<PAGE> 1
KEMPER U.S. MORTGAGE FUND
REPORT TO SHAREHOLDERS
FOR THE PERIOD ENDED SEPTEMBER 30, 1995
OFFERING INVESTORS THE OPPORTUNITY FOR MAXIMUM CURRENT RETURN FROM
A PORTFOLIO OF U.S. GOVERNMENT SECURITIES
"Our extended duration stance continued to enhance the fund's performance
as interest rates moved lower."
[KEMPER MUTUAL FUND LOGO]
<PAGE> 2
TABLE OF CONTENTS
3
General Economic Review
5
Performance Update
7
Terms to Know
9
Portfolio Statistics
10
Portfolio of
Investments
11
Report from
Independent Auditors
12
Financial Statements
14
Notes to
Financial Statements
18
Financial Highlights
About Your Report
Change in Fiscal Year
A change in Kemper U.S. Mortgage Fund's fiscal year requires the mailing of
another shareholder report just two months after the fund reported on the
fiscal year ended July 31, 1995. The fund's new fiscal year now runs from
October 1 to September 30. You can expect your next shareholder report, which
will be a semiannual update, in May.
At A Glance
Kemper U.S. Mortgage Fund Total Returns for the two month period ended
September 30, 1995 (unadjusted for any sales charge):
[BAR GRAPH]
<TABLE>
<S> <C>
CLASS A 2.23%
CLASS B 2.09%
CLASS D 2.10%
LIPPER U.S. MORTGAGE FUNDS CATEGORY AVERAGE(*) 1.98%
</TABLE>
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
9/30/95 9/30/94
- ---------------------------------------------------------
<S> <C> <C>
KEMPER U.S. MORTGAGE FUND CLASS A $7.13 $6.80
KEMPER U.S. MORTGAGE FUND CLASS B $7.12 $6.79
KEMPER U.S. MORTGAGE FUND CLASS C $7.12 $6.78
- ---------------------------------------------------------
</TABLE>
KEMPER U.S. MORTGAGE FUND
LIPPER RANKINGS
COMPARED TO ALL OTHER FUNDS IN THE LIPPER U.S. MORTGAGE FUNDS CATEGORY *
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS A #9 OF 59 FUNDS #20 OF 59 FUNDS #17 OF 59 FUNDS
CLASS B N/A #11 OF 20 FUNDS N/A
CLASS C N/A #10 OF 11 FUNDS N/A
- ------------------------------------------------------------------------------
</TABLE>
* Lipper Analytical Services, Inc. returns and rankings are based upon changes
in net asset value with all dividends reinvested and do not include the effect
of sales charges and, if they had, results may have been less favorable.
Returns and rankings are historical and do not reflect future performance.
DIVIDEND AND YIELD REVIEW
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------
<S> <C> <C> <C>
1 YEAR INCOME: $0.5260 $0.4693 $0.4732
SEPTEMBER
DIVIDEND: $0.0430 $0.0380 $0.0385
ANNUALIZED
DISTRIBUTION RATE+: 7.23% 6.40% 6.49%
SEC YIELD+: 5.85% 5.24% 5.43%
- --------------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on September 30, 1995. 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 September 30, 1995, 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.
<PAGE> 3
General Economic Overview
STEPHEN B. TIMBERS IS CHIEF EXECUTIVE AND CHIEF INVESTMENT
[PHOTO OF OFFICER OF KEMPER FINANCIAL SERVICES, INC. (KFS). KFS AND ITS
STEPHEN B. AFFILIATES MANAGE APPROXIMATELY $63 BILLION IN ASSETS, INCLUDING
TIMBERS] $44 BILLION IN RETAIL MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE
UNIVERSITY AND HOLDS AN M.B.A. FROM HARVARD UNIVERSITY.
DEAR SHAREHOLDER,
Investors enjoyed generally positive performance in both the fixed income and
stock markets in the first 10 months of 1995. At this point in the year, the
returns of most leading securities markets worldwide are significantly higher
than they were at the same time in 1994.
We have an excellent environment for financial assets. After several
quarters of robust growth, the United States economy seems to be growing at a
pace that investors find comfortable. Contrary to isolated reports that caused
some observers to become concerned, the economy is in no jeopardy of recession.
Its health was confirmed with the news that the economy grew (as measured by
real gross domestic product [GDP]) at an annual rate of 4.2% in the third
quarter. This follows much lower growth in the first two quarters, as the
economy was adjusting to the Federal Reserve Board's series of interest rate
increases. The slowdown, in fact, was acknowledged by the Fed when it eased
short-term rates by a small but symbolic 25 basis points in July. Now we know
that the economy was rebounding from July through September.
The economy's continued growth without a corresponding increase in
inflation is very encouraging. Although we are well along in the economic cycle
and at a point when prices often start hiking up, inflationary pressures have
actually been reduced somewhat.
Will the Federal Reserve Board adjust interest rates again? As of this
date -- which precedes any resolution on the federal budget issue -- we doubt
that the Fed has motivation to either ease or (which would be even less likely)
raise interest rates. Our forecast calls for lower growth ranging between 2% to
3% for the next few quarters, with the momentum likely to come from exports and
nonresidential construction.
MARKET OUTLOOK
Slow growth and low inflation is the optimal combination for investors
in the fixed income markets, and we expect them to continue to perform well.
We believe that the opportunities for common stock investors will be
increasingly concentrated in higher quality investments. After hitting new
highs and showing considerable strength for most of the year, the stock market
showed some vulnerability when it took a tumble in the summer. The market
recovered after a brief period and has gained ground since. But such a sudden,
severe mini-correction served to remind investors that the current bull market
will inevitably come to an end someday and that some sectors may even be
overextended today.
As we view the remainder of the year, companies cannot necessarily
count on the economy to provide above-average earnings support. Rather, stocks
that have proven themselves with a pattern of consistent earnings are likely to
attract investor support. Specifically, sectors that produce more consistent
earnings, such as health care, consumer nondurables, selected technology and
selected capital goods can be expected to do well. Picking the right sectors to
invest in will be the key challenge for equity investors during the next few
quarters.
International investing continues to be quite complex. After sinking to
its post-World War II low in April, the value of the U.S. dollar has gained
strength against most foreign currencies. While a stronger dollar favors the
U.S. economy because it reduces the cost of American imports and attracts
foreign capital, a strong dollar in relation to a local currency has the effect
of devaluing a foreign investment. The value of the dollar and the
attractiveness of U.S. investments to foreign investors will be key factors in
the next few months.
3
<PAGE> 4
General 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.
<TABLE>
<CAPTION>
Now (10/31/95) 6 months ago 1 year ago 2 years ago
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.04 6.63 7.96 5.72
PRIME RATE(3) 8.75 9 8.15 6
INFLATION RATE(3)(*) 2.52 3.12 2.5 2.5
THE U.S. DOLLAR(4) -1.17 -10.11 -5.82 1.03
CAPITAL GOODS ORDERS(5)(*) 11.72 9.44 18.9 19.12
INDUSTRIAL PRODUCTION(6)(*) 2.6 3.6 5.65 3.62
EMPLOYMENT GROWTH(7) 1.91 2.12 3.03 2.34
</TABLE>
*Data as of September 30, 1995
(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%. The low, moderate inflation of the last
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 corporate profits and equity performance.
(7) An influence on family income and retail sales.
SOURCE: ECONOMICS DEPARTMENT, KEMPER FINANCIAL SERVICES, INC.
We are in the midst of a global recovery, and the same fundamentals that
have driven markets higher in the U.S. can be found in many foreign countries
currently. However, leading international economies continue to lag the U.S.
Japan and Germany, whose economies typically follow U.S. growth, are not as
robust as in past cycles. Moreover, conditions in emerging market countries
underline the importance of careful research and experience in understanding how
these markets work.
Political leadership also has some bearing on the progress of the
economy and the state of the financial markets. In the months preceding a
presidential election year, it has been common for incumbents to attempt to
stimulate growth. Given our Republican Congress and Democratic President,
however, we do not consider this as likely this time.
With the rest of the country, we are closely following political
initiatives to produce a balanced federal budget. This is a political wild
card, but we would expect both the stock and fixed-income markets to react
with enthusiasm if progress can be made.
With that as an economic backdrop, we encourage you to read the
following detailed report of your fund, including a question-and-answer
interview with your fund's portfolio manager. Thank you for your continued
support. We appreciate the opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
CHIEF INVESTMENT AND EXECUTIVE OFFICER
November 6, 1995
4
<PAGE> 5
Performance Update
[Photo of J. Patrick Beimford]
J. PATRICK BEIMFORD, JR. JOINED KEMPER FINANCIAL SERVICES, INC., IN 1976 AND
IS NOW EXECUTIVE VICE PRESIDENT AND CHIEF INVESTMENT OFFICER FOR FIXED-INCOME
INVESTMENTS. MR. BEIMFORD HAS RE-ASSUMED THE ROLE OF PORTFOLIO MANAGER OF THE
KEMPER U.S. MORTGAGE FUND. MR. BEIMFORD RECEIVED A B.S.I.M DEGREE FROM
PURDUE UNIVERSITY AND RECEIVED HIS M.B.A. FROM THE UNIVERSITY OF CHICAGO.
J. PATRICK BEIMFORD, PORTFOLIO MANAGER OF KEMPER U.S. MORTGAGE FUND DISCUSSES
THE ADJUSTMENTS MADE TO THE FUND DURING THE TWO-MONTH PERIOD ENDED SEPTEMBER
30, 1995. TO PROVIDE YOU WITH A LONG-TERM PERSPECTIVE ON THE FUND'S
INVESTMENT ACTIVITY, WE HAVE INCLUDED AN UPDATED VERSION OF THE Q&A PRINTED
IN YOUR LAST ANNUAL REPORT, WHICH NOW ALSO REVIEWS FUND PERFORMANCE
INFORMATION FOR AUGUST 1995 AND SEPTEMBER 1995.
Q. DURING AUGUST 1995 AND SEPTEMBER 1995 THE FUND PROVIDED A POSITIVE RETURN.
WHAT WERE THE MAJOR INFLUENCES THAT IMPACTED THE FUND'S PERFORMANCE?
A. The fund performed positively during the two month period, outperforming the
average return of its Lipper peer group for both months. Overall, the
government bond market performed modestly but was somewhat volatile during
the period as a spate of economic data revealed mixed signs about the
strength of the economy's growth. Investors also vacillated as stops and
starts in the progress of the federal budget negotiations occurred. But
despite these gyrations, there were no lasting material shifts within the
government market. Interest rates continued to fall, but more slowly than in
previous months and both mortgages and Treasuries provided positive returns.
In August, we reduced our mortgage holdings by six percent to 90
percent of the portfolio and increased our Treasury holdings. This was in
response to a rally in the Treasury market during the latter part of August.
The rally was short-lived and in September we increased our mortgage holdings
to 94 percent of the portfolio. These adjustments were consistent with our
efforts over the past nine months to favor mortgages and to maintain a
relatively long duration. A fund's duration is a measure of its sensitivity
to interest rates. The longer the duration, the more sensitive it is to
interest rate changes. Our extended duration stance continued to enhance the
fund's performance as interest rates moved lower.
Q. SINCE 1994 WE'VE SEEN BOTH RISING AND FALLING INTEREST RATES. WHAT
KINDS OF ADJUSTMENTS DID YOU MAKE TO THE PORTFOLIO AS RATES CONTINUED TO RISE
AND THEN REVERSED DIRECTION?
A. Essentially, we altered durations and the level of our investment in
mortgages as rates fluctuated and our economic outlook changed. Let's look at
what happened in detail.
At the end of October 1994, 84 percent of the portfolio was invested in
mortgages and the fund had a relatively short duration of 3.4 years. This is
considered a defensive position, which was appropriate because the economy
was expanding rapidly and interest rates were rising. This short-duration
stance helped reduce the decline in prices that resulted as interest rates
rose.
In December, we became optimistic that economic growth was beginning to
wane so we increased
5
<PAGE> 6
Performance Update
the fund's duration to 5.2 years. We purchased discount, 30-year Government
National Mortgage Association (GNMA) mortgage-backed securities, which are
long duration assets that tend to perform well in declining interest rate
environments.
The fund outperformed the average return of its peers from December
through February as a result of this strategy, in which we anticipated an
economic slow-down and acted earlier than others. It also positioned the fund
to further benefit from the bond rally that occurred as rates dropped from
March through May. During this rally, we maintained our longer-duration and
sold mortgages to invest in Treasuries. U.S. Treasuries outperformed
throughout the spring as the market continued to rally, again enabling the
fund to provide above average returns.
In June we began to move out of Treasuries and increased our mortgage
holdings by the beginning of July. The shift was prompted by the relative
underperformance of mortgages compared to Treasuries, and our expectation
that mortgages would increase in value if interest rates stabilized. At this
time the price of mortgages had dropped to a point where the risk and reward
of owning them versus Treasuries was extremely attractive. Our assessment was
correct and mortgages outperformed throughout September.
Q. Last year was one of the worst years in the history of the bond market. Yet,
the bond market more than recovered in the first several months of 1995.
What, if anything, did you learn from these two periods?
A. More than anything, perhaps, the last year has demonstrated the importance
of being flexible. For example, this spring's market rally convinced us that we
must be willing to shift funds out of mortgages and into Treasuries.
Previously, our instinct may have been to remain with the higher-yielding
mortgages, but in a rallying market, Treasuries outperform
SEVERAL MARKET FORCES INFLUENCED INVESTORS IN U.S.
GOVERNMENT SECURITIES FROM OCTOBER 1994 THROUGH
SEPTEMBER 1995
A. ECONOMIC GROWTH SLOWED AND THEN ACCELERATED
Economic growth, as measured by quarterly changes in the U.S. economy's gross
domestic product (GDP), was robust throughout 1994, fell dramatically by
mid-1995 and gained momentum during the third quarter of 1995.
[BAR GRAPH]
<TABLE>
<S> <C>
4Q94 5.1
1Q95 2.7
2Q95 1.3
3Q95 4.2
</TABLE>
SOURCE: Barrons AND The Wall Street Journal
B. IN RESPONSE TO RISING SHORT-TERM INTEREST RATES ...
The Federal Reserve Board continued its series of interest rate hikes until
early July 1995, when it announced a modest interest rate cut. This bar graph
tracks the Fed's changes to the federal funds rate (the interest rate that
banks charge each other for overnight loans), which is a measure of
short-term interest rates.
[LINE GRAPH]
<TABLE>
<S> <C>
10/1/94 4.75
11/16 5.25
2/1 6
7/6/95 5.5
</TABLE>
SOURCE: Investment Company Institute (ICI) Mutual Fund 1995 Fact Book and The
Wall Street Journal
C. BUT INFLATION POSED NO THREAT
Despite worries that the strong growth in 1994 would result in increased
price inflation, the Consumer Price Index (CPI) did not significantly
accelerate during the period.
[BAR GRAPH]
<TABLE>
<S> <C>
4Q94 0.6
1Q95 0.8
2Q95 0.8
3Q95 0.5
</TABLE>
*SOURCE: Bureau of Labor Statistics
*Kemper Financial Services, Inc. Forecast
6
<PAGE> 7
Performance Update
mortgages. In fact, at the height of the rally in May, our mortgage holdings
were at their lowest - representing 85 percent of the portfolio - and
Treasuries represented 13 percent. This shift to Treasuries contributed to the
fund's superior May performance. While Treasuries yield less than
mortgage-backed securities, they tend to outperform in declining rate
environments. We continue to manage the fund with a focus on total rate of
return as well as income.
Q. AS VOLATILE AS THE LAST YEAR HAS BEEN, SHAREHOLDERS SEEK CONSISTENT FUND
PERFORMANCE NONETHELESS. WHAT CAN BE DONE TO IMPROVE CONSISTENCY?
A. In fact, our goal is to produce more consistent performance, and that's
something we're pursuing in several ways. In the last year, we restructured
the fund's investments. Specifically, we have favored Treasuries and
30-year mortgage-backed securities over 15-year mortgages and structured
products such as collateralized mortgage obligations. This streamlined
portfolio has helped us weather periods of market volatility with greater ease
and flexibility. Further, we have become more willing to make investment shifts
as necessary to seek maximum performance in a given economic environment. We
are willing to adjust any performance characteristic of the fund - whether it
is the composition of coupons, the fund's duration or its asset allocation
structure - to help enhance our investors' total rate of return.
Q. WHAT'S YOUR OUTLOOK FOR THE NEXT FEW MONTHS?
A. We are steadfast in our belief that the economy is growing, but at a pace
slow enough to allow for further interest rate cuts. In September we trimmed
our duration slightly - to 5.17 years - because of the magnitude of the
interest rate decline year-to-date. We believe rates will trend lower in the
months ahead, but not decline as dramatically as they did in the first nine
months of 1995.
Q. WHAT COULD THREATEN YOUR OUTLOOK - AND RESULT IN AN ADJUSTMENT OF YOUR
PORTFOLIO MANAGEMENT STRATEGY?
A. Our risks are fairly obvious. If strong economic growth resumes, our
interest rate outlook will be wrong, and we'd have to shift our strategy
accordingly. But we don't see that happening. We expect a continued
slow-growth, low-inflation environment, which should be positive for government
securities and for the shareholders of the fund.
TERMS TO KNOW
DURATION Duration is a measure of the interest rate sensitivity of a
fixed-income portfolio incorporating time to maturity and coupon size. The
larger the duration number, the greater the interest rate risk.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period, assuming the
reinvestment of all dividends. It represents the aggregate percentage or
dollar value change over the period.
YIELD A fund's yield is a measure of the net investment income per share
earned over a specific one month or 30-day period expressed as a percentage
of the maximum offering price of the fund's shares at the end of the period.
7
<PAGE> 8
Performance Update
Average Annual Total Returns*
For periods ended September 30, 1995 (adjusted for the maximum sales charge)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR 5-YEAR 10-YEAR CLASS
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER U.S. MORTGAGE FUND A 8.06% N/A N/A 4.24% (SINCE 1/10/92)
KEMPER U.S. MORTGAGE FUND B 9.24 7.78% 7.44% 7.34 (SINCE 10/26/84)
KEMPER U.S. MORTGAGE FUND C 12.47 N/A N/A 8.43 (SINCE 5/31/94)
- ---------------------------------------------------------------------------------------
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER U.S.
MORTGAGE FUND CLASS A FROM 1/10/92 TO 9/30/95
[LINE GRAPH]
<TABLE>
- Kemper U.S. Mortgage - Salomon Brothers - Consumer
Fund Class A(1) 30-Year GNMA Index+ Price Index++
<S> <C> <C> <C>
1/10/92 10,000 10,000 10,000
12/31/92 10,104 10,760 10,290
12/31/93 10,674 11,477 10,573
12/31/94 10,302 11,330 10,856
9/30/95 11,669 12,820 11,109
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER U.S.
MORTGAGE FUND CLASS B FROM 10/26/84 TO 9/30/95
[LINE GRAPH]
<TABLE>
<CAPTION>
- Kemper U.S. Mortgage - Salomon Brothers - Consumer
Fund Class B(1) 30-Year GNMA Index+ Price Index++
<S> <C> <C> <C>
10/26/84 10,000 10,000 10,000
12/31/87 12,600 15,326 10,959
12/31/90 15,710 21,407 12,707
12/31/93 20,128 27,384 13,846
9/30/95 21,692 30,546 14,549
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER U.S.
MORTGAGE FUND CLASS C FROM 5/31/94 TO 9/30/95
[LINE GRAPH]
<TABLE>
<CAPTION>
- Kemper U.S. Mortgage - Salomon Brothers - Consumer
Fund Class C(1) 30-Year GNMA Index+ Price Index++
<S> <C> <C> <C>
5/31/94 10,000 10,000 10,000
12/31/94 9,910 10,091 10,149
9/30/95 11,146 11,418 10,386
</TABLE>
Past performance is not predictive of future performance. Returns and net asset
value fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
* Average annual total return measures net investment income and capital gain
or loss from portfolio investments, assuming reinvestment of all dividends and
for A shares adjustment for the maximum sales charge 4.5% and for B shares
adjustment for the applicable contingent deferred sales charge as follows:
1-year, 3%; 5-year, 1%; since inception, 0%. 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 maximum
sales charge for A shares and the applicable contingent deferred sales charge
in effect at the end of the period for B shares. In comparing the Kemper U.S.
Mortgage Fund performance to Salomon Brothers 30-Year GNMA Index, you should
also note that the fund's performance reflects the maximum sales charge, while
no such charges are reflected in the performance of the index.
+ The Salomon Brothers 30-Year GNMA Index, an unmanaged index, is based on total
return with all dividends reinvested and is comprised of GNMA 30-year pass
throughs of single family and graduated payment mortgages. In order for a GNMA
coupon to be included in the index, it must have at least $200 million of
outstanding coupon product. Source is Salomon Brothers Inc.
++ The Consumer Price Index is a statistical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. It is generally considered to be a measure of inflation. Source is
Towers Data Systems.
8
<PAGE> 9
Portfolio Statistics
THE FUND'S PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
ON 9/30/95 ON 9/30/94
- ---------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE-BACKED GNMA 91% 66%
FNMA/FHLMC 3 22
LONG-TERM GOVERNMENT SECURITIES 6 --
CASH AND EQUIVALENTS
(PRIMARILY SHORT-TERM TREASURIES) -- 12
- ---------------------------------------------------------------------------
100% 100%
- ---------------------------------------------------------------------------
</TABLE>
- - MORTGAGE-BACKED GNMA
- - FNMA/FHLMC
- - LONG-TERM GOVERNMENT SECURITIES
- - CASH AND EQUIVALENTS (PRIMARILY SHORT-TERM TREASURIES)
[PIE CHART] [PIE CHART]
ON 9/30/95 ON 9/30/94
YEARS TO MATURITY
AS A PERCENTAGE OF THE PORTFOLIO
<TABLE>
<CAPTION>
ON 9/30/95 ON 9/30/94
- ---------------------------------------------------------------------------
<S> <C> <C>
LESS THAN 4 YEARS 2% 12%
4-10 YEARS 24 --
10-20 YEARS 70 66
+20 YEARS 4 22
100% 100%
- ---------------------------------------------------------------------------
</TABLE>
- - LESS THAN 4 YEARS
- - 4-10 YEARS
- - 10-20 YEARS
- - +20 YEARS
[PIE CHART] [PIE CHART]
ON 9/30/95 ON 9/30/94
DURATION
On 9/30/95 On 9/30/94
- ---------------------------------------------------------------------------
DURATION 5.2 YEARS 3.6 YEARS
- ---------------------------------------------------------------------------
9
<PAGE> 10
Portfolio of Investments
KEMPER U.S. MORTGAGE FUND
PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
COUPON PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GOVERNMENT NATIONAL Pass-through
MORTGAGE ASSOCIATION - certificates 6.50% 2023-2025 $511,068 $ 493,181
91.2% 7.00 2016-2025 927,913 916,894
(Cost: $3,072,386) 7.50 2007-2025 902,364 910,533
8.00 2016-2025 535,454 550,436
8.50 2021-2025 145,700 151,585
9.00 2008-2022 72,395 76,196
9.50 2009-2023 60,816 64,997
10.0 02016-2021 8,451 9,222
10.5 02019-2021 10,814 11,872
11.00 2019 496 544
-------------------------------------------------------------------------------------
3,185,460
- --------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY SECURITIES -- Notes 8.875-9.375 1996 336,000 342,317
22.0% 8.50 1997 22,000 22,976
(Cost: $770,966) 6.125-9.00 1998 175,000 178,817
8.875-9.125 1999 53,000 58,223
Bonds 12.50 2014 26,700 41,093
7.25 2022 71,000 76,203
6.875 2025 45,000 47,250
-------------------------------------------------------------------------------------
766,879
- --------------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Pass-through
MORTGAGE ASSOCIATION -- certificates 6.50-11.50 2016-2025 114,957 111,816
3.2%
(Cost: $110,565)
=====================================================================================
TOTAL U.S. GOVERNMENT 4,064,155
OBLIGATIONS-116.4%
(COST: $3,953,917)
=====================================================================================
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (A) Collateralized by Government National Mortgage Association securities
- -- 8.3% Yield 5.875%-6.55%, Dated September 1995, Due October 1995
Lehman Securities 100,000 99,998
(held at Chemical Bank)
Nikko Securities 190,000 190,005
(held at The Bank of New York)
=====================================================================================
TOTAL REPURCHASE AGREEMENTS
(Cost: $290,000) 290,003
=====================================================================================
TOTAL INVESTMENTS - 124.7%
(Cost: $4,243,917) 4,354,158
=====================================================================================
LIABILITIES, LESS CASH
AND OTHER ASSET - (24.7%) (861,106)
=====================================================================================
NET ASSETS - 100% $3,493,052
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities. All collateral is held at the Fund's custodian
bank, Investors Fiduciary Trust Company, or at subcustodian banks, as
indicated. The collateral is monitored daily by the Fund so that its market
value exceeds the carrying value of the repurchase agreement.
Based on the cost of investments of $4,243,917,000 for federal income tax
purposes at September 30, 1995, the aggregate gross unrealized appreciation
was $131,340,000, the aggregate gross unrealized depreciation was $21,099,000
and the net unrealized appreciation of investments was $110,241,000.
See accompanying Notes to Financial Statements.
10
<PAGE> 11
Report of Independent Auditors
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER U.S. MORTGAGE FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of the Kemper U.S. Mortgage Fund, a
series of Kemper Portfolios, as of September 30, 1995, the related statements of
operations for the two months then ended and the year ended July 31, 1995,
and changes in net assets for the two months ended September 30, 1995 and each
of the two years in the period ended July 31, 1995 and the financial highlights
for each of the fiscal periods since 1991. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
investments owned as of September 30, 1995, by correspondence with the custodi
an 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. Mortgage Fund at September 30, 1995, the results of
its operations, the changes in its net assets, and the financial highlights
for the periods referred to above, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 14, 1995
11
<PAGE> 12
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995
(in thousands)
<TABLE>
<CAPTION>
ASSETS
- -----------------------------------------------------------------------------------
<S> <C>
Investments, excluding repurchase agreements, at value
(Cost: $3,953,917) $ 4,064,155
Repurchase agreements, at value
(Cost: $290,000) 290,003
Cash 211
Receivable for:
Fund shares sold 914
Investments sold 1,359
Interest 40,000
TOTAL ASSETS 4,396,642
- -----------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -----------------------------------------------------------------------------------
Payable for:
Fund shares redeemed 4,186
Investments purchased 895,700
Management fee 1,466
Distribution services fee 934
Administrative services fee 705
Custodian and transfer agent fees and related expenses 505
Other 94
Total liabilities 903,590
NET ASSETS $ 3,493,052
- -----------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -----------------------------------------------------------------------------------
Paid-in capital $ 4,568,142
Accumulated net realized loss on investments (1,245,903)
Net unrealized appreciation on investments 110,241
Undistributed net investment income 60,572
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 3,493,052
- -----------------------------------------------------------------------------------
THE PRICING OF SHARES
- -----------------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($2,037,209 / 285,770 shares outstanding) $7.13
Maximum offering price per share
(net asset value, plus 4.71% of net
asset value or 4.50% of offering price) $7.47
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($1,454,369 - 204,285 shares outstanding) $7.12
CLASS C SHARES
Net asset value and redemption price per share
($1,474 / 207 shares outstanding) $7.12
- -----------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 13
Financial Statements
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWO MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, JULY 31,
NET INVESTMENT INCOME 1995 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income $ 45,658 321,715
Expenses:
Management fee 2,931 18,595
Distribution services fee 1,863 13,274
Administrative services fees 1,393 8,822
Custodian and transfer agent fees
and related expenses 1,307 6,550
Professional fees 50 90
Reports to shareholders 6 704
Trustees' fees and other 73 221
Total expenses 7,623 48,256
NET INVESTMENT INCOME 38,035 273,459
- -------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------------------
Net realized loss on sales of investments
(including options purchased) (5,927) (108,790)
Net realized gain from futures transactions 1,448 1,600
Net realized loss (4,479) (107,190)
Change in net unrealized depreciation on investments 40,878 138,533
Net gain on investments
36,399 31,343
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 74,434 304,802
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWO MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED JULY 31,
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY 1995 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income $ 38,035 273,459 326,261
Net realized loss (4,479) (107,190) (383,592)
Change in net unrealized appreciation/depreciation 40,878 138,533 (23,587)
Net increase (decrease) in net assets resulting from operations 74,434 304,802 (80,918)
Net equalization charges (1,220) (12,882) (17,926)
Distribution from net investment income (40,438) (267,996) (325,917)
Net decrease from capital share transactions (68,053) (653,661) (1,056,270)
TOTAL DECREASE IN NET ASSETS (35,277) (629,737) (1,481,031)
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------------------------------
Beginning of period 3,528,329 4,158,066 5,639,097
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT
INCOME OF $60,572, 64,192 AND 63,437, RESPECTIVELY) $3,493,052 3,528,329 4,158,066
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
Notes to Financial Statements
1 DESCRIPTION OF THE FUND
Kemper U.S. Mortgage Fund is a separate series of Kemper Portfolios, an open-end
management investment company organized as a business trust under the laws of
Massachusetts. The Fund offers four classes of shares. Class A shares are sold
to investors subject to an initial sales charge. Class B shares are sold without
an initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial or a contingent deferred sales charge
but are subject to higher ongoing expenses than Class A shares and do not
convert into another class. Class I shares (none sold through September 30,
1995) 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. Each share represents an identical interest in the investmen ts of the
Fund and has the same rights.
In 1995, the Fund changed its fiscal year end for financial reporting
purposes and federal income tax purposes from July 31 to September 30.
- --------------------------------------------------------------------------------
2 SIGNIFICANT ACCOUNTING POLICES
INVESTMENT VALUATION. Investments are stated at value. Fixed income
securities are valued by using market quotations, or independent pricing
services that use prices provided by market makers or estimates of market values
obtained from yield data relating to instruments or securities with similar
characteristics. Exchange traded fixed income options are valued at the last
sale price unless there is no sale price, in which event prices provided by
market makers are used. Over-the-counter traded fixed income options are valued
based upon prices provided by market makers. Financial futures and options
thereon are valued at the settlement price established each day by the board of
trade or exchange on which they are traded. Other securities and assets are
valued at fair value as determined in good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME. Investment transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis and includes
premium and discount amortization of money market instruments and
mortgage-backed securities; it also includes original issue and market discount
amortization on long-term fixed income securities. Realized gains and losses
from investment transactions are reported on an identified cost basis.
The Fund may purchase securities with delivery or payment to occur at a later
date. At the time the Fund enters into a commitment to purchase a security,
the transaction is recorded and the value of the security is reflected in the
net asset value. The value of the security may vary with market fluctuations. No
interest accrues to the Fund until payment takes place. At the time the Fund
enters into this type of transaction it is required to designate cash or other
liquid assets equal to the value of the securities purchased. At September 30,
1995 the Fund had $895,700,000 in purchase commitments outstanding (26% of net
assets), with a corresponding amount of assets designated.
14
<PAGE> 15
Notes to Financial Statements
FUND SHARE VALUATION. Fund shares are sold and redeemed on a continuous basis at
net asset value (plus an initial sales charge on most sales of Class A shares).
Proceeds payable on redemption of Class B shares will be reduced by the amount
of any applicable contingent deferred sales charge. On each day the New York
Stock Exchange is open for trading, the net asset value per share is determined
as of the earlier of 3:00 p.m. Chicago time or the close of the Exchange. The
net asset value per share is determined separately for each class by dividing
the Fund's net assets attributable to that class by the number of shares of the
class outstanding.
FEDERAL INCOME TAXES AND DIVIDENDS TO SHAREHOLDERS. The Fund has complied
with the special provisions of the Internal Revenue Code available to investment
companies and therefore no federal income tax provision is required. The
accumulated net realized loss on sales of investments for federal income tax
purposes at September 30, 1995, amounting to approximately $1,230,769,000, is
available to offset future taxable gains. If not applied, $355,103,000 of the
loss carryover expires in 1996, with the remainder expiring through the period
ended 2003.
Differences in dividends per share are due to different class expenses.
Dividends payable to its shareholders are recorded by the Fund on the
ex-dividend date.
Dividends are determined in accordance with income tax principles which may
treat certain transactions differently than generally accepted accounting
principles.
EQUALIZATION ACCOUNTING. A portion of proceeds from sales and cost of
redemptions of Fund shares is credited or charged to undistributed net
investment income so that income per share available for distribution is not
affected by sales or redemptions of shares.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH AFFILIATES
MANAGEMENT AGREEMENT. The Fund has a management agreement with Kemper
Financial Services, Inc. (KFS) and pays a management fee at an annual rate of
.55% of the first $250 million of average daily net assets declining gradually
to .40% of average daily net assets in excess of $12.5 billion. The Fund
incurred a management fee of $2,931,000 for the two month period ended September
30, 1995 and $18,595,000 for the year ended July 31, 1995.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT. The Fund has an underwriting
and distribution services agreement with Kemper Distributors, Inc. (KDI).
Underwriting commissions paid in connection with the distribution of Class A
shares are as follows:
<TABLE>
<CAPTION>
Commissions allowed
Commissions by KDI to retail firms Commissions paid
retained by KDI (including affiliates) to affiliates of KDI
--------------- ---------------------- --------------------
<S> <C> <C> <C>
Two months ended
September 30, 1995 $12,000 123,000 4,000
Year ended
July 31, 1995 $18,000 160,000 25,000
</TABLE>
15
<PAGE> 16
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 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 from redemptions of Class B
shares. Distribution fees and commissions paid in connection with the sale of
Class B and Class C shares, and contin gent deferred sales charges received in
connection with the redemption of Class B shares are as follows:
<TABLE>
<CAPTION>
Commissions
and
Distribution distribution fees Amounts Contingent
fees paid paid by KDI paid to deferred sales
by the Fund to Firms affiliates charges
to KDI (including affiliates) of KDI received by KDI
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Two months ended
September 30, 1995 $1,863,000 158,000 15,000 429,000
Year ended
July 31, 1995 $13,274,000 1,343,000 142,000 4,548,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an administrative services
agreement with KDI. For providing information and administrative services to
shareholders, the Fund pays KDI a fee at an annual rate of up to .25% of average
daily net assets. KDI in turn has various arrangements 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 are as follows:
<TABLE>
<CAPTION>
Administrative
Administrative services fees paid Administrative
services fees paid by KDI to Firms services fees paid
by the Fund to KDI (including affiliates) to affiliates of KDI
----------------------------------------------------------------------
<S> <C> <C> <C>
Two months ended
September 30, 1995 $1,393,000 1,394,000 167,000
Year ended
July 31, 1995 $8,822,000 8,770,000 1,113,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a services agreement with the Fund's
transfer agent, Kemper Service Company (KSvC) is the shareholder service agent
of the Fund. For the two month period ended September 30, 1995 and the year
ended July 31, 1995, the transfer agent remitted shareholder services fees to
KSvC of $845,000 and $6,155,000, respectively.
OFFICERS AND TRUSTEES. Certain officers or trustees of the Fund are also
officers or directors of KFS. For the two month period ended September 30, 1995
and the year ended July 31, 1995 the Fund made no payments to its officers and
incurred trustees' fees of $6,000 and $55,000 respectively to independent
trustees.
- -------------------------------------------------------------------------------
4 INVESTMENT TRANSACTION
Investment transactions (excluding short-term instruments) are as follows (in
thousands):
<TABLE>
<CAPTION>
TWO MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, JULY 31,
1995 1995
---------------------------------
<S> <C> <C>
Purchases $1,725,396 20,546,651
Proceeds from sales 1,656,553 21,577,354
</TABLE>
16
<PAGE> 17
Notes to Financial Statements
- -------------------------------------------------------------------------------
5 CAPITAL SHARE TRANSACTIONS
The following table summarizes the activity in capital shares of the Fund (in
thousands):
<TABLE>
<CAPTION>
TWO MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED JULY 31,
1995 1995 1994
------------------- ------------------ ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHARES SOLD
- ---------------------------------------------------------------------------------------------
Class A 1,023 $ 7,000 6,918 $ 45,618 5,222 $ 35,884
Class B 925 6,312 8,293 55,591 32,281 233,525
Class C 42 296 167 1,153 21 148
- ---------------------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
- ---------------------------------------------------------------------------------------------
Class A 1,950 13,752 12,059 82,686 9,802 71,165
Class B 1,352 9,523 10,543 72,114 15,471 113,238
Class C 1 7 3 19 -- --
- ---------------------------------------------------------------------------------------------
SHARES REDEEMED
- ---------------------------------------------------------------------------------------------
Class A (8,038) (55,910) (63,394) (427,279) (68,014) (484,338)
Class B (7,037) (49,021) (72,004) (483,386) (143,028) (1,025,892)
Class C (2) (12) (26) (177) -- --
- ---------------------------------------------------------------------------------------------
CONVERSION OF SHARES
- ---------------------------------------------------------------------------------------------
Class A 5,480 38,088 43,850 296,147 142,904 1,034,102
Class B (5,492) (38,088) (43,908) (296,147) (143,035) (1,034,102)
NET DECREASE FROM
CAPITAL SHARE
TRANSACTIONS $(68,053) $(653,661) $(1,056,270)
- ---------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
6 FINANCIAL FUTURES CONTRACTS
In order to take advantage of anticipated market conditions, the Fund has
entered into exchange traded financial futures contracts as described below. The
Fund bears the market risk that arises from changes in the value of these
financial instruments.
At the time the Fund enters into a futures contract, it is required to make a
margin deposit with its custodian. Subsequently, gain or loss is recognized and
payments are made on a daily basis between the Fund and the broker as the market
price of the futures contract fluctuates. At September 30, 1995, the market
value of investments pledged by the Fund to cover margin requirements for open
futures positions was $17,601,000. At September 30, 1995, the Fund had
outstanding financial futures contracts as follows (in thousands):
<TABLE>
<CAPTION>
FACE EXPIRATION GAIN AT
TYPE AMOUNT POSITION MONTH 9/30/95
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury
Securities $106,300 Long December $2,383
- ---------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
Financial Highlights
<TABLE>
<CAPTION>
CLASS A SHARES
-----------------------------------------------------------------
TWO MONTHS JANUARY 10,
ENDED YEAR ENDED JULY 31, 1992 TO
SEPTEMBER 30, ------------------------------- JULY 31,
1995 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $7.06 6.96 7.56 7.78 7.81
Income from investment operations:
Net investment income .08 .53 .51 .62 .38
Net realized and unrealized gain (loss) .08 .09 (.59) (.21) (.03)
Total from investment operations .16 .62 (.08) .41 .35
Less distribution from net investment income .09 .52 .52 .63 .38
Net asset value, end of period $7.13 7.06 6.96 7.56 7.78
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.23% 9.48 (1.21) 5.52 4.76
- --------------------------------------------------------------------------------------------------------------
ANNUALIZED RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------------------
Expenses .94% .89 .99 .97 .94
Net investment income 6.87 7.77 7.00 8.22 8.73
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES
----------------------------------------------------------------
TWO MONTHS
ENDED YEAR ENDED JULY 31,
SEPTEMBER 30, -------------------------------------------------
1995 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $7.05 6.96 7.56 7.77 7.25 7.25
Increase from investment operations:
Net investment income .07 .47 .45 .57 .65 .64
Net realized and unrealized gain (loss) .08 .09 (.59) (.21) .49 .01
Total from investment operations .15 .56 (.14) .36 1.14 .65
Less distribution from net investment income .08 .47 .46 .57 .62 .65
Net asset value, end of period $7.12 7.05 6.96 7.56 7.77 7.25
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.09% 8.44 (2.00) 4.85 16.36 9.37
- --------------------------------------------------------------------------------------------------------------
ANNUALIZED RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------------------
Expenses 1.79% 1.75 1.79 1.75 1.86 2.03
Net investment income 6.02 6.91 6.27 7.44 8.70 8.86
- --------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
Financial Highlights
<TABLE>
<CAPTION>
CLASS C SHARES
--------------------------------------------------------------
TWO MONTHS
ENDED YEAR ENDED MAY 31, TO
SEPTEMBER 30, 1995 JULY 31, 1995 JULY 31, 1994
- ------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $7.05 6.95 6.99
Income from investment operations:
Net investment income .07 .48 .07
Net realized and unrealized gain (loss) .08 .09 (.04)
Total from investment operations .15 .57 .03
Less distribution from net investment income .08 .47 .07
Net asset value, end of period $7.12 7.05 6.95
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.10% 8.65 .47
- ------------------------------------------------------------------------------------------------------------------
ANNUALIZED RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------
Expenses 1.69% 1.71 1.55
Net investment income 6.12 6.95 6.46
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ------------------------------------------------------------------------------------------------------------------
TWO MONTHS
ENDED YEAR ENDED JULY 31,
SEPTEMBER 30, --------------------------------------------------------
1995 1995 1994 1993 1992 1991
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $3,493,052 3,528,329 4,158,066 5,639,097 5,602,682 4,879,832
Portfolio turnover rate 249% 573 963 551 376 498
- ------------------------------------------------------------------------------------------------------------------
NOTE: Total return does not reflect the effect of any sales charges.
</TABLE>
SPECIAL SHAREHOLDER MEETING
On September 19, 1995 a special shareholders' meeting was held. Fund
shareholders were asked to vote on four separate issues: election of nine
Trustees to the Board of Trustees, ratification of Ernst & Young LLP as
independent auditors, approval of a new investment management agreement with
Kemper Financial Services, Inc., or its successor and, for Class B and Class C
shareholders only, approval of a new 12b-1 distribution plan with Kemper
Distributors, Inc. or its successor. The fund voted together with the other
two series of Kemper Portfolios on items one and two which is why the numbers
are so much higher. We are pleased to report that all nominees were elected
and all other items were approved. Following are the results for each issue:
1) Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
David W. Belin 424,455,432 12,676,836
Lewis A. Burnham 424,717,712 12,414,556
Donald L. Dunaway 424,630,285 12,501,983
Robert B. Hoffman 424,761,425 12,370,843
Donald R. Jones 424,586,572 12,545,696
David B. Mathis 424,368,006 12,764,262
Shirley D. Peterson 424,193,153 12,939,115
William P. Sommers 424,499,145 12,633,123
Stephen B. Timbers 424,673,998 12,458,270
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
412,345,882 6,901,993 18,462,629
</TABLE>
3) Approval of new investment management agreement
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
279,209,878 7,593,627 16,573,867
</TABLE>
4) Approval of new 12b-1 distribution plan
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
Class B
Shares 121,616,938 3,668,824 7,822,932
Class C
Shares 128,782 320 28
</TABLE>
19
<PAGE> 20
Trustees and Officers
TRUSTEES
STEPHEN B. TIMBERS
President and Trustee
DAVID W. BELIN
Trustee
LEWIS A. BURNHAM
Trustee
DONALD L. DUNAWAY
Trustee
ROBERT B. HOFFMAN
Trustee
DONALD R. JONES
Trustee
DAVID B. MATHIS
Trustee
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
OFFICERS
J. PATRICK BEIMFORD, JR.
Vice President
JOHN E. PETERS
Vice President
MICHELLE M. KEELEY
Vice President
FRANK J. RACHWALSKI, JR.
Vice President
PHILIP J. COLLORA
Vice President and
Secretary
CHARLES F. CUSTER
Vice President and
Assistant Secretary
JEROME L. DUFFY
Treasurer
ELIZABETH C. WERTH
Assistant Secretary
- -------------------------------------------------------------------------------
- -----------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- -----------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
1-800-621-1048
- -----------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- -----------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- -----------------------------------------------------------------------
INVESTMENT MANAGER KEMPER FINANCIAL SERVICES, INC.
- -----------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
120 South LaSalle Street
Chicago, IL 60603
[RECYCLED LOGO]
Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income prospectus. [KEMPER MUTUAL FUNDS LOGO]
KUSMF 2 (11/95) Printed in the U.S.A.
