<PAGE> 1
KEMPER
U.S. MORTGAGE FUND
SEMIANNUAL REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED MARCH 31, 1997
Offering investors the opportunity for maximum current return from a
portfolio of U.S. Government Securities
" . . . We began preparing for a
possible rate hike in January by
shortening the fund's duration . . . "
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
7
Portfolio Statistics
8
Portfolio of
Investments
10
Financial Statements
12
Notes to
Financial Statements
16
Financial Highlights
AT A GLANCE
- -------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND TOTAL RETURNS
- -------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 1997
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 2.57%
CLASS B 1.99%
CLASS C 2.18%
LIPPER U.S. MORTGAGE FUNDS
CATEGORY AVERAGE* 2.65%
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
NET ASSET VALUE
- -------------------------------------------------------------------------------
AS OF AS OF
3/31/97 9/30/96
- -------------------------------------------------------------------------------
<S> <C> <C>
KEMPER U.S. MORTGAGE
FUND CLASS A $6.83 $6.91
- -------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE
FUND CLASS B $6.82 $6.91
- -------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE
FUND CLASS C $6.82 $6.90
- -------------------------------------------------------------------------------
</TABLE>
*Lipper Analytical Services, Inc. returns and rankings are based upon changes in
net asset value with all dividends reinvested and do not include the effect of
sales charges and, if they had, results may have been less favorable. Returns
and rankings are historical and do not reflect future performance.
Returns and net asset value fluctuate. Shares are redeemable at current net
asset value, which may be more or less than original cost.
- -------------------------------------------------------------------------------
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 #27 OF 58 FUNDS #57 OF 58 FUNDS #55 OF 58 FUNDS
- -------------------------------------------------------------------------------
5-YEAR #13 OF 27 FUNDS #25 OF 27 FUNDS N/A
- -------------------------------------------------------------------------------
10-YEAR N/A #13 OF 16 FUNDS N/A
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- -------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF MARCH 31, 1997.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTH INCOME: $0.2580 $0.2282 $0.2311
- -------------------------------------------------------------------------------
MARCH
DIVIDEND: $0.0430 $0.0380 $0.0387
- -------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 7.55% 6.69% 6.81%
- -------------------------------------------------------------------------------
SEC YIELD+: 6.22% 5.63% 5.74%
- -------------------------------------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly
dividend shown as an annualized percentage of net asset value on
March 31, 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
March 31, 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
KEMPER FUNDS' STYLE
-----------------------------------------------
MORNINGSTAR FIXED-INCOME STYLE BOX
-----------------------------------------------
FIXED STYLE BOX Maturity applies to taxable open-end funds:
for short less than four years; for
intermediate between four and 10 years; for
long greater than 10 years. The average credit
quality rating of a bond portfolio: funds that
have an average credit rating of AAA or AA are
high quality; A or BBB are medium quality;
below BB, low quality.
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.
<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 $79 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,
The agreement between the White House and Republican leaders in Congress to
balance the federal budget has effectively ended the market correction that
began in the first quarter. Such sudden progress on balancing the budget, an
initiative that the bond market was anticipating resolution on more than one
year ago, is positive news.
The next several weeks will find Congress and the Clinton administration
negotiating toward a final agreement. Unlike previous failed proposals that
sought to balance the budget principally by increasing income taxes, the current
plan -- which starts from the base of a relatively small deficit -- proposes to
slow the growth of federal spending. As such, its prospects are promising.
Natural skeptics are waiting to see specific legislation to see if the
agreement has teeth. While we are optimistic, we need to temper our enthusiasm.
Much of the good news associated with a balanced budget was quickly discounted
in the higher prices in the stock and bond markets.
Of particular interest to equity investors is the agreement to reduce the
maximum tax rate on capital gains. Although details of the reduction are yet to
be known, the prospect of more favorable tax treatment on gains will have the
short-term effect of supporting stocks -- investors can be expected to postpone
selling until they can qualify for the lower tax rate. With equity sales
essentially "frozen" until the effective date is known, the stock market should
have a considerable underpinning. Once an effective date is determined, we would
expect the pent-up selling to occur once that date is reached. However, then we
shall enjoy the long-term positive effect of the lower tax rate on gains.
Talk of a balanced budget has shifted the spotlight away from the Federal
Reserve Board's upward pressure on interest rates. Nevertheless, we look for the
Fed to raise rates in May. This action may be the last for a while because the
economy seems to be slowing down in the second quarter, after the rapid 5.6
percent growth in the first quarter of the year. An economic slowdown would
reduce the threat of inflation and reduce the need for further rate hikes by the
Fed.
In fact, a review of the standard measures of the economy shows little to
be concerned about. As has been the pattern for more than five years, a few
strong quarters followed by a few weak quarters have produced an overall 2
percent to 3 percent rate of growth in gross domestic product (GDP). Job
creation and the unemployment rate are consistent with a moderately expanding
economy. Corporate profits continue to grow at an expected 4 to 5 percent rate
in 1997. The Consumer Price Index continues to track at a 2.5 percent to 3.0
percent rate.
Just as we see a limited downside to today's rising interest rate
environment, so is there a limited upside in the near future. The effect of
higher rates will have to work itself through the economy. Higher rates have
significant implications for corporate profitability, debt issuance, credit
extension and international trade. Post-correction cash flows into the
financial markets will be a subject of great scrutiny. One of the factors
driving the stock market to its recent all-time high was the unprecedented high
level of investment through mutual funds, 401(k)s and qualified contribution
plans. It is realistic to expect that, on the margin, some of that cash will
find a home in short-term, liquid investments while the stock market sorts
itself out.
Leadership in the stock market has been quite narrow and concentrated for
the past six months in large, multinational companies with familiar consumer
brand names. The recent rally after the announcement of a balanced budget
agreement suggests that once monetary policy is also more certain, leadership
may broaden to include small capitalization stocks.
Higher interest rates are, of course, anathema to the fixed-income market.
However, bond investors in the last few weeks have been cheered by the balanced
budget proposal and by expectations that interest rates would not go much
higher. We expect the bond market to trade in a very narrow range -- with long-
term interest rates no lower than 6.75 percent and no
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 (4/30/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1)* 6.69 6.53 6.51 7.06
PRIME RATE(2)* 8.3 8.25 8.25 9
INFLATION RATE(3)* 2.79 2.99 2.83 3.05
THE U.S. DOLLAR(4) 9.32 3.46 8.51 -10.02
CAPITAL GOODS ORDERS(5)* 6.34 7.46 7.42 9.96
INDUSTRIAL PRODUCTION(5)* 5.62 3.27 2.57 3.73
EMPLOYMENT GROWTH(6) 2.23 2.2 2.07 2.79
</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 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 March 31, 1997.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
higher than 7.25 percent. One positive effect of the stock market correction was
the widening of spreads available on high yield bonds. As a consequence, high
yield bonds today are more reasonably priced.
A natural response to increased volatility in the U.S. equity market is to
look abroad. In fact, the valuations of many international markets are more
attractive than the U.S. However, the weak German and Japanese economies make it
difficult to identify many exciting near-term opportunities without careful
research.
Our recommendation to shareholders is to stay the course and to fight the
temptation to try to time when and where you should be invested. Financial
assets react much quicker today to events. Volatility has returned to the market
and with it heightened uncertainty. Now is the time to rely on your financial
representative for the expertise and the long-term investing discipline that he
or she can provide.
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, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
May 8, 1997
4
<PAGE> 5
PERFORMANCE UPDATE
[BEIMFORD PHOTO]
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.
[VANDENBERG PHOTO]
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 J. PATRICK BEIMFORD AND RICHARD VANDENBERG EXPLAIN HOW
THEY ADJUSTED THE PORTFOLIO'S HOLDINGS TO BETTER POSITION THE FUND AS ECONOMIC
GROWTH GAINED MOMENTUM AND INTEREST RATES ROSE.
Q KEMPER U.S. MORTGAGE FUND BEGAN ITS FISCAL YEAR AMIDST MODERATE ECONOMIC
GROWTH AND FAIRLY STABLE INTEREST RATES. HOWEVER, THE FEDERAL RESERVE BOARD (THE
FED) INCREASED SHORT-TERM INTEREST RATES BY 0.25 PERCENT IN MARCH. WHAT CAUSED
THE FED TO ACT?
A At the start of the fiscal year in October 1996, the market believed that
economic growth was moderating and inflation was under control. Relatively weak
Gross Domestic Product (GDP) figures were released that supported this
assumption. Uncertainty began to creep into the market in November, however,
with the 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. The markets rallied, however, with news that
Republicans maintained control of Congress. The election outcome, combined with
lower GDP figures, was positive for the bond market. Treasuries rallied and
prices increased while yields fell.
This bullish environment changed in December and the rally ended abruptly.
Investors became concerned after 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. A suggestion of
strong holiday retail sales coupled with higher-than-expected fourth quarter GDP
growth caused further concern near year-end.
After Greenspan's "irrational exuberance" comment, investors remained
cautious in early 1997 as strong economic reports surfaced. A stronger-than-
expected employment report indicated a rise in average hourly earnings and an
increase in hours worked. These indicators suggested solid GDP growth, which
registered higher-than-expected for the fourth quarter. This relatively strong
GDP figure indicated to the market that the Fed would likely raise interest
rates to slow the economy. In February, Greenspan stated again that financial
assets may be overvalued. Specifically, Greenspan referenced the level of wage
inflation, and suggested that recent productivity advances may not be able to
offset the current level of wage increases. The Federal Reserve Board did move
to increase short-term rates by 0.25 percent in March. This was considered a
reemptive move aimed at slowing growth in the economy to maintain a low rate
of inflation. Remember, excessive growth in the economy indicates the potential
for higher inflation. Inflation is negative for bond investors as it erodes the
"real" value of fixed-income investments.
5
<PAGE> 6
PERFORMANCE UPDATE
Q HOW DID YOU PREPARE THE FUND FOR THE POSSIBILITY OF A FED INTEREST RATE
INCREASE?
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. 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 98 percent. With a shorter, more defensive duration and a higher
mortgage allocation, the fund's Class A shares were able to outperform its peer
group average as yields rose during the first three months of 1997 (Class A
shares - 0.03% and Lipper -0.19%). The fund's peer group, as categorized by
Lipper Analytical Services, Inc. consists of 58 other funds like Kemper U.S.
Mortgage Fund, which invest primarily in Government National Mortgage
Association (GNMA) securities.
Q WHAT ADJUSTMENTS DID YOU MAKE TO THE PORTFOLIO TO ALTER THE FUND'S
DURATION?
A To alter duration we adjusted the level of mortgages and Treasuries
throughout the period. In anticipation of the rate hike, we reduced our Treasury
holdings in favor of mortgages, which tend to outperform Treasuries in a rising
interest rate environment.
Q LOOKING BACK IS THERE ANYTHING YOU WISH YOU WOULD HAVE DONE DIFFERENTLY
WITH THE FUND DURING THE PERIOD?
A We maintained a neutral duration for the fund during the first few months
of the period. That means that the portfolio's duration was similar in length to
that of our peers. In addition, we were underweighted in mortgages. In
hindsight, we now see that we could have positioned the fund with an even
shorter duration and a higher mortgage allocation, which would have helped the
fund more as the market fell in December through the remainder of the period.
However, economic data available at that time gave us conflicting signals about
the true strength of the economy. We erred on the side of caution early in the
period but were rewarded later when rates did rise.
Q WHAT IS YOUR OUTLOOK FOR THE ECONOMY AND THE GOVERNMENT MORTGAGE MARKET?
A We believe that the economy is fairly strong and we expect it to continue
growing at a rate of 3-4 percent unless interest rates rise high enough to bring
GDP growth down to the 2 1/2 percent range. The Fed will likely raise short-term
rates one or two more times--about 0.25 percent with each tightening. This
should slow the rate of economic growth to the Fed's target rate of 2 1/2
percent. The government market should ultimately benefit from slower growth, but
the short term may be somewhat volatile.
Q WHAT WOULD NEED TO HAPPEN TO ALTER YOUR OUTLOOK?
A If the Fed is not successful in slowing the economy to its target range
with the anticipated rate increases, more tightening would be needed. However,
we don't anticipate that happening. We believe that with the Fed's preemptive
move, it will be successful in slowing the economy's growth.
6
<PAGE> 7
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 3/31/97 ON 9/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
GNMA 85% 83%
- --------------------------------------------------------------------------------
OTHER MORTGAGE-BACKED SECURITIES 11 11
- --------------------------------------------------------------------------------
LONG-TERM GOVERNMENT SECURITIES 4 6
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/97 ON 9/30/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 3/31/97 ON 9/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
LESS THAN 5 6% 15%
- --------------------------------------------------------------------------------
5-10 49 20
- --------------------------------------------------------------------------------
10-20 45 64
- --------------------------------------------------------------------------------
20+ YEARS -- 1
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/97 ON 9/30/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 3/31/97 ON 9/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 7.8 YEARS 8.9 YEARS
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
7
<PAGE> 8
PORTFOLIO OF INVESTMENTS
KEMPER U.S. MORTGAGE FUND
PORTFOLIO OF INVESTMENTS AT MARCH 31, 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 $ 1,485 $ 1,343
MORTGAGE ASSOCIATION - 84.7% Certificates 6.50 2022-2026 434,286 405,459
(Cost: $2,200,692) 7.00 2016-2026 590,211 513,695
7.50 2007-2027 395,010 388,383
8.00 2016-2026 477,330 481,672
8.50 2016-2027 216,262 221,930
9.00 2008-2027 141,712 149,168
9.50 2009-2027 63,398 68,442
10.00 2016-2021 5,728 6,290
10.50 2019-2021 6,798 7,523
11.00 2019 314 350
--------------------------------------------------------------------------
2,244,255
- ---------------------------------------------------------------------------------------------------------------------
U.S. TREASURY Notes 8.75 1997 80,000 81,238
SECURITIES - 18.3% 8.875 1997 75,000 76,312
(Cost: $501,216) 8.125 1998 55,000 55,937
8.875 1998 42,000 43,595
9.00 1998 84,000 86,533
Bonds 12.75 2010 58,835 80,245
14.00 2011 42,100 62,288
--------------------------------------------------------------------------
486,148
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Pass-through 6.50 2026 505 469
MORTGAGE ASSOCIATION - 9.6% Certificates 7.00 2025-2027 131,012 125,364
(Cost: $255,835) 7.50 2027 27,000 26,502
8.00 2024 9,442 9,504
9.00 2016-2025 87,253 91,426
11.50 2018 543 597
--------------------------------------------------------------------------
253,862
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Pass-through 5.00 2021 14,600 13,003
MORTGAGE CORPORATION - 1.7% Certificates 8.00 2017 920 935
(Cost: $46,094) 8.50 2016 278 289
9.50 2027 29,065 30,921
--------------------------------------------------------------------------
45,148
--------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--114.3%
(Cost: $3,003,837) 3,029,413
--------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE Dated March 1997, collateralized by Federal Home Loan Mortgage Corporation
AGREEMENTS (A) - 1.4% and Federal National Mortgage Association securities.
(Cost: $37,000)
CS First Boston Inc.
(held at The Chase Manhattan Bank)
5.70%, 4/3/97 $ 6,000 $ 6,000
Salomon Brothers Inc.
(held at The Bank of New York)
7.00%, 4/1/97 31,000 31,000
--------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS--1.4%
(Cost: $37,000) 37,000
--------------------------------------------------------------------------
TOTAL INVESTMENTS--115.7%
(Cost: $3,040,837) 3,066,413
--------------------------------------------------------------------------
LIABILITIES, LESS OTHER ASSETS--(15.7%) (417,011)
--------------------------------------------------------------------------
NET ASSETS--100% $2,649,402
--------------------------------------------------------------------------
</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 $3,040,837,000 for federal income tax
purposes at March 31, 1997, the gross unrealized appreciation was $57,285,000,
the gross unrealized depreciation was $31,709,000 and the net unrealized
appreciation of investments was $25,576,000.
See accompanying Notes to Financial Statements.
9
<PAGE> 10
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investments, at value
(Cost: $3,040,837) $3,066,413
- --------------------------------------------------------------------------
Receivable for:
Fund shares sold 169
- --------------------------------------------------------------------------
Investments sold 57,225
- --------------------------------------------------------------------------
Interest 30,731
- --------------------------------------------------------------------------
TOTAL ASSETS 3,154,538
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Cash overdraft 67
- --------------------------------------------------------------------------
Payable for:
Fund shares redeemed 2,037
- --------------------------------------------------------------------------
Investments purchased 500,236
- --------------------------------------------------------------------------
Management fee 1,145
- --------------------------------------------------------------------------
Distribution services fee 566
- --------------------------------------------------------------------------
Administrative services fee 531
- --------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 432
- --------------------------------------------------------------------------
Trustees' fees and other 122
- --------------------------------------------------------------------------
Total liabilities 505,136
- --------------------------------------------------------------------------
NET ASSETS $2,649,402
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------
Paid-in capital $3,501,926
- --------------------------------------------------------------------------
Accumulated net realized loss on investments (915,224)
- --------------------------------------------------------------------------
Net unrealized appreciation on investments 25,576
- --------------------------------------------------------------------------
Undistributed net investment income 37,124
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $2,649,402
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($1,767,410 / 258,946 shares outstanding) $6.83
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net asset value or 4.50%
of offering price) $7.15
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($880,123 / 129,028 shares outstanding) $6.82
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($1,869 / 274 shares outstanding) $6.82
- --------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
10
<PAGE> 11
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- ----------------------------------------------------------------------------------------------
Interest income $115,992
- ----------------------------------------------------------------------------------------------
Expenses:
Management fee 7,234
- ----------------------------------------------------------------------------------------------
Distribution services fee 3,699
- ----------------------------------------------------------------------------------------------
Administrative services fee 3,420
- ----------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 3,088
- ----------------------------------------------------------------------------------------------
Professional fees 25
- ----------------------------------------------------------------------------------------------
Reports to shareholders 224
- ----------------------------------------------------------------------------------------------
Trustees' fees and other 78
- ----------------------------------------------------------------------------------------------
Total expenses 17,768
- ----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 98,224
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ----------------------------------------------------------------------------------------------
Net realized gain on sales of investments (including
options purchased) 4,486
- ----------------------------------------------------------------------------------------------
Net realized loss from futures transactions (3,104)
- ----------------------------------------------------------------------------------------------
Net realized gain 1,382
- ----------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments (28,856)
- ----------------------------------------------------------------------------------------------
Net loss on investments (27,474)
- ----------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 70,750
- ----------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
1997 1996
- ----------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 98,224 216,326
- ----------------------------------------------------------------------------------------------
Net realized gain (loss) 1,382 (32,718)
- ----------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation (28,856) (55,809)
- ----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 70,750 127,799
- ----------------------------------------------------------------------------------------------
Net equalization charges (3,997) (6,653)
- ----------------------------------------------------------------------------------------------
Distribution from net investment income (101,054) (226,314)
- ----------------------------------------------------------------------------------------------
Net decrease from capital share transactions (276,432) (427,749)
- ----------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (310,733) (532,917)
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------------------
Beginning of period 2,960,135 3,493,052
- ----------------------------------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment income of
$37,124 and $43,951, respectively) $2,649,402 2,960,135
- ----------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
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 March 31, 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. Exchange traded 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
March 31, 1997 the Fund had $500,208,000 in
purchase commitments outstanding (19% of net
assets), with a corresponding amount of assets
segregated.
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B 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 during the six
months ended March 31, 1997. The accumulated net
realized loss on sales of investments for federal
income tax purposes at March 31, 1997, amounting to
approximately $906,994,000, 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 through 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
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 $7,234,000 for the six
months ended March 31, 1997.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Zurich Kemper Distributors,
Inc. (ZKDI) (formerly known as Kemper Distributors,
Inc.). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS
COMMISSIONS ALLOWED BY ZKDI
RETAINED BY ------------------------------
ZKDI TO ALL FIRMS TO AFFILIATES
----------- ------------ -------------
<S> <C> <C> <C>
Six months ended March 31, 1997 $12,000 100,000 1,000
</TABLE>
For services under the distribution services
agreement, the Fund pays ZKDI a fee of .75% of
average daily net assets of 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
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
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>
COMMISSIONS AND
DISTRIBUTION FEES DISTRIBUTION FEES
AND CDSC PAID BY ZKDI
RECEIVED BY -----------------------------
ZKDI TO ALL FIRMS TO AFFILIATES
----------------- ------------- -------------
<S> <C> <C> <C>
Six months ended March 31,
1997 $ 4,528,000 326,000 1,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with ZKDI. For
providing information and administrative services
to 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>
Six months ended March 31, 1997 $3,420,000 3,414,000 39,000
</TABLE>
SHAREHOLDER SERVICES AGENT AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Zurich Kemper Service Company (ZKSvC) (formerly
known as Kemper Service Company) is the shareholder
service agent of the Fund. Under the agreement,
ZKSvC received shareholder services fees of
$2,060,000 for the six months ended March 31, 1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the six months ended March 31, 1997, the
Fund made no payments to its officers and incurred
trustees' fees of $22,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT For the six months ended March 31, 1997, investment
TRANSACTIONS transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $3,202,562
Proceeds from sales 3,594,135
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
1997 1996
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 1,499 $ 10,985 3,767 $ 25,307
---------------------------------------------------------------------------------
Class B 1,597 10,748 5,032 34,439
---------------------------------------------------------------------------------
Class C 69 479 108 760
---------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 5,683 39,437 11,834 83,107
---------------------------------------------------------------------------------
Class B 2,837 19,683 6,955 48,895
---------------------------------------------------------------------------------
Class C 3 21 7 50
---------------------------------------------------------------------------------
SHARES REDEEMED
Class A (32,090) (220,339) (49,877) (345,978)
---------------------------------------------------------------------------------
Class B (19,828) (137,146) (39,448) (273,798)
---------------------------------------------------------------------------------
Class C (43) (300) (77) (531)
---------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 7,746 52,062 24,615 171,511
---------------------------------------------------------------------------------
Class B (7,753) (52,062) (24,650) (171,511)
---------------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE TRANSACTIONS $(276,432) $(427,749)
---------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
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 March 31, 1997, the
market value of assets pledged by the Fund to cover
margin requirements for open futures positions was
$26,914,000. The Fund also had liquid securities in
its portfolio in excess of the face amount of the
following short futures positions open at March 31,
1997:
<TABLE>
<CAPTION>
FACE EXPIRATION GAIN AT
TYPE AMOUNT MONTH 3/31/97
-------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury securities $460,154,000 June '97 $6,266,000
-------------------------------------------------------------------------------
Eurodollar 165,987,000 June '97 303,000
-------------------------------------------------------------------------------
Eurodollar 60,624,000 September '97 197,000
-------------------------------------------------------------------------------
Eurodollar 36,815,000 December '97 157,000
-------------------------------------------------------------------------------
Eurodollar 20,615,000 March '98 97,000
-------------------------------------------------------------------------------
Eurodollar 9,360,000 June '98 45,000
-------------------------------------------------------------------------------
Eurodollar 5,846,000 September '98 28,000
-------------------------------------------------------------------------------
TOTAL $7,093,000
-------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------------------------
CLASS A SHARES
-----------------------------------------------------------------
SIX MONTHS TWO MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED JULY 31,
MARCH 31, SEPTEMBER 30, 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 .26 .49 .08 .53 .51 .62
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.08) (.19) .08 .09 (.59) (.21)
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations .18 .30 .16 .62 (.08) .41
- ---------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .26 .52 .09 .52 .52 .63
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.83 6.91 7.13 7.06 6.96 7.56
- --------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.57% 4.28 2.23 9.48 (1.21) 5.52
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------------------------------
Expenses .94% .97 .94 .89 .99 .97
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 7.19% 6.98 6.87 7.77 7.00 8.22
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------
CLASS B SHARES
-----------------------------------------------------------------
SIX MONTHS TWO MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED JULY 31,
MARCH 31, SEPTEMBER 30, 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 .22 .44 .07 .47 .45 .57
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.08) (.19) .08 .09 (.59) (.21)
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations .14 .25 .15 .56 (.14) .36
- ---------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .23 .46 .08 .47 .46 .57
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.82 6.91 7.12 7.05 6.96 7.56
- ---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.99% 3.54 2.09 8.44 (2.00) 4.85
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------------------------------
Expenses 1.80% 1.80 1.79 1.75 1.79 1.75
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 6.33% 6.15 6.02 6.91 6.27 7.44
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------------------------------
CLASS C SHARES
--------------------------------------------------------------------
SIX MONTHS TWO MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED MAY 31 TO
MARCH 31, SEPTEMBER 30, 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 .23 .43 .07 .48 .07
- -----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.08) (.19) .08 .09 (.04)
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations .15 .24 .15 .57 .03
- -----------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .23 .46 .08 .47 .07
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.82 6.90 7.12 7.05 6.95
- -----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.18% 3.47 2.10 8.65 .47
- -----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------------------------------------
Expenses 1.70% 1.72 1.69 1.71 1.55
- -----------------------------------------------------------------------------------------------------------------------
Net investment income 6.43% 6.23 6.12 6.95 6.46
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -----------------------------------------------------------------------------------------------------------------------
SIX MONTHS TWO MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED JULY 31,
MARCH 31, SEPTEMBER 30, SEPTEMBER 30, ---------------------------------
1997 1996 1995 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of period (in
thousands) $2,649,402 2,960,135 3,493,052 3,528,329 4,158,066 5,639,097
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 207% 391 249 573 963 551
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
17
<PAGE> 18
NOTES
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES & 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 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
DOMINIQUE P. MORAX JEROME L. DUFFY
Trustee Treasurer
SHIRLEY D. PETERSON ELIZABETH C. WERTH
Trustee Assistant Secretary
WILLIAM P. SOMMERS
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT ZURICH KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER ZURICH KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[RECYCLED LOGO]
Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Funds prospectus.
KUSMF - 3 (5/97) 1031850 [KEMPER FUNDS LOGO]
Printed in the U.S.A.
