remained uncharacteristically low. The government
market along with the broader fixed-income market began recouping losses
experienced with the Fed's interest rate increase as inflation fears continued
to be unconfirmed. For the remainder of the fiscal year, market yields
fluctuated with the release of varying economic data but remained relatively
range-bound. Inflation never became problematic and bonds performed positively.
Q HOW DID KEMPER U.S. GOVERNMENT SECURITIES FUND PERFORM DURING THE YEAR?
A We were pleased with the fund's Class A share performance, which was
in-line with its peer group average. The total return for Class A shares
(unadjusted for any sales charge) was 8.41 percent for the year. By comparison
the average return of the Lipper Analytical Services GNMA Bond Funds Category
was 8.60 percent. This is based on 53 funds that share a similar investment
objective. The fund's Class B shares returned 7.40 percent and Class C shares
returned 7.42 percent.
5
<PAGE> 6
PERFORMANCE UPDATE
Q HOW DID YOU PREPARE THE FUND FOR THE POSSIBILITY OF A FED TIGHTENING?
A We began preparing for a possible rate hike in January, by shortening the
fund's duration to below that of the fund's peer group average. Duration is a
measurement of a fund's sensitivity to interest rates -- the shorter the
duration, the less sensitive the fund is to interest rate changes. In addition,
we sold Treasury notes and purchased GNMA mortgages, which boosted the fund's
mortgage allocation to 95 percent. We made this adjustment because mortgages
tend to outperform Treasuries in a rising interest rate environment.
Q HOW WAS THE FUND IMPACTED BY THE FED'S TIGHTENING?
A The fund struggled with the larger government bond market, but the losses
were minimal in March following the tightening. Class A shares were down just
0.06 percent, while Class B and Class C shares slipped 0.09 percent and 0.21
percent, respectively. We believe our shortened duration and increase in
mortgage holdings supported the fund's performance through the Fed's tightening.
As economic growth slowed and the need for further Fed tightening diminished,
the market and the fund rebounded very quickly and the fund enjoyed positive
returns for the balance of the reporting period.
Q WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE FUND AFTER MARCH?
A By April the markets were in recovery from the Fed's tightening. Inflation
remained relatively benign despite continuing growth in the economy. To take
advantage of this environment, we began adding Treasuries back into the
portfolio. We began in April by adding some short-term Treasuries. As it became
clear that market yields would continue to trend lower, we covered interest rate
hedges and added some longer-maturity Treasuries from July through October.
(Treasuries tend to outperform mortgages in a declining rate environment.)
However, mortgages also continued to perform well in tandem with Treasuries.
This was of course positive for the fund because mortgages are its primary type
of investment.
Q WHAT IS YOUR OUTLOOK FOR THE ECONOMY AND THE GOVERNMENT MORTGAGE MARKET?
A We are optimistic about the prospects for the market and Kemper U.S.
Government Securities Fund. The current economic environment -- benign inflation
and moderate growth -- is a particularly good one for bonds. We also believe
that within a global context, U.S. Government bonds and mortgage securities are
a cheap asset class. The implied threat in early October by Greenspan that the
Fed was prepared to raise interest rates before the end of 1997 was squashed in
late October when several markets in the Far East crashed. These global problems
caused U.S. markets to swoon as well, eliminating whatever reasons the Fed may
have had to justify a rate increase. We will of course keep a close watch on
indicators of inflation and adjust the fund accordingly.
6
<PAGE> 7
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED OCTOBER 31, 1997 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS A 3.55% 5.50% 7.95% 8.99% (since 10/1/79)
- --------------------------------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS B 4.40 N/A N/A 6.62 (since 5/31/94)
- --------------------------------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS C 7.42 N/A N/A 7.21 (since 5/31/94)
- --------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH A]
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class A shares from 10/1/79 to 10/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
10/1/79 12/31/79 12/31/85 12/31/91 10/31/97
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kemper U.S. Government Securities Fund Class A(1) 10000 9427 18043 33575 47432
Salomon Brothers 30-Year GNMA Index+ 10000 9749 22210 42094 62113
Consumer Price Index++ 10000 10281 14651 18485 21609
</TABLE>
[LINE GRAPH B]
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class B shares from 5/31/94 to 10/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 12/31/96 10/31/97
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kemper U.S. Government Securities Fund Class B(1) 10000 9904 11628 11831 12450
Salomon Brothers 30-Year GNMA Index+ 10000 10116 11829 12191 13174
Consumer Price Index++ 10000 10149 10407 10753 10929
</TABLE>
[LINE GRAPH C]
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class C shares from 5/31/94 to 10/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/95 12/31/96 10/31/97
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper U.S. Government Securities Fund Class C(1) 9930 11661 11868 12691
Salomon Brothers 30-Year GNMA Index+ 10116 11829 12191 13174
Consumer Price Index++ 10000 10407 10753 10929
</TABLE>
Past performancee is not predictive of future performance. Returns and net asset
values fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
* Average annual total return measures net investment income and capital
gain or loss from portfolio investments, assuming reinvestment of all
dividends and for Class A shares adjustment for the maximum sales charge of
4.5 percent and for Class B shares adjustment for the applicable contingent
deferred sales charge (CDSC) as follows: 1-year, 3 percent; 5-year, 1
percent; since inception, 0 percent. The maximum CDSC for Class B shares is
4 percent. For Class C shares, there is a 1 percent 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 Class A shares and the CDSC in effect at the
end of the period for Class B shares. In comparing Kemper U.S. Government
Securities Fund Class A and Class B shares 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 10/31/97 ON 10/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
GNMA 87% 77%
- --------------------------------------------------------------------------------
OTHER MORTGAGE-BACKED SECURITIES 5 12
- --------------------------------------------------------------------------------
SHORT-TERM GOVERNMENT SECURITIES -- 8
- --------------------------------------------------------------------------------
INTERMEDIATE-TERM GOVERNMENT SECURITIES 6 3
- --------------------------------------------------------------------------------
LONG-TERM GOVERNMENT SECURITIES 2 --
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/97 ON 10/31/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/97 ON 10/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
LESS THAN 5 38% 18%
- --------------------------------------------------------------------------------
5-10 YEARS 60 31
- --------------------------------------------------------------------------------
10-20 YEARS 1 50
- --------------------------------------------------------------------------------
20+ YEARS 1 1
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/97 ON 10/31/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/97 ON 10/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 7.5 years 8.7 years
- --------------------------------------------------------------------------------
</TABLE>
*Portfolio composition is subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER U.S. GOVERNMENT SECURITIES FUND
Portfolio of Investments at October 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
COUPON PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION - 87.4%
(Cost: $3,041,442)
Pass-through 6.00% 2023-2026 $ 3,637 $ 3,516
certificates 6.50 2023-2027 538,401 533,050
7.00 2022-2028 642,647 646,748
7.50 2007-2027 707,579 725,125
8.00 2016-2027 679,402 706,949
8.50 2016-2027 187,485 196,858
9.00 2005-2027 207,601 222,603
9.50 2009-2027 67,004 72,647
10.00 2009-2022 49,285 54,137
10.50 2013-2021 19,447 21,416
----------------------------------------------------------------------------
3,183,049
- -------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY
SECURITIES - 9.7%
(Cost: $348,395)
Notes 6.75 2000 4,900 5,017
5.75 2002 58,500 58,546
Bonds 10.75 2003 23,270 28,644
12.375 2004 28,000 37,787
10.75 2005 27,585 35,835
12.75 2010 82,920 118,278
10.625 2015 26,585 39,313
6.25 2023 29,500 29,615
----------------------------------------------------------------------------
353,035
- -------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL
MORTGAGE ASSOCIATION - 3.6%
(Cost: $127,530)
Pass-through 6.50 2026 544 535
certificates 7.00 2025-2027 44,115 44,332
7.50 2028 18,000 18,332
8.00 2024 7,596 7,880
9.00 2024-2025 56,037 59,642
----------------------------------------------------------------------------
130,721
- -------------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN
MORTGAGE CORPORATION - 1.1%
(Cost: $38,933)
Pass-through 9.50 2020 36,180 39,159
certificates
----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--101.8%
(Cost: $3,556,300) 3,705,964
----------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE Dated October, 1997. Collateralized by Federal Home Loan Mortgage Corporation
AGREEMENTS - 16.0% and Federal National Mortgage Association securities which are monitored daily
to ensure their market value exceeds the carrying value of the repurchase
agreement.
Chase Securities Inc. $ 50,000 $ 50,000
(held at The Chase Manhattan Bank, subcustodian)
5.55%, 11/12/97
Goldman, Sachs & Co. 284,000 284,001
(held at The Bank of New York, subcustodian)
5.50%-5.76%, 11/3/97-1/7/98
Merrill Lynch, Pierce, Fenner & Smith Inc. 88,600 88,601
(held at The Chase Manhattan Bank, subcustodian)
5.73%, 11/3/97
Nikko Securities Co. International, Inc. 100,000 100,001
(held at The Bank of New York, subcustodian)
5.80%, 11/3/97
Nomura 62,000 62,000
(held at The Bank of New York, subcustodian)
5.55%, 11/12/97
---------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS--16.0%
(Cost: $584,600) 584,603
---------------------------------------------------------------------------------
TOTAL INVESTMENTS--117.8%
(Cost: $4,140,900) 4,290,567
---------------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(17.8%) (648,540)
---------------------------------------------------------------------------------
NET ASSETS--100% $3,642,027
--------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $4,140,900,000 for federal income tax
purposes at October 31, 1997, the gross unrealized appreciation was
$152,311,000, the gross unrealized depreciation was $2,644,000 and the net
unrealized appreciation on investments was $149,667,000.
See accompanying Notes to Financial Statements.
10
<PAGE> 11
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, 1997, 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
1993. 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, 1997, 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, 1997, 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 1993, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 16, 1997
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investments, excluding repurchase agreements, at value
(Cost: $3,556,300) $3,705,964
- --------------------------------------------------------------------------
Repurchase agreements, at value
(Cost: $584,600) 584,603
- --------------------------------------------------------------------------
Cash 10,655
- --------------------------------------------------------------------------
Receivable for:
Interest 29,476
- --------------------------------------------------------------------------
Fund shares sold 1,070
- --------------------------------------------------------------------------
Investments sold 792
- --------------------------------------------------------------------------
TOTAL ASSETS 4,332,560
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Payable for:
Investments purchased 681,773
- --------------------------------------------------------------------------
Fund shares redeemed 5,987
- --------------------------------------------------------------------------
Management fee 1,252
- --------------------------------------------------------------------------
Administrative services fee 565
- --------------------------------------------------------------------------
Distribution services fee 52
- --------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 728
- --------------------------------------------------------------------------
Trustees' fees 176
- --------------------------------------------------------------------------
Total liabilities 690,533
- --------------------------------------------------------------------------
NET ASSETS $3,642,027
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------
Paid-in capital $4,047,911
- --------------------------------------------------------------------------
Accumulated net realized loss on investments (679,113)
- --------------------------------------------------------------------------
Net unrealized appreciation on investments 149,667
- --------------------------------------------------------------------------
Undistributed net investment income 123,562
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $3,642,027
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($3,549,718 / 402,976 shares outstanding) $8.81
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $9.23
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($76,280 / 8,668 shares outstanding) $8.80
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($10,233 / 1,161 shares outstanding) $8.82
- --------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($5,796 / 658 shares outstanding) $8.81
- --------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended October 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------
Interest income $312,161
- ------------------------------------------------------------------------
Expenses:
Management fee 15,888
- ------------------------------------------------------------------------
Administrative services fee 7,013
- ------------------------------------------------------------------------
Distribution services fee 590
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 6,192
- ------------------------------------------------------------------------
Reports to shareholders 594
- ------------------------------------------------------------------------
Professional fees 86
- ------------------------------------------------------------------------
Trustees' fees and other 82
- ------------------------------------------------------------------------
Total expenses 30,445
- ------------------------------------------------------------------------
NET INVESTMENT INCOME 281,716
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------
Net realized gain on sales of investments (including
options purchased) 11,272
- ------------------------------------------------------------------------
Net realized loss from futures transactions (10,317)
- ------------------------------------------------------------------------
Net realized gain 955
- ------------------------------------------------------------------------
Change in net unrealized appreciation on investments 23,068
- ------------------------------------------------------------------------
Net gain on investments 24,023
- ------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $305,739
- ------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 281,716 315,979
- -----------------------------------------------------------------------------------------------
Net realized gain (loss) 955 (51,944)
- -----------------------------------------------------------------------------------------------
Change in net unrealized appreciation 23,068 (39,840)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 305,739 224,195
- -----------------------------------------------------------------------------------------------
Net equalization charges (20,125) (17,437)
- -----------------------------------------------------------------------------------------------
Distribution from net investment income (279,008) (319,368)
- -----------------------------------------------------------------------------------------------
Net decrease from capital share transactions (527,736) (462,648)
- -----------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (521,130) (575,258)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------------------------------
Beginning of year 4,163,157 4,738,415
- -----------------------------------------------------------------------------------------------
END OF YEAR
(including undistributed net investment income
of $123,562 and $140,982, respectively) $3,642,027 4,163,157
- -----------------------------------------------------------------------------------------------
</TABLE>
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 sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares are offered to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
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. Financial futures and options are
valued at the settlement price established each day
by the board of trade or exchange on which they are
traded. Over-the-counter traded options are valued
based upon prices provided by market makers. 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, 1997 the Fund had $675,926,000 in
purchase commitments outstanding (19% 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
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
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
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, 1997, amounting to approximately
$679,036,000, 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 $15,888,000 for the
year ended October 31, 1997.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Zurich Kemper Distributors,
Inc. (ZKDI). Underwriting commissions paid in
connection with the distribution of Class A shares
are as follows:
<TABLE>
<CAPTION>
COMMISSIONS
COMMISSIONS ALLOWED BY ZKDI
RETAINED BY -----------------------------
ZKDI TO ALL FIRMS TO AFFILIATES
--------------- ------------- -------------
<S> <C> <C> <C>
Year ended October 31, 1997 $221,000 1,410,000 10,000
</TABLE>
For services under the distribution services
agreement, the Fund pays ZKDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, ZKDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, ZKDI 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>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES PAID
RECEIVED BY ZKDI BY ZKDI TO FIRMS
----------------- ----------------------
<S> <C> <C>
Year ended October 31, 1997 $825,000 737,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with ZKDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays ZKDI a fee at an annual rate of up to
.25% of average daily net assets of each class.
ZKDI in
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 ZKDI
ASF PAID BY ----------------------------
THE FUND TO ZKDI TO ALL FIRMS TO AFFILIATES
----------------- ------------ -------------
<S> <C> <C> <C>
Year ended October 31, 1997 $7,013,000 7,053,000 35,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Zurich Kemper Service Company (ZKSvC) is the
shareholder service agent of the Fund. Under the
agreement, ZKSvC received shareholder services fees
of $3,598,000 for the year ended October 31, 1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
For the year ended October 31, 1997, the Fund made
no direct payments to its officers and incurred
trustees' fees of $51,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended October 31, 1997, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $10,598,102
Proceeds from sales 11,511,191
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996
--------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 15,238 $ 122,908 17,046 $ 139,065
--------------------------------------------------------------------------------
Class B 3,091 26,702 4,933 43,005
--------------------------------------------------------------------------------
Class C 512 4,408 584 5,086
--------------------------------------------------------------------------------
Class I 357 3,119 520 4,565
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 18,612 161,490 21,176 184,996
--------------------------------------------------------------------------------
Class B 354 3,074 316 2,751
--------------------------------------------------------------------------------
Class C 48 421 41 356
--------------------------------------------------------------------------------
Class I 36 310 57 497
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES REDEEMED
Class A (97,936) (821,052) (95,205) (806,232)
--------------------------------------------------------------------------------
Class B (2,690) (23,510) (3,093) (26,978)
--------------------------------------------------------------------------------
Class C (303) (2,616) (262) (2,252)
--------------------------------------------------------------------------------
Class I (342) (2,990) (853) (7,507)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 154 1,337 81 710
--------------------------------------------------------------------------------
Class B (154) (1,337) (81) (710)
--------------------------------------------------------------------------------
NET DECREASE
FROM CAPITAL
SHARE TRANSACTIONS $(527,736) $(462,648)
--------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The Fund has entered into exchange traded financial
futures contracts in order to take advantage of
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 segregate liquid assets
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,
1997, the market value of assets segregated by the
Fund was $303,047,000 for the following futures
contracts owned by the Fund (in thousands):
<TABLE>
<CAPTION>
FACE EXPIRATION GAIN AT
TYPE AMOUNT POSITION MONTH 10/31/97
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Note $143,793 Long December '97 $ 712
-----------------------------------------------------------------------------
U.S. Treasury Bond 140,822 Long December '97 748
-----------------------------------------------------------------------------
Total $1,460
-----------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------
Class A
------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------
Net asset value, beginning of year $8.74 8.92 8.35 9.29 9.30
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .64 .63 .66 .67 .69
- -------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .06 (.17) .56 (.97) (.01)
- -------------------------------------------------------------------------------------
Total from investment operations .70 .46 1.22 (.30) .68
- -------------------------------------------------------------------------------------
Less distribution from net investment
income .63 .64 .65 .64 .69
- -------------------------------------------------------------------------------------
Net asset value, end of year $8.81 8.74 8.92 8.35 9.29
- -------------------------------------------------------------------------------------
TOTAL RETURN 8.41% 5.36 15.24 (3.37) 7.60
- -------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------
Expenses .78% .77 .72 .75 .65
- -------------------------------------------------------------------------------------
Net investment income 7.34% 7.17 7.68 7.58 7.36
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------
Class B
-----------------------------------
YEAR ENDED MAY 31 TO
OCTOBER 31, OCTOBER 31,
-----------------------------------
1997 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------
Net asset value, beginning of period $8.73 8.91 8.34 8.67
- ------------------------------------------------------------------------------
Income from investment operations:
Net investment income .56 .54 .58 .28
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .06 (.17) .56 (.38)
- ------------------------------------------------------------------------------
Total from investment operations .62 .37 1.14 (.10)
- ------------------------------------------------------------------------------
Less distribution from net investment
income .55 .55 .57 .23
- ------------------------------------------------------------------------------
Net asset value, end of period $8.80 8.73 8.91 8.34
- ------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.40% 4.36 14.18 (1.15)
- ------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------
Expenses 1.73% 1.73 1.69 1.71
- ------------------------------------------------------------------------------
Net investment income 6.39% 6.21 6.71 7.09
- ------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------- -------------------------
CLASS C CLASS I
--------------------------------- -------------------------
YEAR ENDED OCTOBER YEAR ENDED
31, MAY 31 TO OCTOBER 31, JULY 3 TO
------------------- OCTOBER 31, ----------- OCTOBER 31,
1997 1996 1995 1994 1997 1996 1995
- ------------------------------------------------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------- -------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------- -------------------------
Net asset value, beginning of period $8.75 8.93 8.35 8.67 8.74 8.92 8.88
- ------------------------------------------------------------------------------- -------------------------
Income from investment operations:
Net investment income .56 .55 .60 .29 .66 .64 .22
- ------------------------------------------------------------------------------- -------------------------
Net realized and unrealized gain (loss) .06 (.17) .56 (.38) .06 (.17) .04
- ------------------------------------------------------------------------------- -------------------------
Total from investment operations .62 .38 1.16 (.09) .72 .47 .26
- ------------------------------------------------------------------------------- -------------------------
Less distribution from net investment income .55 .56 .58 .23 .65 .65 .22
- ------------------------------------------------------------------------------- -------------------------
Net asset value, end of period $8.82 8.75 8.93 8.35 8.81 8.74 8.92
- ------------------------------------------------------------------------------- -------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.42% 4.40 14.33 (1.01) 8.60 5.56 3.02
- ------------------------------------------------------------------------------- -------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------- -------------------------
Expenses 1.68% 1.70 1.64 1.68 .60 .59 .53
- ------------------------------------------------------------------------------- -------------------------
Net investment income 6.44% 6.24 6.76 7.12 7.52 7.35 7.07
- ------------------------------------------------------------------------------- -------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $3,642,027 4,163,157 4,738,415 4,941,151 6,686,735
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 261% 391 362 1,000 550
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
19
<PAGE> 20
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS CHARLES R. MANZONI, JR.
President and Trustee Vice President
DAVID W. BELIN JOHN E. NEAL
Trustee Vice President
LEWIS A. BURNHAM ROBERT C. PECK, JR.
Trustee Vice President
DONALD L. DUNAWAY RICHARD L. VANDENBERG
Trustee Vice President
ROBERT B. HOFFMAN PHILIP J. COLLORA
Trustee Vice President
DONALD R. JONES JEROME L. DUFFY
Trustee Treasurer
SHIRLEY D. PETERSON ELIZABETH C. WERTH
Trustee Assistant Secretary
WILLIAM P. SOMMERS
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER ZURICH KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER ZURICH KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
Printed on recycled paper.
This report is not to be distributed unless preceded
or accompanied by a Kemper Income
Funds prospectus.
KGSF - 2 (12/97) 1041000
Printed in the U.S.A.
