<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED APRIL 30, 2000
Offering Investors the opportunity for high current
income, liquidity and security of principal
KEMPER U.S. GOVERNMENT
SECURITIES FUND
"... Preserving capital was challenging as the Treasury yield curve inverted and
the difference in interest rates between Treasuries and mortgage debt widened.
..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
TERMS TO KNOW
8
PORTFOLIO STATISTICS
9
PORTFOLIO OF INVESTMENTS
12
FINANCIAL STATEMENTS
15
FINANCIAL HIGHLIGHTS
17
NOTES TO FINANCIAL STATEMENTS
AT A GLANCE
KEMPER U.S. GOVERNMENT SECURITIES FUND TOTAL RETURNS
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 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>
1.09 0.66 0.59 1.15
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE PERFORMANCE.
INVESTMENT RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
*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 MIGHT HAVE BEEN LESS FAVORABLE.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
4/30/00 10/31/99
..........................................................
<S> <C> <C> <C> <C>
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS A $8.19 $8.38
..........................................................
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS B $8.18 $8.37
..........................................................
KEMPER U.S. GOVERNMENT
SECURITIES FUND CLASS C $8.20 $8.40
..........................................................
</TABLE>
KEMPER U.S. GOVERNMENT SECURITIES
FUND RANKINGS AS OF 4/30/00*
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 #29 of #48 of #45 of
56 funds 56 funds 56 funds
...........................................................
3-YEAR #18 of #43 of #42 of
48 funds 48 funds 48 funds
...........................................................
5-YEAR #18 of #38 of #37 of
42 funds 42 funds 42 funds
...........................................................
10-YEAR #8 of 24 N/A N/A
funds
...........................................................
15-YEAR #2 of 9 N/A N/A
funds
...........................................................
20-YEAR #2 of 3 N/A N/A
funds
...........................................................
</TABLE>
DIVIDEND AND YIELD REVIEW
THE FOLLOWING TABLE SHOWS DIVIDEND AND YIELD INFORMATION FOR THE FUND AS OF
APRIL 30, 2000.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
..........................................................
<S> <C> <C> <C> <C> <C>
SIX-MONTHS INCOME: $ 0.28 $ 0.24 $ 0.25
..........................................................
APRIL DIVIDEND: $0.0465 $0.0404 $0.0412
..........................................................
ANNUALIZED
DISTRIBUTION RATE:+ 6.81% 5.93% 6.03%
..........................................................
SEC YIELD:+ 6.29% 5.71% 5.83%
..........................................................
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON APRIL 30, 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 APRIL 30, 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 INCOME STYLE BOX(TM)
<TABLE>
<S> <C>
[MORNINGSTAR EQUITY STYLE Source: Morningstar, Inc., Chicago, IL.
BOX] (312) 696-6000. The Income Style Box
placement is based on a fund's average
effective maturity or duration and the
average credit rating of the bond portfolio.
THE STYLE BOX REPRESENTS A SNAPSHOT OF A
FUND'S PORTFOLIO ON A SINGLE DAY. PLEASE
NOTE THAT STYLE BOXES DO NOT REPRESENT AN
EXACT ASSESSMENT OF RISK AND DO NOT
REPRESENT FUTURE PERFORMANCE. THE FUND'S
PORTFOLIO CHANGES FROM DAY TO DAY. A
LONGER-TERM VIEW IS REPRESENTED BY THE
FUND'S MORNINGSTAR CATEGORY, WHICH IS BASED
ON ITS ACTUAL INVESTMENT STYLE AS MEASURED
BY ITS UNDERLYING PORTFOLIO HOLDINGS OVER
THE PAST THREE YEARS. MORNINGSTAR HAS PLACED
KEMPER U.S. GOVERNMENT SECURITIES FUND IN
THE INTERMEDIATE GOVERNMENT 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,
As we enter summer, there isn't much to complain about. For all the yammering
about the "new" economy, the old economy is doing pretty well. Consumers may
hanker for a new GPS handset or a Palm Pilot, but they lust after a suburban
mansion with a garage big enough to hold their luxury car and SUV -- and state
and local governments are laying old-fashioned asphalt almost as fast as
businesses are building the information superhighway. Satisfying both old and
new desires got the economy off to a fast start in the new century -- GDP growth
rose at an annual rate of more than 5 percent in the first quarter. Even with a
modest slowdown possible in the second half, growth for the year 2000 is likely
to be close to 5 percent.
So everyone is happy, right? Well, almost everyone. Consumers seldom have felt
so confident; businesspeople seldom have behaved so expansively. But there's
still one grump: Federal Reserve Board Chairman Alan Greenspan, who's become
increasingly worried that rapid growth will bring on inflation, and raised
interest rates by half a percentage point (0.50%) accordingly on May 16. The
Fed's move puts the benchmark federal funds rate at 6.5 percent, its highest
level since February 1991, and the more symbolic discount rate at 6.0 percent.
Despite Greenspan's attempt to slow spending by raising interest rates,
consumers are still splurging, and they show few signs of stopping. We know this
because shoppers are buying the big-ticket items they usually purchase early in
a cycle -- items such as personal computers, mobile phones, jewelry, fancy
kitchen appliances, exercise equipment and big boats. Why are consumers still
buying despite Greenspan's attempts to slow their splurging? There are three
answers: deflation, wealth and easy credit.
Falling prices have made big-ticket items almost irresistible. Since 1997,
prices of kitchen appliances have fallen 4.5 percent, TVs and VCRs 16 percent
and sporting equipment 6.5 percent. Even auto showrooms no longer produce
sticker shock, and drivers have responded with gusto, buying a record 16.9
million cars and light trucks in 1999. 2000 is likely to be the first year in
which automotive sales top 17 million.
Some of that spending has been made possible by stock market gains: Wall
Street has handed out windfalls to almost anyone holding equities in the past
few years. But consumers who don't own stocks are also spending, thanks to a
decade of debt. Young, poor or new to America? In the 1990s, it didn't matter;
lenders still loved you. While high-income families have been borrowing less,
those lower on the income scale have been borrowing more.
But it's not just consumers that Greenspan is concerned about; businesses are
splurging as well. During 1999, businesses increased spending on computers and
peripherals by 35 percent and spending on communications equipment by 25 percent
(both after adjusting for price declines). Far from slowing down this year, we
expect investment in these two categories to accelerate -- to 40 percent growth
for computers and 30 percent growth for communications equipment.
And just like consumers, businesses are borrowing to buy. You may think that
with booming sales, entrepreneurs are cash-rich and can afford it. But while
1999 saw economy-wide earnings jump 10 percent and profits of Standard and
Poor's (S&P) 500 companies leap nearly 14 percent, internal cash covered less
than 84 percent of capital spending. With the exception of 1998, that's the
lowest on record. Last year alone, corporate debt shot up by more than 11
percent to $560 billion. And new economy companies are no exception; they have
more debt than most people realize, issuing more than half of all convertible
bonds.
All this debt could cause problems. Although we've increased our 2001
inflation outlook to nearly 3 percent -- an entire percentage point higher than
our prediction three months ago -- we're not particularly worried about
inflation. It's the heavy borrowing we're concerned about. Debt continues to
exceed income growth, and when Greenspan succeeds in slowing the economy with
higher interest rates (which he will succeed in doing), all of the debt American
consumers and businesses are taking on could be tricky to handle. Private
financial obligations must be paid with personal income and corporate profits.
When the economy slows, personal income stagnates and corporate profits often
fall -- which makes it harder to pay off those debts. Consumers and businesses
may have to sell their assets to pay off the debt, and they may risk going into
default.
That being the case, a gradual economic slowdown may be in everyone's best
interest. But "gradual" is the key. Both the old and new economy have a lot
riding on the Fed's ability to rein in growth softly and smoothly, because
abrupt slowdowns encourage consumers and businesses to sell assets -- and
perhaps risk bankruptcy -- to pay off debt, as described above.
A gradual slowdown seems to be what the Fed is seeking, but for all of
Greenspan's semi-tough talk, some indicators suggest that monetary policy has
actually been lax. Broad money and credit creation have vastly exceeded
economic activity since 1995, and no central bank can allow that to continue
indefinitely without creating
3
<PAGE> 4
ECONOMIC OVERVIEW
ECONOMIC GUIDEPOSTS
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND
SHAREHOLDER DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR
DEFLATION, CREDIT EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON
MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR
INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE
10-YEAR TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES.
THE OTHER DATA REPORT YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (5/31/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.40 6.00 5.50 5.60
Prime rate (2) 9.50 8.50 7.75 8.50
Inflation rate (3)* 3.00 2.60 2.30 1.50
The U.S. dollar (4) 4.30 -0.70 -0.90 6.40
Capital goods orders (5)* 17.00 12.30 2.50 14.50
Industrial production (5)* 6.10 3.70 2.90 5.20
Employment growth (6) 2.60 2.20 2.30 2.60
</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 4/30/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
inflation. If we begin to see higher core inflation, the Fed will have to deal
with all that money it's created in a less gradualist manner -- and that could
get tricky. Financial turmoil accompanied each of the Fed's last two efforts to
slow the economy down. In 1994, there was a bond market meltdown that resulted
in a Mexican debt crisis. After a more timid Fed tightening in 1997, crises in
Asia were followed by problems with Russian debt, Brazilian debt and a large
American hedge fund. We don't think this is a coincidence: The global debt
market is so vast and interconnected that it's highly vulnerable to a rise in
the cost of its basic raw material -- short-term funds.
Let's hope, then, that the Fed can slow the economy without upsetting the
financial applecart, because that could affect everyone. After all, the old
economy and the new economy are wedded in many ways. Much of the money that
flows to IPOs is available because mature industries have borrowed to carry out
mergers and share buybacks. Old economy companies are the biggest customers of
new economy products. And e-commerce sites are all about moving traditional
goods over old-fashioned highways. Despite a lot of talk about old and new,
we're all in this economy together.
Happily, financial markets got some better news along that front in late May
and early June. A range of economic data, from retail sales to mortgage
applications to the all-important employment report, began to point to somewhat
softer economic growth. If the Fed believes that the economy is finally slowing
in response to its tightening, the end of the rate hikes could be in sight.
Markets certainly were willing to believe, and they staged a strong relief rally
in late May and early June. While we don't expect a quick end to market
volatility, a slowdown in growth would be most welcome, and would make the
outlook for both stocks and bonds better for the remainder of the year.
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 JUNE 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.
4
<PAGE> 5
PERFORMANCE UPDATE
[VANDENBERG PHOTO]
RICHARD VANDENBERG IS LEAD PORTFOLIO MANAGER OF KEMPER U.S. GOVERNMENT
SECURITIES FUND. HE JOINED SCUDDER KEMPER INVESTMENTS, INC. IN MARCH 1996 AND IS
A MANAGING DIRECTOR. HE HAS 25 YEARS OF FIXED-INCOME PORTFOLIO MANAGEMENT
EXPERIENCE.
[DUGENSKE PHOTO]
JOHN DUGENSKE IS A PORTFOLIO MANAGER FOR KEMPER U.S. GOVERNMENT SECURITIES FUND.
HE IS A VICE PRESIDENT OF SCUDDER KEMPER INVESTMENTS, JOINING THE FIRM IN 1998.
[DOLAN PHOTO]
SCOTT DOLAN IS A PORTFOLIO MANAGER FOR KEMPER U.S. GOVERNMENT SECURITIES FUND.
HE JOINED SCUDDER KEMPER INVESTMENTS IN 1989 AND IS A VICE PRESIDENT.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
KEMPER GOVERNMENT SECURITIES FUND'S INCOME
POTENTIAL GREW AS THE FEDERAL RESERVE RAISED
INTEREST RATES. MORTGAGES GENERALLY UNDERPERFORMED
COMPARABLE-MATURITY TREASURY NOTES AND BONDS DURING
THE FIRST HALF OF FISCAL YEAR 2000.
Q HOW DID THE U.S. BOND MARKET PERFORM DURING THE FIRST SIX MONTHS OF FISCAL
YEAR 2000?
A Preserving capital was challenging as the Treasury yield curve inverted
and the difference in yield spread between Treasuries and mortgage debt widened.
Strong economic growth prompted the Federal Reserve to raise its short-term
interest-rate target three times by a total of 75 basis points (0.75 percent) to
6.0 percent. Between October 31, 1999, and April 30, 2000, yields for five-year
Treasuries increased 60 basis points (0.60 percent) while yields for long-term
bonds fell 20 basis points (0.20 percent). By April 30, 2000, five-year Treasury
notes yielded 6.54 percent, 58 basis points more than 30-year Treasury bonds.
Mortgage interest rates for consumers reached their highest level in three
years. Still, housing and related consumer spending remained brisk as many
consumers turned to adjustable-rate mortgages (ARMs). Consumer credit rose at an
11.2 percent rate in the first quarter of 2000, the fastest pace since 1995.
Many bond market professionals anticipate that to prevent the economy from
overheating, the Fed will raise its interest-rate target beyond 6.50 percent
before the November 2000 national elections.
Q HOW DID KEMPER U.S. GOVERNMENT SECURITIES FUND DO IN THIS ENVIRONMENT?
A With dividends reinvested, the fund provided a modest 1.09 percent total
return (Class A shares, unadjusted for sales charge) for the six months ended
April 30, 2000. The fund's return was less than the 1.70 percent return of the
unmanaged Salomon Smith Barney 30-Year GNMA index and slightly less than the
average fund in the Lipper GNMA Funds category (which rose 1.15 percent). The
fund's duration (see Terms to Know on page 7) was longer than its benchmark at
the start of calendar year 2000, and this hurt our relative performance. We
gradually reduced duration by about half a year so that by April 30, the fund's
duration of 4.4 years nearly matched the index.
U.S. TREASURY YIELDS
Yields on intermediate Treasuries increased substantially between October 31,
1999, and April 30, 2000.
[LINE GRAPH]
<TABLE>
<CAPTION>
10/31/99 4/30/00
-------- -------
<S> <C> <C>
3-month 5.08 5.81
6-month 5.27 6.10
1-year 5.41 6.15
2-year 5.78 6.67
5-year 5.94 6.54
10-year 6.02 6.22
30-year 6.16 5.96
</TABLE>
SOURCE: BLOOMBERG BUSINESS NEWS.
5
<PAGE> 6
PERFORMANCE UPDATE
Q WHY DID SHORT-TERM BOND YIELDS RISE WHILE LONG-TERM YIELDS FELL?
A Since January, normal relationships between bonds of different maturities
have been obscured. Usually, 30-year bonds provide more income potential than
securities maturing in 10 years or less, since they involve more interest-rate
risk. However, this past winter 30-year bonds rallied after the Treasury
announced plans to buy back some long-term bonds from investors. Prior to the
announcement, some institutional investors made large investments based on the
belief that long-term Treasury prices would fall sharply this year. When these
investors realized that the government's action would reduce the supply of
30-year bonds, these securities suddenly became a much more prized commodity.
Q DID MORTGAGES RALLY, TOO?
A Not much. High-quality mortgage bond prices did not rise to the same
degree as long-term Treasuries after the Treasury's announcement. In fact, as
the Fed raised short-term interest rates, the income potential of mortgage
securities rose to its highest level in more than three years.
Also, 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 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 Maes) outperformed FNMA securities and other forms of mortgage debt
between October and April. 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.
Q IS THERE ANY WAY TO ESTIMATE HOW MUCH A GIVEN CHANGE IN INTEREST RATES CAN
AFFECT THE RETURN FROM INVESTMENT-GRADE BONDS?
A Generally, a 100-basis-point increase in interest rates translates into a
price decline of slightly more than one percent for a bond or fixed-income
mutual fund that has an average maturity of one year. Bond prices and
fixed-income mutual fund net asset values are also affected by market factors
such as credit risk with corporate bonds and extension risk with mortgages. The
fund's results were fully in line with market conditions.
Q WHAT'S YOUR OUTLOOK FOR KEMPER U.S. GOVERNMENT SECURITIES FUND FOR THE
MONTHS AHEAD?
A A dual dynamic of the Fed's attempt to keep inflation in check and an
overall reduction in bond supply may dictate what happens this year. We could
easily see more rate hikes from the Fed, especially given that the government's
March consumer price data showed that inflation was running at its worst pace in
five years.
Over the past several years, even small whiffs of inflation from one or two
government statistics that deviate from analysts' expectations have caused
equity and bond prices to rise or fall substantially in a single day. We believe
these overreactions should eventually subside. For that to happen, however, we
believe that U.S. economic growth will have to slow from its current rapid pace
(7.3 percent as measured by Gross Domestic Product).
Given the current environment, we intend to remain somewhat defensive. We are
comfortable that this positioning can allow us to take advantage of increases in
income potential consistent with our efforts to preserve principal. For
investors seeking to reduce the volatility of an equity portfolio, we think the
fund could be an attractive alternative.
FANNIE MAE MORTGAGE COMMITMENT RATES
(60-day, 30-year fixed loans April 30, 1995 to April 28, 2000)
[LINE GRAPH]
<TABLE>
<CAPTION>
FNMA COMMITMENT 30 YR 60 DAY
----------------------------
<S> <C>
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
4/30/00 8.53
</TABLE>
SOURCE: BLOOMBERG BUSINESS NEWS. THIS CHART SHOWS THE AVERAGE LOAN RATE THAT A
HOME BUYER COULD HAVE EXPECTED TO PAY FOR A 30-YEAR TERM, FIXED-RATE LOAN FOR A
HOME PURCHASE WITHIN 60 DAYS.
6
<PAGE> 7
TERMS TO KNOW
ADJUSTABLE-RATE MORTGAGE (ARM) A mortgage whose interest rate adjusts
periodically based on changes to a corresponding index rate. To help protect the
borrower against dramatic rate increases in a short period of time, ARMs are
often originated with interest-rate caps. An interest-rate cap assures the
borrower that the rate will not adjust beyond a certain point within a specific
period.
BASIS POINT The movement of interest rates or yields expressed in hundredths of
a percent. For example, an increase in yield from 5 percent to 5.50 percent is
50 basis points.
DURATION The interest-rate sensitivity of a fixed-income investment or
portfolio, measured in years. The longer the duration, the greater the
portfolio's sensitivity to interest-rate fluctuations.
FEDERAL FUNDS RATE The interest rate that banks charge each other on overnight
loans. The Federal Reserve Board's Open Market Committee sets a target rate to
either make credit more easily available or tighten monetary policy in an
attempt to avoid economic imbalances such as high inflation.
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.
INVERTED YIELD CURVE A market phenomenon in which intermediate-term bonds
(securities with one- to 10-year maturities) have higher income potential and
current yields than long-term bonds (securities with 10- to 30-year maturities).
Historically it has occurred during a period of rising short-term interest rates
and been viewed as an indicator of a future economic slowdown.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 4/30/00 ON 10/31/99
<S> <C> <C> <C> <C>
MORTGAGE-BACKED GNMA SECURITIES 72% 77%
................................................................................
FNMA/FHLMC 15 10
................................................................................
U.S. TREASURIES 9 12
................................................................................
CASH AND EQUIVALENTS 4 1
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
YEARS TO MATURITY
<TABLE>
<CAPTION>
ON 4/30/00 ON 10/31/99
<S> <C> <C> <C> <C>
LESS THAN 5 18% 18%
................................................................................
5-10 YEARS 69 64
................................................................................
11-20 YEARS 13 18
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
AVERAGE MATURITY
<TABLE>
<CAPTION>
ON 4/30/00 ON 10/31/99
<S> <C> <C> <C> <C>
AVERAGE MATURITY 8.5 years 9.2 years
--------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER U.S. GOVERNMENT SECURITIES FUND
Portfolio of Investments at April 30, 2000 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
REPURCHASE AGREEMENTS--4.3%
Merrill Lynch Inc., 5.93%, to be
repurchased at $120,059,300 on
05/01/2000* $120,000,000 $ 120,000,000
State Street Bank and Trust Company,
5.68%, to be repurchased at $4,791,267
on 05/01/2000* 4,789,000 4,789,000
---------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost: $124,789,000) 124,789,000
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY
OBLIGATIONS--9.0%
U.S. Treasury Bond, 14.00%, 11/15/2011 7,800,000 10,772,502
U.S. Treasury Bond, 10.375%, 11/15/2012 59,800,000 72,806,500
U.S. Treasury Bond, 12.00%, 08/15/2013 23,900,000 31,940,199
U.S. Treasury Bond, 12.50%, 08/15/2014 50,600,000 70,871,372
U.S. Treasury Bond, 8.125%, 08/15/2021** 62,500,000 75,908,125
---------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost: $269,447,197) 262,298,698
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION--71.7%***
Government National Mortgage Association
Pass-thru 6.00% with various maturities
to 12/20/2029(b) 104,630,195 94,846,388
Government National Mortgage Association
Pass-thru 6.50% with various maturities
to 01/15/2030(b) 644,821,966 605,533,217
Government National Mortgage Association
Pass-thru 7.00% with various maturities
to 05/01/2030(b)(c) 688,200,400 661,934,040
Government National Mortgage Association
Pass-thru 7.50% with various maturities
to 05/01/2030(b)(c) 268,671,448 264,847,892
Government National Mortgage Association
Pass-thru 8.00% with various maturities
to 05/01/2030(b)(c) 250,670,764 251,404,256
Government National Mortgage Association
Pass-thru 8.50% with various maturities
to 05/01/2030(b)(c) 108,908,379 110,898,823
Government National Mortgage Association
Pass-thru 9.00% with various maturities
to 01/15/2030(b) 37,757,531 39,029,611
Government National Mortgage Association
Pass-thru 9.50% with various maturities
to 05/15/2027(b) 20,349,800 21,290,978
Government National Mortgage Association
Pass-thru 10.00% with various maturities
to 08/15/2022(b) 19,678,870 21,671,356
Government National Mortgage Association
Pass-thru 10.50% with various maturities
to 12/15/2021(b) 8,039,705 8,979,345
---------------------------------------------------------------------------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(Cost: $2,124,092,427) 2,080,435,906
---------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
FEDERAL HOME LOAN
MORTGAGE CORPORATION--6.5%
Federal Home Loan Mortgage Corp., 5.75%,
03/15/2009(b) $ 22,300,000 $ 20,052,606
Federal Home Loan Mortgage Corp., 6.50%,
05/01/2029(b)(c) 192,206 179,712
Federal Home Loan Mortgage Corp., 7.00%,
with various maturities to 04/01/2030(b) 11,265,735 10,784,578
Federal Home Loan Mortgage Corp., 7.50%,
with various maturities to 04/01/2030(b) 55,957,148 54,803,032
Federal Home Loan Mortgage Corp., 8.00%,
06/01/2030(b)(c) 86,000,000 85,986,567
Federal Home Loan Mortgage Corp., 9.50%,
10/01/2020(b)(c) 15,325,997 15,982,142
---------------------------------------------------------------------------------
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION
(Cost: $188,165,453) 187,788,637
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL
MORTGAGE ASSOCIATION--8.5%
Federal National Mortgage Association
PO(b)(d), 05/01/2017 25,588 17,999
Federal National Mortgage Association
5.50%, with various maturities to
05/01/2029(b) 800,805 700,579
Federal National Mortgage Association
6.50%, with various maturities to
10/01/2029(b) 68,537,905 63,940,823
Federal National Mortgage Association
7.00%, with various maturities to
04/01/2015(b) 26,549,944 25,919,383
Federal National Mortgage Association
7.25%, 01/15/2010(b) 30,600,000 30,509,118
Federal National Mortgage Association
7.50%, with various maturities to
04/01/2030(b) 107,304,691 105,006,001
Federal National Mortgage Association
8.00%, with various maturities to
09/01/2024(b) 2,740,931 2,750,408
Federal National Mortgage Association
9.00%, with various maturities to
05/01/2025(b) 17,953,807 18,408,262
---------------------------------------------------------------------------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost: $251,330,841) 247,252,573
---------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $2,957,824,918)(a) $2,902,564,814
---------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
* Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
** At April 30, 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 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 Portfolio of
Investments. Effective maturities of these investments will be shorter than
stated maturities due to prepayments.
(a) The cost for federal income tax purposes was $2,957,824,918. At April 30,
2000, the net unrealized depreciation for all securities based on tax cost
was $55,260,104. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess of market value over tax
cost of $16,631,255 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$71,891,359.
10 The accompanying notes are an integral part of the financial statements.
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(b) At April 30, 2000, these pools, in part of whole, have been segregated to
cover when-issued or forward delivery pools.
(c) When-issued or forward delivery pools included.
(d) Principal only
At April 30, 2000, open futures contracts sold short are as follows:
<TABLE>
<CAPTION>
AGGREGATE FACE
FUTURES EXPIRATION CONTRACTS VALUE MARKET VALUE
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury 5 Year Note June 21, 2000 610 $60,314,856 $59,522,656
---------------------------------------------------------------------------------------------------------------------
U.S. Treasury 10 Year Note June 1, 2000 610 59,802,894 59,141,406
---------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bond June 21, 2000 929 90,948,989 89,706,563
---------------------------------------------------------------------------------------------------------------------
Total unrealized appreciation on open futures
contracts $ 2,696,114
---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
as of April 30, 2000 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value, (cost $2,957,824,918) $2,902,564,814
------------------------------------------------------------------------------
Cash 932,343
------------------------------------------------------------------------------
Receivable for investments sold 288,011,786
------------------------------------------------------------------------------
Interest receivable 19,649,929
------------------------------------------------------------------------------
Receivable for Fund shares sold 5,506,866
------------------------------------------------------------------------------
Other assets 192,846
------------------------------------------------------------------------------
TOTAL ASSETS 3,216,858,584
------------------------------------------------------------------------------
LIABILITIES
Payable for when issued and forward delivery pools 555,266,453
------------------------------------------------------------------------------
Payable for daily variation margin on open futures contracts 354,247
------------------------------------------------------------------------------
Payable for Fund shares redeemed 3,612,835
------------------------------------------------------------------------------
Accrued management fee 588,144
------------------------------------------------------------------------------
Other accrued expenses 2,903,723
------------------------------------------------------------------------------
Total liabilities 562,725,402
------------------------------------------------------------------------------
NET ASSETS, AT VALUE $2,654,133,182
------------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income $ 8,065,126
------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investment securities (55,260,104)
------------------------------------------------------------------------------
Futures 2,696,114
------------------------------------------------------------------------------
Accumulated net realized gain (loss) (669,800,344)
------------------------------------------------------------------------------
Paid-in capital 3,368,432,390
------------------------------------------------------------------------------
NET ASSETS, AT VALUE $2,654,133,182
------------------------------------------------------------------------------
NET ASSETS VALUE AND OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($2,492,035,512 / 304,290,953 shares outstanding of
beneficial interest, $.01 par value, unlimited number of
shares authorized) $8.19
------------------------------------------------------------------------------
Maximum offering price per share (100/95.50 of $8.19) $8.58
------------------------------------------------------------------------------
CLASS B SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($119,560,866
/ 14,619,307 shares outstanding of beneficial interest,
$.01 par value, unlimited number of shares authorized) $8.18
------------------------------------------------------------------------------
CLASS C SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($39,261,457 /
4,785,266 shares outstanding of beneficial interest, $.01
par value, unlimited number of shares authorized) $8.20
------------------------------------------------------------------------------
CLASS I SHARES
Net asset value, offering and redemption price per share
($3,275,347 / 399,851 shares outstanding of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $8.19
------------------------------------------------------------------------------
</TABLE>
12 The accompanying notes are an integral part of the financial statements.
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended April 30, 2000
(UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $103,275,925
----------------------------------------------------------------------------
Total income 103,275,925
----------------------------------------------------------------------------
Expenses:
Management fee 5,840,439
----------------------------------------------------------------------------
Services to shareholders 2,370,836
----------------------------------------------------------------------------
Custodian fees 52,203
----------------------------------------------------------------------------
Distribution services fees 626,153
----------------------------------------------------------------------------
Administrative service fees 3,049,188
----------------------------------------------------------------------------
Auditing 55,445
----------------------------------------------------------------------------
Legal 18,737
----------------------------------------------------------------------------
Trustees' fees and expenses 27,300
----------------------------------------------------------------------------
Reports to shareholders 401,859
----------------------------------------------------------------------------
Registration fees 88,777
----------------------------------------------------------------------------
Other 24,112
----------------------------------------------------------------------------
Total expenses before expense reductions 12,555,049
----------------------------------------------------------------------------
Expense reductions (99,895)
----------------------------------------------------------------------------
Total expenses, after expense reductions 12,455,154
----------------------------------------------------------------------------
NET INVESTMENT INCOME 90,820,771
----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments (25,106,585)
----------------------------------------------------------------------------
Futures (12,615,111)
----------------------------------------------------------------------------
Written options (278,655)
----------------------------------------------------------------------------
(38,000,351)
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on:
Investments (30,562,041)
----------------------------------------------------------------------------
Futures 3,718,404
----------------------------------------------------------------------------
(26,843,637)
----------------------------------------------------------------------------
Net gain (loss) on investment transactions (64,843,988)
----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 25,976,783
----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
APRIL 30, 2000 OCTOBER 31,
(UNAUDITED) 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 90,820,771 197,498,282
--------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (38,000,351) (21,350,014)
--------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period (26,843,637) (131,576,353)
--------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 25,976,783 44,571,915
--------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A (88,695,238) (213,273,535)
--------------------------------------------------------------------------------------------------------
Class B (3,772,547) (8,274,338)
--------------------------------------------------------------------------------------------------------
Class C (1,161,948) (1,909,361)
--------------------------------------------------------------------------------------------------------
Class I (112,909) (249,449)
--------------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 246,860,480 590,195,675
--------------------------------------------------------------------------------------------------------
Reinvestment of distributions 57,256,647 138,495,952
--------------------------------------------------------------------------------------------------------
Cost of shares redeemed (565,163,583) (1,008,823,362)
--------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions (261,046,456) (280,131,735)
--------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets (328,812,315) (459,266,503)
--------------------------------------------------------------------------------------------------------
Net assets at beginning of period 2,982,945,497 3,442,212,000
--------------------------------------------------------------------------------------------------------
Net assets at end of period (including undistributed net
investment income of $8,065,126 and $10,986,997,
respectively) $2,654,133,182 2,982,945,497
--------------------------------------------------------------------------------------------------------
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
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
SIX MONTHS
ENDED
APRIL 30, YEAR ENDED OCTOBER 31,
2000(A) ---------------------------------------------
(UNAUDITED) 1999(A) 1998(A) 1997 1996 1995
<S> <C> <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 8.35
-------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.27 0.53 0.58 0.64 0.63 0.66
-------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (0.18) (0.41) 0.07 0.06 (0.17) 0.56
-------------------------------------------------------------------------------------------------------
Total from investment operations 0.09 0.12 0.65 0.70 0.46 1.22
-------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.28) (0.60) (0.60) (0.63) (0.64) (0.65)
-------------------------------------------------------------------------------------------------------
Total distributions (0.28) (0.60) (0.60) (0.63) (0.64) (0.65)
-------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.19 8.38 8.86 8.81 8.74 8.92
-------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B)(C) 1.09** 1.44 7.64 8.41 5.36 15.24
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 2,492 2,807 3,286 3,550 4,080 4,672
-------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions
(%) 0.84* 0.85 0.80 0.78 0.77 0.72
-------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions
(%) 0.84* 0.84 0.80 0.78 0.77 0.72
-------------------------------------------------------------------------------------------------------
Ratio of net investment income (%) 6.55* 6.22 6.50 7.34 7.17 7.68
-------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 122* 177 150 261 391 362
-------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
SIX MONTHS
ENDED
APRIL 30, YEAR ENDED OCTOBER 31,
2000(A) ---------------------------------------------
(UNAUDITED) 1999(A) 1998(A) 1997 1996 1995
<S> <C> <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 8.34
-------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.23 0.45 0.49 0.56 0.54 0.58
-------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (0.18) (0.40) 0.08 0.06 (0.17) 0.56
-------------------------------------------------------------------------------------------------------
Total from investment operations 0.05 0.05 0.57 0.62 0.37 1.14
-------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.24) (0.53) (0.52) (0.55) (0.55) (0.57)
-------------------------------------------------------------------------------------------------------
Total distributions (0.24) (0.53) (0.52) (0.55) (0.55) (0.57)
-------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.18 8.37 8.85 8.80 8.73 8.91
-------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B)(C) 0.66** 0.54 6.67 7.40 4.36 14.18
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 120 138 129 76 70 53
-------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions
(%) 1.70* 1.76 1.71 1.73 1.73 1.69
-------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions
(%) 1.70* 1.75 1.71 1.73 1.73 1.69
-------------------------------------------------------------------------------------------------------
Ratio of net investment income (%) 5.69* 5.31 5.59 6.39 6.21 6.71
-------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 122* 177 150 261 391 362
-------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
SIX MONTHS
ENDED
APRIL 30, YEAR ENDED OCTOBER 31,
2000(A) -----------------------------------------
(UNAUDITED) 1999(A) 1998(A) 1997 1996 1995
<S> <C> <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 8.35
-----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.24 0.46 0.49 0.56 0.55 0.60
-----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (0.19) (0.40) 0.08 0.06 (0.17) 0.56
-----------------------------------------------------------------------------------------------------
Total from investment operations 0.05 0.06 0.57 0.62 0.38 1.16
-----------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.25) (0.53) (0.52) (0.55) (0.56) (0.58)
-----------------------------------------------------------------------------------------------------
Total distributions (0.25) (0.53) (0.52) (0.55) (0.56) (0.58)
-----------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.20 8.40 8.87 8.82 8.75 8.93
-----------------------------------------------------------------------------------------------------
TOTAL RETURN % (B)(C) 0.59** 0.72 6.66 7.42 4.40 14.33
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 39 35 24 10 8 5
-----------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions
(%) 1.60* 1.66 1.67 1.68 1.70 1.64
-----------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions
(%) 1.60* 1.66 1.67 1.68 1.70 1.64
-----------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 5.79* 5.40 5.63 6.44 6.24 6.76
-----------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 122* 177 150 261 391 362
-----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS I
SIX MONTHS
ENDED
APRIL 30, YEAR ENDED OCTOBER 31,
2000(A) ---------------------------------
(UNAUDITED) 1999(A) 1998(A) 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 0.28 0.55 0.59 0.66 0.64
---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (0.18) (0.40) 0.07 0.06 (0.17)
---------------------------------------------------------------------------------------------
Total from investment operations 0.10 0.15 0.66 0.72 0.47
---------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.29) (0.62) (0.62) (0.65) (0.65)
---------------------------------------------------------------------------------------------
Total distributions (0.29) (0.62) (0.62) (0.65) (0.65)
---------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.19 8.38 8.85 8.81 8.74
---------------------------------------------------------------------------------------------
TOTAL RETURN % (B)(C) 1.25** 1.81 7.75 8.60 5.56
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 3 3 4 6 5
---------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions
(%) 0.52* 0.60 0.57 0.60 0.59
---------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions
(%) 0.52* 0.59 0.57 0.60 0.59
---------------------------------------------------------------------------------------------
Ratio of net investment income (%) 6.87* 6.47 6.73 7.52 7.35
---------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 122* 177 150 261 391
---------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Not annualized
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of any sales charges.
(c) Total return would have been lower had certain expenses not been reduced.
16
<PAGE> 17
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 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.
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,
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
the Fund purchased put options on securities as a
hedge against potential adverse price movements in
the value of portfolio assets.
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 month and simultaneously contracts to
repurchase similar, but not identical, securities
on a fixed date. The Fund receives compensation as
consideration for entering into
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
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) or October 31, 2003
($69,777,000) or October 31, 2004 (51,945,000) or
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. 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.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other
Trust expenses are allocated between the Funds in
proportion to their relative net assets.
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2 PURCHASE & SALES
OF SECURITIES For the six months ended April 30, 2000, investment
transactions (excluding short-term instruments and
U.S. Government obligations) are as follows:
Purchases $2,659,384,016
Proceeds from sales 2,846,534,698
Purchases and sales of direct U.S. Government
obligations are as follows:
Purchases $516,312,498
Proceeds from sales 633,029,314
Purchases and sales of Mortgage Dollar Rolls
transactions are as follows:
Purchases $714,493,314
Proceeds from sales 715,905,325
Transactions in written options for the six months
ended April 30, 2000 are summarized as follows:
<TABLE>
<CAPTION>
PUT 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 $5,840,439 for the six
months ended April 30, 2000.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. ("KDI"). Underwriting
commissions retained by KDI in connection with the
distribution of Class A shares for the six months
ended April 30, 2000 are $145,506.
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 six months ended April 30, 2000 are
$877,036, of which $100,679 is unpaid at April 30,
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.
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
Administrative services fees paid by the Fund to
KDI for the six months ended April 30, 2000 are
$3,049,188, of which $898,930 is unpaid at April
30, 2000. In addition $7,039 was paid by KDI to
affiliates.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company ("KSvC") is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of
$1,727,074 for the six months ended April 30, 2000,
of which $287,846 is unpaid at April 30, 2000.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. During the six months ended April
30, 2000, the Fund made no payments to its officers
and incurred trustees' fees of $27,300 to
independent trustees.
--------------------------------------------------------------------------------
4 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30, YEAR ENDED
2000 OCTOBER 31,
(UNAUDITED) 1999
---------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 24,604,127 $ 203,049,554 49,876,237 $ 428,316,868
--------------------------------------------------------------------------------------
Class B 2,799,761 23,063,290 13,297,866 114,584,332
--------------------------------------------------------------------------------------
Class C 2,433,887 20,215,783 5,159,995 44,640,950
--------------------------------------------------------------------------------------
Class I 64,405 531,853 305,384 2,653,525
--------------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 6,535,069 53,818,138 15,237,954 131,001,414
--------------------------------------------------------------------------------------
Class B 304,642 2,506,295 675,838 5,789,077
--------------------------------------------------------------------------------------
Class C 99,268 819,308 166,078 1,457,371
--------------------------------------------------------------------------------------
Class I 13,709 112,906 28,934 248,090
--------------------------------------------------------------------------------------
SHARES REDEEMED
Class A (61,867,691) (509,624,546) (101,251,016) (868,403,806)
--------------------------------------------------------------------------------------
Class B (4,826,145) (39,616,967) (12,055,762) (103,333,614)
--------------------------------------------------------------------------------------
Class C (1,864,762) (15,361,888) (3,908,822) (33,607,721)
--------------------------------------------------------------------------------------
Class I (68,011) (560,182) (399,744) (3,478,221)
--------------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 129,967 $ 1,073,241 617,031 5,319,135
--------------------------------------------------------------------------------------
Class B (130,125) (1,073,241) (617,745) (5,319,135)
--------------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $(261,046,456) $(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 period, the Fund's custodian
and transfer agent fees were reduced by $7,738 and
$92,157, respectively, under these arrangements.
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6 LINE OF CREDIT The Fund and several Kemper Funds (the
"Participants") share in a $750 million revolving
credit facility for temporary or emergency
purposes, including the meeting of redemptions
requests that otherwise might require the untimely
disposition of securities. The Participants are
charged an annual commitment fee which is allocated
pro rata 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.
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES&OFFICERS
<TABLE>
<S> <C> <C>
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
LINDA C. COUGHLIN MAUREEN E. KANE
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
DONALD L. DUNAWAY CAROLINE PEARSON
Trustee ANN M. MCCREARY Assistant Secretary
Vice President
ROBERT B. HOFFMAN BRENDA LYONS
Trustee KATHRYN L. QUIRK Assistant Treasurer
Vice President
DONALD R. JONES
Trustee
THOMAS W. LITTAUER
Trustee and Vice President
SHIRLEY D. PETERSON
Trustee
WILLIAM P. 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 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
</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 - 3 (6/25/00) 1114220
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
