<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
KEMPER
U.S. MORTGAGE FUND
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED SEPTEMBER 30, 1997
OFFERING INVESTORS THE OPPORTUNITY FOR MAXIMUM CURRENT RETURN FROM A PORTFOLIO
OF U.S. GOVERNMENT SECURITIES
"... We believe our shortened duration
and increase in mortgage holdings
supported the fund's performance
through the Fed's tightening. ..."
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world(SM)
<PAGE> 2
CONTENTS
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, 1997
(UNADJUSTED FOR ANY SALES CHARGE)
- --------------------------------------------------------------------------------
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 9.26%
CLASS B 8.17%
CLASS C 8.45%
LIPPER U.S. MORTGAGE FUNDS CATEGORY AVERAGE* 9.15%
- --------------------------------------------------------------------------------
</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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
9/30/97 9/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER U.S. MORTGAGE FUND
CLASS A $7.01 $6.91
- --------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND
CLASS B $7.00 $6.91
- --------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND
CLASS C $7.00 $6.90
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
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 #30 OF 59 FUNDS #52 OF 59 FUNDS #51 OF 59 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #18 OF 34 FUNDS #32 OF 34 FUNDS N/A
- --------------------------------------------------------------------------------
10-YEAR N/A #17 OF 17 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, 1997.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.5160 $0.4557 $0.4638
- --------------------------------------------------------------------------------
SEPTEMBER DIVIDEND: $0.0430 $0.0380 $0.0387
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 7.36% 6.51% 6.63%
- --------------------------------------------------------------------------------
SEC YIELD+: 6.07% 5.48% 5.60%
- --------------------------------------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on September 30, 1997.
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, 1997, 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
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR FIXED-INCOME STYLE BOX
- --------------------------------------------------------------------------------
[MATURITY/QUALITY DIAGRAM]
Source: Morningstar, Inc., Chicago, IL 312-696-6000. (Morningstar Style Box is
based on a portfolio date as of September 30, 1997.) The Fixed-Income Style Box
placement is based on a fund's average effective maturity or duration and the
average credit rating of the bond portfolio.
Please note that style boxes do not represent an exact assessment of risk and
do not represent future performance. Please consult the prospectus for a
description of investment policies.
DURATION Duration is a measure of the interest rate sensitivity of a
fixed-income investment or portfolio. The longer the duration, 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. Total return assumes the
reinvestment of all dividends and 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
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 $86 BILLION IN ASSETS, INCLUDING $49 BILLION IN RETAIL MUTUAL
FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM
HARVARD UNIVERSITY.
DEAR SHAREHOLDER:
Once again, investors experienced extreme market volatility in the month of
October. Unlike the October corrections of 1987 and 1989, this year's market
drop occurred at a time when the United States economy is remarkably healthy and
resilient. As we have noted, the U.S. economy has been moving forward for
several years with an alternating fast/slow pace that has proven successful in
removing whatever excesses build from quarter to quarter. As a consequence,
interest rates and the rate of inflation are both low and stable. Moreover, the
federal budget deficit has been reduced to such an extent that discussion has
now turned to what the government should do with a projected surplus in 1998.
Fortunately, no part of our strong economic foundation was shaken by the
market correction. If anything, the correction provided a short-lived and
relatively painless lesson about the vulnerability of a highly valued market.
When markets are high, everything -- economic news, corporate earnings and
liquidity -- must go right. When markets are high - as our equity market has
been for most of this year - they are vulnerable to relatively minor
disappointments.
As you have read, of course, the direct source of the October correction
was Southeast Asia, where the world's highest growth economies had been
stumbling since the summer. These economies had become overextended, banks ran
into trouble with bad loans and the local governments failed to take prompt
action. The result was a domino effect of competitive devaluations of
currencies, crashing markets and political chaos.
But while Southeast Asia produced the event that led to the mini-panic in
the U.S. equity market - resulting in a 7 percent loss on October 27 -- the
world quickly looked to the U.S. for solutions. When the U.S. market quickly
rebounded, other markets became less volatile. Considering U.S. economic
fundamentals and the relatively small effect that Southeast Asian problems have
on U.S. companies as a whole, rational investors had to expect our market to
bounce back. In fact, if the U.S. equity market had not been so highly valued,
we would have expected the market's reaction to the Asian problems to be quite
muted. For instance, if the Dow Jones Industrial Average had been closer to
7000 than to 8000, we would have expected that the market would have dropped
only slightly.
But as we have said before, today's markets move very fast. We experienced
in one day the kind of correction that we used to experience over a six-month
period. At this writing, the U.S. equity market remains very volatile. We expect
that condition to continue, as volatility is a factor of higher valued markets.
Despite what the last few years may have suggested, markets do not go in just
one direction.
Our recent experience supported many of the basic tenets of investing:
- Invest for the long term and don't react to the short-term noise.
Investors who got hurt in the October correction were those who had
borrowed the money they invested and were forced to sell at low prices.
Investors who were able to remain invested and did, lost only some of
their above-average gain for the year.
- Diversification helps reduce overall portfolio risk. Government
securities investors, for example, found the bond market to be a safe
haven as the bond market rallied during the stock market correction.
- Investing abroad is complex and requires expert advice. Currency
valuations, in particular, can have a significant effect on investment
returns.
Our forecast for the next several months calls for moderate economic
growth, stable interest rates and controlled inflation. While we cannot rule
out the possibility of another market event that would add to the excitement of
equity investing, we would expect the U.S. market to again demonstrate its
resiliency.
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 (10/31/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.03 6.71 6.2 5.93
PRIME RATE(2) 8.5 8.5 8.25 8.75
INFLATION RATE(3)* 2.15 2.5 2.99 2.74
THE U.S. DOLLAR(4) 7.62 6.55 3.46 -1.57
CAPITAL GOODS ORDERS(5)* 14.97 8.17 7.71 5.13
INDUSTRIAL PRODUCTION(5)* 5.52 4.39 3.27 2.35
EMPLOYMENT GROWTH(6)* 2.23 2.27 2.1 2.19
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commerical lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6 percent. The low, moderate inflation of
the last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of September 30, 1997.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this commentary 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 AND CHIEF INVESTMENT OFFICER
Zurich Kemper Investments, Inc.
November 13, 1997
4
<PAGE> 5
PERFORMANCE UPDATE
[VANDENBERG PHOTO]
RICHARD VANDENBERG JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN MARCH 1996.
HE IS A SENIOR VICE PRESIDENT OF ZKI AND PORTFOLIO MANAGER OF KEMPER U.S.
MORTGAGE FUND. VANDENBERG HAS NEARLY 25 YEARS OF FIXED-INCOME PORTFOLIO
MANAGEMENT EXPERIENCE. HE RECEIVED BOTH A BACHELOR'S DEGREE AND AN M.B.A. FROM
THE UNIVERSITY OF WISCONSIN.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
THE 12-MONTH PERIOD ENDED SEPTEMBER 30, 1997, WAS POSITIVE FOR GOVERNMENT
BONDS. BELOW, PORTFOLIO MANAGER RICHARD VANDENBERG EXPLAINS THE FACTORS
CONTRIBUTING TO THE MARKET'S STRONG PERFORMANCE, EVEN IN LIGHT OF A FEDERAL
RESERVE BOARD INTEREST RATE INCREASE.
Q DURING THE FUND'S FISCAL YEAR, THE FEDERAL RESERVE BOARD (THE FED) RAISED
SHORT-TERM INTEREST RATES. HOW DID THAT AND OTHER ECONOMIC EVENTS IMPACT THE
PERFORMANCE OF GOVERNMENT BONDS DURING THE PERIOD?
A Government bonds and mortgage securities in particular performed well
during the 12-month period. The Fed did raise interest rates but the impact of
the tightening on the market was brief and relatively minimal. Here's a look at
that and other major events which shaped the market's performance.
At the start of the fiscal year political uncertainty began to creep into
the market about the potential outcome of the upcoming presidential and
congressional elections. Investors feared the Republican party might lose
control of Congress and reduce the likelihood of a balanced budget agreement in
1997. Investment markets rallied in November, however, with news that
Republicans maintained control of Congress. Some market participants intimated
that the election outcome was evidence of the public's desire for a true "checks
and balances" government.
The bullish environment began to change in December, when Federal Reserve
Board Chairman Alan Greenspan implied in passing that financial assets might be
overvalued. This shook the market and caused yields to rise and securities
prices to fall. Early in 1997, strong economic reports surfaced and Greenspan
reiterated his concern about the values of securities and about the potential
for a rise in wage inflation. In what was considered to be a preemptive move at
keeping inflation in check, the Fed tightened short-term rates by 0.25 percent
in late March.
While economic growth remained somewhat strong, even after the Fed
tightening, inflation remained uncharacteristically low. The government market
along with the broader fixed-income market began recouping losses experienced
with the Fed's interest rate increase as inflation fears continued to be
unconfirmed. For the remainder of the fiscal period, market yields fluctuated
with the release of varying economic data but remained relatively range-bound.
Inflation never became problematic and bonds performed positively.
Q HOW DID KEMPER U.S. MORTGAGE FUND PERFORM DURING THE PERIOD?
A We were pleased with the fund's Class A share performance, which was
in-line with its peer group average. The total return for Class A shares was
9.26 percent (unadjusted for any sales charge) for the 12-month period. By
comparison the average return of the Lipper Analytical Services U.S. Mortgage
Category was 9.15 percent. This is based on 59 funds that share a similar
investment objective. The fund's Class B shares returned 8.17 percent and Class
C shares returned 8.45 percent (unadjusted for any sales charge).
5
<PAGE> 6
PERFORMANCE UPDATE
Q HOW DID YOU PREPARE THE FUND FOR THE POSSIBILITY OF A FED TIGHTENING?
A We began preparing for a possible rate hike in January, by shortening the
fund's duration to below that of the fund's peer group average. Duration is a
measurement of a fund's sensitivity to interest rates -- the shorter the
duration, the less sensitive the fund is to interest rate changes. In addition,
we sold Treasury notes and purchased GNMA mortgages, which boosted the fund's
mortgage allocation to 95 percent. We made this adjustment because mortgages
tend to outperform Treasuries in a rising interest rate environment.
Q HOW WAS THE FUND IMPACTED BY THE FED'S TIGHTENING?
A The fund's losses in the first quarter were minimal. Class A shares were
down just 0.03 percent, while Class B and Class C shares slipped 0.24 percent
and 0.22 percent (unadjusted for any sales charge), respectively. We believe our
shortened duration and increase in mortgage holdings supported the fund's
performance through the Fed's tightening. As economic growth slowed and the need
for further Fed tightening diminished, the market and the fund rebounded very
quickly and the fund enjoyed positive returns for the balance of the reporting
period.
Q WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE FUND AFTER MARCH?
A By April, the markets were in recovery from the Fed's tightening.
Inflation remained relatively benign despite continuing growth in the economy.
To take advantage of this environment, we began adding Treasuries back into the
portfolio. We began in April by adding some short-term Treasuries. As it became
clear that market yields would continue to trend lower, we covered interest rate
hedges and added some longer-maturity Treasuries from July through September.
(Treasuries tend to outperform mortgages in a declining rate environment.)
However, mortgages also continued to perform well in tandem with Treasuries.
This was of course positive for the fund because mortgages are its primary type
of investment.
Q WHAT IS YOUR OUTLOOK FOR THE ECONOMY AND THE GOVERNMENT MORTGAGE MARKET?
A We are optimistic about the prospects for the market and Kemper U.S.
Mortgage Fund. The current economic environment -- benign inflation and moderate
growth -- is a particularly good one for bonds. We also believe that within a
global context, U.S. government bonds and mortgage securities are a cheap asset
class. We will of course keep a close watch on indicators of inflation and
adjust the fund accordingly.
6
<PAGE> 7
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED SEPTEMBER 30, 1997 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER U.S. MORTGAGE FUND CLASS A 4.28% 4.64% N/A 5.10% (since 1/10/92)
- ---------------------------------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND CLASS B 5.17 4.60 7.32 7.11 (since 10/26/84)
- ---------------------------------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND CLASS C 8.45 N/A N/A 6.93 (since 5/31/94)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper U.S. Mortgage Fund Class A shares FROM 1/10/92 TO 9/30/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1/10/92 12/31/93 12/31/95 9/30/97
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper U.S. Mortgage Fund Class A(1) $10,000 $10,674 $12,164 $13,296
Salomon Brothers 30-Year GNMA Index+ $10,000 $11,477 $13,249 $14,974
Consumer Price Index++ $10,000 $10,574 $11,131 $11,661
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper U.S. Mortgage Fund Class B shares FROM 10/31/84 TO 9/30/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
10/31/84 12/31/90 12/31/93 9/30/97
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper U.S. Mortgage Fund Class B(1) $10,000 $15,710 $20,128 $24,294
Salomon Brothers 30-Year GNMA Index+ $10,000 $21,407 $27,384 $35,680
Consumer Price Index++ $10,000 $12,707 $13,846 $15,271
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper U.S. Mortgage Fund Class C shares FROM 5/31/94 TO 9/30/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 9/30/97
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper U.S. Mortgage Fund Class C(1) $10,000 $ 9,910 $11,598 $12,507
Salomon Brothers 30-Year GNMA Index+ $10,000 $10,091 $11,800 $13,337
Consumer Price Index++ $10,000 $10,149 $10,407 $10,902
</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 3.5 percent, for Class B shares adjustment for the applicable
contingent deferred sales charge (CDSC) as follows: 1-year, 3 percent;
5-year, 1 percent; since inception, 0 percent and for Class C shares no
adjustment for sales charge. The maximum CDSC for Class B shares is 4
percent. For Class C shares, there is a 1 percent 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 Class A shares and the contingent deferred sales
charge in effect at the end of the period for Class 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.
+ 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 9/30/97 ON 9/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
GNMA 88% 83%
- --------------------------------------------------------------------------------
OTHER MORTGAGE-BACKED SECURITIES 7 11
- --------------------------------------------------------------------------------
INTERMEDIATE-TERM GOVERNMENT SECURITIES 3 --
- --------------------------------------------------------------------------------
LONG-TERM GOVERNMENT SECURITIES 2 6
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/97 ON 9/30/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 9/30/97 ON 9/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
LESS THAN 5 15% 15%
- --------------------------------------------------------------------------------
5-10 83 20
- --------------------------------------------------------------------------------
10-20 1 64
- --------------------------------------------------------------------------------
20+ YEARS 1 1
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/97 ON 9/30/97
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 9/30/97 ON 9/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 7.2 years 8.9 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, 1997
(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 $ 1,452 $ 1,387
MORTGAGE ASSOCIATION --87.9% Certificates 6.50 2022-2026 387,835 380,841
(Cost: $2,091,624) 7.00 2016-2027 461,215 462,037
7.50 2007-2027 572,605 583,248
8.00 2014-2027 421,533 437,627
8.50 2016-2027 127,363 133,347
9.00 2008-2027 113,938 122,105
9.50 2009-2027 58,489 63,349
10.00 2016-2021 5,114 5,608
10.50 2019-2021 5,720 6,292
11.00 2019 247 274
---------------------------------------------------------------------------
2,196,115
- ----------------------------------------------------------------------------------------------------------------------
U.S. TREASURY Notes 8.875 1997 75,000 75,293
SECURITIES --12.2% Bonds 8.875 1998 42,000 43,418
(Cost: $309,245) 10.75 2003 16,420 20,020
10.75 2005 13,170 16,882
12.75 2010 76,835 108,253
10.625 2015 14,850 21,398
6.25 2023 20,500 19,901
---------------------------------------------------------------------------
305,165
- ----------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Pass-through 6.50 2026 499 486
MORTGAGE ASSOCIATION --5.5% Certificates 7.00 2025-2027 31,534 31,462
(Cost: $134,353) 7.50 2027 12,000 12,202
8.00 2024 8,832 9,138
9.00 2016-2025 78,313 83,291
11.50 2018 537 589
---------------------------------------------------------------------------
137,168
- ----------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Pass-through 8.00 2017 850 886
MORTGAGE CORPORATION --1.2% Certificates 8.50 2016 242 254
(Cost: $28,734) 9.50 2020 25,731 27,733
---------------------------------------------------------------------------
28,873
---------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--106.8%
(Cost: $2,563,956) 2,667,321
---------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
REPURCHASE Dated September 1997. Collateralized by Federal Home Loan Mortgage
AGREEMENT --11.1% Corporation and Federal National Mortgage Association securities which
(Cost: $278,500) are monitored daily to ensure their market value exceeds the carrying
value of the repurchase agreement.
Nomura $ 278,500 $ 278,500
(held at The Bank of New York,
subcustodian)
6.41%, 10/1/97
--------------------------------------------------------------------------
TOTAL INVESTMENTS--117.9%
(Cost: $2,842,456) $2,945,821
--------------------------------------------------------------------------
LIABILITIES, LESS OTHER ASSETS--(17.9%) (447,996)
--------------------------------------------------------------------------
NET ASSETS--100% $2,497,825
--------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $2,842,456,000 for federal income tax
purposes at September 30, 1997, the gross unrealized appreciation was
$108,639,000, the gross unrealized depreciation was $5,274,000 and the net
unrealized appreciation on investments was $103,365,000.
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, 1997, the related statements of
operations for the year then ended and changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
fiscal periods since 1993. 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, 1997, 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, 1997, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the fiscal periods
since 1993, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 18, 1997
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investments, at value
(Cost: $2,842,456) $2,945,821
- --------------------------------------------------------------------------
Receivable for:
Fund shares sold 206
- --------------------------------------------------------------------------
Investments sold 59,171
- --------------------------------------------------------------------------
Interest 23,009
- --------------------------------------------------------------------------
TOTAL ASSETS 3,028,207
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Cash overdraft 183
- --------------------------------------------------------------------------
Payable for:
Fund shares redeemed 3,608
- --------------------------------------------------------------------------
Investments purchased 523,916
- --------------------------------------------------------------------------
Management fee 1,068
- --------------------------------------------------------------------------
Distribution services fee 459
- --------------------------------------------------------------------------
Administrative services fee 497
- --------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 533
- --------------------------------------------------------------------------
Trustees' fees and other 118
- --------------------------------------------------------------------------
Total liabilities 530,382
- --------------------------------------------------------------------------
NET ASSETS $2,497,825
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------
Paid-in capital $3,258,101
- --------------------------------------------------------------------------
Accumulated net realized loss on investments (896,109)
- --------------------------------------------------------------------------
Net unrealized appreciation on investments 103,365
- --------------------------------------------------------------------------
Undistributed net investment income 32,468
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $2,497,825
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($1,772,766 / 252,946 shares outstanding) $7.01
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net asset value or 4.50%
of offering price) $7.34
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($722,317 / 103,130 shares outstanding) $7.00
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($2,742 / 392 shares outstanding) $7.00
- --------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- --------------------------------------------------------------------------------------------
Interest income $222,143
- --------------------------------------------------------------------------------------------
Expenses:
Management fee 13,793
- --------------------------------------------------------------------------------------------
Distribution services fee 6,701
- --------------------------------------------------------------------------------------------
Administrative services fee 6,498
- --------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 6,107
- --------------------------------------------------------------------------------------------
Professional fees 78
- --------------------------------------------------------------------------------------------
Reports to shareholders 481
- --------------------------------------------------------------------------------------------
Trustees' fees and other 122
- --------------------------------------------------------------------------------------------
Total expenses 33,780
- --------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 188,363
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- --------------------------------------------------------------------------------------------
Net realized gain on sales of investments (including options purchased) 8,609
- --------------------------------------------------------------------------------------------
Net realized loss from futures transactions (14,507)
- --------------------------------------------------------------------------------------------
Net realized loss (5,898)
- --------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 48,933
- --------------------------------------------------------------------------------------------
Net gain on investments 43,035
- --------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $231,398
- --------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996
- -----------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 188,363 216,326
- -----------------------------------------------------------------------------------------------
Net realized loss (5,898) (32,718)
- -----------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation 48,933 (55,809)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 231,398 127,799
- -----------------------------------------------------------------------------------------------
Net equalization charges (7,042) (6,653)
- -----------------------------------------------------------------------------------------------
Distribution from net investment income (192,807) (226,314)
- -----------------------------------------------------------------------------------------------
Net decrease from capital share transactions (493,859) (427,749)
- -----------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (462,310) (532,917)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------------------------------
Beginning of year 2,960,135 3,493,052
- -----------------------------------------------------------------------------------------------
END OF YEAR (including undistributed
net investment income of
$32,468 and $43,951, respectively) $2,497,825 2,960,135
- -----------------------------------------------------------------------------------------------
</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 sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions within one year of purchase.
Class C shares do not convert into another class.
Class I shares (none sold through September 30,
1997) 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.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES 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. Financial futures and options are
valued at the settlement price established each day
by the board of trade or exchange on which they are
traded. Over-the-counter traded fixed income
options are valued based upon prices provided by
market makers. 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 securities purchased. At
September 30, 1997 the Fund had $523,882,000 in
purchase commitments outstanding (21% 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
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
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, 1997, amounting to approximately
$894,044,000, is available to offset future taxable
gains. If not applied, $275,760,000 of the loss
carryover expires during the period ended 1998 with
the remainder expiring through the period ended
2006.
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
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
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 $13,793,000 for the
year ended September 30, 1997.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Zurich Kemper Distributors,
Inc. (ZKDI). Underwriting commissions paid in
connection with the distribution of Class A shares
are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS
RETAINED BY ALLOWED BY ZKDI
ZKDI TO FIRMS
----------- -----------------
<S> <C> <C>
Year ended September 30, 1997 $29,000 201,000
</TABLE>
For services under the distribution services
agreement, the Fund pays ZKDI a fee of .75% of
average daily net assets of the Class B and Class C
shares. Pursuant to the agreement, ZKDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, ZKDI 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>
DISTRIBUTION FEES
AND CDSC COMMISSIONS AND
RECEIVED BY DISTRIBUTION FEES
ZKDI PAID BY ZKDI TO FIRMS
----------------- ---------------------
<S> <C> <C>
Year ended September 30, 1997 $8,064,000 661,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with ZKDI. For
providing information and administrative services
to
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
shareholders, the Fund pays ZKDI a fee at an annual
rate of up to .25% of average daily net assets of
each class. ZKDI 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 ZKDI
ASF PAID BY THE ------------------------------
FUND TO ZKDI TO ALL FIRMS TO AFFILIATES
---------------- ------------- --------------
<S> <C> <C> <C>
Year ended September 30, 1997 $6,498,000 6,503,000 73,000
</TABLE>
SHAREHOLDER SERVICES AGENT AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Zurich Kemper Service Company (ZKSvC) is the
shareholder service agent of the Fund. Under the
agreement, ZKSvC received shareholder services fees
of $3,192,000 for the year ended September 30,
1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the year ended September 30, 1997, the Fund
made no payments to its officers and incurred
trustees' fees of $46,000 to independent trustees.
- --------------------------------------------------------------------------------
4 TRANSACTIONS
INVESTMENT For the year ended September 30, 1997, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $6,836,351
Proceeds from sales 7,671,185
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996
------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 2,806 $ 18,135 3,767 $ 25,307
---------------------------------------------------------------------------------
Class B 3,168 22,086 5,032 34,439
---------------------------------------------------------------------------------
Class C 207 1,429 108 760
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 11,133 77,149 11,834 83,107
---------------------------------------------------------------------------------
Class B 5,110 35,406 6,955 48,895
---------------------------------------------------------------------------------
Class C 9 64 7 50
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
SHARES REDEEMED
Class A (59,510) (408,055) (49,877) (345,978)
---------------------------------------------------------------------------------
Class B (34,898) (239,589) (39,448) (273,798)
---------------------------------------------------------------------------------
Class C (69) (484) (77) (531)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 22,409 153,714 24,615 171,511
---------------------------------------------------------------------------------
Class B (22,425) (153,714) (24,650) (171,511)
---------------------------------------------------------------------------------
NET DECREASE
FROM CAPITAL SHARE
TRANSACTIONS $(493,859) $(427,749)
---------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The Fund has entered into exchange traded financial
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, 1997,
the market value of assets pledged by the Fund to
cover margin requirements for open futures
positions was $13,948,000. The Fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures positions
open at September 30, 1997:
<TABLE>
<CAPTION>
FACE EXPIRATION GAIN/
TYPE AMOUNT MONTH (LOSS)
------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bonds $31,731,000 December '97 $ 29,000
------------------------------------------------------------------------------
Eurodollar 31,891,000 December '97 (127,000)
------------------------------------------------------------------------------
Eurodollar 9,841,000 March '98 (39,000)
------------------------------------------------------------------------------
Eurodollar 9,360,000 June '98 (41,000)
------------------------------------------------------------------------------
Eurodollar 5,846,000 September '98 (24,000)
------------------------------------------------------------------------------
TOTAL $(202,000)
------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------------------
CLASS A
------------------------------------------------------
YEAR ENDED TWO MONTHS
SEPTEMBER 30, ENDED YEAR ENDED JULY 31,
-------------- SEPTEMBER 30, -------------------
1997 1996 1995 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------
Net asset value, beginning of period $6.91 7.13 7.06 6.96 7.56 7.78
- ----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .52 .49 .08 .53 .51 .62
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .10 (.19) .08 .09 (.59) (.21)
- ----------------------------------------------------------------------------------------------------
Total from investment operations .62 .30 .16 .62 (.08) .41
- ----------------------------------------------------------------------------------------------------
Less distribution from net investment income .52 .52 .09 .52 .52 .63
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $7.01 6.91 7.13 7.06 6.96 7.56
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 9.26% 4.28 2.23 9.48 (1.21) 5.52
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------
Expenses .96% .97 .94 .89 .99 .97
- ----------------------------------------------------------------------------------------------------
Net investment income 7.23% 6.98 6.87 7.77 7.00 8.22
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------
CLASS B
-------------------------------------------------------
YEAR ENDED TWO MONTHS
SEPTEMBER 30, ENDED YEAR ENDED JULY 31,
------------- SEPTEMBER 30, -------------------
1997 1996 1995 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------------
Net asset value, beginning of period $6.91 7.12 7.05 6.96 7.56 7.77
- -----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .45 .44 .07 .47 .45 .57
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .10 (.19) .08 .09 (.59) (.21)
- -----------------------------------------------------------------------------------------------------
Total from investment operations .55 .25 .15 .56 (.14) .36
- -----------------------------------------------------------------------------------------------------
Less distribution from net investment income .46 .46 .08 .47 .46 .57
- -----------------------------------------------------------------------------------------------------
Net asset value, end of period $7.00 6.91 7.12 7.05 6.96 7.56
- -----------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.17% 3.54 2.09 8.44 (2.00) 4.85
- -----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------------------
Expenses 1.83% 1.80 1.79 1.75 1.79 1.75
- -----------------------------------------------------------------------------------------------------
Net investment income 6.36% 6.15 6.02 6.91 6.27 7.44
- -----------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION> -----------------------------------------------------------------
CLASS C
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER TWO MONTHS YEAR
30, ENDED ENDED MAY 31 TO
---------------------- SEPTEMBER 30, JULY 31, JULY 31,
1997 1996 1995 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $6.90 7.12 7.05 6.95 6.99
- ---------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .43 .07 .48 .07
- ---------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .10 (.19) .08 .09 (.04)
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations .56 .24 .15 .57 .03
- ---------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .46 .46 .08 .47 .07
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.00 6.90 7.12 7.05 6.95
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.45% 3.47 2.10 8.65 .47
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------------------------
Expenses 1.71% 1.72 1.69 1.71 1.55
- ---------------------------------------------------------------------------------------------------------------
Net investment income 6.48% 6.23 6.12 6.95 6.46
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
CLASS B
---------------------------------------------------------------------------
YEAR ENDED TWO MONTHS
SEPTEMBER 30, ENDED YEAR ENDED JULY 31,
---------------------- SEPTEMBER 30, ----------------------------------
1997 1996 1995 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $2,497,825 2,960,135 3,493,052 3,528,329 4,158,066 5,639,097
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 235% 391 249 573 963 551
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
19
<PAGE> 20
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
TRUSTEES&OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS CHARLES R. MANZONI, JR.
President and Trustee Vice President
DAVID W. BELIN JOHN E. NEAL
Trustee Vice President
LEWIS A. BURNHAM ROBERT C. PECK, JR.
Trustee Vice President
DONALD L. DUNAWAY FRANK J. RACHWALSKI, JR.
Trustee Vice President
ROBERT B. HOFFMAN RICHARD L. VANDENBERG
Trustee Vice President
DONALD R. JONES 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 ZURICH KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER ZURICH KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world(SM)
Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income prospectus.
KUSMF - 2 (11/97) 1039850
