<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
[MORNINGSTAR RATINGS LOGO] ENDED APRIL 30, 1999
OFFERING INVESTORS THE OPPORTUNITY FOR HIGH CURRENT
INCOME, LIQUIDITY AND SECURITY OF PRINCIPAL
KEMPER U.S. GOVERNMENT SECURITIES FUND
"... after the outsized moves of the last 18 months, we're returning to a more
normal atmosphere. ..."
[KEMPER FUNDS LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
<PAGE> 2
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, 1999
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 1.42%
CLASS B 0.95%
CLASS C 0.97%
LIPPER GNMA BOND FUNDS CATEGORY AVERAGE* 1.69%
- --------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not guarantee future performance.
Investments returns and principal values will flutuate so that shares, when
redeemed, may be worth more or less than original cost.
* Lipper Analytical Services, Inc. returns and rankings are based upon changes
in net asset value with all dividend 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
4/30/99 10/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS A $8.65 $8.86
- --------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS B $8.64 $8.85
- --------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS C $8.67 $8.87
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT SECURITIES
FUND RANKINGS AS OF 4/30/99*
- --------------------------------------------------------------------------------
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 #14 of 51 funds #41 of 51 funds #41 of 51 funds
- ------------------------------------------------------------------------------------
5-YEAR #19 of 35 funds N/A N/A
- ------------------------------------------------------------------------------------
10-YEAR #13 of 23 funds N/A N/A
- ------------------------------------------------------------------------------------
15-YEAR #3 of 7 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 APRIL 30, 1999
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME $.3230 $.2830 $.2851
- --------------------------------------------------------------------------------
APRIL DIVIDEND $.0465 $.0404 $.0415
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE+ 6.44% 5.60% 5.74%
- --------------------------------------------------------------------------------
SEC YIELD+ 5.55% 4.72% 3.94%
- --------------------------------------------------------------------------------
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON APRIL 30, 1999. 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, 1999, 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.
YIELDS AND DISTRIBUTION RATES ARE HISTORICAL AND WILL FLUCTUATE.
TERMS TO KNOW
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR INCOME STYLE BOX
- --------------------------------------------------------------------------------
[MATURITY QUALITY BOX]
Source: Morningstar, Inc., Chicago, IL (312) 696-6000. 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.
THE STYLE BOX REPRESENTS A SNAPSHOT OF A FUND'S PORTFOLIO ON A SINGLE DAY.
PLEASE NOTE THAT STYLE BOXES DO NOT REPRESENT AN EXACT ASSESSMENT OF RISK AND DO
NOT REPRESENT FUTURE PERFORMANCE. THE FUND'S PORTFOLIO CHANGES FROM DAY-TO-DAY.
A LONGER-TERM VIEW IS REPRESENTED BY THE FUND'S MORNINGSTAR CATEGORY, WHICH IS
BASED ON ITS ACTUAL INVESTMENT STYLE AS MEASURED BY ITS UNDERLYING PORTFOLIO
HOLDINGS OVER THE PAST THREE-YEARS. MORNINGSTAR HAS PLACED KEMPER U.S.
GOVERNMENT SERCURITIES FUND IN THE INTERMEDIATE GOVERNMENT CATEGORY. PLEASE
CONSULT THE PROSPECTUS FOR A DESCRIPTION OF INVESTMENT POLICIES.
BASIS POINT The movement of interest rates or yields expressed in hundredths of
a percent. For example, an increase in yield from 5.00% to 5.50% is 50 basis
points.
DURATION A measure of the interest rate sensitivity of a fixed income investment
or portfolio. The longer the duration, the greater the portfolio's sensitivity
to interest rate fluctuations.
GROSS DOMESTIC PRODUCT (GDP) The market value of goods and services produced by
a country during a specified period. It acts as a useful gauge when measuring
the strength of an economy, especially when comparing different time periods.
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.
<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.
SILVIA HOLDS A BACHELOR'S DEGREE AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND A MASTER'S DEGREE IN ECONOMICS FROM BROWN UNIVERSITY IN
PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER INVESTMENTS, HE WAS WITH
THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $280 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER:
In April, investor enthusiasm drove the market to its second milestone in a
year -- the Dow Jones Industrial Average rose to 11,000 just a month after it
broke 10,000 for the first time. In May, expectations of rising inflation and
higher short-term interest rates led to a slowdown. But in early June, the
market rallied again. What drove the market rallies, and what, at the same time,
led to investor anxiety?
Inflation worries have been seeping into the market for months. The growing
conviction that Asian and Latin American economies are recovering is raising
commodity prices, particularly oil. The price of West Texas Intermediate oil
surged from less than $12 in February to almost $19 in early May. That alone
almost guarantees a rise in the "headline" inflation rate this year, which is
the rate of inflation as measured by the entire CPI. But it's important to note
that the Federal Reserve Board looks primarily at the core inflation rate, which
is the CPI minus food and energy -- and the core inflation rate looks at if it
will remain low at about 2 percent this year. Investors should note, however,
that the Federal Reserve Board also considers what will happen to inflation next
year -- and all indications are that the Fed expects inflation to increase in
2000.
As a result, the Fed is considering a change in monetary policy. Recent Fed
policy has been reactive, not proactive, which means that the Fed tends to
respond to inflation only when it picks up. That may change as the Fed tries to
preemptively halt inflation momentum. Such a change in monetary policy would
likely lead to an increase in short-term interest rates before the end of the
year. However, the change is likely to be small. Because we don't see pressure
toward sustained inflation, there's no reason for the Fed to want a sharp
slowdown in the overall economy.
The long-term economic situation, however, appears to be positive. The
federal budget surplus continues to benefit from good revenue gains (which are
based on good income gains, especially for households), good capital gains and
continued restraint in federal spending. The surplus this year is expected to
approach $100 billion.
This positive environment is exactly what sometimes poses risk for
investors, and is key to understanding recent volatility in the market. A strong
economy has the potential to feed inflation fears and drive up interest rates.
Indeed, recent market events illustrate the domino effect of investors reacting
to positive economic news, which they consider troubling at this point, more
than eight years into the economic expansion. In April, the steady stream of
positive economic news led to a sell-off in the financial markets based on fears
that the strong pace of economic growth would eventually lead to higher
inflation. The benchmark 30-year Treasury bond yield rose, which pulled stocks
lower.
Where can we expect to go from here? The fundamentals by which we judge the
health of the economy suggest continued growth as we move into the second half
of 1999. For example, the gross domestic product (GDP), the value of all goods
and services produced in the U.S., rose at an annual rate of 4.5 percent in the
first quarter, following a tremendous fourth-quarter surge of 6 percent. This is
very much in line with what we've grown accustomed to over the past year -- over
the four quarters of 1998, the U.S. economy expanded by 4.3 percent. Some people
aren't surprised at all by strong GDP growth that once would have alarmed them.
That's partially because we've grown accustomed to a strong economy. But it's
also because we've been able to absorb growth without driving up inflation.
That's important for investors. If prices had been rising as the economy was
growing, the Fed would have most likely raised short-term interest rates by now,
and that would have changed the financial market outlook.
However, we do see some vulnerability on the economic front. Trade is a weak
spot in the economy right now. Exports of U.S. goods and services dropped in the
first quarter while imports soared. This reflects the fact that the U.S. is one
of the few countries financially fit enough to buy goods produced elsewhere in
the world. But for as long as less vibrant international economies are unable to
buy U.S. goods, the profitability of U.S. companies trying to export will be
challenged.
When you think about it, vulnerability in regard to the international
economy is nothing new. Globally, the outlook is slightly more positive than it
was a few months ago. For example, the European markets are slowing down, which
has already led to the European Central Bank lowering interest rates in order to
boost domestic spending. In many countries in Europe there are no fixed-rate
mortgages, only adjustable-rate mortgages. When interest rates go down, mortgage
payments are reduced and homeowners can spend money elsewhere. This has a huge
impact on consumer spending, and will help European equities over time.
Additionally, the situation in Japan remains unchanged. And, problems in the
emerging markets haven't had the negative impact many people expected -- both
the Mexican and Brazilian stock markets have actually risen in the past two
months.
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 (5/31/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10 Year Treasury Rate(1) 5.54 5.34 5.57 6.42
Prime Rate(2) 7.75 8.5 8.5 8.25
Inflation Rate(3)* 2.28 1.68 1.63 3.04
The U.S. Dollar(4) -1.22 8.17 5.05 7.67
Capital goods orders(5)* 11.67 3.05 12.61 3.93
Industrial production (5)* 2.01 2.71 5.92 6.44
Employment growth(6) 2.14 2.67 2.76 2.44
</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 APRIL 30, 1999.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
But don't forget that international crises have the potential to affect the
U.S. markets dramatically. An increase in military spending on Kosovo by the 11
European Monetary Union (EMU) countries could force them to spend less in other
areas, which could have economic implications, including higher interest rates.
That's because many European countries have small economies and little leeway in
their budgets. Consequently, those countries finance unplanned military
expenditures by selling government bonds -- which, in Europe's small bond
market, typically raises interest rates. As an example, consider Italy, which
recently asked for more leeway on its deficit targets. When leeway was granted,
this led to a further sell-off in the eurodollar.
The international situation alone, however, is by no means an indicator of
a U.S. slowdown -- and without any such indications, complacency may be our
greatest concern. It's easy to look at the current U.S. economic situation and
behave as if no risk exists. But when you see the market soaring and are tempted
to jump in, note that the bull market grew to records on the strength of just a
few dozen stocks, while most other stock prices were flat or actually declined.
In summary, there are concerns that the current economy is unsustainable and
we soon could see an abrupt end. In many cases, however, people are looking for
a slowdown because they are fearful growth will drive up inflation these are
particularly older investors who are accustomed to inflation accompanying
growth. But again, sustained inflation seems unlikely, so a sharp slowdown is
not necessary. In the short term, we expect a modest economic slowdown but no
recession. The best approach now, as in any market, is to diversify and invest
for the long term.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ JOHN E. SILVIA
John E. Silvia
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF DR. JOHN SILVIA AS OF JUNE 9, 1999, AND MAY
NOT ACTUALLY COME TO PASS. THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF
THIS MATERIAL IS INTENDED AS AN INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
PERFORMANCE UPDATE
[VANDENBERG PHOTO]
RICHARD VANDENBERG IS LEAD PORTFOLIO MANAGER OF KEMPER U.S. GOVERNMENT
SECURITIES FUND. HE JOINED SCUDDER KEMPER INVESTMENTS, INC. IN MARCH 1996 AND IS
A MANAGING DIRECTOR. HE HAS 25 YEARS OF FIXED-INCOME PORTFOLIO MANAGEMENT
EXPERIENCE.
[DUGENSKE PHOTO]
JOHN DUGENSKE IS A PORTFOLIO MANAGER FOR KEMPER U.S. GOVERNMENT SECURITIES FUND.
HE IS A VICE PRESIDENT OF SCUDDER KEMPER INVESTMENTS, JOINING THE FIRM IN 1998.
[DOLAN PHOTO]
SCOTT DOLAN IS A PORTFOLIO MANAGER FOR KEMPER U.S. GOVERNMENT SECURITIES FUND.
HE JOINED SCUDDER KEMPER INVESTMENTS IN 1989 AND IS A VICE PRESIDENT.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
DURING THE LAST SIX MONTHS, THE U.S. GOVERNMENT BOND MARKET EXPERIENCED A
TRANSITION AS INVESTORS ABANDONED THE "FLIGHT-TO-QUALITY" BIAS OF THE PREVIOUS
18 MONTHS THAT HAD PUSHED BOND YIELDS DOWN TO HISTORICALLY LOW LEVELS. IN THIS
REPORT, RICHARD VANDENBERG DISCUSSES HOW THIS CHANGE IMPACTED THE MARKET AND HOW
THE FUND WAS POSITIONED TO RESPOND.
Q HOW DID THE GOVERNMENT BOND MARKET PERFORM DURING THE FIRST SIX MONTHS OF
THE FISCAL YEAR?
A The period from November 1998 to April 1999 can probably best be described
as a return to normalcy in the market, albeit a bumpy one. The returns investors
received varied substantially by instrument and by maturity. Mortgages tended to
outperform Treasuries, and the long end of the market was fairly volatile. For
example, 30-year Treasury bonds declined 6.53 percent on a total return basis,
as measured by the Salomon 30-year Treasury Benchmark Index.* The Salomon
10-year Treasury Benchmark Index** was off 3.42 percent. On the other hand, the
Salomon GMNA Mortgage Index*** gained 2.54 percent for the period.
If you recall, 30-year Treasury bond yields were at or near all-time lows
last October. The reason was a "flight-to-quality" as investors world-wide,
anxious about the health of foreign economies, rushed to the safe haven of U.S.
Treasuries. Demand pushed yields dramatically lower on longer-maturity
instruments. Essentially, this was a culmination of an 18-month long
preoccupation with global economies that overshadowed the usual emphasis on
economic conditions at home.
In October, that mentality changed. To show America's commitment to
supporting economies worldwide, the Federal Reserve cut interest rates twice in
October. While this helped support global markets, investors began to wonder if
the cuts might spur strong growth and renewed inflation in the U.S. Long-term
government bond yields responded with a sharp jump. Thus, as the fiscal year
began, the market was caught in a tug-of-war as investors tried to determine the
extent of weakness in global economies and strength in the American economy, and
how each would affect the other. Yields and prices varied dramatically within a
broad range, making it a challenge to position the portfolio effectively.
In March, we finally started to get clarification on some fronts. Asia
began showing signs of recovery, and the Japanese appeared serious about
stimulating their economy. Potential problems in Latin American economies,
especially Brazil, began to look as if they were under control and would not
hurt the U.S. economy as much as some people feared. And in America, the economy
is rolling along with 4.5-5 percent GDP growth in the first quarter with no
signs of a substantive increase in inflation.
So, after the outsized moves of the last 18 months, we're returning to a
more normal atmosphere. Yields are stabilizing at a more realistic level, and
investors are finally starting to focus on the fundamentals, such as GDP growth
and inflation, rather than rushing
5
<PAGE> 6
PERFORMANCE UPDATE
between a utopian outlook and a doomsday outlook.
* SALOMON 30-YEAR TREASURY BENCHMARK INDEX GENERALLY REPRESENTS THE MARKET FOR
30-YEAR TREASURY BONDS. SOURCE IS TOWERSDATA.
** SALOMON 10-YEAR TREASURY BENCHMARK INDEX GENERALLY REPRESENTS THE MARKET FOR
10-YEAR TREASURY BONDS. SOURCE IS TOWERSDATA.
*** SALOMON GNMA MORTGAGE INDEX IS AN UNMANAGED INDEX THAT IS GENERALLY
REPRESENTATIVE OF GNMA SECURITIES. SOURCE IS TOWERSDATA.
Q HOW DID YOU POSITION THE FUND DURING THIS UNCERTAIN PERIOD?
A Even though the market was volatile and there was a lot of anxiety among
investors, we were reasonably certain of one thing at the beginning of the
fiscal year: that rates wouldn't go much lower. Therefore, for most of the
six-month period we kept the duration of the fund neutral and worked to add
performance by maintaining an overweight in mortgage-backed securities versus
Treasuries. In part, we bought mortgages because, in an environment of steady or
rising interest rates, mortgages generally outperform Treasuries due to the
yield advantage they offer. Also, after the substantial rally in Treasuries that
took place last summer, mortgages offered excellent value. This strategy worked
well since mortgages outperformed Treasuries for the majority of the six-month
period.
We also adjusted the coupons of the mortgages we bought as market
conditions changed. The goal was to keep the fund concentrated in mortgages that
offered the best trade-off of risk and return given the market's psychology.
Because the market has been so volatile, we were somewhat defensive by moving
down in coupons. While this meant giving up a little bit in relative
performance, it also meant we were able to moderate the fund's potential share
price volatility.
The bottom line was that, for the six-month period, our 1.42 percent total
return (Class A shares unadjusted for sales charges) modestly trailed the Lipper
GNMA Funds Index's 1.99 percent return. However, for the one-year period we were
#14 of the 51 GNMA funds tracked by Lipper Analytical Services for the 1-year
period ended April 30, 1999 (for Class A shares, see page 2 for more
information).
For various reasons, we don't think rates will rise much from here.
Therefore, we intend to continue maintaining a higher than normal allocation to
GNMA mortgages. We also lengthened our duration slightly versus our peer group,
which should enhance the fund's total return if we're correct in our interest
rate expectations.
Q YOU'VE SAID YOU DON'T EXPECT RATES TO GO UP MUCH FROM HERE. WHY?
A There are several reasons. First, there's been a lot of talk about the
strength of the economy and the big first quarter GDP number, but we feel a
large part of that was the traditional first quarter spending of tax refunds.
The average refund was far more than last year and we think the consumer has put
that to work already. We believe it's unlikely that this pace of growth will
continue into the summer.
Longer term, the U.S. government's fiscal surplus is starting to be felt.
The supply of new Treasury offerings will be relatively light, which should help
raise prices and lower yields.
And finally, inflation has been very tame. An increase in oil prices caused
some concern at the end of March, but the market was able to absorb it.
Meanwhile, worker productivity continues to increase, which should help keep
price increases and inflation in check.
The big picture is that investors are able to reap about 6 percent on
intermediate-maturity AAA-rated mortgages while inflation remains lodged near 3
percent. So fixed income investors are getting a nice return on their investment
and we would expect that to continue.
6
<PAGE> 7
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 4/30/99 ON 10/31/98
- -------------------------------------------------------------------------------
<S> <C> <C>
GNMA 76% 84%
- -------------------------------------------------------------------------------
OTHER MORTGAGE-BACKED SECURITIES 9 3
- -------------------------------------------------------------------------------
SHORT-TERM GOVERNMENT SECURITIES 1 1
- -------------------------------------------------------------------------------
INTERMEDIATE-TERM GOVERNMENT SECURITIES 1 5
- -------------------------------------------------------------------------------
LONG-TERM GOVERNMENT SECURITIES 10 5
- -------------------------------------------------------------------------------
CASH AND EQUIVALENTS 3 2
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 4/30/99 ON 10/31/98
YEARS TO MATURITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 4/30/99 ON 10/31/98
- -------------------------------------------------------------------------------
<S> <C> <C>
LESS THAN 5 35% 47%
- -------------------------------------------------------------------------------
5-10 YEARS 52 46
- -------------------------------------------------------------------------------
11-20 YEARS 10 2
- -------------------------------------------------------------------------------
21+ YEARS -- 5
- -------------------------------------------------------------------------------
CASH AND EQUIVALENTS 3 --
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 4/30/99 ON 10/31/98
AVERAGE MATURITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 4/30/99 ON 10/31/98
- -------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 7.5 years 6.1 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, 1999 (unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
COUPON
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY PRINCIPLE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION - 71.2%
(Cost: $2,374,732)
Pass-through 6.00% 2023 - 2029 $ 66,177 $ 64,051
certificates
6.50 2023 - 2029 486,960 484,954
7.00 2011 - 2029 797,272 809,370
7.50 2007 - 2029 446,720 461,022
8.00 2016 - 2028 409,633 427,469
8.50 2016 - 2028 39,119 41,305
9.00 2005 - 2028 64,719 69,294
9.50 2009 - 2027 28,282 30,447
10.00 2009 - 2022 27,949 30,806
10.50 2013 - 2021 11,750 12,962
-----------------------------------------------------------------------------
2,431,680
- ------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY
SECURITIES - 10.6%
(Cost: $367,187)
Bonds 10.75 2003 39,965 47,556
12.75 2010 71,420 99,296
12.50 2014 50,600 77,189
7.50 2016 105,200 123,216
8.75 2020 10,980 14,699
-----------------------------------------------------------------------------
361,956
- ------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL
MORTGAGE ASSOCIATION - 4.6%
(Cost: $157,600)
Agency notes 5.50 2017 - 2019 62,446 58,831
Pass-through 6.00 2028 - 2029 58,163 56,390
certificates
6.50 2028 - 2029 10,713 10,648
7.50 2027 363 374
8.00 2005 - 2024 3,734 3,891
9.00 2024 - 2025 24,906 26,401
-----------------------------------------------------------------------------
156,535
- ------------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN
MORTGAGE CORPORATION - 5.4%
(Cost: $183,612)
Pass-through 6.50 2029 66,000 65,660
certificates
7.00 2028 - 2029 42,654 43,274
7.50 2012 - 2029 49,714 51,184
9.50 2020 21,321 22,767
-----------------------------------------------------------------------------
182,885
-----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--91.8%
(Cost: $3,083,131) 3,133,056
-----------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
MONEY MARKET
INSTRUMENTS - 8.2%
(Cost: $280,530)
(a)Repurchase agreements
Donaldson, Lufkin & Jenrette Securities
Corp.
dated 4/30/99, 4.94%, due 5/3/99 33,000 33,000
CS First Boston Corp
dated 4/30/99, 4.72%, due 5/3/99 59,000 59,000
-----------------------------------------------------------------------------
92,000
-----------------------------------------------------------------------------
Other
Yield -- 4.63% to 4.75%
Due -- May 1999
Federal Home Loan Mortgage Corp. 50,000 49,844
Other 139,000 138,686
-----------------------------------------------------------------------------
188,530
-----------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS 280,530
-----------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $3,363,661) $3,413,586
-----------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Repurchase agreements are fully collateralized by U.S. Treasury or
Government securities. The collateral is monitored daily by the fund so that
its market value exceeds the carrying value of the repurchase agreement.
Based on the cost of investments of $3,363,661,000 for federal income tax
purposes at April 30, 1999, the gross unrealized appreciation was $62,002,000,
the gross unrealized depreciation was $12,077,000 and the net unrealized
appreciation on investments was $49,925,000.
See accompanying Notes to Financial Statements.
9
<PAGE> 10
FINANCIAL STATEMENTS
STATEMENT OF ASSETS & LIABILITIES
April 30, 1999 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investments, at value (Cost: $3,363,661) $3,413,586
- --------------------------------------------------------------------------
Receivable for:
Investments sold 95,411
- --------------------------------------------------------------------------
Fund shares sold 851
- --------------------------------------------------------------------------
Interest 27,122
- --------------------------------------------------------------------------
TOTAL ASSETS 3,536,970
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Cash overdraft 13
- --------------------------------------------------------------------------
Payable for:
Investments purchased 4,133
- --------------------------------------------------------------------------
Fund shares redeemed 277,089
- --------------------------------------------------------------------------
Management fee 1,135
- --------------------------------------------------------------------------
Distribution services fee 108
- --------------------------------------------------------------------------
Administrative services fee 571
- --------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 1,176
- --------------------------------------------------------------------------
Trustees' fees and other 72
- --------------------------------------------------------------------------
Total liabilities 284,297
- --------------------------------------------------------------------------
NET ASSETS $3,252,673
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------
Paid-in capital $3,811,983
- --------------------------------------------------------------------------
Accumulated net realized loss on investments (606,173)
- --------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investments 49,925
- --------------------------------------------------------------------------
Futures (740)
- --------------------------------------------------------------------------
Accumulated net investment loss (2,322)
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $3,252,673
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($3,078,259 / 355,722 shares outstanding) $8.65
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $9.06
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($138,645 / 16,040 shares outstanding) $8.64
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($32,442 / 3,741 shares outstanding) $8.67
- --------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($3,327 / 384 shares outstanding) $8.65
- --------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended April 30, 1999 (unaudited)
(in thousands)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------
Interest income $114,844
- ------------------------------------------------------------------------
Expenses:
Management fee 6,949
- ------------------------------------------------------------------------
Distribution services fee 611
- ------------------------------------------------------------------------
Administrative services fee 3,395
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 2,994
- ------------------------------------------------------------------------
Professional fees 65
- ------------------------------------------------------------------------
Reports to shareholders 201
- ------------------------------------------------------------------------
Trustees' fees and other 120
- ------------------------------------------------------------------------
Total expenses 14,335
- ------------------------------------------------------------------------
NET INVESTMENT INCOME 100,509
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------
Net realized gain (loss) on:
Investments 8,099
- ------------------------------------------------------------------------
Futures (7,430)
- ------------------------------------------------------------------------
669
- ------------------------------------------------------------------------
Change in net unrealized depreciation on:
Investments (55,422)
- ------------------------------------------------------------------------
Futures (740)
- ------------------------------------------------------------------------
(56,162)
- ------------------------------------------------------------------------
Net loss on investments (55,493)
- ------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 45,016
- ------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the six months ended April 30, 1999 (unaudited), and the year ended
October 31, 1998
(in thousands)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------------
Net investment income $ 100,509 225,518
- -----------------------------------------------------------------------------------------------
Net realized gain 669 72,926
- -----------------------------------------------------------------------------------------------
Change in net unrealized depreciation (56,162) (44,320)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 45,016 254,124
- -----------------------------------------------------------------------------------------------
Distribution from net investment income (122,599) (235,465)
- -----------------------------------------------------------------------------------------------
Net decrease from capital share transactions (111,956) (218,474)
- -----------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (189,539) (199,815)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------------------------------
Beginning of period 3,442,212 3,642,027
- -----------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment income
of $19,768 in 1998) $3,252,673 3,442,212
- -----------------------------------------------------------------------------------------------
</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 SECURITY VALUATION. Investments are stated at
value. Portfolio debt securities with remaining
maturities greater than sixty days are valued by
pricing agents approved by the officers of the
fund, which quotations reflect broker/dealer-
supplied valuations and electronic data processing
techniques. If the pricing agents are unable to
provide such quotations, the most recent bid
quotation supplied by a bona fide market maker
shall be used. Money market instruments purchased
with an original maturity of sixty days or less are
valued at amortized cost. An exchange-traded
options contract on securities, futures and other
financial instruments is valued at its most recent
sale price on such exchange. Lacking any sales, the
options contract is valued at the calculated mean.
Lacking any calculated mean, the options contract
is valued at the most recent bid quotation in the
case of a purchased options contract, or the most
recent asked quotation in the case of a written
options contract. An options contract on securities
and other financial instruments traded
over-the-counter is valued at the most recent bid
quotation in the case of a purchased options
contract and at the most recent asked quotation in
the case of a purchased options contract and at the
most recent asked quotation in the case of a
written options contract. Futures contracts are
valued at the most recent settlement price. All
other securities are valued at their fair value as
determined in good faith by the Valuation Committee
of the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. 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
payment to occur at a later date. At the time the
fund enters into a commitment to purchase a
security, the transaction is recorded and the value
of the security is reflected in the net asset
value. The value of the security may vary with
market fluctuations. No interest accrues to the
fund until payment takes place. At the time the
fund enters into
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
this type of transaction it is required to
segregate cash or other liquid assets equal to the
value of the securities purchased.
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 close of the Exchange. The net
asset value per share is determined separately for
each class by dividing the fund's net assets
attributable to that class by the number of shares
of the class outstanding.
FEDERAL INCOME TAXES. The fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies, and to distribute
all of its taxable income to its shareholders.
Accordingly, the fund paid no federal income taxes
and no federal income tax provision was required.
At October 31, 1998, the fund had a tax basis net
loss carryforward of approximately $606,764,000,
which may be applied against any realized net
taxable gains of each succeeding year until fully
utilized, or it will expire during the period 2002
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.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a monthly investment
management fee of 1/12 of the 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 $6,949,000 for the six
month ended April 30, 1999.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the six months ended April
30, 1999 are $138,000, of which $1,000 was paid by
KDI to affiliates.
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 separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the six months ended April 30, 1999 are
$775,000.
ADMINISTRATIVE SERVICES AGREEMENT. The fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
fund pays KDI a fee at an annual
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
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 paid by the fund to KDI for the six
months ended April 30, 1999 are $3,395,000, of
which $8,000 was paid by KDI to affiliates.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the fund. Under the agreement,
KSvC received shareholder services fees of
$1,847,000 for the six months ended April 30, 1999.
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,
1999, the fund made no direct payments to its
officers and incurred trustees' fees of $34,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended April 30, 1999, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $2,358,458
Proceeds from sales 2,569,590
- --------------------------------------------------------------------------------
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, 1999 OCTOBER 31, 1998
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------
SHARES SOLD
--------------------------------------------------------------------------------
Class A 23,690 $ 207,474 31,438 $ 270,880
--------------------------------------------------------------------------------
Class B 7,402 64,842 9,910 87,882
--------------------------------------------------------------------------------
Class C 3,033 26,634 2,477 21,982
--------------------------------------------------------------------------------
Class I 203 1,783 713 6,328
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
--------------------------------------------------------------------------------
Class A 8,321 72,897 14,264 127,311
--------------------------------------------------------------------------------
Class B 352 3,065 428 3,389
--------------------------------------------------------------------------------
Class C 84 765 72 595
--------------------------------------------------------------------------------
Class I 15 135 32 258
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES REDEEMED
--------------------------------------------------------------------------------
Class A (47,660) (417,149) (78,196) (685,295)
--------------------------------------------------------------------------------
Class B (5,921) (51,695) (3,909) (34,468)
--------------------------------------------------------------------------------
Class C (2,075) (18,169) (1,011) (8,949)
--------------------------------------------------------------------------------
Class I (289) (2,538) (948) (8,387)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CONVERSION OF SHARES
--------------------------------------------------------------------------------
Class A 345 3,030 544 4,806
--------------------------------------------------------------------------------
Class B (346) (3,030) (544) (4,806)
--------------------------------------------------------------------------------
NET DECREASE FROM CAPITAL
SHARE TRANSACTIONS $(111,956) $(218,474)
--------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, payments are made
on a daily basis between the fund and the broker as
the market value of the futures contract fluctuates
and are recorded for financial reporting purposes
as unrealized gains or losses by the fund. At April
30, 1999, the market value of assets pledged by the
fund to cover margin requirements for open futures
positions was $3,800,000. The fund also had liquid
securities in its portfolio in excess of the face
amount of the following open futures positions at
April 30, 1999 (in thousands):
<TABLE>
<CAPTION>
FACE EXPIRATION UNREALIZED
TYPE AMOUNT POSITION MONTH GAIN (LOSS)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bond $55,406 Long June '99 $(785)
--------------------------------------------------------------------------------
U.S. Treasury Note (10 year) 49,316 Short June '99 27
--------------------------------------------------------------------------------
U.S. Treasury Note (5 year) 7,669 Long June '99 18
--------------------------------------------------------------------------------
TOTAL $(740)
--------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------
CLASS A
--------------------------------------------
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31,
APRIL 30, -------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------
Net asset value, beginning of period $8.86 8.81 8.74 8.92 8.35
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .27 .58 .64 .63 .66
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.16) .07 .06 (.17) .56
- ---------------------------------------------------------------------------------------
Total from investment operations .11 .65 .70 .46 1.22
- ---------------------------------------------------------------------------------------
Less distribution from net investment
income .32 .60 .63 .64 .65
- ---------------------------------------------------------------------------------------
Net asset value, end of period $8.65 8.86 8.81 8.74 8.92
- ---------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.42% 7.64 8.41 5.36 15.24
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------
Expenses .81% .80 .78 .77 .72
- ---------------------------------------------------------------------------------------
Net investment income 6.06% 6.50 7.34 7.17 7.68
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------
CLASS B
--------------------------------------------
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31,
APRIL 30, --------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------
Net asset value, beginning of period $8.85 8.80 8.73 8.91 8.34
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .23 .49 .56 .54 .58
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.16) .08 .06 (.17) .56
- --------------------------------------------------------------------------------------
Total from investment operations .07 .57 .62 .37 1.14
- --------------------------------------------------------------------------------------
Less distribution from net investment
income .28 .52 .55 .55 .57
- --------------------------------------------------------------------------------------
Net asset value, end of period $8.64 8.85 8.80 8.73 8.91
- --------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) .95% 6.67 7.40 4.36 14.18
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------
Expenses 1.72% 1.71 1.73 1.73 1.69
- --------------------------------------------------------------------------------------
Net investment income 5.15% 5.59 6.39 6.21 6.71
- --------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------
CLASS C
-------------------------------------------
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31,
APRIL 30, --------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.87 8.82 8.75 8.93 8.35
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .24 .49 .56 .55 .60
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.15) .08 .06 (.17) .56
- --------------------------------------------------------------------------------------------
Total from investment operations .09 .57 .62 .38 1.16
- --------------------------------------------------------------------------------------------
Less distribution from net investment
income .29 .52 .55 .56 .58
- --------------------------------------------------------------------------------------------
Net asset value, end of period $8.67 8.87 8.82 8.75 8.93
- --------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) .97% 6.66 7.42 4.40 14.33
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------
Expenses 1.55% 1.67 1.68 1.70 1.64
- --------------------------------------------------------------------------------------------
Net investment income 5.32% 5.63 6.44 6.24 6.76
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------
CLASS I
-------------------------------------------
SIX MONTHS YEAR ENDED OCTOBER
ENDED 31, JULY 3 TO
APRIL 30, ------------------ OCTOBER 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.85 8.81 8.74 8.92 8.88
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .27 .59 .66 .64 .22
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.14) .07 .06 (.17) .04
- --------------------------------------------------------------------------------------------
Total from investment operations .13 .66 .72 .47 .26
- --------------------------------------------------------------------------------------------
Less distribution from net investment
income .33 .62 .65 .65 .22
- --------------------------------------------------------------------------------------------
Net asset value, end of period $8.65 8.85 8.81 8.74 8.92
- --------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.66% 7.75 8.60 5.56 3.02
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------
Expenses .59% .57 .60 .59 .53
- --------------------------------------------------------------------------------------------
Net investment income 6.28% 6.73 7.52 7.35 7.07
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31,
APRIL 30, -------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in
thousands) $3,252,673 3,442,212 3,642,027 4,163,157 4,738,415
- ---------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 149% 150 261 391 362
- ---------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges. Per share
data were determined based on average shares outstanding during the year ended
October 31, 1998. Data for the six months ended April 30, 1999 is unaudited.
17
<PAGE> 18
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 17, 1998, a special shareholders' meeting was held. Kemper U.S.
Government Sercurities Fund shareholders were asked to vote on two separate
issues: approval of the new Investment Management Agreement between the fund and
Scudder Kemper Investments, Inc., and to modify or eliminate certain policies
and to eliminate the shareholder approval requirements as to certain other
matters. The following are the results.
1) Approval of the new Investment Management Agreement between the fund and
Scudder Kemper Investments, Inc. This item was approved.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
234,805,153 4,478,707 13,634,612
</TABLE>
2) To modify or eliminate certain policies and to eliminate the shareholder
approval requirements as to certain other matters. These items were approved.
Investment objectives
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
179,895,687 10,600,394 21,848,914 40,573,477
</TABLE>
Investment policies
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
179,914,267 10,567,449 21,863,279 40,573,477
</TABLE>
Diversification
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
180,026,042 10,455,674 21,863,279 40,573,477
</TABLE>
Borrowing
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
179,698,957 10,780,531 21,865,507 40,573,477
</TABLE>
Senior securities
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
180,062,010 10,419,706 21,863,279 40,573,477
</TABLE>
Concentration
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
180,026,411 10,455,305 21,863,279 40,573,477
</TABLE>
Underwriting of securities
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
180,073,845 10,407,871 21,863,279 40,573,477
</TABLE>
Investment in real estate
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
179,948,245 10,533,471 21,863,279 40,573,477
</TABLE>
Purchase of commodities
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
179,836,414 10,645,302 21,863,279 40,573,477
</TABLE>
Lending
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
179,899,869 10,582,112 21,863,014 40,573,477
</TABLE>
Pledging of assets
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
179,554,365 10,931,441 21,859,189 40,573,477
</TABLE>
Purchases of options and warrants
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
179,774,412 10,707,304 21,863,279 40,573,477
</TABLE>
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY RICHARD L. VANDENBERG
Chairman and Trustee President Vice President
JOHN W. BALLANTINE PHILIP J. COLLORA LINDA J. WONDRACK
Trustee Vice President and Vice President
Secretary
LEWIS A. BURNHAM MAUREEN E. KANE
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
DONALD L. DUNAWAY CAROLINE PEARSON
Trustee ANN M. MCCREARY Assistant Secretary
Vice President
ROBERT B. HOFFMAN ELIZABETH C. WERTH
Trustee ROBERT C. PECK, JR. Assistant Secretary
Vice President
DONALD R. JONES BRENDA LYONS
Trustee KATHRYN L. QUIRK Assistant Treasurer
Vice President
THOMAS W. LITTAUER
Trustee and Vice President
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
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LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
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SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
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CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02110
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TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
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INVESTMENT MANAGER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL
www.kemper.com
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Long-term investing in a short-term world(SM)
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 (6/21/99) 1076880
