<PAGE> 1
KEMPER
U.S. MORTGAGE FUND
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED SEPTEMBER 30,
1996
Offering Investors the opportunity for maximum current return from a
portfolio of U.S. Government Securities
" . . . This [neutral to defensive
duration] positioning helped the
fund as the market traded in a
choppy pattern . . ."
[KEMPER FUNDS LOGO]
<PAGE> 2
Table of
Contents
2
At a Glance
2
Terms to Know
3
Economic Overview
5
Performance Update
8
Portfolio Statistics
9
Portfolio of
Investments
11
Report of
Independent Auditors
12
Financial Statements
14
Notes to
Financial Statements
18
Financial Highlights
At A Glance
- -------------------------------------------------------------------------------
Kemper U.S. Mortgage Fund Total Returns
- -------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1996 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
LIPPER U.S.
MORTGAGE
FUNDS CATEGORY
CLASS A CLASS B CLASS C AVERAGE*
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
4.28% 3.54% 3.47% 4.59%
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NET ASSET VALUE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
9/30/96 9/30/95
- -------------------------------------------------------------------------------
<S> <C> <C>
KEMPER U.S. MORTGAGE FUND
CLASS A $6.91 $7.13
- -------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND
CLASS B $6.91 $7.12
- -------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND
CLASS C $6.90 $7.12
- -------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not represent 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.
*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.
- -------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND RANKINGS*
- -------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER U.S. MORTGAGE FUNDS CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #33 OF #49 OF #54 OF
60 FUNDS 60 FUNDS 60 FUNDS
- --------------------------------------------------------------------------------
5-YEAR N/A #18 OF
23 FUNDS N/A
- --------------------------------------------------------------------------------
10-YEAR N/A #13 OF
15 FUNDS N/A
- --------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- -------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF SEPTEMBER 30, 1996.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1 YEAR INCOME: $0.5160 $0.4555 $0.4607
- --------------------------------------------------------------------------------
SEPTEMBER
DIVIDEND: $0.0430 $0.0380 $0.0383
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 7.47% 6.60% 6.66%
- --------------------------------------------------------------------------------
SEC YIELD+: 6.01% 5.46% 5.55%
- --------------------------------------------------------------------------------
</TABLE>
+Current annualized distribution rate is the latest monthly dividend shown as an
annualized percentage of net asset value on September 30, 1996. 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, 1996 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.
- --------------------------------------------------------------------------------
TERMS TO KNOW
AVERAGE ANNUAL TOTAL RETURN Average annual total return is a fund's total return
expressed as an annualized average, adjusted for the maximum sales charge for
Class A shares or the applicable contingent deferred sales charge in effect at
the end of the period for Class B and C shares.
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.
<PAGE> 3
GENERAL ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $76 BILLION IN ASSETS, INCLUDING $42 BILLION IN RETAIL
MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM
HARVARD UNIVERSITY.
DEAR SHAREHOLDER:
As we approach the close of 1996, it's remarkable how eventful the year has been
and yet, economically, we are essentially where we were one year ago.
The fundamentals of the economy are remarkably similar today to what they
were in 1995. Long-term interest rates are approximately 6.52% compared to 6.29%
in November 1995. The economy is growing at a rate of approximately 2.2%.
Inflation continues to be well under control, at about 3.0%.
One significant difference between today and one year ago is that prices of
the stocks are on average up 15% to 20%. While price movements were more
volatile in 1996 than in the past few years, the patient investor was amply
rewarded. The prime element sending the stock market higher was strong positive
cash flows. This liquidity in an environment of modestly increasing corporate
profits and relatively stable interest rates pushed stocks higher for most of
the year.
This higher stock market has caused many market observers to worry. While
we cannot ignore what has happened, we find no reason to be bearish over the
long term. The environment is benign to favorable for financial assets. Given
steady interest rates, moderate economic growth and continued moderate corporate
earnings growth, there are few excesses in the system. In fact, real interest
rates are probably too high considering our outlook for inflation, and we may
see them decline over time.
Naturally, we cannot rule out the possibility of a market correction. But,
in our belief, the downside would appear to be limited to 5% to 8%, which is the
size of a typical correction based on historical data. As we have said in
previous outlooks, three elements tend to move the market:
- - EARNINGS. We forecast corporate earnings to range between 0% and 5% on
average for the Standard & Poor's 500* in 1997 -- not as high as in recent
previous years but positive nonetheless.
- - INTEREST RATES. Rates should remain stable, and short-term interest
rates may even decline.
- - LIQUIDITY. Investors, through mutual funds, 401(k)s and qualified
contribution plans in particular, continue to create strong demand for
securities.
In order to move the market more than would be expected in a typical
decline, one or more of these elements will have to turn negative in 1997, and,
while future market conditions cannot be predicted with certainty, we fail to
see what would materially change our outlook. Our outlook going forward is that
1997 should be a lot like 1996.
While the economy continued along a relatively consistent path, the United
States took some politically significant steps in 1996. First, of course,
President Bill Clinton and a Republican Congress were re-elected by the voters.
In the first few days after the general election, especially, investors
demonstrated their support for such a balance in our leadership. But of much
greater long-term significance is the expressed commitment by both parties to
balance the federal budget and address certain entitlement programs. The first
year after an election can be a fertile time to accomplish major initiatives,
and we are hopeful that progress can be made.
The future of the Social Security system, which many experts believe will
run out of money about 20 years from now, will be a subject in which you can
expect Zurich Kemper Investments, Inc. to play a leadership role. The possible
solutions for "fixing Social Security" are finite: raise Social Security taxes,
reduce benefits, raise the retirement age, change inflation assumptions or
pursue a higher rate of return on assets contributed by workers. We believe that
a bipartisan solution will be worked out, which will include giving individuals
the option of investing a portion of their Social Security contributions in an
account earmarked for them. This change is needed to return credibility to the
system, which many Americans have lost faith in.
What to do with Social Security is a debate that spans generations and
promises to occupy much attention in the coming years. As we hope to help
advance constructive debate, we'll be advocating partial privatization for this
federal program while maintaining a safety net for many low-wage earners and
providing a seamless transition for seniors near or in retirement.
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 (10/31/96) 6 Months ago 1 year ago 2 years ago
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.53 6.74 6.04 7.74
Prime rate (2) 8.25 8.25 8.75 7.75
Inflation rate (3) 3 2.9 2.6 2.6
The U.S. dollar (4) 4.74 8.94 -1.05 -5.28
Capital goods orders (5)* 2.24 7.42 8.57 15.65
Industrial production (5) 3.5 2.56 1.92 6.77
Employment growth (6) 2.01 2.07 1.93 3.3
</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%. 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 the 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 September 30, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this letter as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
- ----------------------
Stephen B. Timbers
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
November 15, 1996
*THE STANDARD & POOR'S 500 IS AN UNMANAGED INDEX GENERALLY REPRESENTATIVE OF THE
U.S. STOCK MARKET.
4
<PAGE> 5
PERFORMANCE UPDATE
[PHOTO OF J. PATRICK BEIMFORD, JR.]
J. PATRICK BEIMFORD, JR., JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN 1976.
HE IS EXECUTIVE VICE PRESIDENT AND CHIEF INVESTMENT OFFICER FOR FIXED-INCOME
INVESTMENTS. MR. BEIMFORD IS ALSO PORTFOLIO CO-MANAGER FOR KEMPER U.S. MORTGAGE
FUND. HE RECEIVED A BACHELOR OF SCIENCE AND INDUSTRIAL MANAGEMENT DEGREE FROM
PURDUE UNIVERSITY AND RECEIVED AN M.B.A. FROM THE UNIVERSITY OF CHICAGO.
[PHOTO OF RICHARD VANDENBURG]
RICHARD VANDENBERG JOINED ZKI IN MARCH 1996, AS SENIOR VICE PRESIDENT OF ZKI AND
PORTFOLIO CO-MANAGER OF KEMPER U.S. MORTGAGE FUND. VANDENBERG HAS MORE THAN 22
YEARS OF FIXED-INCOME PORTFOLIO MANAGEMENT EXPERIENCE. HE RECEIVED BOTH A
BACHELORS DEGREE AND M.B.A. FROM THE UNIVERSITY OF WISCONSIN.
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.
PORTFOLIO CO-MANAGERS PATRICK BEIMFORD AND RICHARD VANDENBERG DISCUSS
THE POSITIONING OF THE FUND DURING A YEAR CHARACTERIZED PRIMARILY BY RISING
INTEREST RATES AND FEARS OF STRONGER ECONOMIC GROWTH AND INFLATION.
Q. HOW WOULD YOU CHARACTERIZE THE ECONOMIC ENVIRONMENT OVER THE LAST 12
MONTHS, AND HOW DID GOVERNMENT SECURITIES FARE?
A. The investment climate changed dramatically over the past 12
months. At the start of the fiscal year, investors were optimistic about the
government market. It was expected that the economy would continue to grow
slowly, inflation would remain low, and that perhaps the Federal Reserve Board
(the Fed) would lower short-term interest rates. (The Fed did move in December
1995 and January 1996, to lower interest rates.) The market was also hopeful,
that the negotiations underway in Washington, D.C., in late 1995 would lead to
a balanced budget agreement with a solid plan for reducing the federal budget
deficit. All of these events were positive for government securities because
they supported a slow-growth, benign inflation environment. As a result, market
interest rates (yields) of government securities fell and their prices
increased.
By February 1996, political and economic events caused investors to
re-evaluate whether the economy could continue on its slow growth, low inflation
path. This uncertainty moved market interest rates higher and prices of
government securities lower. Most of the adjustment in interest rates occurred
in the first quarter of 1996, but yields remained at higher levels.
Q. WHAT WERE THE EVENTS THAT CAUSED THE CHANGE IN INTEREST RATE DIRECTION?
A. Initially, the collapse of federal budget negotiations caused
market yields to rise. Additionally, columnist Patrick Buchanan's strong early
showing in the presidential primaries added concern as the market viewed many
of his proposals as potentially inflationary. Further, in his testimony before
Congress, Fed Chairman Alan Greenspan intimated that the pace of economic
growth was improving. This caused some investors to conclude that another
reduction in interest rates was not imminent. These events prompted investors
to sell, and interest rates rose.
However, the most dramatic rise in market rates during the period
occurred in early March, when the U.S. Labor Department reported an
unanticipated and dramatic increase in employment growth. Many bond investors
saw this data as evidence that the economy was gaining more momentum than
previously anticipated. The news caused a sell-off in the market. This is
because more rapid economic growth is associated with higher inflation, which
erodes the value of fixed- income investments. Fears of inflation and a
potential rate hike by the Fed continued to impact the market throughout the
rest of the period and rates never moved back to their lower 1995 levels.
5
<PAGE> 6
PERFORMANCE UPDATE
Q. WAS THE FUND'S PERFORMANCE IMPACTED BY RISING INTEREST RATES?
A. When interest rates rise, the prices of bonds fall. Therefore, the
government bond market, and Kemper U.S. Mortgage Fund were both adversely
impacted by the rise in interest rates that began occurring in early 1996.
During the first quarter of the fiscal year, we had expected interest
rates to decline and had positioned the fund with a longer than average
duration. Duration is a measurement of a fund's sensitivity to interest rates.
The longer the duration, the more sensitive it is to interest rate changes. Our
outlook on rates, however, began to change in January so we reduced the fund's
duration believing that the yields would not continue their precipitous decline.
We reduced duration again in early March and positioned the fund for a more
stable interest rate environment. Unfortunately, the employment release in March
caused the market to trade down sharply, which hurt the fund's performance --
even with its shortened duration.
From that point forward we maintained a neutral to defensive duration
positioning for the fund. This means that we reduced the portfolio's duration to
a length similar to that of the market or shorter. This positioning helped the
fund as the market traded in a choppy pattern throughout the rest of the period.
Q. WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE PORTFOLIO TO ALTER THE
FUND'S DURATION?
A. To adjust duration, we altered our level of mortgages versus Treasuries.
When interest rates were falling during the first three months of the period, we
added Treasuries to the portfolio. This enabled the fund to benefit from the
market's rally, as Treasuries offer better price appreciation potential when
interest rates decline. It also reduced the fund's exposure to mortgage
prepayment risk. The risk of prepayments is always more prevalent when rates
fall because borrowers are likely to refinance into lower-rate mortgages. As
this happens, mortgages with higher interest rates are paid off early and the
proceeds are reinvested at lower market rates. Although mortgages generally
provide higher yields, Treasuries offered the potential for a higher total
return early in the fiscal year. Total return, remember, includes both income on
the investments and price change.
In January 1996, we began selling Treasuries to reduce the fund's
duration and to increase its investment in mortgages. We made this adjustment
because we expected that rates would begin to stabilize or move somewhat higher.
In a higher interest rate environment, mortgages tend to outperform Treasuries.
We also wanted to align the fund's portfolio more closely to the defensive
positioning favored by our peers. By May, 100 percent of the fund's portfolio
was invested in mortgages. The allocation to mortgages was kept between 94 and
100 percent throughout the remainder of the fiscal period. When we did invest in
Treasuries, it was only in short-term securities, which was part of our neutral
to defensive strategy.
Q. WHAT TYPES OF MORTGAGE SECURITIES DID THE FUND FAVOR DURING THE PERIOD?
A. For the most part, the fund was invested in Government National Mortgage
Association (GNMA) 30-year mortgage-backed securities as well as a small
percentage in Federal National Mortgage Association (FNMA) 30-year mortgage-
backed securities. We favored 7 1/2 to 8 percent coupons, which tend to
outperform in stable to slightly higher interest rate environments. Also, we
accumulated some seasoned 6 1/2 to 7 percent coupon securities, which offered
slightly shorter durations. These coupons performed very well during the period.
Q. WHAT'S YOUR OUTLOOK FOR THE GOVERNMENT MARKET AND KEMPER U.S. MORTGAGE
FUND IN PARTICULAR?
A. We don't expect to see any more significant increases in interest rates.
In fact, given the current economic environment and the low level of inflation,
rates should remain somewhat stable. This scenario is relatively positive for
mortgages, which are the fund's primary investment. There would need to be a
major change in economic fundamentals to move rates drastically one way or
another. But at this point, we don't anticipate that happening.
6
<PAGE> 7
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
Average Annual Total Returns*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED SEPTEMBER 30, 1996 (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 CLASS A - 0.46% N/A N/A 4.24% (since 1/10/92)
- -----------------------------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND CLASS B 0.63 5.30% 6.46 7.02 (since 10/26/84)
- -----------------------------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND CLASS C 3.47 N/A N/A 6.28 (since 5/31/94)
- -----------------------------------------------------------------------------------------------------
</TABLE>
Growth of an assumed $10,000 investment in Kemper U.S. Mortgage Fund
Class A from 1/10/92 through 9/30/96
[LINE GRAPH]
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
1/10/92 12/31/93 12/31/95 9/30/96
- -----------------------------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND CLASS A (1) 10,000 10,674 12,164 12,169
- -----------------------------------------------------------------------------------------------------
SALOMON BROTHERS 30-YEAR GNMA INDEX + 10,000 11,477 13,249 13,590
- -----------------------------------------------------------------------------------------------------
CONSTANT PRICE INDEX ++ 10,000 10,573 11,131 11,443
- -----------------------------------------------------------------------------------------------------
</TABLE>
Growth of an assumed $10,000 investment in Kemper U.S. Mortgage Fund
Class B from 10/31/84 through 9/30/96
[LINE GRAPH]
<TABLE>
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
10/31/84 12/31/87 12/31/90 12/31/93 9/30/96
- -----------------------------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND CLASS B (1) 10,000 12,600 15,710 20,128 22,460
- -----------------------------------------------------------------------------------------------------
SALOMON BROTHERS 30-YEAR GNMA INDEX + 10,000 15,326 21,407 27,384 32,381
- -----------------------------------------------------------------------------------------------------
CONSTANT PRICE INDEX ++ 10,000 10,959 12,707 13,846 14,986
- -----------------------------------------------------------------------------------------------------
</TABLE>
Growth of an assumed $10,000 investment in Kemper U.S. Mortgage Fund
Class C from 5/31/94 through 9/30/96
[LINE GRAPH]
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
5/31/94 12/31/94 12/31/95 9/30/96
- -----------------------------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND CLASS C (1) 10,000 9,910 11,598 11,532
- -----------------------------------------------------------------------------------------------------
SALOMON BROTHERS 30-YEAR GNMA INDEX + 10,000 10,091 11,800 12,104
- -----------------------------------------------------------------------------------------------------
CONSTANT PRICE INDEX ++ 10,000 10,149 10,407 10,698
- -----------------------------------------------------------------------------------------------------
</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 dividends and for
Class A shares adjustment for the maximum sales charge of 4.5%, for Class B
shares adjustment for the applicable contingent deferred sales charge(CDSC) as
follows: 1-year, 3%; 5-year, 1%; since inception, 0% and for C shares no
adjustment for sales charge. The maximum B share CDSC is 4%. For C shares
purchased on or after 4/1/96 there is a 1% CDSC on certain redemptions within
the first year of purchase. During the periods noted, securities prices
fluctuated. For additional information, see the Prospectus and Statement of
Additional Information and the Financial Highlights at the end of this report.
(1)Performance includes reinvestment of dividends and adjustment for the maximum
sales charge for A shares and the contingent deferred sales charge in effect at
the end of the period for B shares. In comparing Kemper U.S. Mortgage Fund to
the 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.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
ON 9/30/96 ON 9/30/95
<S> <C> <C>
- ----------------------------------------------------------------------------------------
MORTGAGE-BACKED:
GNMA 83% 91%
- ----------------------------------------------------------------------------------------
OTHER 11 3
- ----------------------------------------------------------------------------------------
LONG-TERM GOVERNMENT SECURITIES 6 6
- ----------------------------------------------------------------------------------------
100% 100%
[PIE CHART]
<CAPTION>
YEARS TO MATURITY
- ----------------------------------------------------------------------------------------
ON 9/30/96 ON 9/30/95
<S> <C> <C>
- ----------------------------------------------------------------------------------------
LESS THAN 5 15% 2%
- ----------------------------------------------------------------------------------------
5-10 20 24
- ----------------------------------------------------------------------------------------
10-20 64 64
- ----------------------------------------------------------------------------------------
20+ YEARS 1 --
- ----------------------------------------------------------------------------------------
100% 100%
<CAPTION>
[PIE CHART]
AVERAGE MATURITY
- ----------------------------------------------------------------------------------------
ON 9/30/96 ON 9/30/95
<S> <C> <C>
AVERAGE MATURITY 8.9 YEARS 11.1 YEARS
- ----------------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER U.S. MORTGAGE FUND
PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1996
(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 6.00% 2023-2026 $ 1,507 $ 1,372
MORTGAGE ASSOCIATION - 83.1% Certificates 6.50 2022-2026 448,531 422,406
(Cost: $2,399,069) 7.00 2016-2026 613,442 593,332
7.50 2007-2026 468,857 464,483
8.00 2016-2026 520,808 527,718
8.50 2016-2026 273,942 281,893
9.00 2008-2026 95,267 100,256
9.50 2009-2023 47,825 51,605
10.00 2016-2021 6,465 7,051
10.50 2019-2021 7,933 8,735
11.00 2019 373 412
--------------------------------------------------------------------------
2,459,263
- ---------------------------------------------------------------------------------------------------------------------
U.S. TREASURY Notes 8.75 1997 118,000 121,411
SECURITIES - 22.5% 8.875 1997 122,000 125,889
(Cost: $673,498) 8.125 1998 70,000 71,925
8.875 1998 42,000 44,238
9.00 1998 84,000 87,793
Bonds 12.75 2010 67,640 94,590
14.00 2011 42,100 63,920
11.25 2015 20,390 29,279
6.00 2026 32,000 28,115
--------------------------------------------------------------------------
667,160
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Pass-through 6.50 2026 512 481
MORTGAGE ASSOCIATION - 10.3% Certificates 7.00 2011-2026 72,982 71,058
(Cost: $303,836) 8.00 2024 9,942 10,048
8.50 2026 109,000 111,793
9.00 2016-2026 106,311 110,897
11.50 2018 637 711
--------------------------------------------------------------------------
304,988
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Pass-through 5.00 2021 14,600 12,989
MORTGAGE CORPORATION - .5% Certificates 8.00 2017 1,016 1,038
(Cost: $14,907) 8.50 2016 293 304
--------------------------------------------------------------------------
14,331
--------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--116.4%
(Cost: $3,391,310) 3,445,742
--------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE Dated September 1996, collateralized by Government National Mortgage
AGREEMENT (A) - .3% Association securities.
(Cost: $10,000)
First Boston
(held at The Chase Manhattan Bank, N.A.)
5.35%, 10/02/96 $ 10,000 $ 10,000
--------------------------------------------------------------------------
TOTAL INVESTMENTS--116.7%
(Cost: $3,401,310) 3,455,742
--------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER
ASSETS--(16.7%) (495,607)
--------------------------------------------------------------------------
NET ASSETS--100% $2,960,135
--------------------------------------------------------------------------
</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, Investor's 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 $3,401,310,000 for federal income tax
purposes at September 30, 1996, the gross unrealized appreciation was
$75,667,000, the gross unrealized depreciation was $21,235,000 and the net
unrealized appreciation on investments was $54,432,000.
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 Kemper U.S. Mortgage Fund, a series
of Kemper Portfolios, as of September 30, 1996, the related statements of
operations for the year then ended and changes in net assets for the year then
ended, the two months ended September 30, 1995 and the year ended July 31, 1995
and the financial highlights for each of the fiscal periods since 1992. 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, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
U.S. Mortgage Fund at September 30, 1996, 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 18, 1996
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1996
(IN THOUSANDS)
<TABLE>
- --------------------------------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------------------------------
<S> <C>
Investments, at value
(Cost: $3,401,310) $ 3,455,742
- --------------------------------------------------------------------------------------------------------
Cash 9,270
- --------------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 388
- --------------------------------------------------------------------------------------------------------
Investments sold 850
- --------------------------------------------------------------------------------------------------------
Interest 35,728
- --------------------------------------------------------------------------------------------------------
TOTAL ASSETS 3,501,978
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------------------------------------
Payable for:
Fund shares redeemed 4,166
- --------------------------------------------------------------------------------------------------------
Investments purchased 534,298
- --------------------------------------------------------------------------------------------------------
Management fee 1,253
- --------------------------------------------------------------------------------------------------------
Distribution services fee 666
- --------------------------------------------------------------------------------------------------------
Administrative services fee 584
- --------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 763
- --------------------------------------------------------------------------------------------------------
Trustees' fees and other 113
- --------------------------------------------------------------------------------------------------------
Total liabilities 541,843
- --------------------------------------------------------------------------------------------------------
NET ASSETS $ 2,960,135
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------------------------------------
Paid-in capital $ 3,778,358
- --------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (916,606)
- --------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 54,432
- --------------------------------------------------------------------------------------------------------
Undistributed net investment income 43,951
- --------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 2,960,135
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($1,907,665 / 276,108 shares outstanding) $6.91
- --------------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net asset value or 4.50% of offering price) $7.24
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to contingent deferred sales charge) per
share
($1,050,776 / 152,175 shares outstanding) $6.91
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to contingent deferred sales charge) per
share
($1,694 / 245 shares outstanding) $6.90
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended September 30, 1996
(IN THOUSANDS)
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
Interest income $258,044
- -------------------------------------------------------------------------------------------------------
Expenses:
Management fee 16,340
- -------------------------------------------------------------------------------------------------------
Distribution services fee 9,340
- -------------------------------------------------------------------------------------------------------
Administrative services fee 7,733
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 7,483
- -------------------------------------------------------------------------------------------------------
Professional fees 121
- -------------------------------------------------------------------------------------------------------
Reports to shareholders 617
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 84
- -------------------------------------------------------------------------------------------------------
Total expenses 41,718
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 216,326
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Net realized loss on sales of investments (including options purchased) (33,861)
- -------------------------------------------------------------------------------------------------------
Net realized gain from futures transactions 1,143
- -------------------------------------------------------------------------------------------------------
Net realized loss (32,718)
- -------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments (55,809)
- -------------------------------------------------------------------------------------------------------
Net loss on investments (88,527)
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $127,799
- -------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWO MONTHS YEAR
YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, JULY 31,
1996 1995 1995
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------------------------
Net investment income $ 216,326 38,035 273,459
- -----------------------------------------------------------------------------------------------------------
Net realized loss (32,718) (4,479) (107,190)
- -----------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation (55,809) 40,878 138,533
- -----------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 127,799 74,434 304,802
- -----------------------------------------------------------------------------------------------------------
Net equalization charges (6,653) (1,220) (12,882)
- -----------------------------------------------------------------------------------------------------------
Distribution from net investment income (226,314) (40,438) (267,996)
- -----------------------------------------------------------------------------------------------------------
Net decrease from capital share transactions (427,749) (68,053) (653,661)
- -----------------------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (532,917) (35,277) (629,737)
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------------------------------------------
Beginning of period 3,493,052 3,528,329 4,158,066
- -----------------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment income
OF $43,951, $60,572, and $64,192, respectively) $ 2,960,135 3,493,052 3,528,329
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
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 sales charge but are subject to
higher ongoing expenses than Class A shares and,
for shares sold on or after April 1, 1996, 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 (none sold through September 30,
1996) are offered to a limited group of investors,
are not subject to initial or contingent deferred
sales charges and have lower ongoing expenses than
other classes. Differences in class expenses will
result in the payment of different per share income
dividends by class. All shares of the Fund have
equal rights with respect to voting, dividends and
assets, subject to class specific preferences.
In 1995, the Fund changed its fiscal year end for
financial reporting and federal income tax purposes
from July 31 to September 30.
- --------------------------------------------------------------------------------
2 SIGNIFICANT INVESTMENT VALUATION. Investments are stated at
ACCOUNTING POLICIES 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 discount amortization on
all fixed income securities and premium
amortization on mortgage-backed securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
The Fund may purchase securities with delivery or
payment to occur at a later date. At the time the
Fund enters into a commitment to purchase a
security, the transaction is recorded and the value
of the security is reflected in the net asset
value. The value of the security may vary with
market fluctuations. No interest accrues to the
Fund until payment takes place. At the time the
Fund enters into this type of transaction it is
required to segregate cash or other liquid assets
equal to the value of the
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
securities purchased. At September 30, 1996 the
Fund had $534,298,000 in purchase commitments
outstanding (18% of net assets), with a
corresponding amount of assets segregated.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the 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. 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, 1996, amounting to approximately
$908,376,000, is available to offset future taxable
gains. If not applied, $302,158,000 of the loss
carryover expires during the period ended 1998 with
the remainder expiring during the period ended
2005.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income monthly and
any net realized capital gains annually, which are
recorded on the ex-dividend date. Dividends are
determined in accordance with income tax principles
which may treat certain transactions differently
from generally accepted accounting principles.
EQUALIZATION ACCOUNTING. 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 MANAGEMENT AGREEMENT. The Fund has a management
AFFILIATES agreement with Zurich Kemper Investments, Inc.
(ZKI), and pays a management fee at an annual rate
of .55% of the first $250 million of average daily
net assets declining to .40% of average daily net
assets in excess of $12.5 billion. The Fund
incurred a management fee of $16,340,000 for the
year ended September 30, 1996.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS ------------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- -------------- -------------
<S> <C> <C> <C
Year ended September 30, 1996 $38,000 226,000 11,000
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of Class B and Class C
shares.
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
Pursuant to the agreement, KDI enters into related
selling group agreements with various firms at
various rates for sales of Class B and Class C
shares. In addition, KDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees and
commissions paid in connection with the sale of
Class B and Class C shares and the CDSC received in
connection with the redemption of such shares are
as follows:
<TABLE>
<CAPTION>
COMMISSIONS AND
DISTRIBUTION FEES
DISTRIBUTION FEES PAID BY KDI
AND CDSC -----------------------------
RECEIVED BY KDI TO ALL FIRMS TO AFFILIATES
----------------- ------------- -------------
<S> <C> <C> <C>
Year ended September 30, 1996 $11,487,000 997,000 22,000
</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 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 that the firms service.
Administrative services fees (ASF) paid are as
follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY THE -----------------------------
FUND TO KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------- -------------
<S> <C> <C> <C>
Year ended September 30, 1996 $ 7,733,000 7,729,000 301,000
</TABLE>
SHAREHOLDER SERVICES AGENT 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
$4,709,000 for the year ended September 30, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the year ended September 30, 1996, the Fund
made no payments to its officers and incurred
trustees' fees of $56,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT For the year ended September 30, 1996, investment
TRANSACTIONS transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $13,839,792
Proceeds from sales 14,368,538
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>
YEAR ENDED TWO MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, JULY 31,
1996 1995 1995
-------------------- ------------------ --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Shares Sold
Class A 3,767 $ 25,307 1,023 $ 7,000 6,918 $ 45,618
--------------------------------------------------------------------------------
Class B 5,032 34,439 925 6,312 8,293 55,591
--------------------------------------------------------------------------------
Class C 108 760 42 296 167 1,153
--------------------------------------------------------------------------------
Shares Issued in
Reinvestment of
Dividends
Class A 11,834 83,107 1,950 13,752 12,059 82,686
--------------------------------------------------------------------------------
Class B 6,955 48,895 1,352 9,523 10,543 72,114
--------------------------------------------------------------------------------
Class C 7 50 1 7 3 19
--------------------------------------------------------------------------------
Shares Redeemed
Class A (49,877) (345,978) (8,038) (55,910) (63,394) (427,279)
--------------------------------------------------------------------------------
Class B (39,448) (273,798) (7,037) (49,021) (72,004) (483,386)
--------------------------------------------------------------------------------
Class C (77) (531) (2) (12) (26) (177)
--------------------------------------------------------------------------------
Conversion of Shares
Class A 24,615 171,511 5,480 38,088 43,850 296,147
--------------------------------------------------------------------------------
Class B (24,650) (171,511) (5,492) (38,088) (43,908) (296,147)
--------------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE
TRANSACTIONS $(427,749) $(68,053) $(653,661)
--------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The Fund has entered into exchange traded futures
contracts in order to help protect itself from
anticipated market conditions and, as such, bears
the risk that arises from entering into these
contracts.
At the time a Fund enters into a futures contract,
it is required to make a margin deposit with its
custodian. Subsequently, gain or loss is recognized
and payments are made on a daily basis between the
Fund and its broker as the market value of the
futures contract fluctuates. At September 30, 1996,
the market value of assets pledged by the Fund to
cover margin requirements for open futures
positions was $29,554,000. The Fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures position open
at September 30, 1996 (in thousands):
<TABLE>
<CAPTION>
FACE EXPIRATION LOSS AT
TYPE AMOUNT MONTH 9/30/96
----------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury $329,685 December '96 $(3,000)
----------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A SHARES
-----------------------------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED JULY 31, JANUARY 10 TO
SEPTEMBER 30, SEPTEMBER 30, ------------------------ JULY 31,
1996 1995 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.13 7.06 6.96 7.56 7.78 7.81
- -----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .49 .08 .53 .51 .62 .38
- -----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.19) .08 .09 (.59) (.21) (.03)
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations .30 .16 .62 (.08) .41 .35
- -----------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .52 .09 .52 .52 .63 .38
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.91 7.13 7.06 6.96 7.56 7.78
- -----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.28% 2.23 9.48 (1.21) 5.52 4.76
- -----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------------------------------------
Expenses .97% .94 .89 .99 .97 .94
- -----------------------------------------------------------------------------------------------------------------------
Net investment income 6.98 6.87 7.77 7.00 8.22 8.73
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES
---------------------------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED JULY 31,
SEPTEMBER 30, SEPTEMBER 30, ----------------------------------
1996 1995 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.12 7.05 6.96 7.56 7.77 7.25
- -------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .44 .07 .47 .45 .57 .65
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.19) .08 .09 (.59) (.21) .49
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations .25 .15 .56 (.14) .36 1.14
- -------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .46 .08 .47 .46 .57 .62
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.91 7.12 7.05 6.96 7.56 7.77
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.54% 2.09 8.44 (2.00) 4.85 16.36
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------------------------------
Expenses 1.80% 1.79 1.75 1.79 1.75 1.86
- -------------------------------------------------------------------------------------------------------------------
Net investment income 6.15 6.02 6.91 6.27 7.44 8.70
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C SHARES
------------------------------------------------------------
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED MAY 31 TO
SEPTEMBER 30, SEPTEMBER 30, JULY 31, JULY 31,
1996 1995 1995 1994
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.12 7.05 6.95 6.99
- ---------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .43 .07 .48 .07
- ---------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.19) .08 .09 (.04)
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations .24 .15 .57 .03
- ---------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .46 .08 .47 .07
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.90 7.12 7.05 6.95
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.47% 2.10 8.65 .47
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------------------------
Expenses 1.72% 1.69 1.71 1.55
- ---------------------------------------------------------------------------------------------------------------
Net investment income 6.23 6.12 6.95 6.46
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
TWO MONTHS
YEAR ENDED ENDED YEAR ENDED JULY 31,
SEPTEMBER 30, SEPTEMBER 30 ---------------------------------------------------------
1996 1995 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (in
thousands) $ 2,960,135 3,493,052 3,528,329 4,158,066 5,639,097 5,602,682
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 391% 249 573 963 551 376
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
19
<PAGE> 20
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR.
President and Trustee Vice President
DAVID W. BELIN CHARLES R. MANZONI, JR.
Trustee Vice President
LEWIS A. BURNHAM JOHN E. NEAL
Trustee Vice President
DONALD L. DUNAWAY MICHELLE M. KEELEY
Trustee Vice President
ROBERT B. HOFFMAN FRANK J. RACHWALSKI, JR.
Trustee Vice President
DONALD R. JONES RICHARD L. VANDENBERG
Trustee Vice President
DOMINIQUE P. MORAX PHILIP J. COLLORA
Trustee Vice President
and Secretary
SHIRLEY D. PETERSON
Trustee JEROME L. DUFFY
Treasurer
WILLIAM P. SOMMERS
Trustee 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 ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
http://www.kemper.com
[RECYCLE LOGO]
Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Fund prospectus.
KUSMF - 2 (11/96) 1024060 [KEMPER FUNDS LOGO]
Printed in the U.S.A.
