<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED APRIL 30, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD (SM)
[LOGO]
Offering investors the opportunity for high current
income, liquidity and security of principal
KEMPER
U.S. GOVERNMENT SECURITIES FUND
"...Because mortgages tend to perform well
in a tight-range bound environment, we kept
the fund fully allocated to mortgages. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
At A GLANCE
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
PORTFOLIO STATISTICS
8
PORTFOLIO OF
INVESTMENTS
10
FINANCIAL STATEMENTS
12
NOTES TO
FINANCIAL STATEMENTS
16
FINANCIAL HIGHLIGHTS
18
SHAREHOLDERS' MEETING
AT A GLANCE
- -----------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT SECURITIES
FUND TOTAL RETURNS
- -----------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1998
(UNADJUSTED FOR ANY SALES CHARGE):
[BAR GRAPH]
- -----------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 3.34%
CLASS B 2.87%
CLASS C 2.87%
LIPPER GNMA BOND FUNDS CATEGORY AVERAGE* 3.17%
- -----------------------------------------------------------------------------
</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.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
4/30/98 10/31/97
- -----------------------------------------------------------------------------
<S> <C> <C>
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS A $8.80 $8.81
- -----------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS B $8.79 $8.80
- -----------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS C $8.81 $8.82
- -----------------------------------------------------------------------------
</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 #24 of #46 of #45 of
52 funds 52 funds 52 funds
- -----------------------------------------------------------------------------
5-YEAR #12 of N/A N/A
30 funds
- -----------------------------------------------------------------------------
10-YEAR #14 of N/A N/A
24 funds
- -----------------------------------------------------------------------------
15-YEARS #2 of N/A N/A
5 funds
- -----------------------------------------------------------------------------
20-YEARS #1 of N/A N/A
3 funds
- -----------------------------------------------------------------------------
</TABLE>
DIVIDEND AND YIELD REVIEW
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF APRIL 30, 1998.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME: $0.3000 $0.2589 $0.2600
- -----------------------------------------------------------------------------
APRIL DIVIDEND: $0.0500 $0.0430 $0.0432
- -----------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 6.82% 5.87% 5.88%
- -----------------------------------------------------------------------------
SEC YIELD:+ 6.10% 5.44% 5.46%
- -----------------------------------------------------------------------------
</TABLE>
+Current annualized distribution rate is the latest monthly dividend shown as an
annualized percentage of net asset value on April 30, 1998. Distribution rate
simply measures the level of dividends and is not a complete measure of
performance. The SEC yield is net investment income per share earned over the
month ended April 30, 1998, 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
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR INCOME STYLE BOX
- --------------------------------------------------------------------------------
Source: Morningstar, Inc., Chicago, IL 312-696-6000. (Morningstar's Style Box
is based on a portfolio date as of April 30, 1998.) The 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.
ASIAN CONTAGION Term used to describe the overflow effect of Southeast Asia's
markets and currency troubles onto neighboring Asian countries and the global
economy.
GINNIE MAE Short for Government National Mortgage Association and securities
guaranteed by that agency.
DURATION A measure of the interest rate sensitivity of a portfolio,
incorporating time to maturity and coupon size. The longer the duration, the
greater the interest rate risk.
<PAGE> 3
ECONOMIC OVERVIEW
[SILVIA PHOTO]
DR. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS. HE IS ALSO A MEMBER OF THE INVESTMENT POLICY AND STRATEGY COMMITTEE
FOR KEMPER FUNDS.
SILVIA HOLDS BACHELOR OF ARTS AND PH.D. DEGREES IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND HAS A MASTER'S DEGREE IN ECONOMICS FROM BROWN
UNIVERSITY IN PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS
WITH THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT MANAGER FOR KEMPER
FUNDS. IT IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT
ORGANIZATIONS WORLDWIDE, MANAGING MORE THAN $200 BILLION IN ASSETS GLOBALLY FOR
MUTUAL FUND INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND
CORPORATE CLIENTS, INSURANCE COMPANIES AND PRIVATE, FAMILY AND INDIVIDUAL
ACCOUNTS. IT IS ONE OF THE 10 LARGEST MUTUAL FUND COMPLEXES IN THE UNITED
STATES.
DEAR SHAREHOLDERS,
Stable economic growth, low interest rates and sustained lower inflation have
continued to produce a beneficial market environment for investors in the second
quarter of 1998. Despite heightened sensitivity to earnings estimates and
announcements, the market continued to support financial assets. We expect this
favorable climate to continue -- in spite of the sensitivity -- at least over
the shorter term.
As always, expectations have been at the heart of the actions and
reactions that move the markets. Expectations appear to be high, as
demonstrated by a record flow of new cash into mutual funds. As of April 30,
1998, a record $5 trillion in mutual fund assets surpassed total assets of the
nation's banks, according to the Investment Company Institute, a trade
organization that monitors the mutual fund industry, and the Federal Reserve
Bank in Washington.
Unfortunately, high expectations often combine with high anxiety --
today's investors are attuned to even the smallest hint of economic change. The
result is volatility. Many who believe that our long-running bull market is too
good to be true or that stock prices are too high are wondering when the market
will reverse.
While a reversal may not be on the immediate horizon, investors are
wise to watch for several signs that change is underway: rising prices,
indicating higher inflation; repercussions of the Asian economic crisis on
American business, which could appear in the form of reduced earnings; and a
continued widening of our trade deficit, a serious imbalance caused by
heightened American demand for foreign goods and services.
On April 27, expectations were tested by reports that the Federal
Reserve Board ("the Fed") was considering a hike in interest rates. The markets
reacted immediately to this news, driving stock prices downward. But at its
monetary policy meeting on May 19, the Fed chose to leave interest rates alone.
In the coming months, the Fed could raise rates if inflation accelerates or if
growth appears to be too rapid compared to the Fed's expectations.
Our positive outlook for the short term is based primarily on the
current resiliency of our marketplace. The United States appears to be firmly
planted in the middle of an economic cycle, with no evidence of detrimental
pressures that might be associated with the market's phenomenal growth. We are
not seeing price increases for goods and services or a downturn in the housing
market, both of which we might expect late in an economic cycle.
Equities have continued to reward investors. The U.S. stock market, as
measured by the Standard & Poor's 500, gained nearly 14 percent in the first
quarter of 1998 and returned more than 13 percent year-to-date through the end
of May. Bonds have also rewarded investors in terms of real return, which is
total return less the rate of inflation. The high yield and corporate debt
fixed-income markets also have performed well.
U.S. economic growth, as measured by the gross domestic product (GDP)
growth rate, was slightly above 4 percent for the first quarter. Our general
expectation for the year is that growth in all of 1998 will increase between
2.5 and 3 percent over last year. In other words, the economy will remain
strong, but will slow down as the year progresses.
Consumer spending and corporate fixed investment have fueled the
economy's solid growth. Spending on both capital goods and high technology has
been strong. Corporate profits have grown between 5 and 10 percent, which
appears to be acceptable in an environment of stable interest rates. U.S.
employment growth has ranged from 2 to 2.25 percent, continuing to exceed
expectations. Consumer confidence has continued to hit near all-time highs. The
increase in output prices, an indicator of inflation measured by the Consumer
Price Index (CPI), has remained at 1.5 to 2 percent.
Adding to the good news, all seems to be quiet on the domestic policy
front. At the end of February, the U.S. federal budget deficit essentially
vanished. Recent efforts to reduce the deficit, combined with higher federal
revenues due to the robust economy, have left us with an expected budget
surplus of $60 billion to $80 billion for fiscal 1998. To date, our Democratic
president and Republican Congress have not agreed on any significant
legislation regarding tax credits, spending cuts or health care that could
threaten the newfound federal budget surplus.
Can we expect a little more excitement from overseas? A full-scale
global recession from last year's Asian economic crisis seems unlikely at this
point. The crisis has yet
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 (5/31/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 5.65 5.81 6.49 6.91
PRIME RATE(2) 8.5 8.5 8.5 8.25
INFLATION RATE(3)* 1.5 1.89 2.23 2.89
THE U.S. DOLLAR(4) 6.86 10.26 5.52 9.15
CAPITAL GOODS ORDERS(5)* 9.28 10.28 7.16 3.48
INDUSTRIAL PRODUCTION(5)* 3.85 5.76 4.28 3.79
EMPLOYMENT GROWTH(6) 2.61 2.8 2.5 2.13
</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) Change 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 April 30, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
to hurt most U.S. businesses and investors. Quite the contrary. While the mere
threat of repercussions from the Asian crisis added to the anxiety mentioned
earlier, it has also had the effect of keeping U.S. interest rates and prices in
check, making the U.S. economy all the more attractive to investors around the
world.
In the global economy, the U.S. dollar continues to appreciate in value
compared to other currencies. In fact, more capital is flowing into U.S. markets
as investors generally avoid Asia. Europe also has been benefiting from the
crisis. Canada, which is a commodity-producing exporter, has been somewhat
negatively affected as commodity prices have fallen. Political unrest in
Indonesia, nuclear tests in India and Pakistan and economic turmoil in Russia
have been keeping international investors on the edges of their seats.
Other major developments abroad include the final selection of countries to
participate in Europe's single currency next year. Many European countries are
adopting more restrictive fiscal policy and reducing inflation in anticipation
of the momentous European Economic and Monetary Union (EMU). But after the EMU
is established in 1999, tensions may indeed mount as countries work to adapt to
the new structure.
As we approach the turn of the century, one caveat remains: Don't
underestimate the potential of the Year 2000 computer code problem. It appears
that a significant number of federal government agencies will not meet the
criteria necessary to avoid the problem. Many businesses are revealing that
billions of dollars are being spent on the situation. Some experts say a global
recession is in store. Others adamantly disagree. In any event, we may indeed
see a reduction in capital spending toward the end of 1998 and the first half of
next year as companies focus on fixing existing computers rather than on
purchasing new equipment. We'll keep you posted!
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ John E. Silvia
JOHN E. SILVIA
June 10, 1998
4
<PAGE> 5
PERFORMANCE UPDATE
[VANDENBERG PHOTO]
RICHARD VANDENBERG JOINED SCUDDER KEMPER INVESTMENTS, INC. IN MARCH 1996 AND IS
A MANAGING DIRECTOR. HE IS ALSO A PORTFOLIO MANAGER OF KEMPER U.S. GOVERNMENT
SECURITIES FUND. VANDENBERG HAS 25 YEARS OF FIXED-INCOME PORTFOLIO MANAGEMENT
EXPERIENCE. HE RECEIVED A BACHELOR'S DEGREE AND 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 GOVERNMENT BOND MARKET VACILLATED FROM NOVEMBER 1, 1997 THROUGH APRIL 30,
1998, THE FISCAL SEMIANNUAL PERIOD FOR KEMPER U.S. GOVERNMENT SECURITIES
FUND, AS WORLDWIDE ECONOMIC EVENTS SPOTLIGHTED U.S. TREASURIES. PORTFOLIO
MANAGER RICHARD VANDENBERG SHARES HIS INSIGHT TO THE MARKET AND HIS STRATEGY
FOR THE FUND, WHICH PERFORMED WELL IN THE PERIOD.
Q HOW DID KEMPER U.S. GOVERNMENT SECURITIES FUND PERFORM DURING THE
SIX-MONTH PERIOD ENDED APRIL 30, 1998?
A I'm happy to report that the fund had another strong period. Class A
shares (unadjusted for any sales charge) outperformed the peer group, Lipper
Analytical Services GNMA Bond Funds category, with a gain of 3.34 percent from
November 1, 1997 through April 30, 1998, compared with Lipper's 3.17 percent
gain. Class B and C shares each advanced 2.87 percent for the period.
Q HOW DID YOU STRUCTURE THE FUND'S PORTFOLIO TO ACHIEVE THESE POSITIVE
RESULTS?
A In any given day, we spend a lot of time deciding how much of the
portfolio should be allocated to mortgages and how much to U.S. Treasuries. The
fund is basically comprised of two types of government bonds -- Treasuries and
Ginnie Maes, or mortgage securities guaranteed by the Government National
Mortgage Association. The fund usually also holds a few traditional
mortgage-backed bonds. In a decreasing interest rate environment, mortgages tend
to underperform Treasuries, and the opposite holds true in an increasing
interest rate environment. One easy way to understand this concept is by
accepting that as interest rates fall, home owners tend to refinance their
mortgages at the new lower rates. Mortgage bonds, therefore, will suffer from
prepayment of the underlying mortgages.
During Kemper U.S. Government Securities Fund's six-month period ended
April 30, 1998, however, we had an unusual interest rate situation. The
benchmark 30-year Treasury bond crept from a high of 6.19 percent on November
6, 1997 to 5.96 percent to close out the six-month period on April 30,
1998. It did not go higher than the 6.19 percent and the lowest it fell was to
5.74 percent on January 8, 1998. This is considered a very tight trading range,
and the government market has remained in one of the longest tight trading
ranges I've witnessed. Mortgages tend to perform well in a tight-range bound
environment, so we kept the fund fully allocated to mortgages.
This tight range also explains why we kept the fund's duration neutral.
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.
When the interest rate remains somewhat stable, as it had been, we want to be
neither too long (aggressive), nor short (defensive). This, again, is achieved
by what kinds of mortgages we buy.
We've positioned the fund to be prepared for when the tight trading range
breaks, whether interest rates go up or down.
5
<PAGE> 6
PERFORMANCE UPDATE
Q THAT GIVES US A GOOD LOOK AT THE BIG PICTURE. WHAT DID YOU DO MORE
SPECIFICALLY WITH THE FUND, AND WHY?
A Well, in November, December and early January, we kept the fund
underweighted in premium and par coupon mortgages and overweighted in discounts
(in relation to our peers). We also kept the fund's duration somewhat longer at
the beginning of the period. Beginning in December, we shortened it to a more
neutral stance figuring that much of the "good news" from the 'Asian contagion'
was already priced in market yields. We thought that perhaps the market was
overbought at that point. It turned out to be the right strategy. The fund
gained 1.03 percent in December and 1.14 percent in January.
The market took a slight hit in February following Federal Reserve
Chairman Alan Greenspan's Humphrey Hawkins speech, in which he said his
balanced outlook on the economy was based on continued strong domestic growth
offset by the ongoing Southeast Asia crisis and low inflation. However, yield
levels in the government market had an easing by the Federal Reserve Board (the
Fed) priced into them and after Greenspan explained his neutral outlook, yields
rose. The fund's performance was inhibited by its high allocation in February
to Ginnie Maes rather than conventional mortgages, which outperformed Ginnie
Maes.
The market continued its back and forth reactions to news of Southeast
Asia and domestic growth through the end of the period. We kept the fund in
a neutral duration throughout this period, as I've mentioned earlier.
Q WASN'T THERE TALK IN APRIL ABOUT THE FEDERAL RESERVE BOARD RAISING
INTEREST RATES?
A As different economic reports were released, there was a ripple effect
throughout the market as fears of a Fed tightening ebbed and flowed. The
vacillation depended on the degree to which those reports showed weakness
related to Asia or strength related to domestic spending. Reports that domestic
consumption was strong and the labor market was tight led people to think the
Fed would raise rates, but the very next day another report stating that imports
were increasing while exports were decreasing sent the opposite message. The Fed
typically raises rates to slow down the economy, in effect, to make money more
expensive with the intention to stave off inflation. Inflation historically is
the natural economic effect of above trend domestic growth and raises the
potential for the Fed to increase rates. However, Southeast Asia's problems are
containing prices here in the United States. As long as imported products remain
cheap, it's unlikely domestic suppliers could raise prices and start an
inflationary trend.
We will continue to keep a close eye on the various economic reports as
they are released to look for signs of potential inflation and adjust the
portfolio accordingly.
Q AT THE START OF THE FUND'S REPORTING PERIOD, PROBLEMS IN SOUTHEAST ASIA
CREATED AN IMMEDIATE 'FLIGHT TO QUALITY' BY INVESTORS AROUND THE WORLD. DID THIS
EVENT HAVE ANY ENDURING AFFECT ON THE GOVERNMENT SECURITIES MARKET?
A We're still waiting to see. The government markets benefited from the
flight to quality, which is the typical market reaction whenever and wherever a
major global event rocks a currency. But that's somewhat short lived. Again,
Southeast Asia's situation has kept a lid on inflation here. The fallout is
something we need to continue to monitor as its full effect has yet to impact
domestic U.S. growth.
Q WHAT'S YOUR OUTLOOK FOR THE GOVERNMENT BOND MARKET?
A With the Asian crisis not improving, U.S. Treasuries still stand tall as
the safest securities in the world. That continued demand is a positive for the
market. Also, our government has gone from net fiscal deficit to net surplus and
the supply of government securities will continue to decrease. This decreased
supply is also a boon for the market.
6
<PAGE> 7
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ON 4/30/98 ON 10/31/97
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
GNMA 86% 87%
- ------------------------------------------------------------------------------------------------------
OTHER MORTGAGE-BACKED SECURITIES 5 5
- ------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM GOVERNMENT SECURITIES 6 6
- ------------------------------------------------------------------------------------------------------
LONG-TERM GOVERNMENT SECURITIES 2 2
- ------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS 1 --
- ------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 4/30/98 ON 10/31/97
YEARS TO MATURITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ON 4/30/98 ON 10/31/97
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
LESS THAN 5 24% 38%
- ------------------------------------------------------------------------------------------------------
5-10 YEARS 74 60
- ------------------------------------------------------------------------------------------------------
11-20 YEARS 1 1
- ------------------------------------------------------------------------------------------------------
21+ YEARS 1 1
- ------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 4/30/98 ON 10/31/97
AVERAGE MATURITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ON 4/30/98 ON 10/31/97
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 6.0 years 7.5 years
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
7
<PAGE> 8
PORTFOLIO OF INVESTMENTS
KEMPER U.S. GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS AT APRIL 30, 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
COUPON
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GOVERNMENT NATIONAL Pass-through 6.00% 2023-2026 $ 3,532 $ 3,428
MORTGAGE ASSOCIATION - 85.5% certificates 6.50 2023-2026 469,097 465,876
(Cost: $2,810,701) 7.00 2011-2028 800,223 810,968
7.50 2007-2028 761,821 787,011
8.00 2016-2027 517,221 543,691
8.50 2016-2028 105,541 111,454
9.00 2005-2028 102,416 110,172
9.50 2009-2027 42,796 46,329
10.00 2009-2022 41,571 45,767
10.50 2013-2021 16,597 18,299
----------------------------------------------------------------------------
2,942,995
- ------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY Bonds 10.75 2003 39,965 48,521
SECURITIES - 8.3% 12.375 2004 28,000 37,367
(Cost: $283,982) 10.75 2005 8,930 11,543
12.75 2010 82,920 117,422
10.625 2015 26,585 39,803
6.25 2023 29,500 30,339
----------------------------------------------------------------------------
284,995
- ------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Pass-through 6.50 2026 536 532
MORTGAGE ASSOCIATION - 3.9% certificates 7.00 2025-2028 80,893 81,822
(Cost: $132,779) 7.50 2027 510 524
8.00 2024 5,897 6,113
9.00 2024-2025 43,877 46,509
----------------------------------------------------------------------------
135,500
- ------------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Pass-through 9.50 2020 32,286 34,728
MORTGAGE CORPORATION - 1.0% certificates
(Cost: $34,725) ----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--98.7%
(Cost: $3,262,187) 3,398,218
----------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT OR
NUMBER OF CONTRACTS VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dated April, 1998. Collateralized by Federal Home Loan Mortgage Corporation and
Federal National Mortgage Association securities which are monitored daily to
ensure their market value exceeds the carrying value of the repurchase
agreement.
REPURCHASE
AGREEMENTS - 4.6%
Chase Securities Inc. $ 20,000 $ 20,000
(held at The Chase Manhattan Bank,
subcustodian)
5.51%-5.52%, 5/13/98-5/27/98
Goldman, Sachs & Co. 95,000 95,000
(held at The Bank of New York, subcustodian)
5.54%, 5/1/98
Nomura Securities International, Inc. 25,000 25,000
(held at The Bank of New York, subcustodian)
5.52%, 6/17/98
Salomon Brothers, Inc. 15,000 15,000
(held at The Bank of New York, subcustodian)
5.52%, 6/24/98
-------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS--4.6%
(Cost: $155,000) 155,000
------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
LONG CALL OPTION - .1% U.S. Treasury Bond Futures
(Cost: $3,663) September 1998, 120 1,752cts. 3,695
-------------------------------------------------------------------------------
TOTAL INVESTMENTS--103.4%
(Cost: $3,420,850) 3,556,913
-------------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(3.4)% (112,793)
-------------------------------------------------------------------------------
NET ASSETS--100% $3,444,120
-------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $3,420,850,000 for federal income tax
purposes at April 30, 1998, the gross unrealized appreciation was $139,273,000,
the gross unrealized depreciation was $3,210,000 and the net unrealized
appreciation on investments was $136,063,000.
See accompanying Notes to Financial Statements.
9
<PAGE> 10
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investments at value
(Cost: $3,420,850) $3,556,913
- --------------------------------------------------------------------------
Cash 1,027
- --------------------------------------------------------------------------
Receivable for:
Investments sold 256,845
- --------------------------------------------------------------------------
Fund shares sold 408
- --------------------------------------------------------------------------
Interest 29,217
- --------------------------------------------------------------------------
TOTAL ASSETS 3,844,410
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Payable for:
Investments purchased 396,439
- --------------------------------------------------------------------------
Fund shares redeemed 1,319
- --------------------------------------------------------------------------
Management fee 1,196
- --------------------------------------------------------------------------
Administrative services fee 541
- --------------------------------------------------------------------------
Distribution services fee 58
- --------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 549
- --------------------------------------------------------------------------
Trustees' fees 188
- --------------------------------------------------------------------------
Total liabilities 400,290
- --------------------------------------------------------------------------
NET ASSETS $3,444,120
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------
Paid-in capital $3,860,904
- --------------------------------------------------------------------------
Accumulated net realized loss on investments (665,727)
- --------------------------------------------------------------------------
Net unrealized appreciation on investments 136,063
- --------------------------------------------------------------------------
Undistributed net investment income 112,880
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $3,444,120
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($3,344,555 / 380,160 shares outstanding) $8.80
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $9.21
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($82,023 / 9,330 shares outstanding) $8.79
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($12,071 / 1,371 shares outstanding) $8.81
- --------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($5,471 / 622 shares outstanding) $8.80
- --------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
10
<PAGE> 11
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- ----------------------------------------------------------------------------------------------
Interest income $130,926
- ----------------------------------------------------------------------------------------------
Expenses:
Management fee 7,355
- ----------------------------------------------------------------------------------------------
Administrative services fee 3,350
- ----------------------------------------------------------------------------------------------
Distribution services fee 343
- ----------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 2,676
- ----------------------------------------------------------------------------------------------
Reports to shareholders 440
- ----------------------------------------------------------------------------------------------
Professional fees 52
- ----------------------------------------------------------------------------------------------
Trustees' fees and other 88
- ----------------------------------------------------------------------------------------------
Total expenses 14,304
- ----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 116,622
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ----------------------------------------------------------------------------------------------
Net realized gain on sales of investments (including options purchased) 13,797
- ----------------------------------------------------------------------------------------------
Net realized loss from futures transactions (411)
- ----------------------------------------------------------------------------------------------
Net realized gain 13,386
- ----------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments (13,604)
- ----------------------------------------------------------------------------------------------
Net loss on investments (218)
- ----------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $116,404
- ----------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
APRIL 30, YEAR ENDED
1998 OCTOBER 31,
(UNAUDITED) 1997
- -----------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 116,622 281,716
- -----------------------------------------------------------------------------------------------
Net realized gain 13,386 955
- -----------------------------------------------------------------------------------------------
Change in net unrealized appreciation (13,604) 23,068
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 116,404 305,739
- -----------------------------------------------------------------------------------------------
Net equalization charges (7,183) (20,125)
- -----------------------------------------------------------------------------------------------
Distribution from net investment income (120,121) (279,008)
- -----------------------------------------------------------------------------------------------
Net decrease from capital share transactions (187,007) (527,736)
- -----------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (197,907) (521,130)
- -----------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------
Beginning of period 3,642,027 4,163,157
- -----------------------------------------------------------------------------------------------
END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT
INCOME OF $112,880 AND $123,562, RESPECTIVELY) $3,444,120 3,642,027
- -----------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
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
April 30, 1998 the Fund had $394,323,000 in
purchase commitments outstanding (11% 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
12
<PAGE> 13
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 for the six
months ended April 30, 1998. The accumulated net
realized loss on sales of investments for federal
income tax purposes at April 30, 1998, 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 INVESTMENT MANAGER COMBINATION. Effective December
31, 1997, Zurich Insurance Company, the parent of
Zurich Kemper Investments, Inc. (ZKI), acquired a
majority interest in Scudder, Stevens & Clark, Inc.
(Scudder), another major investment manager. As a
result of this transaction, the operations of ZKI
were combined with Scudder to form a new global
investment organization named Scudder Kemper
Investments, Inc. (Scudder Kemper). The transaction
resulted in the termination of the Fund's
investment management agreement with ZKI, however,
a new investment management agreement between the
Fund and Scudder Kemper was approved by the Fund's
Board of Trustees and by the Fund's shareholders.
The new management agreement, which was effective
December 31, 1997, is the same in all material
respects as the previous management agreement,
except that Scudder Kemper is the new investment
adviser to the Fund. In addition, the names of the
Fund's principal underwriter and shareholder
service agent were changed to Kemper Distributors,
Inc. (KDI) and Kemper Service Company (KSvC),
respectively.
MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper, 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 $7,355,000 for the six months
ended April 30, 1998.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with 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>
Six months ended April 30, 1998 $124,000 793,000 5,000
</TABLE>
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
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
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, CDSC and commissions related to
Class B and Class C shares are as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES PAID
RECEIVED BY KDI BY KDI TO FIRMS
----------------- ----------------------
<S> <C> <C>
Six months ended April 30, 1998 $433,000 522,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, the Fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets 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>
Six months ended April 30,
1998 $3,350,000 3,369,000 16,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
KSvC is the shareholder service agent of the Fund.
Under the agreement, KSvC received shareholder
services fees of $1,697,000 for the six months
ended April 30, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the six months ended April 30,
1998, the Fund made no direct payments to its
officers and incurred trustees' fees of $29,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended April 30, 1998, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $2,750,238
Proceeds from sales 3,058,148
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
APRIL 30, OCTOBER 31,
1998 1997
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 7,971 $ 65,643 15,238 $ 122,908
--------------------------------------------------------------------------------
Class B 2,206 19,360 3,091 26,702
--------------------------------------------------------------------------------
Class C 366 3,202 512 4,408
--------------------------------------------------------------------------------
Class I 484 4,275 357 3,119
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 7,930 69,732 18,612 161,490
--------------------------------------------------------------------------------
Class B 187 1,645 354 3,074
--------------------------------------------------------------------------------
Class C 29 257 48 421
--------------------------------------------------------------------------------
Class I 17 151 36 310
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES REDEEMED
Class A (39,044) (332,594) (97,936) (821,052)
--------------------------------------------------------------------------------
Class B (1,404) (12,308) (2,690) (23,510)
--------------------------------------------------------------------------------
Class C (185) (1,621) (303) (2,616)
--------------------------------------------------------------------------------
Class I (537) (4,749) (342) (2,990)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 327 2,891 154 1,337
--------------------------------------------------------------------------------
Class B (327) (2,891) (154) (1,337)
--------------------------------------------------------------------------------
NET DECREASE
FROM CAPITAL
SHARE TRANSACTIONS $(187,007) $(527,736)
--------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The Fund has entered into exchange traded financial
futures contracts in order to help protect itself
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 April 30,
1998, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $12,438,000. The Fund also had liquid
securities in its portfolio in excess of the face
amount of the following open futures positions at
April 30, 1998 (in thousands):
<TABLE>
<CAPTION>
FACE EXPIRATION GAIN AT
TYPE AMOUNT POSITION MONTH 4/30/98
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Note $298,119 Short June '98 $242
-----------------------------------------------------------------------------
U.S. Treasury Bond 109,377 Long June '98 98
-----------------------------------------------------------------------------
U.S. Treasury Bond 91,045 Short September '98 251
-----------------------------------------------------------------------------
Total $591
-----------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------------
CLASS A
------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31,
APRIL 30, -----------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.81 8.74 8.92 8.35 9.29
- ----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .29 .64 .63 .66 .67
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) -- .06 (.17) .56 (.97)
- ----------------------------------------------------------------------------------------------------
Total from investment operations .29 .70 .46 1.22 (.30)
- ----------------------------------------------------------------------------------------------------
Less distribution from net investment income .30 .63 .64 .65 .64
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $8.80 8.81 8.74 8.92 8.35
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.34% 8.41 5.36 15.24 (3.37)
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------
Expenses .78% .78 .77 .72 .75
- ----------------------------------------------------------------------------------------------------
Net investment income 6.59% 7.34 7.17 7.68 7.58
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------
CLASS B
------------------------------------------------
SIX MONTHS YEAR ENDED OCTOBER
ENDED 31, MAY 31 TO
APRIL 30, ------------------- OCTOBER 31,
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.80 8.73 8.91 8.34 8.67
- ------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .25 .56 .54 .58 .28
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) -- .06 (.17) .56 (.38)
- ------------------------------------------------------------------------------------------------------
Total from investment operations .25 .62 .37 1.14 (.10)
- ------------------------------------------------------------------------------------------------------
Less distribution from net investment income .26 .55 .55 .57 .23
- ------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.79 8.80 8.73 8.91 8.34
- ------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.87% 7.40 4.36 14.18 (1.15)
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------
Expenses 1.67% 1.73 1.73 1.69 1.71
- ------------------------------------------------------------------------------------------------------
Net investment income 5.70% 6.39 6.21 6.71 7.09
- ------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------------
CLASS C
--------------------------------------------------
SIX MONTHS YEAR ENDED OCTOBER
ENDED 31, MAY 31 TO
APRIL 30, ------------------- OCTOBER 31,
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.82 8.75 8.93 8.35 8.67
- ------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .25 .56 .55 .60 .29
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) -- .06 (.17) .56 (.38)
- ------------------------------------------------------------------------------------------------------
Total from investment operations .25 .62 .38 1.16 (.09)
- ------------------------------------------------------------------------------------------------------
Less distribution from net investment income .26 .55 .56 .58 .23
- ------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.81 8.82 8.75 8.93 8.35
- ------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.87% 7.42 4.40 14.33 (1.01)
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.68% 1.68 1.70 1.64 1.68
- ------------------------------------------------------------------------------------------------------
Net investment income 5.69% 6.44 6.24 6.76 7.12
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------
CLASS I
------------------------------------------
SIX MONTHS YEAR ENDED
ENDED OCTOBER 31, JULY 3 TO
APRIL 30, ----------- OCTOBER 31,
1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.81 8.74 8.92 8.88
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .30 .66 .64 .22
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) -- .06 (.17) .04
- ----------------------------------------------------------------------------------------------
Total from investment operations .30 .72 .47 .26
- ----------------------------------------------------------------------------------------------
Less distribution from net investment income .31 .65 .65 .22
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $8.80 8.81 8.74 8.92
- ----------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.43% 8.60 5.56 3.02
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------
Expenses .59% .60 .59 .53
- ----------------------------------------------------------------------------------------------
Net investment income 6.78% 7.52 7.35 7.07
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31,
APRIL 30, -------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in
thousands) $3,444,120 3,642,027 4,163,157 4,738,415 4,941,151
- --------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 149% 261 391 362 1,000
- --------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges. Data for
the period ended April 30, 1998 is unaudited.
17
<PAGE> 18
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 3, 1997, a special shareholders' meeting was held and adjourned as
necessary. Kemper U.S. Government Securities Fund shareholders were asked to
vote on five separate issues: election of the nine members to the Board of
Trustees, ratification of Ernst & Young LLP as independent auditors, approval of
a new investment management agreement with Scudder Kemper Investments, Inc.,
approval of changes in the fund's fundamental investment policies to permit a
master/feeder fund structure and approval of a new rule 12b-1 distribution plan
with Zurich Kemper Distributors, Inc. for Class B shares and Class C shares. The
following are the results for each issue:
1) Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
David W. Belin 257,863,149 4,948,106
Lewis A. Burnham 257,919,376 4,891,879
Donald L. Dunaway 257,992,859 4,818,397
Robert B. Hoffman 258,005,156 4,806,099
Donald R. Jones 257,895,432 4,915,824
Shirley D. Peterson 257,341,891 5,469,364
Daniel Pierce 257,278,049 5,533,207
William P. Sommers 257,914,223 4,897,032
Edmond D. Villani 257,748,450 5,062,805
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the current fiscal year.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
254,776,842 2,009,829 6,024,584
</TABLE>
3) Approval of a new investment management agreement with Scudder Kemper
Investments, Inc.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
243,413,035 4,983,562 10,653,205
</TABLE>
4) Approval of changes in the fund's fundamental investment policies to permit a
master/feeder fund structure.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
216,357,779 8,340,997 15,612,583
</TABLE>
5) To approve a new rule 12b-1 distribution plan with Zurich Kemper
Distributors, Inc.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
Class B 4,274,781 44,718 122,747
Class C 661,328 8,586 12,036
</TABLE>
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY
Chairman and Trustee President
DAVID W. BELIN PHILIP J. COLLORA
Trustee Vice President and
Secretary
LEWIS A. BURNHAM JOHN R. HEBBLE
Trustee Treasurer
DONALD L. DUNAWAY JERARD K. HARTMAN
Trustee Vice President
ROBERT B. HOFFMAN THOMAS W. LITTAUER
Trustee Vice President
DONALD R. JONES ANN M. MCCREARY
Trustee Vice President
SHIRLEY D. PETERSON ROBERT C. PECK, JR.
Trustee Vice President
WILLIAM P. SOMMERS KATHRYN L. QUIRK
Trustee Vice President
EDMOND D. VILLANI RICHARD L. VANDENBERG
Trustee Vice President
LINDA J. WONDRACK
Vice President
MAUREEN E. KANE
Assistant Secretary
CAROLINE PEARSON
Assistant Secretary
ELIZABETH C. WERTH
Assistant Secretary
..............................................................................
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
..............................................................................
SHAREHOLDER 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
..............................................................................
INVESTMENT MANAGER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER LOGO]
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Income Funds prospectus.
KGSF - 3 (6/98) 1048370
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
