<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED OCTOBER 31, 2000
Offering Investors the opportunity for high current
income, liquidity and security of principal
KEMPER U.S. GOVERNMENT
SECURITIES FUND
"... Long-term Treasury bond prices rose, inverting the yield curve for the
first time since the mid-1990s. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
7
PERFORMANCE UPDATE
10
TERMS TO KNOW
12
PORTFOLIO STATISTICS
13
PORTFOLIO OF INVESTMENTS
16
FINANCIAL STATEMENTS
19
FINANCIAL HIGHLIGHTS
21
NOTES TO FINANCIAL STATEMENTS
26
REPORT OF INDEPENDENT AUDITORS
AT A GLANCE
KEMPER U.S. GOVERNMENT SECURITIES
FUND TOTAL RETURNS
FOR THE YEAR ENDED OCTOBER 31, 2000 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER U.S. GOVERNMENT KEMPER U.S. GOVERNMENT LIPPER GNMA BOND
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS A SECURITIES FUND CLASS B SECURITIES FUND CLASS C FUNDS CATEGORY AVERAGE*
---------------------------------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
6.44 5.54 5.50 6.78
</TABLE>
PERFORMANCE IS HISTORICAL AND INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL
GAINS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH CHANGING MARKET
CONDITIONS, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN
ORIGINAL COST. THE FUND'S SHARES ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT.
*LIPPER, 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; IF
SALES CHARGES HAD BEEN INCLUDED, RESULTS MAY HAVE BEEN LESS FAVORABLE.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
10/31/00 10/31/99
.........................................................
<S> <C> <C> <C> <C>
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS A $8.34 $8.38
.........................................................
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS B $8.33 $8.37
.........................................................
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS C $8.35 $8.40
.........................................................
</TABLE>
KEMPER U.S. GOVERNMENT SECURITIES
FUND RANKINGS AS OF 10/31/00
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER GNMA BOND FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
......................................................................................
<S> <C> <C> <C> <C> <C>
1-YEAR #39 of 54 funds #50 of 54 funds #51 of 54 funds
......................................................................................
3-YEAR #21 of 42 funds #39 of 42 funds #38 of 42 funds
......................................................................................
5-YEAR #21 of 37 funds #35 of 37 funds #34 of 37 funds
......................................................................................
10-YEAR #9 of 21 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, 2000.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
........................................................
<S> <C> <C> <C> <C> <C>
ONE-YEAR INCOME: $ 0.56 $ 0.48 $ 0.49
........................................................
OCTOBER DIVIDEND: $0.0445 $0.0386 $0.0392
........................................................
ANNUALIZED
DISTRIBUTION RATE+: 6.40% 5.56% 5.63%
........................................................
SEC YIELD+: 6.06% 5.42% 5.52%
........................................................
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON OCTOBER 31, 2000. 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, 2000, 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.
YOUR FUND'S STYLE
MORNINGSTAR FIXED INCOME STYLE BOX(TM)
<TABLE>
<S> <C>
[MORNINGSTAR FIXED INCOME Source: Data provided by Morningstar, Inc.,
STYLE BOX] Chicago, IL, (312) 696-6000. The Morningstar
Fixed-Income Style Box(TM) 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 BOND CATEGORY. PLEASE
CONSULT THE PROSPECTUS FOR A DESCRIPTION OF
INVESTMENT POLICIES.
</TABLE>
<PAGE> 3
ECONOMIC OVERVIEW
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 $290 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:
Times have been good. During the first half of 2000, the global economy grew
faster than it has in over a decade. All regions participated. The United
States, of course, was still powering ahead. The growth rate in Europe was
nearly 4 percent. Asia fed off an electronics boom and a revitalized China.
South America got a boost from an improved credit rating. New money pumped up
energy producers from Mexico to the Middle East.
Now for the bad news, which is that the best news is probably behind us.
Global growth peaked in the spring, and in the United States, at least, the
slowdown was abrupt. After 6 percent growth in the year ending June 30, the
economy grew at a rate of just 2.43 percent during the summer. It seems that
expensive energy, currency volatility and more widespread profit problems are
bringing the exuberant global economy, including the United States, to heel.
Let's explore these factors in more detail.
OIL, OIL, TOIL AND TROUBLE
Although oil prices have receded somewhat, everyone's still jittery, and with
good reason: Of the seven recessions since World War II, six were preceded by a
spike in crude oil prices.
Oil prices have already been strong enough for long enough to crimp growth,
and they're biting the rest of the world even harder than the United States. But
there are two factors working to our advantage. First, oil prices are still
historically low. Oil is slightly more than $30 per barrel today, but it peaked
at over $75 per barrel back in 1980 (stated in today's dollars). Second, our
dependence on oil has decreased: The United States uses only roughly half as
much oil to produce a unit of GDP as it did thirty years ago. This gives us hope
that the economy can escape recession this time around.
What would make us worry more? Outright energy shortages or a political
crisis. If either happens, the odds of a recession occurring would rise steeply.
People panic or become excessively cautious when they have to fret. Can I fill
up my oil tank? Will there be a war? Their loss of confidence can be much more
devastating than price increases alone.
CURRENCY CONCERNS
Currency turmoil is a second danger to the economy. Central bankers have
intervened to halt the euro's decline, and they're right that the euro is
fundamentally undervalued. But intervention is a hazardous game. Let's hope they
don't convince the markets that the euro should rise a lot very quickly. A
suddenly weak dollar might make Europeans think about selling all those American
stocks and bonds they've been buying, and would greatly complicate the Fed's
inflation fight.
BUSINESS: BIG PLANS BUT PROFIT DISAPPOINTMENTS
Profit warnings escalated late this summer, and we believe there's fire amid
that smoke.
Sure, businesses have had a voracious appetite for money -- and until very
recently, corporate treasurers were finding it easily: Banks increased business
lending by 10.8 percent in the past year. Bond markets have suddenly become a
lot more picky, especially for low-quality credits, but money is still available
for investment grade borrowers. Capital goods orders reflect executives'
enthusiasm -- while volatile month-to-month, they have been up an average of 15
to 20 percent compared to a year ago for the past six months.
Still, we expect total capital spending to slow, from this year's estimated 14
percent to 12.5 percent in 2001. The reason? A profit squeeze is about to take
some of the edge off executives' animal spirits.
We've always been more cautious than Wall Street about 2001 profits, and our
forecast hasn't changed. Profits are likely to be flat to down next year for
several reasons. First, the growth slowdown will make it harder to keep up the
productivity gains that have kept labor costs under control. We saw the first
evidence of how productivity slows along with economic growth in the third
quarter: Productivity gains dipped to just 3.3 percent from the second quarter's
remarkable 6.1 percent. Second, interest expense will surge (thanks to higher
rates and all that new debt. Third, depreciation costs are escalating. And
finally, the excessively weak euro and higher oil costs will sap earnings.
3
<PAGE> 4
ECONOMIC OVERVIEW
ECONOMIC GUIDEPOSTS
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND
SHAREHOLDER DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR
DEFLATION, CREDIT EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON
MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR
INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE
10-YEAR TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES.
THE OTHER DATA REPORT YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (11/30/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
-------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 5.70 6.40 6.00 4.80
Prime rate (2) 9.50 9.25 8.50 8.00
Inflation rate (3)* 3.50 3.10 2.60 1.40
The U.S. dollar (4) 11.10 4.30 -0.70 1.20
Capital goods orders (5)* 7.00 17.10 12.30 -0.60
Industrial production (5)* 5.20 6.50 4.40 4.00
Employment growth (6)* 1.80 2.50 2.30 2.50
</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 10/31/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
SAVING GRACES: FISCAL POLICY AND CONSUMER SPENDING
While growth has peaked and is now slowing, we can be thankful that growth
probably won't slow too much, thanks in part to a more stimulative fiscal policy
and consumer spending.
Fiscal policy is likely to be more stimulative. Of course, most economists
agree that the last thing this pumped-up economy needs is another shot of
stimulants -- too much stimulus, after all, is widely believed to cause
inflation. But economists weren't running for office; politicians were. And
inflation risk was about the last thing on the mind of either candidate in the
heat of election campaigning. They wanted to win votes, and the time-tested way
to do so was to make promises. Although we didn't have the name of the winner as
of press time, neither candidate seems to be planning a lot of fiscal
restraint -- but the good news is that neither candidate's plan is likely to be
enacted until 2002 at the earliest.
Second, consumers continue to spend, spend, spend. The personal savings rate
keeps falling, from an already low 2.2 percent last year to a nearly invisible
0.1 percent this year. Critics of this admittedly squishy statistic claim it
doesn't adequately capture households' growing wealth. As it turns out, however,
the average American not only doesn't save much, but he's not getting wealthier
in leaps and bounds, either.
Net worth for the median family where the head of the household is over 45
(and where thoughts are presumably beginning to turn to retirement), rose less
than $13,000 between 1995 and 1998. That's less than a 12 percent gain during
the same three years the stock market nearly doubled and the market value of
owner-occupied homes jumped 21 percent. Why didn't the average family get richer
in that time? Because they were borrowing and spending like crazy. House values
were up 21 percent -- but mortgage debt rose even faster, by 25 percent!
Consumers' profligacy worries many financial professionals. Some people aren't
saving enough for retirement because they have inflated expectations of future
investment returns. Other people aren't saving enough for retirement because
they don't realize just how much money they'll need. Either way, people aren't
saving.
Still, no one wants consumers to change their profligate ways too fast. After
all, hearty consumer spending is a prime reason America's growth has stayed on a
fast track so far. Most economists would like to see shoppers be a bit more
moderate -- but only a bit. If Americans suddenly turned thrifty, the economy
would lurch into reverse.
4
<PAGE> 5
ECONOMIC OVERVIEW
Luckily, there's little chance of that happening, unless lenders get cold
feet. So far, they're hot to trot. In the past year, mortgage lending by banks
rocketed nearly 17 percent while loans to consumers jumped 10 percent. Brokers
are selling the loans banks don't want on their balance sheets to mortgage pools
and the asset-backed securities market, where eager non-bank lenders are
snapping them up. In the past year, these markets provided $625 billion of new
credit, a leap of more than 12 percent.
With so much money at their disposal, consumers didn't stay out of the
shopping centers and restaurants for long. Consumer spending growth jumped up to
4.5 percent in the summer, and we expect it to stay well above 3 percent through
2001.
OMINOUS SIGNS?
Decelerations are always tricky, to be sure. But barring some unexpected
shock, overall economic growth should to pop back into the 3.5 percent to 4
percent range in 2001. Why? Borrowing costs a little more than it did last year,
but money is still freely available for good quality borrowers. Capital goods
orders are strong, so there's a lot of life left in business spending. Shoppers
are a little pickier, but they're still more interested in visiting the mall
than in filling their piggy banks. And after the election, no matter who wins,
fiscal policy is likely to be more stimulative than it has been for years. The
price to pay will likely be a rise in core inflation (inflation excluding food
and energy). We expect it to hit 3 percent next year, up from its recent rate of
2.5 percent. We believe we'll make it safely through 2001, but investors should
keep their hands on the wheel and their eyes peeled.
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 THE ECONOMIC ADVISORS OF SCUDDER
KEMPER INVESTMENTS, INC. AS OF DECEMBER 6, 2000, 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.
Sincerely,
Scudder Kemper Investments, Economics Group
5
<PAGE> 6
ECONOMIC OVERVIEW
[INTENTIONALLY LEFT BLANK]
6
<PAGE> 7
PERFORMANCE UPDATE
[VANDENBERG PHOTO]
RICHARD VANDENBERG JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1996 AND IS A
MANAGING DIRECTOR. HE IS LEAD PORTFOLIO MANAGER OF KEMPER U.S. GOVERNMENT
SECURITIES FUND. VANDENBERG 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, HAVING JOINED 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, AND SHOULD NOT BE CONSIDERED AS A RECOMMENDATION OF ANY SPECIFIC
SECURITY.
THIS PAST YEAR WAS MARKED BY EXCEPTIONAL VOLATILITY IN INTEREST RATES.
SHORT-TERM RATES ROSE AS THE FEDERAL RESERVE TIGHTENED CREDIT TO REDUCE FUTURE
INFLATION, WHILE LONG-TERM RATES FELL IN RESPONSE TO THE TREASURY'S DEBT BUYBACK
PROGRAM. BELOW, THE FUND'S PORTFOLIO MANAGERS DISCUSS KEMPER U.S. GOVERNMENT
SECURITIES FUND'S POSITIONING DURING THIS PERIOD AND GIVE THEIR VIEWS ON THE
YEAR AHEAD.
Q HOW DID THE GOVERNMENT BOND MARKET BEHAVE BETWEEN OCTOBER 1999 AND OCTOBER
2000?
A Strong economic growth prompted the Federal Reserve to raise its
short-term interest-rate target by 125 basis points (1.25 percent) to 6.50
percent. However, between October 31, 1999, and October 31, 2000, long-term
Treasury bond prices rose, inverting the yield curve for the first time since
the mid-1990s. By October 31, 2000, three-month Treasury bills yielded 6.38
percent, some 62 basis points more than 10-year Treasury bonds. Mortgage
interest rates for consumers reached their highest levels in five years,
increasing the income potential of mortgage securities. Crude oil prices soared
past $35 a barrel. Overall consumer prices were relatively tame, but as the
fiscal year drew to a close, many economists remained concerned about the
inflationary impact of high heating oil prices and natural gas shortages.
[LINE GRAPH]
<TABLE>
<CAPTION>
10/31/99 10/31/00
-------- --------
<S> <C> <C>
3-month 5.08 6.38
6-month 5.27 6.35
1-year 5.41 6.16
2-year 5.78 5.92
5-year 5.94 5.81
10-year 6.02 5.76
30-year 6.16 5.79
</TABLE>
Source: Bloomberg Business News.
Q HOW DID KEMPER U.S. GOVERNMENT SECURITIES FUND PERFORM IN THIS
ENVIRONMENT?
A Kemper U.S. Government Securities Fund's total return of 6.44 percent (for
Class A shares, unadjusted for sales charge) was less than the average return of
comparable mutual funds investing in government and mortgage securities for the
12-month period ended October 31, 2000. The unmanaged Lehman Brothers GNMA index
rose 7.87 percent for the period, while the average fund rose 6.79 percent. The
unmanaged Salomon Smith Barney 30-Year GNMA index rose 7.80 percent.
This past winter, the mortgage market was negatively affected by comments from
the Treasury about the implicit government guarantees associated with Fannie Mae
(FNMA) and Freddie Mac (FHLMC) securities. Some bond investors also grew
concerned about the regulatory environment
7
<PAGE> 8
PERFORMANCE UPDATE
for Fannie Mae and Freddie Mac, two of the largest private mortgage market
participants. In general, mortgages backed by the Government National Mortgage
Association (GNMA, or Ginnie Mae) outperformed FNMA securities and other forms
of mortgage debt between October and March.
The fund's positioning of a majority of its portfolio in GNMA securities (see
Portfolio Composition) helped its performance during the first half of fiscal
year 2000. During the second half, however, FNMA and FHLMC bonds outperformed
GNMAs as legal uncertainties abated, and the fund underperformed its peers for
the six months ended October 31, 2000. Our goal is to be in the top 25 percent
of government securities funds over the long term. The fund's returns placed it
in the top half of its peer group for the three years ended October 31, 2000. We
realize we have further to go, and we are closely monitoring our positioning and
refining our long-term strategy in an effort to improve our results.
Q IN WHAT TYPES OF SECURITIES DID THE FUND INVEST?
A Within the mortgage market, we attempted to avoid exposing the fund to
adverse risks. Mortgage securities generally did well this past fiscal year
because of their superior income characteristics and because relatively few home
owners refinanced their properties. Overall, mortgage securities were attractive
to risk-sensitive, income-oriented investors this past year. Income potential
rose sharply, and price volatility was less than long-term Treasuries.
To identify securities with the highest potential returns, we undertake an
extensive analysis of the prepayment expectations -- the rate at which home
owners may pay off their mortgages early or refinance mortgages to take
advantage of lower interest rates. We try to manage the fund's exposure to
prepayment risk by analyzing refinancing possibilities. This includes adjusting
the fund's weighting between seasoned, or older, mortgages, which tend to have
more predictable prepayment characteristics, and those that have been issued
more recently. We also invest in Treasury securities, which have lower yields
but tend to provide better performance when interest rates are declining.
Q THE FEDERAL RESERVE HASN'T RAISED INTEREST RATES SINCE MAY. WHAT IMPACT
HAS THIS HAD ON THE MARKETS?
A First, the yield curve has steepened, with short-term interest rates
declining more than long-term rates, which may indicate some investor concern
about long-term trends in inflation or government spending. Second, the spreads
(the difference in interest rates) between 10-year Treasuries and
comparable-maturity GNMA securities have narrowed. Compare this with the first
half of the fiscal year, when yield spreads were somewhat volatile, ranging from
120 to 180 basis points (1.2 to 1.8 percentage points). In the second half, the
trading range was narrower, with GNMAs yielding from 160 to 180 basis points
(1.6 to 1.8 percentage points) more than Treasuries. In July, short- and
intermediate-term securities began outperforming long-term securities, partly
reversing the strong performance we had been getting from longer-term bonds.
We've positioned the fund in intermediate-term securities to maximize income
potential, while at the same time being mindful that spreads between Treasuries
and mortgages could again be more volatile in the months ahead.
Q IS THERE ANY WAY TO ESTIMATE HOW MUCH A GIVEN CHANGE IN INTEREST RATES CAN
AFFECT TOTAL RETURN FROM BONDS?
A
Generally, a 100-basis-point increase in interest rates translates into a
price decline of slightly more than 1 percent for a bond or fixed-income mutual
fund that has a duration of one year. Bond prices and fixed-income mutual fund
net asset values are also affected by market factors such as credit risk and,
for mortgage securities, the risk that borrowers will prepay loans. (Operating
expenses also have an effect on mutual fund net asset values.) We think a period
of stable interest rates would be beneficial for the fund. Typically, mortgages
outperform Treasuries in a stable rate environment because investors are more
willing to assume some risk in exchange for higher yield. We believe the fund's
mortgage position can serve us well in such an environment.
Q WHAT'S YOUR OVERALL OUTLOOK FOR THE YEAR AHEAD?
A While it appears that the Federal Reserve has tamed inflation for the
moment and that U.S. economic growth is slowing, a lot of variables remain that
could cause a resurgence in interest rates, particularly energy, national fiscal
policy and relatively high levels of consumer consumption. Higher oil prices
usually translate into increased inflation risk. However, we are encouraged by
other strong trends in the economy that have been supportive of low inflation,
particularly high productivity levels. In addition, as a result of tax
8
<PAGE> 9
PERFORMANCE UPDATE
increases and nine years of economic growth, the U.S. government posted a record
budget surplus of $237 billion for its fiscal year ended September 30, 2000,
which may enable it to pay off some of the nation's debt. When Washington
borrows less and repays debt, it frees up resources that generally can be put to
more productive use in the private sector.
At the start of the fund's fiscal year, 10-year Treasuries yielded 6.02
percent, 94 basis points higher than three-month Treasury bills (5.08 percent).
By October 31, 2000, the yield curve had completely inverted, so that
three-month Treasury bills yielded more than any other segment of the curve.
While the Treasury's buyback program should support long-term Treasury prices in
the coming months, history has shown that the yield curve does not remain
inverted for an extended period.
If interest rates fall modestly, we believe that Kemper U.S. Government
Securities Fund may be in a strong position to benefit. We are comfortable with
a positioning that can allow us to provide an attractive level of income
consistent with our efforts to preserve principal. For investors seeking to
reduce the volatility of a lower-quality bond portfolio or an equity portfolio,
we think the fund can be an attractive alternative.
Fannie Mae Mortgage Commitment Rates
(60-day, 30-year fixed loans) October 31, 1990, to October 31, 2000
[LINE GRAPH]
<TABLE>
<CAPTION>
FNMA COMMITMENT 30 YR 60 DAY
----------------------------
<S> <C>
10/31/90 10.13
9.83
9.69
9.47
9.42
9.50
9.38
9.37
9.55
9.34
9.06
8.73
8.57
8.62
7.98
8.68
8.60
8.89
8.75
5/31/92 8.49
8.27
7.97
7.81
7.72
8.22
8.29
8.06
7.68
7.38
7.32
7.31
5/31/93 7.36
7.06
7.06
6.75
6.80
6.79
7.13
7.10
6.88
7.41
8.28
8.53
5/31/94 8.63
8.66
8.55
8.57
8.91
9.06
9.34
9.36
9.07
8.65
8.77
8.52
5/31/95 7.87
7.86
8.03
7.93
7.85
7.65
7.46
7.20
7.21
7.65
8.00
8.24
5/31/96 8.35
8.29
8.37
8.34
8.17
7.87
7.63
7.82
7.97
8.00
8.30
8.19
5/31/97 8.04
7.82
7.44
7.70
7.49
7.34
7.32
7.22
7.03
7.16
7.16
7.16
5/31/98 7.01
7.03
7.01
6.81
6.48
6.65
6.71
6.71
6.70
7.08
7.03
6.99
5/31/99 7.39
7.78
7.92
8.08
7.87
7.87
7.99
8.13
8.50
8.38
8.37
8.53
8.68
8.28
8.32
8.16
7.95
10/31/00 7.94
</TABLE>
Source: Bloomberg Business News. This chart shows the average loan rate a home
buyer could have expected to pay for a 30-year-term, fixed-rate loan for a home
purchase within 60 days.
9
<PAGE> 10
TERMS TO KNOW
BASIS POINT The movement of interest rates or yields expressed in hundredths of
a percent. For example, an increase in yield from 5.00 percent to 6.00 percent
is 100 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.
YIELD CURVE A graph showing the term structure of interest rates by plotting the
yields of all bonds of the same quality, with maturities ranging from the
shortest to the longest available. The resulting curve shows the relationship
among short-, intermediate- and long-term interest rates.
YIELD SPREAD The difference in yield between two types of bonds. A
mortgage-backed security's yield is often measured against the yield of a
Treasury bond of similar maturity as a market yardstick. If GNMA yield spreads
are "narrow," for example, it typically means that GNMA yields have been
declining, and prices rising, compared with Treasury bonds of similar maturity.
10
<PAGE> 11
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED OCTOBER 31, 2000 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF FUND
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER U.S. GOVERNMENT SECURITIES
FUND CLASS A 1.71% 4.86% 6.82% 8.43% (since 10/1/79)
..................................................................................................
KEMPER U.S. GOVERNMENT SECURITIES
FUND CLASS B 2.55 4.72 n/a 5.75 (since 5/31/94)
..................................................................................................
KEMPER U.S. GOVERNMENT SECURITIES
FUND CLASS C 5.50 4.91 n/a 5.82 (since 5/31/94)
..................................................................................................
</TABLE>
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS A
Growth of an assumed $10,000 investment in Class A
shares from 1/31/80 to 10/31/00
[LINE GRAPH]
<TABLE>
<CAPTION>
KEMPER U.S. GOVERNMENT SALOMON BROTHERS 30-YR U.S. CONSUMER PRICE
SECURITIES FUND CLASS A1 MORTGAGE INDEX+ INDEX++
------------------------ ---------------------- -------------------
<S> <C> <C> <C>
1/31/80 9553.00 10000.00 10000.00
9817.00 10544.00 11093.00
9871.00 10669.00 12082.00
12687.00 15076.00 12545.00
13817.00 16716.00 13021.00
15509.00 19345.00 13535.00
12/31/85 18868.00 24303.00 14049.00
21932.00 27576.00 14203.00
22520.00 28696.00 14833.00
23949.00 31233.00 15488.00
27301.00 36003.00 16208.00
29943.00 39938.00 17198.00
35109.00 46211.00 17725.00
12/31/92 36727.00 49639.00 18239.00
39043.00 53091.00 18740.00
37846.00 52331.00 19242.00
44800.00 61289.00 19730.00
46068.00 64655.00 20386.00
50230.00 70816.00 20733.00
53763.00 75769.00 21067.00
53925.00 77037.00 21632.00
10/31/00 57657.00 83294.00 22344.00
</TABLE>
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS B
Growth of an assumed $10,000 investment in Class B
shares from 5/31/94 to 10/31/00
[LINE GRAPH]
<TABLE>
<CAPTION>
KEMPER U.S. GOVERNMENT SALOMON BROTHERS 30-YR U.S. CONSUMER PRICE
SECURITIES FUND CLASS B1 MORTGAGE INDEX+ INDEX++
------------------------ ---------------------- -------------------
<S> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00
9936.00 9966.00 10034.00
9934.00 10042.00 10129.00
9904.00 10107.00 10149.00
10395.00 10641.00 10264.00
10989.00 11203.00 10339.00
11165.00 11442.00 10386.00
11629.00 11837.00 10407.00
3/31/96 11373.00 11787.00 10556.00
11345.00 11869.00 10624.00
11570.00 12122.00 10698.00
11831.00 12487.00 10753.00
11820.00 12499.00 10847.00
12208.00 12973.00 10868.00
12532.00 13356.00 10929.00
12795.00 13677.00 10936.00
12965.00 13904.00 10997.00
13172.00 14143.00 11051.00
9/30/98 13550.00 14513.00 11092.00
13566.00 14633.00 11112.00
13576.00 14778.00 11186.00
13449.00 14712.00 11268.00
13517.00 14844.00 11383.00
13488.00 14878.00 11410.00
13691.00 15109.00 11607.00
13912.00 15461.00 11688.00
14254.00 15963.00 11776.00
10/31/00 14320.00 16086.00 11786.00
</TABLE>
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS C
Growth of an assumed $10,000 investment in Class C
shares from 05/31/94 to 10/31/00
[LINE GRAPH]
<TABLE>
<CAPTION>
KEMPER U.S. GOVERNMENT SALOMON BROTHERS 30-YR U.S. CONSUMER PRICE
SECURITIES FUND CLASS C1 MORTGAGE INDEX+ INDEX++
------------------------ ---------------------- -------------------
<S> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00
9948.00 9966.00 10034.00
9948.00 10042.00 10129.00
9931.00 10107.00 10149.00
10423.00 10641.00 10264.00
11018.00 11203.00 10339.00
11195.00 11442.00 10386.00
11662.00 11837.00 10407.00
3/31/96 11407.00 11787.00 10556.00
11367.00 11869.00 10624.00
11592.00 12122.00 10698.00
11869.00 12487.00 10753.00
11844.00 12499.00 10847.00
12234.00 12973.00 10868.00
12573.00 13356.00 10929.00
12837.00 13677.00 10936.00
12993.00 13904.00 10997.00
13201.00 14143.00 11051.00
9/30/98 13593.00 14513.00 11092.00
13610.00 14633.00 11112.00
13636.00 14778.00 11186.00
13511.00 14712.00 11268.00
13583.00 14844.00 11383.00
13541.00 14878.00 11410.00
13763.00 15109.00 11607.00
13989.00 15461.00 11688.00
14335.00 15963.00 11776.00
10/31/00 14385.00 16086.00 11786.00
</TABLE>
PERFORMANCE IS HISTORICAL AND INCLUDES
REINVESTMENT OF DIVIDENDS AND CAPITAL
GAINS. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE WITH CHANGING
MARKET CONDITIONS, SO THAT WHEN
REDEEMED, SHARES MAY BE WORTH MORE OR
LESS THAN ORIGINAL COST.
*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. DURING THE
PERIODS NOTED, SECURITIES PRICES
FLUCTUATED. FOR ADDITIONAL
INFORMATION, SEE THE PROSPECTUS,
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
SHARE AND THE CONTINGENT DEFERRED
SALES CHARGE IN EFFECT AT THE END OF
THE PERIOD FOR CLASS B SHARES. IN
COMPARING KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS A SHARE
PERFORMANCE WITH 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 COMPRISES 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: WIESENBERGER(R).
++THE U.S. 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:
WIESENBERGER(R).
11
<PAGE> 12
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 10/31/00 ON 10/31/99
<S> <C> <C> <C> <C>
MORTGAGE-BACKED
GNMA 91% 77%
................................................................................
FNMA/FHLMC 1 10
................................................................................
U.S TREASURIES 6 12
................................................................................
CASH AND EQUIVALENTS 2 1
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
CREDIT QUALITY
<TABLE>
<CAPTION>
ON 10/31/00 ON 10/31/99
<S> <C> <C> <C> <C>
AAA 100% 100%
--------------------------------------------------------------------------------
</TABLE>
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
ON 10/31/00 ON 10/31/99
<S> <C> <C> <C> <C>
DURATION 3.9 years 4.4 years
................................................................................
AVERAGE MATURITY 8.3 years 9.2 years
--------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
KEMPER U.S. GOVERNMENT SECURITIES FUND
Portfolio of Investments at October 31, 2000
<TABLE>
<CAPTION>
REPURCHASE AGREEMENTS--1.5% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Bear Stearns Government, 6.480%, to be
repurchased at $40,007,200 on
11/01/2000*
(Cost $40,000,000) $ 40,000,000 $ 40,000,000
---------------------------------------------------------------------------------
<CAPTION>
U. S. TREASURY OBLIGATIONS--6.3%
<S> <C> <C> <C> <C> <C>
U.S. Treasury Bond:
8.000%, 11/15/2021** 76,100,000 94,055,034
12.500%, 08/15/2014 50,600,000 72,682,346
---------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $169,132,487) 166,737,380
---------------------------------------------------------------------------------
<CAPTION>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--91.3%***
<S> <C> <C> <C> <C> <C>
Government National Mortgage Association
Pass-thru:
6.00% with various maturities to
11/01/2030(b) 81,197,462 76,389,632
6.50% with various maturities to
11/01/2030(b) 635,280,717 613,911,237
7.00% with various maturities to
11/01/2030(b)(c) 619,109,087 610,948,607
7.50% with various maturities to
10/20/2030(b)(c) 469,937,359 472,496,610
8.00% with various maturities to
11/01/2030(b)(c) 408,319,609 415,817,060
8.50% with various maturities to
11/01/2030(b)(c) 65,562,980 67,313,567
9.00% with various maturities to
11/01/2030(b) 103,248,507 106,998,354
9.50% with various maturities to
05/15/2027(b) 18,248,961 19,038,800
10.00% with various maturities to
08/15/2022(b) 17,447,992 19,209,148
10.50% with various maturities to
12/15/2021(b) 6,991,323 7,804,064
---------------------------------------------------------------------------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(Cost $2,400,622,243) 2,409,927,079
---------------------------------------------------------------------------------
<CAPTION>
FEDERAL HOME LOAN MORTGAGE CORPORATION--0.7%
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corp.:
6.50% with various maturities to
05/01/2029(b)(c) 188,461 181,630
7.00% with various maturities to
11/15/2029(b) 1,050,000 1,032,117
7.50% with various maturities to
03/01/2030(b) 1,508,695 1,508,459
8.50% with various maturities to
07/01/2030(b)(c) 163,382 167,390
9.50% with various maturities to
10/01/2020(b)(c) 13,689,850 14,596,803
---------------------------------------------------------------------------------
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION
(Cost $17,598,582) 17,486,399
---------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
FEDERAL NATIONAL MORTGAGE ASSOCIATION--0.2% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Federal National Mortgage Association:
0.00% with various maturities to
05/01/2017 $ 22,452 $ 15,976
5.50% with various maturities to
12/01/2028(b) 655,512 594,980
6.50% with various maturities to
09/01/2029(b) 268,458 258,139
7.00%, 04/01/2015(b) 135,970 135,206
7.50% with various maturities to
09/01/2030(b) 1,051,723 1,050,573
8.00% with various maturities to
09/01/2024(b) 2,388,240 2,429,231
8.50% with various maturities to
09/01/2030(b) 149,850 153,175
9.00% with various maturities to
05/01/2030(b) 140,070 144,404
---------------------------------------------------------------------------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $4,811,948) 4,781,684
---------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100.0%
(Cost $2,632,165,260)(a) $2,638,932,542
---------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
* Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
** At October 31, 2000, these securities, in part or in whole, have been
segregated to cover initial margin requirements for open futures contracts.
*** The investments in mortgage-backed securities of the Government National
Mortgage Association, Federal National Mortgage Association and Federal Home
Loan Mortgage Corporation are interests in separate pools of mortgages. All
separate investments in each of these issues which have similar coupon rates
have been aggregated for presentation purposes in the Investment Portfolio.
Effective maturities of these investments will be shorter than stated
maturities due to prepayments.
(a) The cost for federal income tax purposes was $2,632,165,260. At October 31,
2000, the net unrealized appreciation for all securities based on tax cost
was $6,767,282. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess of value over tax cost of
$24,796,984 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value of $18,029,702.
(b) At October 31, 2000, these pools, in part or whole, have been segregated to
cover when-issued or forward delivery pools.
(c) When-issued or forward delivery pools included.
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
PORTFOLIO OF INVESTMENTS
At October 31, 2000, open futures contracts are as follows:
<TABLE>
<CAPTION>
AGGREGATE MARKET
FUTURES EXPIRATION CONTRACTS FACE VALUE($) VALUE($)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury 5 Year Note December 19, 2000 581 58,239,658 58,499,438
----------------------------------------------------------------------------------------
10 Year Agency Future December 29, 2000 530 49,835,602 50,424,531
----------------------------------------------------------------------------------------
U.S. Treasury 10 Year Note December 19, 2000 92 9,276,740 9,264,688
----------------------------------------------------------------------------------------
U.S. Long Bond Note December 29, 2000 (1,020) (99,881,782) (101,840,625)
----------------------------------------------------------------------------------------
Total net unrealized appreciation on open futures
contracts 1,122,186
----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
As of October 31, 2000
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value, (cost $2,632,165,260) $2,638,932,542
------------------------------------------------------------------------------
Cash 1,230,147
------------------------------------------------------------------------------
Receivable for investments sold 145,847,785
------------------------------------------------------------------------------
Interest receivable 19,035,573
------------------------------------------------------------------------------
Receivable for Fund shares sold 2,106,073
------------------------------------------------------------------------------
Receivable for daily variation margin on open futures
contracts 165,229
------------------------------------------------------------------------------
TOTAL ASSETS 2,807,317,349
------------------------------------------------------------------------------
LIABILITIES
Payable for when issued and forward delivery pools 218,829,422
------------------------------------------------------------------------------
Dividends payable 5,144,141
------------------------------------------------------------------------------
Payable for Fund shares redeemed 4,463,534
------------------------------------------------------------------------------
Accrued management fee 888,822
------------------------------------------------------------------------------
Other accrued expenses and payables 1,480,619
------------------------------------------------------------------------------
TOTAL LIABILITIES 230,806,538
------------------------------------------------------------------------------
NET ASSETS, AT VALUE $2,576,510,811
------------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Accumulated distributions in excess of net investment income $ (8,159,200)
------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investments 6,767,282
------------------------------------------------------------------------------
Futures (1,122,186)
------------------------------------------------------------------------------
Accumulated net realized gain (loss) (680,277,577)
------------------------------------------------------------------------------
Paid-in-capital 3,259,302,492
------------------------------------------------------------------------------
NET ASSETS, AT VALUE $2,576,510,811
------------------------------------------------------------------------------
NET ASSETS VALUE AND OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($2,413,495,569 / 289,303,828 shares outstanding of
beneficial interest, $.01 par value, unlimited number of
shares authorized) $8.34
------------------------------------------------------------------------------
Maximum offering price per share (100/95.50 of $8.34) $8.73
------------------------------------------------------------------------------
CLASS B SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($122,898,354
/ 14,760,006 shares outstanding of beneficial interest,
$.01 par value, unlimited number of shares authorized) $8.33
------------------------------------------------------------------------------
CLASS C SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($35,958,220 /
4,304,527 shares outstanding of beneficial interest, $.01
par value, unlimited number of shares authorized) $8.35
------------------------------------------------------------------------------
CLASS I SHARES
Net asset value, offering and redemption price per share
($4,158,668 / 498,786 shares outstanding of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $8.34
------------------------------------------------------------------------------
</TABLE>
16 The accompanying notes are an integral part of the financial statements.
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended October 31, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $199,489,671
----------------------------------------------------------------------------
Total income 199,489,671
----------------------------------------------------------------------------
Expenses:
Management fee 11,324,099
----------------------------------------------------------------------------
Services to shareholders 3,607,100
----------------------------------------------------------------------------
Custodian fees 173,675
----------------------------------------------------------------------------
Distribution services fees 1,211,559
----------------------------------------------------------------------------
Administrative service fees 5,946,401
----------------------------------------------------------------------------
Auditing 70,117
----------------------------------------------------------------------------
Legal 27,568
----------------------------------------------------------------------------
Trustees' fees and expenses 54,900
----------------------------------------------------------------------------
Reports to shareholders 397,643
----------------------------------------------------------------------------
Registration fees 89,040
----------------------------------------------------------------------------
Other 78,865
----------------------------------------------------------------------------
Total expenses, before expense reductions 22,980,967
----------------------------------------------------------------------------
Expense reductions (203,675)
----------------------------------------------------------------------------
Total expenses, after expense reductions 22,777,292
----------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 176,712,379
----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments (33,563,947)
----------------------------------------------------------------------------
Futures (14,542,382)
----------------------------------------------------------------------------
Written options 130,286
----------------------------------------------------------------------------
(47,976,043)
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on:
Investments 31,465,345
----------------------------------------------------------------------------
Futures (99,896)
----------------------------------------------------------------------------
31,365,449
----------------------------------------------------------------------------
Net gain (loss) on investment transactions (16,610,594)
----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $160,101,785
----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 17
<PAGE> 18
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------
2000 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ 176,712,379 197,498,282
---------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (47,976,043) (21,350,014)
---------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period 31,365,449 (131,576,353)
---------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 160,101,785 44,571,915
---------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A (170,157,086) (213,273,535)
---------------------------------------------------------------------------------------------------
Class B (7,217,623) (8,274,338)
---------------------------------------------------------------------------------------------------
Class C (2,261,027) (1,909,361)
---------------------------------------------------------------------------------------------------
Class I (239,003) (249,449)
---------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 451,680,047 595,514,810
---------------------------------------------------------------------------------------------------
Reinvestment of distributions 110,356,608 138,495,952
---------------------------------------------------------------------------------------------------
Cost of shares redeemed (948,698,387) (1,014,142,497)
---------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions (386,661,732) (280,131,735)
---------------------------------------------------------------------------------------------------
Increase (decrease) in net assets (406,434,686) (459,266,503)
---------------------------------------------------------------------------------------------------
Net assets at beginning of period 2,982,945,497 3,442,212,000
---------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD (including accumulated
distributions in excess of and undistributed net investment
income of $(8,159,200) and $10,987,000, respectively) $2,576,510,811 2,982,945,497
---------------------------------------------------------------------------------------------------
</TABLE>
18 The accompanying notes are an integral part of the financial statements.
<PAGE> 19
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLES INCLUDE SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED OCTOBER 31,
------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.38 8.86 8.81 8.74 8.92
---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .54(a) .53(a) .58(a) .64 .63
---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.02) (.41) .07 .06 (.17)
---------------------------------------------------------------------------------------
Total from investment operations .52 .12 .65 .70 .46
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.56) (.60) (.60) (.63) (.64)
---------------------------------------------------------------------------------------
Total distributions (.56) (.60) (.60) (.63) (.64)
---------------------------------------------------------------------------------------
Net asset value, end of period $8.34 8.38 8.86 8.81 8.74
---------------------------------------------------------------------------------------
TOTAL RETURN % (B) 6.44 1.44 7.64 8.41 5.36
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 2,414 2,807 3,286 3,550 4,080
---------------------------------------------------------------------------------------
Ratio of expenses before expense reductions
(%) .80 .85 .80 .78 .77
---------------------------------------------------------------------------------------
Ratio of expenses after expense reductions
(%) .79 .84 .80 .78 .77
---------------------------------------------------------------------------------------
Ratio of net investment income (%) 6.58 6.22 6.50 7.34 7.17
---------------------------------------------------------------------------------------
Portfolio turnover rate (%) 193 177 150 261 391
---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
YEAR ENDED OCTOBER 31,
---------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.37 8.85 8.80 8.73 8.91
------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .47(a) .45(a) .49(a) .56 .54
------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.03) (.40) .08 .06 (.17)
------------------------------------------------------------------------------------------
Total from investment operations .44 .05 .57 .62 .37
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.48) (.53) (.52) (.55) (.55)
------------------------------------------------------------------------------------------
Total distributions (.48) (.53) (.52) (.55) (.55)
------------------------------------------------------------------------------------------
Net asset value, end of period $8.33 8.37 8.85 8.80 8.73
------------------------------------------------------------------------------------------
TOTAL RETURN % (B) 5.54 .54 6.67 7.40 4.36
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 123 138 129 76 70
------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions
(%) 1.70 1.76 1.71 1.73 1.73
------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions
(%) 1.69 1.75 1.71 1.73 1.73
------------------------------------------------------------------------------------------
Ratio of net investment income (%) 5.68 5.31 5.59 6.39 6.21
------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 193 177 150 261 391
------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
YEAR ENDED OCTOBER 31,
-----------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.40 8.87 8.82 8.75 8.93
--------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .48(a) .46(a) .49(a) .56 .55
--------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.04) (.40) .08 .06 (.17)
--------------------------------------------------------------------------------------------
Total from investment operations .44 .06 .57 .62 .38
--------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.49) (.53) (.52) (.55) (.56)
--------------------------------------------------------------------------------------------
Total distributions (.49) (.53) (.52) (.55) (.56)
--------------------------------------------------------------------------------------------
Net asset value, end of period $8.35 8.40 8.87 8.82 8.75
--------------------------------------------------------------------------------------------
TOTAL RETURN % (B) 5.50 .72 6.66 7.42 4.40
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 36 35 24 10 8
--------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions
(%) 1.60 1.66 1.67 1.68 1.70
--------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions
(%) 1.59 1.66 1.67 1.68 1.70
--------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 5.79 5.40 5.63 6.44 6.24
--------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 193 177 150 261 391
--------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS I
YEAR ENDED OCTOBER 31,
-------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.38 8.85 8.81 8.74 8.92
----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .56(a) .55(a) .59(a) .66 .64
----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.02) (.40) .07 .06 (.17)
----------------------------------------------------------------------------------------------
Total from investment operations .54 .15 .66 .72 .47
----------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.58) (.62) (.62) (.65) (.65)
----------------------------------------------------------------------------------------------
Total distributions (.58) (.62) (.62) (.65) (.65)
----------------------------------------------------------------------------------------------
Net asset value, end of period $8.34 8.38 8.85 8.81 8.74
----------------------------------------------------------------------------------------------
TOTAL RETURN % (B) 6.78 1.81 7.75 8.60 5.56
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 4 3 4 6 5
----------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions
(%) .55 .60 .57 .60 .59
----------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions
(%) .54 .59 .57 .60 .59
----------------------------------------------------------------------------------------------
Ratio of net investment income (%) 6.84 6.47 6.73 7.52 7.35
----------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 193 177 150 261 391
----------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of any sales charges.
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES Kemper U.S. Government Securities Fund (the "Fund")
is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open end,
diversified management investment company organized
as a Massachusetts business trust.
The Fund offers multiple classes of shares. Class A
shares are offered to investors subject to an
initial sales charge. Class B shares are offered
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 offered 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.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of the Fund have
equal rights with respect to voting subject to
class specific arrangements.
The Fund's financial statements are prepared in
accordance with accounting principles generally
accepted in the United States which require the use
of management estimates. The policies described
below are followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Portfolio debt securities
purchased with an original maturity greater than
sixty days are valued by pricing agents approved by
the officers of the Fund, whose 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. All other
securities are valued at their fair value as
determined in good faith by the Valuation Committee
of the Board of Trustees.
REPURCHASE AGREEMENTS. The Fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
OPTIONS. An option contract is a contract in which
the writer of the option grants the buyer of the
option the right to purchase from (call option), or
sell to (put option), the writer a designated
instrument at a specified price within a specified
period of time. Certain options, including options
on indices, will require cash settlement by the
Fund if the option is exercised. During the period,
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
the Fund purchased put options on financial
instruments as a hedge against potential adverse
price movements in the value of portfolio assets.
In addition, during the period, the Fund wrote put
options on financial instruments as a temporary
substitute for purchasing selected investments.
The liability representing the Fund's obligation
under an exchange traded written option or
investment in a purchased option is valued at the
last sale price or, in the absence of a sale, the
mean between the closing bid and asked prices or at
the most recent asked price (bid for purchased
options) if no bid and asked price are available.
Over-the-counter written or purchased options are
valued using dealer supplied quotations. Gain or
loss is recognized when the option contract expires
or is closed.
If the Fund writes a covered call option, the Fund
foregoes, in exchange for the premium, the
opportunity to profit during the option period from
an increase in the market value of the underlying
security above the exercise price. If the Fund
writes a put option it accepts the risk of a
decline in the market value of the underlying
security below the exercise price. Over-the-counter
options have the risk of the potential inability of
counterparties to meet the terms of their
contracts. The Fund's maximum exposure to purchased
options is limited to the premium initially paid.
In addition, certain risks may arise upon entering
into option contracts including the risk that an
illiquid secondary market will limit the Fund's
ability to close out an option contract prior to
the expiration date and that a change in the value
of the option contract may not correlate exactly
with changes in the value of the securities or
currencies hedged.
FUTURES CONTRACTS. A futures contract is an
agreement between a buyer or seller and an
established futures exchange or its clearinghouse
in which the buyer or seller agrees to take or make
a delivery of a specific amount of a financial
instrument at a specified price on a specific date
(settlement date). During the period, the Fund
purchased interest rate futures to manage the
duration of the portfolio. In addition, the Fund
also sold interest rate futures to hedge against
declines in the value of portfolio securities.
Upon entering into a futures contract, the Fund is
required to deposit with a financial intermediary
an amount ("initial margin") equal to a certain
percentage of the face value indicated in the
futures contract. Subsequent payments ("variation
margin") are made or received by the Fund dependent
upon the daily fluctuations in the value of the
underlying security and are recorded for financial
reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction,
the Fund will realize a gain or loss equal to the
difference between the value of the futures
contract to sell and the futures contract to buy.
Futures contracts are valued at the most recent
settlement price.
Certain risks may arise upon entering into futures
contracts, including the risk that an illiquid
secondary market will limit the Fund's ability to
close out a futures contract prior to the
settlement date and that a change in the value of a
futures contract may not correlate exactly with the
changes in the value of the securities or
currencies hedged. When utilizing futures contracts
to hedge, the Fund gives up the opportunity to
profit from favorable price movements in the hedged
positions during the term of the contract.
MORTGAGE DOLLAR ROLLS. The Fund may enter into
mortgage dollar rolls in which the Fund sells
mortgage-backed securities for delivery in the
current
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
month and simultaneously contracts to repurchase
similar, but not identical, securities on a fixed
date. The Fund receives compensation as
consideration for entering into the commitment to
repurchase. The compensation is paid in the form of
a fee which is recorded as deferred income and
amortized to income over the roll period, or
alternatively, a lower price for the security upon
its repurchase. Mortgage dollar rolls may be
renewed with a new sale and repurchase price and a
cash settlement made at each renewal without
physical delivery of the securities subject to the
contract.
WHEN ISSUED/DELAYED DELIVERY SECURITIES. The Fund
may purchase securities with delivery or payment to
occur at a later date beyond the normal settlement
period. 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 at least equal to the amount of
the commitment.
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, 2000, the Fund had a net tax basis
capital loss carryforward of approximately
$681,400,000 which may be applied against any
realized net taxable capital gains of each
succeeding year until fully utilized or until
October 31, 2002 ($485,042,000) or October 31, 2003
($69,777,000) or October 31, 2004 ($51,945,000) or
October 31, 2007 ($26,058,000) or October 31, 2008
($48,578,000), the respective expiration dates,
whichever occurs first.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made monthly.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the Fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital
accounts without impacting the net asset value of
the Fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Realized gains and losses from
investment transactions are recorded on an
identified cost basis. All discounts are accreted
for both tax and financial reporting purposes.
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2 PURCHASE & SALES
OF SECURITIES For the year ended October 31, 2000, investment
transactions (excluding short-term instruments and
U.S. Government obligations) are as follows:
Purchases $4,607,854,839
Proceeds from sales 4,933,950,708
Purchases and sales of direct U.S. Government
obligations are as follows:
Purchases $ 902,163,650
Proceeds from sales 1,112,769,663
Transactions in written options for the year ended
October 31, 2000 are summarized as follows:
<TABLE>
<CAPTION>
WRITTEN OPTIONS CONTRACTS PREMIUMS
---------------------------------------------------------------------
<S> <C> <C>
Beginning of Period -- $ --
Written 1,245 782,230
Closed (863) (661,725)
Exercised -- --
Expired (382) (120,505)
End of Period -- $ --
</TABLE>
--------------------------------------------------------------------------------
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 $11,324,099 for the
year ended October 31, 2000. This was equivalent to
an annualized effective rate of .42% of the Fund's
daily net assets.
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 year ended
October 31, 2000 are $121,037.
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares pursuant to separate Rule 12b-1 plans for
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 charge
("CDSC") from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the year ended October 31, 2000 are $1,629,233,
of which $103,057 is unpaid at October 31, 2000.
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 paid by the
Fund to KDI for the year ended October 31, 2000 are
$5,946,401, of which $465,014 is unpaid at October
31, 2000. In addition $13,765 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
24
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of
$3,335,291 for the year ended October 31, 2000, of
which $630,730 is unpaid at October 31, 2000.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or trustees of
Scudder Kemper. During the year ended October 31,
2000, the Fund made no payments to its officers and
incurred trustees' fees of $54,900 to independent
trustees.
--------------------------------------------------------------------------------
4 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31,
2000 1999
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 42,338,607 $ 349,950,198 49,259,000 $ 428,316,868
---------------------------------------------------------------------------------------
Class B 5,325,266 44,004,813 13,297,866 114,584,332
---------------------------------------------------------------------------------------
Class C 6,160,243 51,177,911 5,160,500 44,640,950
---------------------------------------------------------------------------------------
Class I 173,615 1,440,859 305,500 2,653,525
---------------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 12,575,560 103,714,462 15,237,954 131,001,500
---------------------------------------------------------------------------------------
Class B 576,553 4,750,494 675,838 5,788,991
---------------------------------------------------------------------------------------
Class C 199,944 1,652,684 166,078 1,457,371
---------------------------------------------------------------------------------------
Class I 28,959 238,968 28,934 248,090
---------------------------------------------------------------------------------------
SHARES REDEEMED
Class A (101,114,996) (834,198,326) (101,251,499) (868,403,806)
---------------------------------------------------------------------------------------
Class B (6,996,734) (57,553,610) (11,438,499) (103,333,614)
---------------------------------------------------------------------------------------
Class C (6,172,533) (51,067,484) (3,908,986) (33,607,721)
---------------------------------------------------------------------------------------
Class I (93,536) (772,701) (399,744) (3,478,221)
---------------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 615,175 5,106,266 617,031 5,319,135
---------------------------------------------------------------------------------------
Class B (616,253) (5,106,266) (617,745) (5,319,135)
---------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
FROM CAPITAL SHARE TRANSACTIONS
$(386,661,732) $(280,131,735)
---------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
5 EXPENSE OFF-SET
ARRANGEMENTS The Fund has entered into arrangements with its
custodian and transfer agent whereby credits
realized as a result of uninvested cash balances
were used to reduce a portion of the Fund's
expenses. During the year ended October 31, 2000,
the Fund's custodian and transfer agent fees were
reduced by $17,367 and $186,309, respectively,
under these arrangements.
--------------------------------------------------------------------------------
6 LINE OF CREDIT The Fund and several Kemper funds (the
"Participants") share in a $750 million revolving
credit facility with Chase Manhattan Bank for
temporary or emergency purposes, including the
meeting of redemption requests that otherwise might
require the untimely disposition of securities. The
Participants are charged an annual commitment fee
which is allocated, pro rata based on net assets,
among each of the Participants. Interest is
calculated based on the market rates at the time of
the borrowing. The Fund may borrow up to a maximum
of 33 percent of its net assets under the
agreement.
25
<PAGE> 26
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 Kemper U.S. Government Securities
Fund as of October 31, 2000, the related statement of operations for the year
then ended, the statements of 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 1996. 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 auditing standards generally
accepted in the United States. 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, 2000, by correspondence with the custodian or other
auditing procedures. 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 provides 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, 2000, the results of its
operations, the changes in its net assets and the financial highlights for each
of the fiscal periods since 1996, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Chicago, Illinois
December 15, 2000
26
<PAGE> 27
NOTES
27
<PAGE> 28
TRUSTEES&OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
JOHN W. BALLANTINE MARK S. CASADY LINDA J. WONDRACK
Title President Vice President
LEWIS A. BURNHAM PHILIP J. COLLORA MAUREEN E. KANE
Trustee Vice President and Assistant Secretary
Secretary
LINDA C. COUGHLIN CAROLINE PEARSON
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
DONALD L. DUNAWAY BRENDA LYONS
Trustee KATHRYN L. QUIRK Assistant Treasurer
Vice President
ROBERT B. HOFFMAN
Trustee RICHARD L. VANDENBERG
Vice President
DONALD R. JONES
Trustee
THOMAS W. LITTAUER
Chairman, Trustee
and Vice President
SHIRLEY D. PETERSON
Trustee
WILLIAM SOMMERS
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 219557
Kansas City, MO 64121
.............................................................................................
CUSTODIAN AND STATE STREET BANK AND TRUST COMPANY
TRANSFER AGENT 225 Franklin Street
Boston, MA 02110
.............................................................................................
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
.............................................................................................
PRINCIPAL UNDERWRITER 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 (12/22/00) 4676
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
