<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED OCTOBER 31, 1999
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
"... Throughout the year, we kept 85 to 90 percent of the
fund in mortgages and about 10 to 12 percent in Treasuries.
This strategy worked well since mortgages substantially outperformed
Treasuries for the year overall. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
TERMS TO KNOW
9
PORTFOLIO STATISTICS
10
PORTFOLIO OF INVESTMENTS
12
FINANCIAL STATEMENTS
14
NOTES TO FINANCIAL STATEMENTS
19
FINANCIAL HIGHLIGHTS
21
REPORT OF INDEPENDENT AUDITORS
AT A GLANCE
KEMPER U.S. GOVERNMENT SECURITIES
FUND TOTAL RETURNS
FOR THE YEAR ENDED OCTOBER 31, 1999
(UNADJUSTED FOR ANY SALES CHARGE).
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER U.S. GOVERNMENT KEMPER U.S. GOVERNMENT
KEMPER U.S. GOVERNMENT SECURITIES FUND SECURITIES FUND SECURITIES FUND LIPPER GNMA BOND FUNDS
CLASS A CLASS B CLASS C CATEGORY AVERAGE*
- -------------------------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
1.44% 0.54% 0.72% 1.48%
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. THE FUND'S SHARES ARE
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
*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; IF SALES CHARGES HAD BEEN INCLUDED, RESULTS MAY HAVE BEEN LESS
FAVORABLE.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
10/31/99 10/31/98
.........................................................
<S> <C> <C>
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS A $8.38 $8.86
.........................................................
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS B $8.37 $8.85
.........................................................
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS C $8.40 $8.87
.........................................................
</TABLE>
KEMPER U.S. GOVERNMENT SECURITIES
FUND RANKINGS AS OF 10/31/99
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER GNMA BOND FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
.......................................................................
<S> <C> <C> <C>
1-YEAR #31 of 54 funds #47 of 54 funds #43 of 54 funds
.......................................................................
5-YEAR #18 of 38 funds #34 of 38 funds #32 of 38 funds
.......................................................................
10-YEAR #14 of 24 funds N/A N/A
.......................................................................
15-YEAR #2 of 8 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, 1999.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
..........................................................
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.6020 $0.5257 $0.5308
..........................................................
OCTOBER DIVIDEND: $0.0465 $0.0411 $0.0418
..........................................................
ANNUALIZED
DISTRIBUTION RATE+: 6.66% 5.89% 5.97%
..........................................................
SEC YIELD+: 5.71% 4.53% 4.35%
..........................................................
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON OCTOBER 31, 1999. DISTRIBUTION RATE
SIMPLY MEASURES THE LEVEL OF DIVIDENDS AND IS NOT A COMPLETE MEASURE OF
PERFORMANCE. THE SEC YIELD IS NET INVESTMENT INCOME PER SHARE EARNED OVER THE
MONTH ENDED OCTOBER 31, 1999, SHOWN AS AN ANNUALIZED PERCENTAGE OF THE MAXIMUM
OFFERING PRICE ON THAT DATE. THE SEC YIELD IS COMPUTED IN ACCORDANCE WITH A
STANDARDIZED METHOD PRESCRIBED BY THE SECURITIES AND EXCHANGE COMMISSION. YIELDS
AND DISTRIBUTION RATES ARE HISTORICAL AND WILL FLUCTUATE.
YOUR FUND'S STYLE
MORNINGSTAR INCOME STYLE BOX
<TABLE>
<S> <C>
[MORNINGSTAR INCOME STYLE Source: Morningstar, Inc., Chicago, IL (312)
BOX] 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.
</TABLE>
<PAGE> 3
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.
ECONOMIC Overview
DEAR KEMPER FUNDS SHAREHOLDER:
Markets have been aquiver about inflation risks. Growth in the United States
continues to exceed most expectations. Labor markets are visibly tight. These
are the precursors to inflation -- everybody knows it.
Everybody except us, that is. We don't buy it in principle, and reality is
proving our theory correct.
First, let's look at growth. The traditional economic view is that growth
causes inflation. Today, we're seeing exactly the opposite: Low inflation is
causing growth. Low inflation keeps interest rates down, and low interest rates
spur investment by making borrowing money cheap. Investment allows companies to
add capacity, keeping competition fierce. As a result, companies aren't raising
prices; they're competing for business by keeping goods attractive and prices
low. That's true for the old economy, in which consumers were buying t-shirts,
and the new economy, in which consumers are buying Internet services. Everywhere
they look, consumers see bargains -- in the malls, in the auto showrooms, at the
mortgage companies.
As for tight labor markets, the traditional economic view is that tight
labor -- i.e., many "help-wanted" signs -- forces companies to pay a premium for
talent. That, in turn, forces companies to raise their prices in order to
protect their profits. And raising prices results in inflation. In contrast, we
believe that tight labor markets won't cause wages to surge. Why?
To start with, temporary agencies have proliferated, accounting for 2.2
percent of jobs, up from 0.5 percent in the early 1980s. They get just the right
amount and type of labor to the right spot at the right time to get the job
done.
Immigration also keeps a lid on wage rates, since it replenishes the work
force much faster than births. Immigration is at its highest level ever; an
amazing 10 percent of the population is foreign-born. Nearly 1 million people
enter the United States legally each year, and another 300,000 just show up.
When they get here, they look for jobs. And often, they're willing to accept
lower-paying jobs than the average citizen.
Finally, and perhaps most importantly, wage rates are kept in check by
executives' intense profit focus. Payroll is a company's biggest expense. When
payroll skyrockets, profits decline -- and that would be bad for a CEO who
promised Wall Street double-digit earnings growth from now to the end of time.
If investors are disappointed in earnings growth, they sell their stock. And
when they sell their stock, the stock options that are an essential part of many
executives' compensation are as valuable as scrap paper.
Supporting our theory are two distinct and important sets of data released in
late October: The Bureau of Economic Analysis released its third-quarter
estimate of gross domestic product (GDP), the value of all goods and services
produced in the United States, and the Bureau of Labor Statistics released its
employment cost index (ECI), which measures what employers pay for their
workers' wages, salaries and benefits.
GDP grew at a 4.8 percent rate in the third quarter, up sharply from the
revised 1.9 percent second-quarter pace and just slightly above the consensus
estimate of 4.7 percent.
At the same time, however, the ECI rose by 0.8 percent in the July-September
period, down from a 1.1 percent increase in the second quarter. The
third-quarter gain also was lower than the 0.9 percent increase forecast by
economists in a Reuters poll. (The report, by the way, is said to be one of the
favorites of Federal Reserve Chairman Alan Greenspan, who uses it as a key
indicator of inflation pressures in the world's largest economy.)
In essence, then, the U.S. economy posted its strongest growth so far this
year in the third quarter, while wage costs remained tame. The combination of
strong consumer demand and the lowest unemployment in a generation just isn't
igniting wage-driven inflation.
Nevertheless, the Federal Reserve Board raised the federal funds rate and the
discount rate by one quarter of a point (0.25%) each at its Nov. 16 meeting. Do
we think the Fed made a bad decision? Actually, no.
First, the Fed has to guard against the possibility that the old relationship
between growth and inflation will soon reassert itself. Even if the Fed shared
our belief that
3
<PAGE> 4
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 (11/30/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
-------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.00 5.50 4.80 5.90
Prime rate (2) 8.50 7.75 8.00 8.50
Inflation rate (3)* 2.60 2.30 1.50 2.00
The U.S. dollar (4) -0.7 -0.9 1.20 9.40
Capital goods orders (5)* 12.60 2.50 -0.6 6.40
Industrial production (5)* 3.30 2.90 3.50 6.90
Employment growth (6)* 2.10 2.10 2.30 2.70
</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 10/30/99.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
Economic OVERVIEW
strong consumer demand and low unemployment isn't igniting wage-driven
inflation, the organization wouldn't be doing its job if it didn't act in the
face of any possibility that inflation might reassert itself.
More important, the Fed has to be concerned about the explosion in credit
we've seen during the last year. Almost everyone but Uncle Sam has been loading
up on debt. Companies have borrowed heavily to fund mergers, share buybacks and
new investments. Homeowners have taken out bigger mortgages on their houses and
new home equity loans. Equity shareholders have ramped up their margin debt.
Financial institutions have issued record amounts of new paper to fund their
aggressive growth. The Fed's decision to raise interest rates, thereby making
borrowing costlier, should take the frenzy out of this borrowing binge. That is
a good thing for future financial stability.
Indeed, the early positive market reaction to the Fed's move suggests that the
markets share our views that the Fed made the right decision.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
Scudder Kemper Investments Economics Group
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 NOVEMBER 18, 1999, AND MAY NOT ACTUALLY COME TO PASS.
THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF THIS MATERIAL IS INTENDED AS
AN INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
PERFORMANCE UPDATE
[VANDENBERG PHOTO]
RICHARD VANDENBERG JOINED SCUDDER KEMPER INVESTMENTS, INC. IN MARCH 1996 AND IS
A MANAGING DIRECTOR. HE IS A PORTFOLIO MANAGER OF KEMPER U.S. GOVERNMENT
SECURITIES FUND. VANDENBERG HAS 25 YEARS OF FIXED-INCOME PORTFOLIO MANAGEMENT
EXPERIENCE.
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.
ANXIETY ABOUT INFLATION IN THE UNITED STATES AND GROWING CONFIDENCE IN BOND
MARKETS ABROAD HAVE COMBINED TO PUSH U.S. GOVERNMENT BOND YIELDS HIGHER AND
PRICES LOWER THROUGHOUT 1999. IN THE FOLLOWING Q&A, THE FUND'S MANAGEMENT
TEAM DISCUSSES THE BEHAVIOR OF THE U.S. GOVERNMENT BOND MARKET AND HOW THE
FUND WAS POSITIONED TO RESPOND.
Q BEFORE WE GET INTO THE SPECIFICS OF HOW THE FUND WAS MANAGED, COULD YOU
PROVIDE SOME BACKGROUND ON THE PERFORMANCE OF THE GOVERNMENT BOND MARKET DURING
THE LAST 12 MONTHS?
A Over the past year, we've witnessed a nearly unabated rise in interest
rates. The returns investors received varied widely by instrument and by
maturity. Shorter-term instruments tended to significantly outperform
longer-term ones. For example, the Lehman Long Government Bond index* total
return for the 12-month period ended October 31 was -6.10 percent, while the
Lehman Intermediate Government Bond index* gained 0.82 percent. The Salomon
Brothers Mortgage index* gained 3.07 percent, as mortgages performed better than
their long-term Treasury counterparts.
The negative and nominal returns of the indices reflect a rising-interest-
rate environment that began last October 1998. At that time, investors had many
reasons to favor the U.S. government market. The U.S. economy was growing well,
but inflation was subdued. Meanwhile, foreign markets, particularly those in
Asia and Latin America, were hindered by uncertainty regarding the strength of
their economies and their currencies. European markets were considered less
dependable because Europe was set to introduce a new currency, the euro, at
year-end. Thus, money poured into U.S. government bonds due to their relative
safety and liquidity. In fact, the 30-year Treasury bond yield hovered below 5
percent last October, near its historic lows.
This climate began to reverse itself when the Federal Reserve (the Fed),
concerned that deteriorating fundamentals abroad could lead to a downturn in the
economy at home, took an unusual step. The Fed cut interest rates three times
last fall, even though the U.S. economy was growing well. Normally, it cuts
rates only if it sees imminent signs of a domestic economic slowdown.
Nevertheless, the strategy worked. Asia began showing signs of recovery.
Potential problems in Latin American economies, especially Brazil, began to look
as if they were under control.
As a result, investors became more comfortable taking a higher degree of risk
and began moving money from the U.S. government market into other assets, such
as emerging markets. Unfortunately, this coincided with a deluge of supply in
the U.S. market. The end result was that prices on 30-year Treasury bonds
dropped as the yield moved from 4.87 percent in October 1998 to 6.05 percent a
year later. The impact of these sharply higher yields is reflected in the index
returns we cited earlier.
5
<PAGE> 6
PERFORMANCE UPDATE
In the second half of the fiscal year, the Federal Reserve was compelled to
start rescinding its earlier rate cuts. The Fed raised rates on June 30 and
again on August 24. On October 5, the Fed changed its bias from neutral to
tighten, which augured for another rate hike. Clearly, the Fed plans to be
particularly vigilant should the economy's growth appear too strong or inflation
become problematic.
* THE LEHMAN LONG GOVERNMENT BOND INDEX IS A TOTAL RETURN INDEX CONSIDERED
GENERALLY REPRESENTATIVE OF THE MARKET FOR GOVERNMENT BONDS WITH MATURITIES OF
10 YEARS OR MORE. THE LEHMAN INTERMEDIATE GOVERNMENT BOND INDEX IS A TOTAL
RETURN INDEX CONSIDERED GENERALLY REPRESENTATIVE OF THE MARKET FOR GOVERNMENT
BONDS WITH MATURITIES OF BETWEEN THREE AND 10 YEARS. THE SALOMON BROTHERS
MORTGAGE INDEX IS A TOTAL RETURN INDEX CONSIDERED GENERALLY REPRESENTATIVE OF
THE MARKET FOR MORTGAGE-BACKED SECURITIES. INVESTORS CANNOT ACTUALLY INVEST IN
THE INDICES.
Q WHAT WAS YOUR GENERAL STRATEGY FOR MANAGING THE KEMPER U.S. GOVERNMENT
SECURITIES FUND THIS YEAR?
A Even though there was a lot of anxiety among investors, we were reasonably
certain of one thing at the beginning of the fiscal year: that rates wouldn't go
much lower. Therefore, we tried to keep the duration (see Terms To Know on page
7) of the fund neutral and worked to add performance by maintaining an
overweight in mortgage-backed securities versus Treasuries. In part, we bought
mortgages because, in an environment of steady or rising interest rates,
mortgages generally outperform Treasuries due to the yield advantage they offer.
Throughout the year, we kept 85 to 90 percent of the fund in mortgages and about
10 to 12 percent in Treasuries. This strategy worked well, since mortgages
substantially outperformed Treasuries for the year overall. We also had some
short-term targeted interest-rate trades that worked well for the fund.
Also, during the second quarter of the year, we gradually shifted assets
within our mortgage allocation from Ginnie Mae mortgages to Fannie Mae and
Freddie Mac (see Terms To Know on page 7). The main reason is that the latter
types of mortgages offer an incremental yield advantage, and in a rising-rate
environment, you want to pursue all the income you reasonably can to offset
falling prices. We started 1999 with about 84 percent of net assets in GNMAs. We
whittled that down to about 71 percent by April 30, 1999. By that point, GNMAs
had started to look like a more attractive value, so we slowly increased our
weighting to about 80 percent by the end of the fiscal year.
The last major move we made was to lengthen the fund's duration starting in
August. We did this because we believed long-term interest rates were
approaching an interim peak, and we wanted to capture the attendant higher
yields in case they began to head lower. In retrospect, we were early in that
move. Although rates began to move lower at the end of October, they rose from
August through September. That was a little disappointing because we had been
outperforming our peer group up to that time. As it turned out, we ended below
the middle of the pack with a 1.44 percent return (A shares unadjusted for sales
charge) for the year, versus 1.48 percent for the Lipper GNMA Bond Funds
Category Average.
Q WHAT'S YOUR OUTLOOK FOR THE GOVERNMENT AND MORTGAGE MARKETS?
A Near-term, we expect bond markets to continue to be buffeted as investors
try to sort out where interest rates are going, given the economy's strength,
uncertainty regarding the Federal Reserve's response, and the unknown of Y2K.
Some economists believe that the Federal Reserve will be reluctant to raise
rates further because it doesn't want to constrain the banking system's
liquidity, given Y2K concerns.
Q WILL Y2K HAVE AN IMPACT ON THE MARKET OR THE FUND?
A With Y2K, the perception may be more important than reality. We don't
think the coming of the millennium will cause enormous problems. But it may
create an artificially heightened level of fear, which may in turn create
opportunities in some areas of the market if yields rise to an unreasonable
level.
Q WHAT ABOUT YOUR LONGER-TERM OUTLOOK?
A Whether the Fed raises rates further next year depends on the rate of
economic growth and productivity growth, as well as labor pool availability. It
is likely that domestic growth will slow to 3.0 to 3.5 percent next year, which
would reduce inflation worries and reduce pressure on labor.
Right now, it's difficult to make a case for rates to move substantially
outside of the current range of 5.60
6
<PAGE> 7
PERFORMANCE UPDATE
to 6.40 percent. Inflation remains subdued near a 3 percent annual rate,
productivity has been able to offset tight labor markets, and commodity prices
have yet to show they can sustain a substantial increase. Meanwhile, the Federal
Reserve has made it clear that it intends to stop inflation before it starts.
The upshot is that investors are able to reap about a 3 percent return on AAA-
rated mortgages after taking inflation into account, which historically is a
fairly attractive level.
As far as how we plan to manage the fund, we won't vary substantially from the
norm because the market isn't currently compensating us to take more risk.
Rather, we'll closely monitor the market and make strategic shifts between
Treasuries and mortgages, and within different areas of the mortgage market,
that we think will add up to good performance over the longer term.
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 5.50 percent
is 50 basis points.
DURATION A measure of the interest-rate sensitivity of a fixed-income investment
or portfolio. The longer the duration, the greater the portfolio's sensitivity
to interest-rate fluctuations.
GINNIE MAE Short for Government National Mortgage Association (GNMA), which was
established to purchase both government-backed and conventional mortgages for
lenders and securitize them. These securities are AAA-rated, but because they
entail slightly more risk than Treasuries, they tend to have higher yields. GNMA
securities differ from other mortgage-backed securities in that they are U.S.
government guaranteed.
FANNIE MAE Short for Federal National Mortgage Association (FNMA), a publicly
owned, government-sponsored organization established to purchase both
government-backed and conventional mortgages for lenders and securitize them.
These securities are AAA-rated, but because they entail slightly more risk than
Treasuries or Ginnie Maes, they tend to have higher yields, and are not U.S.
government guaranteed.
FREDDIE MAC Short for Federal Home Loan Mortgage Association (FHL), a publicly
owned, government-sponsored organization established to purchase both
government-backed and conventional mortgages for lenders and securitize them.
These securities are AAA-rated, but because they entail slightly more risk than
Treasuries or Ginnie Maes, they tend to have higher yields, and are not U.S.
government guaranteed.
TOTAL RETURN A measure of the net investment income as well as any realized and
unrealized appreciation or depreciation of the underlying investments in a
fund's portfolio for the period. Total return assumes the reinvestment of all
dividends and represents the aggregate percentage or dollar value change over
the period.
7
<PAGE> 8
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED OCTOBER 31, 1999 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER U.S. GOVERNMENT SECURITIES FUND
CLASS A -3.15% 6.55% 6.73% 8.53% (since 10/1/79)
- --------------------------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT SECURITIES FUND
CLASS B -2.29 6.38 N/A 5.65 (since 5/31/94)
- --------------------------------------------------------------------------------------------------
KEMPER U.S. GOVERNMENT SECURITIES FUND
CLASS C 0.72 6.62 N/A 5.89 (since 5/31/94)
- --------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS A
Growth of an assumed $10,000 investment in class A
shares from 12/13/97 to 10/31/99
<TABLE>
<CAPTION>
KEMPER U.S. GOVERNMENT SALOMON BROTHERS 30-YEAR
SECURITIES FUND CLASS A1 GNMA INDEX+ CONSUMER PRICE INDEX++
------------------------ ------------------------ ----------------------
<S> <C> <C> <C>
1/31/80 9553.00 10000.00 10000.00
9817.00 10544.00 11081.00
9871.00 10669.00 12071.00
12687.00 15076.00 12539.00
13817.00 16716.00 13015.00
15509.00 19345.00 13529.00
18868.00 24303.00 14040.00
12/31/86 21932.00 27576.00 14198.00
22520.00 28696.00 14824.00
23949.00 31233.00 15475.00
27301.00 36003.00 16194.00
29943.00 39938.00 17183.00
35109.00 46211.00 17710.00
36727.00 49639.00 18218.00
12/31/93 39043.00 53091.00 18724.00
37846.00 52331.00 19225.00
44800.00 61289.00 19700.00
46068.00 64655.00 20368.00
50230.00 70816.00 20715.00
53763.00 75769.00 21049.00
10/31/99 54167.00 77267.00 21666.00
</TABLE>
[LINE GRAPH]
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS B
Growth of an assumed 10,000 investment in class B
shares from 5/31/94 to 10/31/99
<TABLE>
<CAPTION>
KEMPER U.S. GOVERNMENT SALOMON BROTHERS 30-YEAR
SECURITIES FUND CLASS B1 GNMA INDEX+ CONSUMER PRICE INDEX++
------------------------ ------------------------ ----------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9904 10107 10149
12/31/95 11629 11837 10400
11831 12487 10753
12/31/97 12795 13677 10936
13566 14633 11112
10/31/99 13473 14922 11438
</TABLE>
[LINE GRAPH]
KEMPER U.S. GOVERNMENT SECURITIES FUND CLASS C
Growth of an assumed $10,000 investment in class C
shares from 5/31/94 to 10/31/99
<TABLE>
<CAPTION>
KEMPER U.S. GOVERNMENT SALOMON BROTHERS 30-YEAR
SECURITIES FUND CLASS C1 GNMA INDEX+ CONSUMER PRICE INDEX++
------------------------ ------------------------ ----------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9931 10107 10149
12/31/95 11662 11837 10400
11869 12487 10753
12/31/97 12837 13677 10936
13610 14633 11112
10/31/99 13635 14922 11438
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF
FUTURE RESULTS. INVESTMENT RETURNS AND
PRINCIPAL VALUE 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 ADJUSTMENT FOR THE APPLICABLE
CONTINGENT DEFERRED SALES CHARGE
(CDSC) AS FOLLOWS: 1-YEAR, 3%; 5-YEAR,
1%; SINCE INCEPTION, 0 PERCENT AND FOR
CLASS C SHARES NO ADJUSTMENT FOR SALES
CHARGE. THE MAXIMUM CDSC FOR CLASS B
SHARES IS 4%. FOR CLASS C SHARES,
THERE IS A 1% CDSC ON CERTAIN
REDEMPTIONS WITHIN THE FIRST YEAR OF
PURCHASE. SHARE CLASSES INVEST IN THE
SAME UNDERLYING PORTFOLIO. AVERAGE
ANNUAL TOTAL RETURNS REFLECT
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 FOR
SALOMON BROTHERS 30-YEAR GNMA INDEX
IS 11/31/80. AS A RESULT, WE ARE
UNABLE TO ILLUSTRATE THE LIFE OF
FUND PERFORMANCE (SINCE 10/1/79) FOR
KEMPER U.S. GOVERNMENT SECURITIES
CLASS A SHARES. IN COMPARING KEMPER
U.S. GOVERNMENT SECURITIES FUND
CLASS A SHARES 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 IS WIESENBERGER.
++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
WIESENBERGER.
8
<PAGE> 9
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 10/31/99 ON 10/31/98
- -------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE-BACKED
- -------------------------------------------------------------------------------
GNMA 77% 84%
- -------------------------------------------------------------------------------
OTHER 10 3
- -------------------------------------------------------------------------------
SHORT-TERM GOVERNMENTS -- 1
- -------------------------------------------------------------------------------
INTERMEDIATE-TERM GOVERNMENTS -- 5
- -------------------------------------------------------------------------------
LONG-TERM GOVERNMENTS -- 5
- -------------------------------------------------------------------------------
U.S. TREASURIES 12 --
- -------------------------------------------------------------------------------
CASH AND EQUIVALENTS 1 2
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/99 ON 10/31/98
YEARS TO MATURITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 10/31/99 ON 10/31/98
- -------------------------------------------------------------------------------
<S> <C> <C>
LESS THAN 5 YEARS 18% 47%
- -------------------------------------------------------------------------------
5-10 YEARS 64 46
- -------------------------------------------------------------------------------
10-20 YEARS 18 2
- -------------------------------------------------------------------------------
20+ YEARS -- 5
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/99 ON 10/31/98
AVERAGE MATURITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 10/31/99 ON 10/31/98
- -------------------------------------------------------------------------------
<S> <C> <C>
9.2 years 6.1 years
- -------------------------------------------------------------------------------
</TABLE>
*Portfolio composition and holdings are subject to change.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER U.S. GOVERNMENT SECURITIES FUND
Portfolio of Investments at October 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
COUPON
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GOVERNMENT NATIONAL Agency notes (c) 6.00% 2023 - 2029 $ 65,025 $ 60,314
MORTGAGE ASSOCIATION - 76.6% Pass-through (c) 6.50 2023 - 2029 714,226 685,047
(Cost: $2,447,415) certificates (c) 7.00 2011 - 2029 757,566 743,776
(b)(c) 7.50 2007 - 2029 518,930 520,724
(b)(c) 8.00 2016 - 2029 283,014 289,957
(c) 8.50 2016 - 2028 32,427 33,742
(c) 9.00 2005 - 2028 44,055 46,501
(c) 9.50 2009 - 2027 23,467 25,109
(c) 10.00 2009 - 2022 23,082 25,448
(c) 10.50 2013 - 2021 9,492 10,560
----------------------------------------------------------------------------------
2,441,178
- ----------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY Bonds 9.125 2009 19,600 21,784
SECURITIES - 11.8% 14.00 2011 7,800 11,136
(Cost: $386,164) 10.375 2012 59,800 74,535
11.75 2014 40,000 55,619
12.50 2014 50,600 72,722
(d) 9.25 2016 109,420 139,322
----------------------------------------------------------------------------------
375,118
- ----------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Agency notes (c)(e) -- 2017 32 22
MORTGAGE ASSOCIATION - 4.5% Pass-through (c) 5.50 2028 - 2029 61,254 55,234
(Cost: $147,145) certificates (c) 6.00 2028 - 2029 56,470 52,632
(c) 6.50 2028 - 2029 10,176 9,759
(c) 7.50 2027 327 329
(c) 8.00 2005 - 2024 3,173 3,238
(c) 9.00 2024 - 2025 19,847 20,753
----------------------------------------------------------------------------------
141,967
- ----------------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Pass-through (c) 6.50 2029 75,554 72,483
MORTGAGE CORPORATION - 5.5% certificates (c) 7.00 2028 - 2029 41,018 40,322
(Cost: $178,940) (b)(c) 7.50 2012 - 2029 45,001 45,300
(c) 9.50 2020 17,453 18,598
----------------------------------------------------------------------------------
176,703
----------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--98.4%
(Cost: $3,159,664) 3,134,966
----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
MONEY MARKET (a) Repurchase agreement
INSTRUMENTS - 1.6% State Street Bank and Trust Company
(Cost: $52,313) dated 10/29/99, 5.20%, due 11/01/99 52,313 52,313
----------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $3,211,977) $ 3,187,279
----------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
(b) When issued or forward delivery pools included.
(c) At October 31, 1999, these securities, in part or in whole have been
segregated to cover when issued or forward delivery pools.
(d) At October 31, 1999, these securities, in part or in whole, have been
segregated to cover initial margin requirements for open futures contracts.
At October 31, 1999, open futures contracts purchased are as follows (in
thousands):
<TABLE>
<CAPTION>
AGGREGATE FACE
FUTURES EXPIRATION CONTRACTS VALUE($) MARKET VALUE($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury 5 Year Note December '99 796 85,670 85,931
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bond December '99 821 92,499 93,260
- --------------------------------------------------------------------------------------------------------------------------
Total unrealized depreciation on open futures contract (1,022)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(e) Principal only
Based on the cost of investments of $3,211,977 for federal income tax purposes
at October 31, 1999, the gross unrealized appreciation was $30,536, the gross
unrealized depreciation was $55,234, and the net unrealized depreciation on
investments was $24,698.
The accompanying notes are an integral part of the financial statements.
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF ASSETS & LIABILITIES
October 31, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investment securities, at value, (cost $3,211,977) $3,187,279
- --------------------------------------------------------------------------
Cash 1
- --------------------------------------------------------------------------
Receivable for:
Investments sold 224,175
- --------------------------------------------------------------------------
Interest 26,553
- --------------------------------------------------------------------------
Fund shares sold 4,371
- --------------------------------------------------------------------------
TOTAL ASSETS 3,442,379
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------
Payable for:
Investments purchased 1,862
- --------------------------------------------------------------------------
When-issued and forward delivery pools 431,037
- --------------------------------------------------------------------------
Dividends 16,435
- --------------------------------------------------------------------------
Fund shares redeemed 5,130
- --------------------------------------------------------------------------
Daily variation margin on open futures contracts 1,394
- --------------------------------------------------------------------------
Accrued management fee 711
- --------------------------------------------------------------------------
Other payables and accrued expenses 2,865
- --------------------------------------------------------------------------
Total liabilities 459,434
- --------------------------------------------------------------------------
NET ASSETS $2,982,945
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income $ 10,987
- --------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investment securities (24,698)
- --------------------------------------------------------------------------
Futures (1,022)
- --------------------------------------------------------------------------
Accumulated net realized loss (631,800)
- --------------------------------------------------------------------------
Paid-in capital 3,629,478
- --------------------------------------------------------------------------
NET ASSETS $2,982,945
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
NET ASSETS VALUE
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($2,807,227 / 334,889 shares outstanding) $8.38
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net asset value or
4.50% of offering price) $8.77
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($137,879 / 16,471 shares outstanding) $8.37
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($34,572 / 4,117 shares outstanding) $8.40
- --------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price
($3,267 / 390 shares outstanding) $8.38
- --------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended October 31, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------
INVESTMENT INCOME
- -------------------------------------------------------------------------
Interest income $ 226,032
- -------------------------------------------------------------------------
Expenses:
Management fee 13,436
- -------------------------------------------------------------------------
Services to shareholders 5,328
- -------------------------------------------------------------------------
Custodian fees 814
- -------------------------------------------------------------------------
Trustees' fees and expenses 29
- -------------------------------------------------------------------------
Reports to shareholders 870
- -------------------------------------------------------------------------
Auditing 89
- -------------------------------------------------------------------------
Legal 24
- -------------------------------------------------------------------------
Distribution fees 1,261
- -------------------------------------------------------------------------
Administrative service fees 6,700
- -------------------------------------------------------------------------
Other 93
- -------------------------------------------------------------------------
Expenses, before expense reductions 28,644
- -------------------------------------------------------------------------
Expense reductions (110)
- -------------------------------------------------------------------------
Expenses, net 28,534
- -------------------------------------------------------------------------
NET INVESTMENT INCOME 197,498
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
- -------------------------------------------------------------------------
Net realized gain (loss) from:
Investment securities (14,282)
- -------------------------------------------------------------------------
Futures (7,068)
- -------------------------------------------------------------------------
(21,350)
- -------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on:
Investment securities (130,554)
- -------------------------------------------------------------------------
Futures (1,022)
- -------------------------------------------------------------------------
(131,576)
- -------------------------------------------------------------------------
Net gain (loss) on investment transactions (152,926)
- -------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 44,572
- -------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------
1999 1998
<S> <C> <C>
- ------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
- ------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income $197,498 225,518
- ------------------------------------------------------------------------------------------
Net realized gain (loss) (21,350) 72,926
- ------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) (131,576) (44,320)
- ------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 44,572 254,124
- ------------------------------------------------------------------------------------------
Distributions from net investment income (223,707) (235,465)
- ------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions (280,132) (218,474)
- ------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (459,267) (199,815)
- ------------------------------------------------------------------------------------------
Net assets at beginning of year 3,442,212 3,642,027
- ------------------------------------------------------------------------------------------
NET ASSETS AT END OF YEAR (including undistributed net
investment income of $10,987 and $19,768, respectively) $2,982,945 3,442,212
- ------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF
THE FUND 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 generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by the fund in the
preparation of its financial statements.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES 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 Trust, 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
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
require cash settlement by the fund if the option
is exercised. During the period, the fund purchased
put options on securities as a hedge against
potential adverse price movements in the value of
portfolio assets and/or as a temporary substitute
for selling 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 the 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 month and
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
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, 1999 the fund had a net tax basis
capital loss carryforward of approximately
$632,822,000 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), October 31, 2003
(69,777,000), October 31, 2004 (51,945,000), and
October 31, 2007 (26,058,000), 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.
Investments 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.
- --------------------------------------------------------------------------------
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
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
$12.5 billion. The fund incurred a management fee
of $13,436,000 for the year ended October 31, 1999.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the year ended October 31,
1999 are $222,000, of which $3,000 was paid by KDI
to affiliates.
For services under the distribution services
agreement, the fund pays KDI a fee of .75% of
average daily net assets of Class B and Class C
shares pursuant to separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for year ended October 31, 1999 are $1,635,000, of
which $111,000 is unpaid.
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, 1999 are
$6,700,000, of which $840,000 is unpaid.
Additionally, $16,000 was paid by KDI to
affiliates.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the fund. Under the agreement,
KSvC received shareholder services fees of
$3,824,000 for the year ended October 31, 1999.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. For the year ended October 31,
1999, the fund made no direct payments to its
officers and incurred trustees' fees of $29,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended October 31, 1999 investment
transactions (excluding short-term instruments and
U.S. Government obligations) are as follows (in
thousands):
Purchases $4,291,974
Proceeds from sales 4,655,347
Purchases and sales of direct U.S. Government
obligations are as follows (in thousands):
Purchases $1,355,705
Proceeds from sales 1,040,532
Purchases and sales of mortgage dollar roll
transactions are as follows (in thousands):
Purchases $123,602
Proceeds from sales 123,772
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1999 1998
------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 49,259 $ 428,317 31,438 $ 270,880
---------------------------------------------------------------------------------
Class B 13,298 114,584 9,910 87,882
---------------------------------------------------------------------------------
Class C 5,161 44,641 2,477 21,982
---------------------------------------------------------------------------------
Class I 306 2,654 713 6,328
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 15,238 131,002 14,264 127,311
---------------------------------------------------------------------------------
Class B 676 5,789 428 3,389
---------------------------------------------------------------------------------
Class C 166 1,457 72 595
---------------------------------------------------------------------------------
Class I 29 248 32 258
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
SHARES REDEEMED
Class A (101,251) (868,404) (78,196) (685,295)
---------------------------------------------------------------------------------
Class B (11,438) (103,334) (3,909) (34,468)
---------------------------------------------------------------------------------
Class C (3,909) (33,608) (1,011) (8,949)
---------------------------------------------------------------------------------
Class I (400) (3,478) (948) (8,387)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 617 5,319 544 4,806
---------------------------------------------------------------------------------
Class B (618) (5,319) (544) (4,806)
---------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $(280,132) $(218,474)
---------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 EXPENSE OFF-SET
ARRANGEMENTS The fund has entered into arrangements with its
custodian whereby credits realized as a result of
uninvested cash balances were used to reduce a
portion of the fund's expenses. During the period,
the fund's custodian fees were reduced by $110,000
under these arrangements.
- --------------------------------------------------------------------------------
7 LINE OF CREDIT The fund and several Kemper funds (the
"Participant") share in a $750 million revolving
credit facility 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
prorata among each of the Participants. Interest is
calculated based on the market rates at the time of
borrowing. The fund may borrow up to a maximum of
33 percent of its net assets under the agreement.
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------
CLASS A
------------------------------------------
YEAR ENDED OCTOBER 31,
1999(A) 1998(A) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------
Net asset value, beginning of year $8.86 8.81 8.74 8.92 8.35
- -----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .53 .58 .64 .63 .66
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.41) .07 .06 (.17) .56
- -----------------------------------------------------------------------------------------------
Total from investment operations .12 .65 .70 .46 1.22
- -----------------------------------------------------------------------------------------------
Less distribution from net investment income .60 .60 .63 .64 .65
- -----------------------------------------------------------------------------------------------
Net asset value, end of year $8.38 8.86 8.81 8.74 8.92
- -----------------------------------------------------------------------------------------------
TOTAL RETURN 1.44% 7.64 8.41 5.36 15.24
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------
Expenses, before expense reductions .85% .80 .78 .77 .72
- -----------------------------------------------------------------------------------------------
Expenses, net .84% .80 .78 .77 .72
- -----------------------------------------------------------------------------------------------
Net investment income 6.22% 6.50 7.34 7.17 7.68
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION> -------------------------------------------
CLASS B
------------------------------------------
YEAR ENDED OCTOBER 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------
Net asset value, beginning of year $8.85 8.80 8.73 8.91 8.34
- ------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .45 .49 .56 .54 .58
- ------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.40) .08 .06 (.17) .56
- ------------------------------------------------------------------------------------------------
Total from investment operations .05 .57 .62 .37 1.14
- ------------------------------------------------------------------------------------------------
Less distribution from net investment income .53 .52 .55 .55 .57
- ------------------------------------------------------------------------------------------------
Net asset value, end of year $8.37 8.85 8.80 8.73 8.91
- ------------------------------------------------------------------------------------------------
TOTAL RETURN .54% 6.67 7.40 4.36 14.18
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------
Expenses, before expense reductions 1.76% 1.71 1.73 1.73 1.69
- ------------------------------------------------------------------------------------------------
Expenses, net 1.75% 1.71 1.73 1.73 1.69
- ------------------------------------------------------------------------------------------------
Net investment income 5.31% 5.59 6.39 6.21 6.71
- ------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------
CLASS C
----------------------------------------
YEAR ENDED OCTOBER 31,
1999(A) 1998(A) 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------
Net asset value, beginning of year $8.87 8.82 8.75 8.93 8.35
- -----------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .49 .56 .55 .60
- -----------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.40) .08 .06 (.17) .56
- -----------------------------------------------------------------------------------
Total from investment operations .06 .57 .62 .38 1.16
- -----------------------------------------------------------------------------------
Less distribution from net investment
income .53 .52 .55 .56 .58
- -----------------------------------------------------------------------------------
Net asset value, end of year $8.40 8.87 8.82 8.75 8.93
- -----------------------------------------------------------------------------------
TOTAL RETURN .72% 6.66 7.42 4.40 14.33
- -----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------
Expenses, before expense reductions 1.66% 1.67 1.68 1.70 1.64
- -----------------------------------------------------------------------------------
Expenses, net 1.66% 1.67 1.68 1.70 1.64
- -----------------------------------------------------------------------------------
Net investment income 5.40% 5.63 6.44 6.24 6.76
- -----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------
CLASS I
--------------------------------
YEAR ENDED OCTOBER 31,
1999(A) 1998(A) 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------
Net asset value, beginning of year $8.85 8.81 8.74 8.92
- ---------------------------------------------------------------------------
Income from investment operations:
Net investment income .55 .59 .66 .64
- ---------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.40) .07 .06 (.17)
- ---------------------------------------------------------------------------
Total from investment operations .15 .66 .72 .47
- ---------------------------------------------------------------------------
Less distribution from net investment
income .62 .62 .65 .65
- ---------------------------------------------------------------------------
Net asset value, end of year $8.38 8.85 8.81 8.74
- ---------------------------------------------------------------------------
TOTAL RETURN 1.81% 7.75 8.60 5.56
- ---------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------
Expenses, before expense reductions .60% .57 .60 .59
- ---------------------------------------------------------------------------
Expenses, net .59% .57 .60 .59
- ---------------------------------------------------------------------------
Net investment income 6.47% 6.73 7.52 7.35
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $2,982,945 3,442,212 3,642,027 4,163,157 4,738,415
- ---------------------------------------------------------------------------------------------------------
Portfolio turnover rate 177%(b) 150 261 391 362
- ---------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
(a) Per share data was determined based on monthly average shares outstanding
during the period.
(b) The portfolio turnover rate including mortgage dollar roll transactions was
181% for the period ended October 31, 1999.
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.
20
<PAGE> 21
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, 1999, and 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 1995. 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 sup-porting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
October 31, 1999, 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, 1999, 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 1995 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 23, 1999
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
JOHN W. BALLANTINE MARK S. CASADY RICHARD L. VANDENBERG
Trustee President Vice President
LEWIS A. BURNHAM PHILIP J. COLLORA LINDA J. WONDRACK
Trustee Vice President and Vice President
Secretary
DONALD L. DUNAWAY MAUREEN E. KANE
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
ROBERT B. HOFFMAN CAROLINE PEARSON
Trustee ANN M. MCCREARY Assistant Secretary
Vice President
DONALD R. JONES BRENDA LYONS
Trustee ROBERT C. PECK, JR. Assistant Treasurer
Vice President
THOMAS W. LITTAUER
Trustee and Vice President KATHRYN L. QUIRK
Vice President
SHIRLEY D. PETERSON
Trustee
CORNELIA SMALL
Trustee and Vice President
WILLIAM P. SOMMERS
Trustee
- --------------------------------------------------------------------------------
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 STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02110
- --------------------------------------------------------------------------------
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
- --------------------------------------------------------------------------------
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
[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 (12/28/99) 1096600
