<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED OCTOBER 31, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[MORNINGSTAR RATINGS LOGO]
OFFERING INVESTORS THE OPPORTUNITY FOR HIGH CURRENT
INCOME, LIQUIDITY AND SECURITY OF PRINCIPAL
KEMPER
U.S. GOVERNMENT SECURITIES FUND
"... There are two ways to add value in
a government fund: adjusting duration
... and adjusting allocation ... We did a
pretty good job of both this year...."
[KEMPER FUNDS LOGO]
<PAGE> 2
Contents
3
Economic Overview
5
Performance Update
8
Portfolio Statistics
9
Portfolio of
Investments
10
Report of
Independent Auditors
11
Financial Statements
13
Notes to
Financial Statements
18
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT
SECURITIES FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31, 1998 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 7.64
CLASS B 6.67
CLASS C 6.66
LIPPER GNMA BOND FUNDS CATEGORY AVERAGE* 6.77
- --------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not guarantee future results.
Investment returns and principal values will fluctuate 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 dividends reinvested and do not include the effect of
sales charges and, if they had, results may have been less favorable.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
10/31/98 10/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS A $8.86 $8.81
- --------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS B $8.85 $8.80
- --------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS C $8.87 $8.82
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT
SECURITIES FUND RANKINGS AS OF 10/31/98
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER GNMA BOND FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1-YEAR #5 of 51 Funds #25 of 51 Funds #29 of 51 Funds
- --------------------------------------------------------------------------------
5-YEAR #14 of 32 Funds N/A N/A
- --------------------------------------------------------------------------------
10-YEAR #10 of 23 Funds N/A N/A
- --------------------------------------------------------------------------------
15-YEAR #2 of 6 Funds N/A N/A
- --------------------------------------------------------------------------------
20-YEAR #1 of 3 Funds N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF OCTOBER 31, 1998.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.6000 $0.5192 $0.5199
- --------------------------------------------------------------------------------
OCTOBER DIVIDEND: $0.0500 $0.0433 $0.0434
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 6.77% 5.87% 5.87%
- --------------------------------------------------------------------------------
SEC YIELD+: 5.69% 5.04% 5.06%
- --------------------------------------------------------------------------------
</TABLE>
+Current annualized distribution rate is the latest monthly dividend shown as an
annualized percentage of net asset value on October 31, 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 October 31, 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. Yields
and distribution rates are historical and will fluctuate.
TERMS TO KNOW
YOUR FUND'S STYLE
[FIXED STYLE BOX]
- --------------------------------------------------------------------------------
MORNINGSTAR INCOME STYLE BOX
- --------------------------------------------------------------------------------
Source: Data provided by 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.
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 Securities Fund in the
Intermediate Government Category. Please
consult the prospectus for a description
of investment policies.
DURATION Duration is a measure of the interest rate sensitivity of a
fixed-income investment or portfolio. The longer the duration, the greater the
interest rate risk.
YIELD A fund's yield is a measure of the net investment income per share earned
over a specific one-month or 30-day period expressed as a percentage of the
maximum offering price of the fund's shares at the end of the period.
<PAGE> 3
ECONOMIC OVERVIEW
[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, 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 $245 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES, AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS.
DEAR SHAREHOLDERS,
If you're like most investors, you may be wondering if you should allow yourself
to breathe a sigh of relief as 1998 comes to a close. After several months of
generally declining stock prices and extreme volatility, the U.S. stock market
seems to have rediscovered its resiliency. In the fourth quarter, the Standard &
Poor's 500, an unmanaged index generally representative of the U.S. stock
market, bounced back into the 1100-point range, up nearly 20 percent from its
third-quarter low of 957. The blue chip Dow Jones Industrial Average enjoyed a
comparable rise. Investor confidence suddenly overtook the investor uncertainty
that had plagued the markets at summer's end. While financial volatility appears
to be continuing, the mood for investors definitely has improved.
To what can we attribute the change? Simply this -- the cumulative effect of
some good news, not the least of which was a long-awaited series of interest
rate reductions by the Federal Reserve Board. In September, the Fed reduced the
federal funds rate a modest quarter of a percentage point, however, this first
cut disappointed some investors who were expecting a more dramatic gesture. Two
weeks later, the Fed came back with an additional quarter of a percentage point
reduction. This was an unexpected cut that seemed to have a positive effect on
Wall Street. In November, a third rate cut of a quarter of a percentage point
also boosted investor confidence. Investors were further surprised by
better-than-expected corporate earnings reports early in the fourth quarter.
Finally, economic data regarding retail sales, employment and home sales
suggested continued economic growth and very little prospect of recession.
Although there was no good news to be garnered from the sensationalized
presidential scandal, as the shock of Kenneth Starr's report wore off, the
nation seemed to refocus its attention on other matters. In this sense, another
veil of despair was lifted.
In many ways, 1998's market activity provides a study in how investor
perceptions can upstage economic realities. Certainly, the tumultuous lessons of
Russia and Southeast Asia renewed investors' awareness of risk in 1998, which
was an important wake-up call. At all times, investors must understand and
consider risk. But over the course of 1998, U.S. economic fundamentals have
essentially remained strong. In fact, inflation has remained low for the entire
year. Economic growth has been solid. Our consumer confidence has remained
fairly high, although not quite as high as last year. The nation's budget
surplus for 1998 came in at $60 billion, with another budget surplus expected
for fiscal 1999.
Growth in the nation's gross domestic product (GDP), which represents the
total value of all goods and services produced within the U.S. economy, has
remained remarkably steady. GDP is expected to have grown at an annualized rate
of between 2.5 percent and 3.5 percent for the second half of 1998 and is
anticipated to hover around 2 percent for the first half of 1999. The consumer
price index (CPI) remains in a range of 1.5 percent to 2 percent.
While employment growth has slowed a bit, the slowdown in wage gains may
provide the Fed with an incentive to reduce interest rates even further. U.S.
corporate profits have generally been flat, so we may see a decrease in capital
spending. Banks appear to be only a little less willing to lend, so the threat
of a general credit crunch is minimal.
Investors may take comfort in the fact that the U.S. markets and economy have
withstood the test of 1998's tumultuous third quarter. Similarly, while certain
countries, such as Malaysia, Indonesia, Brazil and Russia, are still suffering
from economic crises, others, including the Philippines, South Korea, Thailand
and China, appear to have survived. As long as the Fed and the Group of Seven
leading industrial nations (G7) are committed to avoiding recession on national
and global levels respectively, investors have a good chance of experiencing a
more stable economic environment.
At home, there has been somewhat of a slowdown in manufacturing, as reduced
U.S. exports reflect foreign economic turmoil. But the global impact of the
Asian crisis still has not hit the U.S. as hard as was expected. Indeed, Asian
turmoil has not affected U.S. trade as much as it has lowered import prices and
helped reduce global interest rates.
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>
NOV 98 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1)* 4.53 5.64 6.03 6.53
PRIME RATE(2)* 8.12 8.50 8.50 8.25
INFLATION RATE(3)* 1.49 1.50 2.08 2.99
THE U.S. DOLLAR(4) 0.83 6.86 9.65 3.46
CAPITAL GOODS ORDERS(5)* 2.51 7.47 10.64 9.19
INDUSTRIAL PRODUCTION(5)* 2.12 4.97 6.72 4.93
EMPLOYMENT GROWTH(6) 2.28 2.65 2.70 2.33
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
* DATA AS OF OCTOBER 31, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
In Europe, the much anticipated Economic and Monetary Union (EMU) is on the
move, with a focus on more flexibility and growth potential for the region.
European equities may be the beneficiaries of increased spending, as governments
seek to foster growth and reduce unemployment.
If you're a long-term investor in today's short-term world, go ahead and
breathe that sigh of relief as 1998 comes to an end -- but get ready for 1999.
It's going to be an interesting year as the EMU emerges, the race for the next
presidency heats up and the year 2000 approaches. And, remember: Investors don't
like uncertainty, be it economic or political. The threat of impeachment, new
acts of terrorism or any other hints of crisis could prompt a downward spike in
our markets in the short run. In the long run, the keys to investment
performance remain moderate growth, low inflation and limited taxation and
regulation.
I would like to take this opportunity to thank you for choosing to invest with
Kemper Funds. We appreciate the opportunity to serve your investment needs.
Sincerely,
/s/ John E. Silvia
JOHN E. SILVIA
MANAGING DIRECTOR
SCUDDER KEMPER INVESTMENTS, INC
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 DECEMBER 2, 1998, AND
MAY NOT ACTUALLY COME TO PASS. THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF
THIS MATERIAL IS INTENDED AS AN INVESTMENT RECOMMENDATION.
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 THE 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.
THROUGHOUT THE FUND'S FISCAL YEAR, TURBULENT INTERNATIONAL MARKETS PROMPTED
INVESTORS WORLDWIDE TO FLEE TO THE RELATIVE SAFETY OF U.S. GOVERNMENT BONDS.
DESPITE VOLATILITY GENERATED AS INVESTORS SCRAMBLED TO ASSESS THE IMPACT ON THE
U.S. ECONOMY, THE FUND POSTED 7.64 PERCENT TOTAL RETURN (CLASS A SHARES,
UNADJUSTED FOR ANY SALES CHARGE) FOR THE YEAR, SOUNDLY BEATING THE AVERAGE GNMA
FUND.
Q WHAT WERE THE MOST SIGNIFICANT FACTORS THAT AFFECTED THE INVESTMENT
ENVIRONMENT DURING THE FISCAL YEAR?
A Without a doubt, the most significant impact was felt as a result of
instability in foreign bond and stock markets -- first from developments in
Asia, then Russia and finally in Latin America.
As you may recall, in October 1997 investor concern regarding potential
economic and currency problems in Asian countries reached a boiling point.
Investors began to realize that the outsized growth in recent years experienced
by these countries -- particularly Hong Kong, Thailand, Malaysia and
Indonesia -- was supported largely by intense speculation worldwide. This
support began to reverse itself in the summer of 1997 with the devaluation of
the Thailand Baht, and in October the Hong Kong stock market imploded and other
Asian countries devalued their currencies.
As the fiscal year progressed, the Asian crisis spread to other
developing economies -- Latin American countries also started to experience
problems, and most recently, Russia effectively devalued the ruble and
rescheduled its outstanding debt.
Ironically, the problems abroad led to strong performance by U.S.
Government bonds, long considered the safest investment in the world. Global
investors opted for the relatively safe haven of U.S. Treasuries, and demand
drove Treasury bond prices sharply higher. At the same time, investors expected
cheaper foreign goods to put a damper on domestic inflation, and lower exports
to impede U.S. economic growth.
Thus, the turmoil abroad was responsible for one of the most startling
turnarounds in investor psychology we've seen in domestic bond markets for quite
a while. You must remember that, in early 1998, the U.S. economy appeared to be
growing quite rapidly, which indicated steady or perhaps rising interest rates.
The troubles in foreign markets changed this perception and suggested an
opportunity for lower interest rates in the future, a positive for bonds. As
uncertainty over the direction of global economies increased, so did demand for
U.S. government bonds, and the result was a powerful rally in Treasuries,
particularly through August and September.
The culmination of this uncertainty was a 0.25 percent interest rate cut
by the Federal Reserve on September 29, which was meant to appease markets and
show America's commitment to supporting economies worldwide. Financial markets,
however, were expecting more aggressive action and reacted negatively, which
caused a drop in bond prices at the end of the fiscal year. Another 0.25 percent
rate cut followed on October 16, however, and global financial markets rebounded
substantially.
Q FOR THE ONE-YEAR PERIOD ENDED OCTOBER 31, 1998, THE FUND'S 7.64 PERCENT
RETURN (CLASS A SHARES, UNADJUSTED FOR ANY SALES CHARGE) SOUNDLY
5
<PAGE> 6
PERFORMANCE UPDATE
BEAT THE LIPPER GNMA FUND CATEGORY'S 6.77 PERCENT RETURN. HOW DID YOU MANEUVER
THE FUND IN A VOLATILE MARKET TO ACHIEVE THIS PERFORMANCE?
A There are two ways to add value in a government fund: adjusting duration
to benefit from moves in interest rates, and adjusting the allocation between
Treasuries and mortgages when one or the other looks attractive. We did a pretty
good job of both this year.
As the fiscal year began, we suspected that the problems in Asia were
going to develop into a worldwide issue, and our expectation was that the
uncertainty would be a positive sign for "safe haven" investments like U.S.
government bonds. So we began to lengthen the fund's duration to help the fund
benefit more fully from an expected decline in rates. By mid-January, rates had
indeed declined as the market priced in a rosy scenario for bonds. It was widely
accepted that the Asian crises would curtail U.S. economic growth in 1998, and
the market clearly anticipated that the Federal Reserve would cut interest rates
to help sustain the economy's growth. So we made the right decision to lengthen
when we did.
In January, however, despite the market's optimism, we didn't see any
hard numbers supporting the theory that U.S. growth would succumb to decreased
overseas demand. We decided then to reduce the fund's duration slightly to try
to lock in some of our profits. This strategy worked out quite well through
mid-1998.
During the second half of the fiscal year, the challenge was to adjust
allocations in the face of rapidly declining long-term interest rates. Treasury
bonds react most favorably to rate declines, because their fixed payout becomes
more attractive. Mortgages don't react as favorably, the reason being fear of
prepayment. As rates fall, homeowners refinance their mortgages, opting to get a
new mortgage with a lower rate and paying off the previous, higher-rate
mortgage. This means investors in mortgage-backed securities are concerned
they'll get their investment back sooner than expected and have to reinvest at a
lower rate.
As rates fell from July through October, we were able to trade down to
lower-coupon mortgages and avoid securities with a lot of prepayment risk. We
also boosted the fund's allocation to Treasuries and Treasury futures. This
helped us ride out the long-term rate decline in pretty good shape.
Most recently, we have boosted our mortgage allocation to a neutral
weighting, because we don't think long rates can go much lower near-term. Nor do
we think they'll trend significantly higher. So we've adopted what might be
considered a "normal" stance regarding our duration and allocation.
Q WHAT'S YOUR OUTLOOK FOR THE GOVERNMENT BOND MARKET FROM HERE?
A Last year, investors focused on events outside the United States.
We expect their focus in the year ahead to turn closer to home. Japan appears as
if it is finally taking substantive action to alleviate credit problems and
repair the banking sector. Should their efforts be successful, much of the
concern that now clouds Southeast Asian markets would be lifted. The
International Monetary Fund (IMF) also looks as if it will receive the necessary
funding to help other emerging markets, most importantly Russia and Brazil. If
overseas markets calm down, that would relieve pressure on global interest rates
and possibly allow them to move lower, which would be positive for bonds.
In the U.S., the static from foreign markets has, to this point, muddied
a very favorable environment for government bonds. Inflation remains extremely
low and economic growth, while not robust, appears to be solid and sustainable.
That would lead us to expect a slow-growth, low-inflation environment that would
be beneficial for bonds. We fully expect some additional volatility in the
markets as a few big hedge funds unwind some overzealous currency and fixed
income positions. But, overall, the investment climate for fixed-income
investors is quite favorable.
6
<PAGE> 7
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED OCTOBER 31, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER U.S. GOVERNMENT SECURITIES FUND
CLASS A 2.74% 5.51% 7.74% 8.92% (since 10/1/79)
- ---------------------------------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT SECURITIES FUND
CLASS B 3.67 N/A N/A 6.65 (since 5/31/94)
- ---------------------------------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT SECURITIES FUND
CLASS C 6.66 N/A N/A 7.09 (since 5/31/94)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH] KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS A
<TABLE>
<CAPTION>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER U.S. GOVERNMENT SALOMON BROTHERS 30-YEAR
CLASS A SHARES FROM 12/31/97 TO 10/31/98 SECURITIES FUND CLASS A1 GNMA INDEX+ CONSUMER PRICE INDEX++
------------------------ ------------------------ ---------------------
<S> <C> <C> <C>
12/31/79 10000.00 10000.00 10000.00
8776.00 8965.00 10443.00
10199.00 10967.00 10782.00
9273.00 10026.00 10952.00
9462.00 10041.00 11252.00
9301.00 9941.00 11538.00
9052.00 9647.00 11812.00
8360.00 8881.00 12151.00
9515.00 10195.00 12256.00
9765.00 10680.00 12321.00
10069.00 11058.00 12647.00
11493.00 13168.00 12764.00
12229.00 14282.00 12725.00
12548.00 14876.00 12764.00
12747.00 15021.00 12973.00
12940.00 15289.00 13129.00
13319.00 15707.00 13207.00
13458.00 15583.00 13377.00
13311.00 14862.00 13520.00
14141.00 16468.00 13690.00
14950.00 17907.00 13729.00
15369.00 18324.00 13872.00
16656.00 20213.00 14029.00
16951.00 20742.00 14120.00
12/31/85 18286.00 22554.00 14250.00
19859.00 23555.00 14185.00
20104.00 23667.00 14276.00
20526.00 24590.00 14368.00
21256.00 25498.00 14407.00
21566.00 26082.00 14615.00
21452.00 25637.00 14798.00
20806.00 24882.00 14993.00
21825.00 26394.00 15046.00
22545.00 27558.00 15189.00
22797.00 28048.00 15385.00
23095.00 28660.00 15619.00
23210.00 28747.00 15711.00
23438.00 29059.00 15945.00
25292.00 31472.00 16180.00
25530.00 31907.00 16297.00
26460.00 33240.00 16441.00
26108.00 33205.00 16780.00
26930.00 34459.00 16936.00
27210.00 34993.00 17301.00
29020.00 36868.00 17445.00
29699.00 37905.00 17601.00
30099.00 38687.00 17731.00
31975.00 40810.00 17888.00
12/31/91 34027.00 42746.00 17979.00
33242.00 42503.00 18162.00
34578.00 44220.00 18279.00
35609.00 45537.00 18422.00
35594.00 45995.00 18501.00
36352.00 47350.00 18722.00
37076.00 48346.00 18827.00
37735.00 48375.00 18918.00
37839.00 48743.00 19009.00
36914.00 47505.00 19192.00
36641.00 47400.00 19296.00
36676.00 47741.00 19478.00
36679.00 48053.00 19518.00
38600.00 50589.00 19739.00
40853.00 53226.00 19883.00
41606.00 54372.00 19974.00
43416.00 56192.00 20013.00
42575.00 56099.00 20300.00
42526.00 56448.00 20430.00
43471.00 57638.00 20574.00
44645.00 59374.00 20678.00
44616.00 59435.00 20860.00
46245.00 61691.00 20900.00
47581.00 63591.00 21017.00
48674.00 65012.00 21030.00
49397.00 66064.00 21147.00
50302.00 67187.00 21252.00
51917.00 68873.00 21330.00
10/31/98 51744.00 68825.00 21330.00
</TABLE>
[LINE GRAPH] KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS B
<TABLE>
<CAPTION>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER U.S. GOVERNMENT SALOMON BROTHERS 30-YEAR
CLASS B SHARES FROM 5/31/94 TO 10/31/98 SECURITIES FUND CLASS B1 GNMA INDEX+ CONSUMER PRICE INDEX++
------------------------ ------------------------ ---------------------
<S> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00
9936.44 9954.00 10034.00
9934.06 10026.00 10129.00
9903.63 10081.00 10149.00
10394.60 10624.00 10264.00
10988.50 11177.00 10339.00
11164.50 11418.00 10386.00
12/31/95 11628.20 11800.00 10407.00
11372.00 11781.00 10556.00
11344.80 11854.00 10624.00
11569.20 12104.00 10698.00
12/31/96 11831.00 12469.00 10753.00
11819.20 12481.00 10847.00
12207.20 12855.00 10868.00
12530.50 13354.00 10929.00
12793.40 13653.00 10936.00
12963.80 13873.00 10997.00
13170.90 14109.00 11051.00
13549.10 14463.00 11092.00
10/31/98 13293.20 14453.00 11092.00
</TABLE>
[LINE GRAPH] KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS C
<TABLE>
<CAPTION>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER U.S. GOVERNMENT SALOMON BROTHERS 30-YEAR
CLASS C SHARES FROM 5/31/94 TO 10/31/98 SECURITIES FUND CLASS C1 GNMA INDEX+ CONSUMER PRICE INDEX++
------------------------ ------------------------ ---------------------
<S> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00
9948.00 9954.00 10034.00
9948.00 10026.00 10129.00
9930.00 10081.00 10149.00
10422.00 10624.00 10264.00
11018.00 11177.00 10339.00
11194.00 11418.00 10386.00
12/31/95 11661.00 11800.00 10407.00
11406.00 11781.00 10556.00
11366.00 11854.00 10624.00
11592.00 12104.00 10698.00
12/31/96 11868.00 12469.00 10753.00
11843.00 12481.00 10847.00
12233.00 12855.00 10868.00
12572.00 13354.00 10929.00
12836.00 13653.00 10936.00
12992.00 13873.00 10997.00
13200.00 14109.00 11051.00
13592.00 14463.00 11092.00
10/31/98 13537.00 14453.00 11092.00
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF
FUTURE RESULTS. INVESTMENT RETURNS AND
PRINCIPAL VALUES WILL FLUCTUATE SO THAT
SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN ORIGINAL COST.
*AVERAGE ANNUAL TOTAL RETURN AND TOTAL
RETURN MEASURE NET INVESTMENT INCOME
AND CAPITAL GAIN OR LOSS FROM
PORTFOLIO INVESTMENTS OVER THE PERIODS
SPECIFIED, ASSUMING REINVESTMENT OF
DIVIDENDS AND, WHERE INDICATED,
ADJUSTMENT FOR THE MAXIMUM SALES
CHARGE. THE MAXIMUM SALES CHARGE FOR
CLASS A SHARES IS 4.5%. FOR CLASS B
SHARES, THE MAXIMUM CONTINGENT
DEFERRED SALES CHARGE (CDSC) IS 4%.
CLASS C SHARES HAVE NO SALES CHARGE
ADJUSTMENT, BUT REDEMPTIONS WITHIN ONE
YEAR OF PURCHASE MAY BE SUBJECT TO A
CDSC OF 1%. SHARE CLASSES INVEST IN
THE SAME UNDERLYING PORTFOLIO. AVERAGE
ANNUAL TOTAL RETURN REFLECTS
ANNUALIZED CHANGE WHILE TOTAL RETURN
REFLECTS AGGREGATE CHANGE. DURING THE
PERIODS NOTED, SECURITIES PRICES
FLUCTUATED. FOR ADDITIONAL
INFORMATION, SEE THE PROSPECTUS AND
STATEMENT OF ADDITIONAL INFORMATION
AND THE FINANCIAL HIGHLIGHTS AT THE
END OF THIS REPORT.
(1)PERFORMANCE INCLUDES REINVESTMENT OF
DIVIDENDS AND ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE FOR CLASS A
SHARES AND THE CONTINGENT DEFERRED
SALES CHARGE IN EFFECT AT THE END OF
THE PERIOD FOR CLASS B SHARES. WHEN
REVIEWING THE PERFORMANCE CHART,
PLEASE NOTE THAT THE INCEPTION DATE
FOR THE SALOMON BROTHERS 30-YEAR
GNMA INDEX IS 12/31/79. AS A RESULT,
WE ARE UNABLE TO ILLUSTRATE THE LIFE
OF FUND PERFORMANCE (SINCE 10/1/79)
FOR KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS A SHARES. IN
COMPARING KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS A SHARES
PERFORMANCE TO THE SALOMON BROTHERS
30-YEAR GNMA INDEX, YOU SHOULD ALSO
NOTE THAT THE FUND'S PERFORMANCE
REFLECTS THE APPLICABLE SALES
CHARGE, WHILE NO SUCH CHARGES ARE
REFLECTED IN THE PERFORMANCE OF THE
INDEX.
+THE SALOMON BROTHERS 30-YEAR GNMA
INDEX IS UNMANAGED, IS ON A TOTAL
RETURN BASIS WITH ALL DIVIDENDS
REINVESTED AND IS COMPRISED OF GNMA
30-YEAR PASS THROUGHS OF SINGLE FAMILY
AND GRADUATED PAYMENT MORTGAGES. IN
ORDER FOR A GNMA COUPON TO BE INCLUDED
IN THE INDEX, IT MUST HAVE AT LEAST
$200 MILLION OF OUTSTANDING COUPON
PRODUCT. SOURCE IS SALOMON BROTHERS
INC.
++THE CONSUMER PRICE INDEX IS A
STATISTICAL MEASURE OF CHANGE, OVER
TIME, IN THE PRICES OF GOODS AND
SERVICES IN MAJOR EXPENDITURE GROUPS
FOR ALL URBAN CONSUMERS. SOURCE IS
TOWERSDATA.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
ON 10/31/98 ON 10/31/97
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
GNMA 84% 87%
- ----------------------------------------------------------------------------------------------------
OTHER MORTGAGE-BACKED SECURITIES 3 5
- ----------------------------------------------------------------------------------------------------
SHORT-TERM GOVERNMENT SECURITIES 1 --
- ----------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM GOVERNMENT SECURITIES 5 6
- ----------------------------------------------------------------------------------------------------
LONG-TERM GOVERNMENT SECURITIES 5 2
- ----------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS 2 --
- ----------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
YEARS TO MATURITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
ON 10/31/98 ON 10/31/97
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
LESS THAN 5 47% 38%
- ----------------------------------------------------------------------------------------------------
5-10 YEARS 46 60
- ----------------------------------------------------------------------------------------------------
11-20 YEARS 2 1
- ----------------------------------------------------------------------------------------------------
21+ YEARS 5 1
- ----------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS 2 --
- ----------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/98 ON 10/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 6.1 years 7.5 years
- --------------------------------------------------------------------------------
</TABLE>
*Portfolio composition and holdings are subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER U.S. GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
COUPON
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION - 84.4%
(Cost: $2,811,998)
Pass-through 6.00% 2023-2028 $ 63,956 $ 63,432
certificates 6.50 2023-2028 472,126 477,546
7.00 2011-2028 878,279 899,290
7.50 2007-2028 675,838 696,285
8.00 2016-2027 480,845 499,189
8.50 2016-2028 85,853 90,738
9.00 2005-2028 82,407 88,435
9.50 2009-2027 35,479 38,429
10.00 2009-2022 34,194 37,645
10.50 2013-2021 14,093 15,538
----------------------------------------------------------------------------
2,906,527
- ------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY
SECURITIES - 10.1%
(Cost: $336,813)
Bonds 10.75 2003 39,965 49,992
12.375 2004 28,000 38,618
12.75 2010 49,820 73,290
11.75 2014 50,930 79,952
8.125 2021 63,500 85,854
8.00 2021 14,950 20,024
----------------------------------------------------------------------------
347,730
- ------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL
MORTGAGE ASSOCIATION - 2.5%
(Cost: $84,665)
Agency notes 6.00 2008 41,300 43,823
Pass-through 6.50 2026 517 521
certificates 7.50 2027 462 474
8.00 2005-2024 4,777 4,940
9.00 2024-2025 33,304 35,011
----------------------------------------------------------------------------
84,769
- ------------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN
MORTGAGE CORPORATION - 1.5%
(Cost: $52,688)
Pass-through 7.50 2012 23,830 24,530
certificates 9.50 2020 26,214 27,951
----------------------------------------------------------------------------
52,481
----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--98.5%
(Cost: $3,286,164) 3,391,507
----------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
MONEY MARKET
INSTRUMENTS - 2.8%
(Cost: $95,000)
Yield--5.58%
Due--November 1998 95,000 95,004
----------------------------------------------------------------------------
TOTAL INVESTMENTS--101.3%
(Cost: $3,381,164) 3,486,511
----------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(1.3)% (44,299)
----------------------------------------------------------------------------
NET ASSETS--100% $3,442,212
----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $3,381,164,000 for federal income tax
purposes at October 31, 1998, the gross unrealized appreciation was
$106,926,000, the gross unrealized depreciation was $1,579,000 and the net
unrealized appreciation on investments was $105,347,000.
See accompanying Notes to Financial Statements.
9
<PAGE> 10
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER U.S. GOVERNMENT SECURITIES FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of the Kemper U.S. Government Securities
Fund as of October 31, 1998, the related statements of operations for the year
then ended and changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the fiscal periods since
1994. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
October 31, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
U.S. Government Securities Fund at October 31, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the fiscal periods since 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 14, 1998
10
<PAGE> 11
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investments, at value
(Cost: $3,381,164) $3,486,511
- --------------------------------------------------------------------------
Cash 6,710
- --------------------------------------------------------------------------
Receivable for:
Interest 31,001
- --------------------------------------------------------------------------
Investments sold 2,139
- --------------------------------------------------------------------------
Fund shares sold 2,485
- --------------------------------------------------------------------------
TOTAL ASSETS 3,528,846
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Payable for:
Investments purchased 80,763
- --------------------------------------------------------------------------
Fund shares redeemed 2,802
- --------------------------------------------------------------------------
Management fee 1,196
- --------------------------------------------------------------------------
Administrative services fee 583
- --------------------------------------------------------------------------
Distribution services fee 96
- --------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 1,020
- --------------------------------------------------------------------------
Trustees' fees 174
- --------------------------------------------------------------------------
Total liabilities 86,634
- --------------------------------------------------------------------------
NET ASSETS $3,442,212
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
Paid-in capital $3,923,939
- --------------------------------------------------------------------------
Accumulated net realized loss on investments (606,842)
- --------------------------------------------------------------------------
Net unrealized appreciation on investments 105,347
- --------------------------------------------------------------------------
Undistributed net investment income 19,768
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $3,442,212
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
THE PRICING OF SHARES
CLASS A SHARES
Net asset value and redemption price per share
($3,285,516 / 371,026 shares outstanding) $8.86
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $9.28
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($128,735 / 14,553 shares outstanding) $8.85
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($23,931 / 2,699 shares outstanding) $8.87
- --------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($4,030 / 455 shares outstanding) $8.85
- --------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended October 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------
Interest income $254,270
- ------------------------------------------------------------------------
Expenses:
Management fee 14,451
- ------------------------------------------------------------------------
Administrative services fee 6,670
- ------------------------------------------------------------------------
Distribution services fee 782
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 5,985
- ------------------------------------------------------------------------
Reports to shareholders 637
- ------------------------------------------------------------------------
Professional fees 86
- ------------------------------------------------------------------------
Trustees' fees and other 141
- ------------------------------------------------------------------------
Total expenses 28,752
- ------------------------------------------------------------------------
NET INVESTMENT INCOME 225,518
- ------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------
Net realized gain on sales of investments (including
options purchased) 70,514
- ------------------------------------------------------------------------
Net realized gain from futures transactions 2,412
- ------------------------------------------------------------------------
Net realized gain 72,926
- ------------------------------------------------------------------------
Change in net unrealized appreciation on investments (44,320)
- ------------------------------------------------------------------------
Net gain on investments 28,606
- ------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $254,124
- ------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1998 1997
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------------
Net investment income $ 225,518 281,716
- -----------------------------------------------------------------------------------------------
Net realized gain 72,926 955
- -----------------------------------------------------------------------------------------------
Change in net unrealized appreciation (44,320) 23,068
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 254,124 305,739
- -----------------------------------------------------------------------------------------------
Net equalization charges -- (20,125)
- -----------------------------------------------------------------------------------------------
Distribution from net investment income (235,465) (279,008)
- -----------------------------------------------------------------------------------------------
Net decrease from capital share transactions (218,474) (527,736)
- -----------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (199,815) (521,130)
- -----------------------------------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------------------------------
Beginning of year 3,642,027 4,163,157
- -----------------------------------------------------------------------------------------------
END OF YEAR (including undistributed net investment
income of $19,768 and $123,562, respectively) $3,442,212 3,642,027
- -----------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
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 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. An exchange-traded options
contract on securities, futures and other financial
instruments is valued at its most recent sale price
on such exchange. If no sales occurred, the options
contract is valued at the calculated mean between
the most recent bid and asked quotations. If there
are no such bid and asked quotations, 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 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 (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
payment to occur at a later date. At the time the
fund enters into a commitment to purchase a
security, the transaction is recorded and the value
of the security is reflected in the net asset
value. The value of the security may vary with
market fluctuations. No interest accrues to the
fund until payment takes place. At the time the
fund enters into this type of transaction it is
required to segregate cash or other liquid assets
equal to the value of the securities purchased. At
October 31, 1998, the fund
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
had $78,896,000 in purchase commitments outstanding
(2% 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 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.
EQUALIZATION ACCOUNTING. Prior to November 1, 1997,
the fund used equalization accounting to keep a
continuing shareholder's per share interest in
undistributed net investment income unaffected by
shareholder activity. This was accomplished by
allocating a portion of the proceeds from sales and
the cost of redemptions of fund shares to
undistributed net investment income. As of November
1, 1997, the fund discontinued using equalization.
This change has no effect on the fund's net assets,
net asset value per share or distributions to
shareholders. Discontinuing the use of equalization
accounting will result in simpler financial
statements. The cumulative effect of the
discontinuance of equalization accounting was to
decrease undistributed net investment income and
increase paid-in capital previously reported
through October 31, 1997 by $98,702,000.
- --------------------------------------------------------------------------------
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 $14,451,000 for the
year ended October 31, 1998.
ZURICH/B.A.T MERGER. On September 7, 1998, Zurich
Insurance Company (Zurich), majority owner of
Scudder Kemper, entered into an agreement with
B.A.T Industries p.l.c. (B.A.T) pursuant to which
the financial services businesses of B.A.T were
combined with Zurich's businesses to form a new
global insurance and financial services company
known as Zurich Financial Services. Upon
consummation of the transaction, the fund's
investment management
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
agreement with Scudder Kemper was deemed to have
been assigned and, therefore, terminated. The Board
of Trustees of the fund has approved a new
investment management agreement with Scudder
Kemper, which is substantially identical to the
former investment management agreement, except for
the dates of execution and termination. The Board
of Trustees of the fund will seek shareholder
approval of the new investment management agreement
through a proxy solicitation that is currently
scheduled to conclude in mid-December.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS -----------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------- -------------
<S> <C> <C> <C>
Year ended October 31, 1998 $227,000 1,655,000 8,000
</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 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, 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>
Year ended October 31, 1998 $970,000 1,437,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of fund accounts the firms
service. Administrative services fees (ASF) paid
are as follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY ----------------------------
THE FUND TO KDI TO ALL FIRMS TO AFFILIATES
----------------- ------------ -------------
<S> <C> <C> <C>
Year ended October 31, 1998 $6,670,000 6,718,000 27,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the fund. Under the agreement,
KSvC received shareholder services fees of
$3,275,000 for the year ended October 31, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. For the year ended October 31,
1998, the fund made no direct payments to its
officers and incurred trustees' fees of $55,000 to
independent trustees.
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended October 31, 1998, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $5,431,404
Proceeds from sales 5,772,054
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1998 1997
------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 31,438 $ 270,880 15,238 $ 122,908
---------------------------------------------------------------------------------
Class B 9,910 87,882 3,091 26,702
---------------------------------------------------------------------------------
Class C 2,477 21,982 512 4,408
---------------------------------------------------------------------------------
Class I 713 6,328 357 3,119
---------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 14,264 127,311 18,612 161,490
---------------------------------------------------------------------------------
Class B 428 3,389 354 3,074
---------------------------------------------------------------------------------
Class C 72 595 48 421
---------------------------------------------------------------------------------
Class I 32 258 36 310
---------------------------------------------------------------------------------
SHARES REDEEMED
Class A (78,196) (685,295) (97,936) (821,052)
---------------------------------------------------------------------------------
Class B (3,909) (34,468) (2,690) (23,510)
---------------------------------------------------------------------------------
Class C (1,011) (8,949) (303) (2,616)
---------------------------------------------------------------------------------
Class I (948) (8,387) (342) (2,990)
---------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 544 4,806 154 1,337
---------------------------------------------------------------------------------
Class B (544) (4,806) (154) (1,337)
---------------------------------------------------------------------------------
NET DECREASE
FROM CAPITAL
SHARE TRANSACTIONS $(218,474) $(527,736)
---------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The fund has entered into exchange traded financial
futures contracts in order to 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 October 31,
1998, the market value of assets pledged by the
fund to cover margin requirements for open futures
positions was $5,241,000. The fund also had liquid
securities in its portfolio in excess of the face
amount of the following open futures positions at
October 31, 1998 (in thousands):
<TABLE>
<CAPTION>
FACE EXPIRATION
TYPE AMOUNT POSITION MONTH GAIN (LOSS)
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bond $100,462 Long December '98 $(817)
------------------------------------------------------------------------
U.S. Treasury Note 90,874 Short December '98 308
------------------------------------------------------------------------
TOTAL $(509)
------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------
CLASS A
YEAR ENDED OCTOBER 31,
-----------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------
Net asset value, beginning of year $8.81 8.74 8.92 8.35 9.29
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .58 .64 .63 .66 .67
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .07 .06 (.17) .56 (.97)
- ---------------------------------------------------------------------------------------
Total from investment operations .65 .70 .46 1.22 (.30)
- ---------------------------------------------------------------------------------------
Less distribution from net investment income .60 .63 .64 .65 .64
- ---------------------------------------------------------------------------------------
Net asset value, end of year $8.86 8.81 8.74 8.92 8.35
- ---------------------------------------------------------------------------------------
TOTAL RETURN 7.64% 8.41 5.36 15.24 (3.37)
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------
Expenses .80% .78 .77 .72 .75
- ---------------------------------------------------------------------------------------
Net investment income 6.50% 7.34 7.17 7.68 7.58
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------
CLASS B
YEAR ENDED OCTOBER 31, MAY 31 TO
--------------------------- 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 .49 .56 .54 .58 .28
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .08 .06 (.17) .56 (.38)
- ---------------------------------------------------------------------------------------------
Total from investment operations .57 .62 .37 1.14 (.10)
- ---------------------------------------------------------------------------------------------
Less distribution from net investment income .52 .55 .55 .57 .23
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $8.85 8.80 8.73 8.91 8.34
- ---------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 6.67% 7.40 4.36 14.18 (1.15)
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------
Expenses 1.71% 1.73 1.73 1.69 1.71
- ---------------------------------------------------------------------------------------------
Net investment income 5.59% 6.39 6.21 6.71 7.09
- ---------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------
CLASS C
-----------------------------------------
YEAR ENDED OCTOBER 31, MAY 31 TO
--------------------------- 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 .49 .56 .55 .60 .29
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .08 .06 (.17) .56 (.38)
- ---------------------------------------------------------------------------------------------
Total from investment operations .57 .62 .38 1.16 (.09)
- ---------------------------------------------------------------------------------------------
Less distribution from net investment income .52 .55 .56 .58 .23
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $8.87 8.82 8.75 8.93 8.35
- ---------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 6.66% 7.42 4.40 14.33 (1.01)
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------
Expenses 1.67% 1.68 1.70 1.64 1.68
- ---------------------------------------------------------------------------------------------
Net investment income 5.63% 6.44 6.24 6.76 7.12
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------
CLASS I
---------------------------------
YEAR ENDED OCTOBER
31, JULY 3 TO
------------------- OCTOBER 31,
1998 1997 1996 1995
<S> <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 .59 .66 .64 .22
- -------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .07 .06 (.17) .04
- -------------------------------------------------------------------------------------
Total from investment operations .66 .72 .47 .26
- -------------------------------------------------------------------------------------
Less distribution from net investment income .62 .65 .65 .22
- -------------------------------------------------------------------------------------
Net asset value, end of period $8.85 8.81 8.74 8.92
- -------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.75% 8.60 5.56 3.02
- -------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------
Expenses .57% .60 .59 .53
- -------------------------------------------------------------------------------------
Net investment income 6.73% 7.52 7.35 7.07
- -------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $3,442,212 3,642,027 4,163,157 4,738,415 4,941,151
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate 150% 261 391 362 1,000
- ----------------------------------------------------------------------------------------------------
</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.
TAX INFORMATION
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Kemper Fund account, please call 1-800-621-1048.
19
<PAGE> 20
TRUSTEES & OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY RICHARD L. VANDENBERG
Chairman and Trustee President Vice President
DAVID W. BELIN 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 THOMAS W. LITTAUER Assistant Secretary
Vice President
ROBERT B. HOFFMAN ELIZABETH C. WERTH
Trustee ANN M. MCCREARY Assistant Secretary
Vice President
DONALD R. JONES BRENDA LYONS
Trustee ROBERT C. PECK, JR. Assistant Treasurer
Vice President
SHIRLEY D. PETERSON
Trustee KATHRYN L. QUIRK
Vice President
WILLIAM P. SOMMERS
Trustee
EDMOND D. VILLANI
Trustee
</TABLE>
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------
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 Avenue
Kansas City, MO 64105
- ----------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- ----------------------------------------------------------------------------------
INVESTMENT MANAGER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
</TABLE>
[KEMPER FUNDS LOGO]
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 - 2 (12/98) 1061600
