<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED SEPTEMBER 30, 1998
[MORNINGSTAR RATINGS LOGO]
OFFERING INVESTORS THE OPPORTUNITY FOR MAXIMUM CURRENT RETURN FROM A PORTFOLIO
OF U.S. GOVERNMENT SECURITIES
KEMPER U.S. MORTGAGE FUND
" . . . Thus, the turmoil abroad was responsible
for one of the most startling turnarounds in
investor psychology we've seen in domestic
bond markets for quite a while. . . . "
[KEMPER FUNDS LOGO]
<PAGE> 2
AT A GLANCE
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
8
PORTFOLIO STATISTICS
9
PORTFOLIO OF INVESTMENTS
10
REPORT OF
INDEPENDENT AUDITORS
11
FINANCIAL STATEMENTS
13
NOTES TO
FINANCIAL STATEMENTS
17
FINANCIAL HIGHLIGHTS
KEMPER U.S. MORTGAGE FUND
TOTAL RETURNS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<S> <C>
CLASS A 8.99%
CLASS B 8.00%
CLASS C 8.30%
LIPPER 8.30%
</TABLE>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
9/30/98 9/30/97
- -------------------------------------------------------
<S> <C> <C>
KEMPER U.S. MORTGAGE FUND
CLASS A $7.15 $7.01
- -------------------------------------------------------
KEMPER U.S. MORTGAGE FUND
CLASS B $7.14 $7.00
- -------------------------------------------------------
KEMPER U.S. MORTGAGE FUND
CLASS C $7.15 $7.00
- -------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not guarantee future results.
Investment returns and principal value will fluctuate so that shares, when
redeemed, may be worth 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.
- --------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND
RANKINGS AS OF 9/30/98
- --------------------------------------------------------------------------------
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 #21 of #42 of #32 of
67 funds 67 funds 67 funds
- -------------------------------------------------------
5-YEAR #19 of #35 of N/A
48 funds 48 funds
- -------------------------------------------------------
10-YEAR N/A #15 of N/A
17 funds
- -------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF SEPTEMBER 30, 1998.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR
INCOME: $0.4675 $0.4026 $0.4123
- -------------------------------------------------------
SEPTEMBER
DIVIDEND: $0.0375 $0.0314 $0.0325
- -------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 6.29% 5.28% 5.45%
- -------------------------------------------------------
SEC YIELD+: 5.54% 4.86% 5.03%
- -------------------------------------------------------
</TABLE>
+Current annualized distribution rate is the latest monthly dividend shown as an
annualized percentage of net asset value on September 30, 1998. 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, 1998, shown as an annualized percentage of the maximum
offering price on that date. The SEC yield is computed in accordance with a
standardized method prescribed by the Securities and Exchange Commission. Yields
and distribution rates are historical and will fluctuate.
<TABLE>
<S> <C>
YOUR FUND'S STYLE
FIXED STYLE BOX
MORNINGSTAR INCOME STYLE BOX
Source: Data provided by Morningstar,
Inc., Chicago, IL 312-696-6000. The Income
Style Box placement is based on a fund's
average effective maturity or duration and
the average credit rating of the bond
portfolio.
Please note that style boxes do not
represent an exact assessment of risk and
do not represent future performance. The
fund's portfolio changes from day-to-day.
A longer-term view is represented by the
fund's Morningstar category, which is
based on its actual investment style as
measured by its underlying portfolio
holdings over the past three-years.
Morningstar has placed Kemper U.S.
Mortgage Fund in the Intermediate
Government Category. Please consult the
prospectus for a description of investment
policies.
</TABLE>
TERMS TO KNOW
BASIS POINT The movement of interest rates or yields expressed in hundredths of
a percent.
DURATION 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 represents the aggregate percentage or dollar
value change over the period.
<PAGE> 3
ECONOMIC OVERVIEW
[SILVIA PHOTO]
DR. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS.
SILVIA HOLDS A BACHELOR'S DEGREE AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND A MASTER'S DEGREE IN ECONOMICS FROM BROWN UNIVERSITY IN
PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS WITH THE HARRIS
BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT MANAGER FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $245 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES, AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS.
DEAR SHAREHOLDERS,
If you're like most investors, you may be wondering if you should allow yourself
to breathe a sigh of relief as 1998 comes to a close. After several months of
generally declining stock prices and extreme volatility, the U.S. stock market
seems to have rediscovered its resiliency. In the fourth quarter, the Standard &
Poor's 500, an unmanaged index generally representative of the U.S. stock
market, bounced back into the 1100-point range, up nearly 20 percent from its
third-quarter low of 957. The blue chip Dow Jones Industrial Average enjoyed a
comparable rise. Investor confidence suddenly overtook the investor uncertainty
that had plagued the markets at summer's end.
To what can we attribute the change? Simply this -- the cumulative effect of
some good news, not the least of which was a long-awaited reduction in interest
rates by the Federal Reserve Board. In September, the Fed reduced the federal
funds rate a modest 1/4 of a percentage point, however, the cut disappointed
some investors who were expecting a more dramatic gesture. In October, the Fed
reduced the rate an additional 1/4 of a percentage point. This was an unexpected
cut that seemed to have a positive effect on Wall Street. Investors were also
pleasantly surprised by better-than-expected corporate earnings reports early in
the fourth quarter. (Other contributors to the good vibrations included Mark
McGwire, Sammy Sosa and John Glenn. While they don't have the market clout of
Alan Greenspan, they may have played a role in elevating the national mood.)
Although there was no good news to be garnered from the sensationalized
presidential scandal, as the shock of Kenneth Starr's report wore off, the
nation seemed to refocus its attention on other matters. In this sense, another
veil of despair was lifted.
In many ways, 1998's market activity provides a study in how investor
perceptions can upstage economic realities. Certainly, the tumultuous lessons of
Russia and Southeast Asia renewed investors' awareness of risk in 1998, which
was an important wake-up call. At all times, investors must understand and
consider risk. But over the course of 1998, U.S. economic fundamentals have
essentially remained strong. In fact, inflation has remained low for the entire
year. Economic growth has been solid. Our consumer confidence has remained
fairly high, although not quite as high as last year.
Other signs of strength this year have included better-than-expected regional
retail sales, as well as robust housing starts and home sales. The nation's
budget surplus for 1998 came in at $60 billion, with another budget surplus
expected for fiscal 1999.
Growth in the nation's gross domestic product (GDP), which represents the
total value of all goods and services produced within the U.S. economy, has
remained remarkably steady. GDP is expected to have grown at an annualized rate
of between 2 and 3 percent for the second half of 1998 and is anticipated to
hover around 2 percent for the first half of 1999. The consumer price index
(CPI) remains at about 1.5 percent to 2 percent.
While employment growth has slowed a bit, the slowdown in wage gains may
provide the Fed with an incentive to reduce interest rates even further. U.S.
corporate profits have generally been flat, so we may see a decrease in capital
spending. Banks appear to be only a little less willing to lend, so the threat
of a general credit crunch is minimal.
Investors may take comfort in the fact that the U.S. markets and economy have
withstood the test of 1998's tumultuous third quarter. Similarly, while certain
countries, such as Malaysia, Indonesia, Brazil and Russia, are still suffering
from economic crises, others, including the Philippines, South Korea, Thailand
and China, appear to have survived. As long as the Fed and the Group of Seven
leading industrial nations (G7) are committed to avoiding recession on national
and global levels respectively, investors have a good chance of experiencing a
more stable economic environment.
At home, there has been somewhat of a slowdown in manufacturing, as reduced
U.S. exports reflect foreign economic turmoil. But the global impact of the
Asian crisis still has not hit the U.S. as hard as was expected. Indeed, Asian
turmoil has not affected U.S. trade as much as it has lowered import prices and
helped reduce global interest rates.
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>
OCTOBER 31, 1998 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 4.53 5.64 6.03 6.53
PRIME RATE(2) 8.12 8.50 8.50 8.25
INFLATION RATE(3)* 1.43 1.38 2.22 3.00
THE U.S. DOLLAR(4)* 0.89 3.92 7.62 4.74
CAPITAL GOODS ORDERS(5)* 10.21 10.47 15.67 4.79
INDUSTRIAL PRODUCTION(5)* 2.45 2.57 2.60 3.18
EMPLOYMENT GROWTH(6)* 2.34 2.57 2.65 2.22
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE
VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE VALUE OF U.S. FIRMS'
FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
* DATA AS OF SEPTEMBER 30, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
In Europe, the much anticipated Economic and Monetary Union (EMU) is on the
move, with a focus on more flexibility and growth potential for the region.
European equities may be the beneficiaries of increased spending, as governments
seek to foster growth and reduce unemployment.
If you're a long-term investor in today's short-term world, go ahead and
breathe that sigh of relief as 1998 comes to an end -- but get ready for 1999.
It's going to be an interesting year as the EMU emerges, the race for the next
presidency heats up and the year 2000 approaches. And, remember: Investors don't
like uncertainty, be it economic or political. A threat of impeachment, new acts
of terrorism or any other hints of crisis could help drag our markets downward
again.
I would like to take this opportunity to thank you for choosing to invest with
Kemper Funds. We appreciate the opportunity to serve your investment needs.
Sincerely,
/S/ John E. Silvia
JOHN E. SILVIA
November 9, 1998
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF DR. JOHN SILVIA AS OF NOVEMBER 9, 1998, AND
MAY NOT ACTUALLY COME TO PASS. THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF
THIS MATERIAL IS INTENDED AS AN INVESTMENT RECOMMENDATION.
4
<PAGE> 5
[VANDENBERG PHOTO]
RICHARD VANDENBERG JOINED SCUDDER KEMPER INVESTMENTS, INC. IN MARCH 1996
AND IS A MANAGING DIRECTOR. HE IS ALSO A PORTFOLIO MANAGER OF KEMPER U.S.
MORTGAGE FUND. VANDENBERG HAS 25 YEARS OF FIXED- INCOME PORTFOLIO MANAGEMENT
EXPERIENCE. HE RECEIVED A BACHELOR'S DEGREE AND 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.
PERFORMANCE UPDATE
THROUGHOUT THE FUND'S FISCAL YEAR, TURBULENT
INTERNATIONAL MARKETS PROMPTED INVESTORS WORLDWIDE
TO FLEE TO THE RELATIVE SAFETY OF U.S. GOVERNMENT
BONDS. THE RESULTING DEMAND BOOSTED DOMESTIC
GOVERNMENT BOND PRICES AND HELPED THE FUND POST AN
8.99 PERCENT TOTAL RETURN (CLASS A SHARES,
UNADJUSTED FOR ANY SALES CHARGE) FOR THE YEAR.
Q THE GOVERNMENT MARKET APPEARED TO PERFORM VERY WELL OVER THE LAST YEAR. IN
FACT, KEMPER U.S. MORTGAGE FUND'S RETURN OF 8.99 PERCENT (CLASS A SHARES,
UNADJUSTED FOR ANY SALES CHARGE) RIVALED THE STOCK MARKET'S 9.08 PERCENT AS
MEASURED BY THE S&P 500*. WHAT WERE THE MOST SIGNIFICANT FACTORS THAT AFFECTED
THE INVESTMENT ENVIRONMENT DURING THE FISCAL YEAR?
A Without a doubt, the most significant impact was felt as a result of
instability in foreign bond and stock markets -- first from developments in
Asia, then Russia and finally in Latin America.
As you may recall, in October 1997 investor concern regarding potential
economic and currency problems in Asian countries reached a boiling point.
Investors began to realize that the outsized growth in recent years experienced
by these countries -- particularly Hong Kong, Thailand, Malaysia and
Indonesia -- was supported largely by intense speculation worldwide. This
support began to reverse itself in the summer of 1997 with the devaluation of
the Thailand Baht, and in October the Hong Kong stock market imploded followed
by other Asian countries devaluing their currencies.
As the fiscal year progressed, the Asian crisis spread to other developing
economies. Latin American countries also started to experience problems, and
most recently, Russia effectively devalued the ruble.
Ironically, the problems abroad led to strong performance by U.S. Government
bonds, long considered the safest investment in the world. Global investors
opted for the relatively safe haven of U.S. Treasuries, and demand drove
Treasury bond prices sharply higher. At the same time, investors expected
cheaper foreign goods to put a damper on domestic inflation, and lower exports
to impede U.S. economic growth.
Thus, the turmoil abroad was responsible for one of the most startling
turnarounds in investor psychology we've seen in domestic bond markets for quite
a while. You must remember that, in early 1998, the U.S. economy appeared to be
growing quite rapidly, which indicated steady or perhaps rising interest rates.
The troubles in foreign markets changed this perception and suggested an
opportunity for lower interest rates in the future, a positive for bonds. As
uncertainty over the direction of global economies increased, so did demand for
U.S. government bonds, and the result was a powerful rally in Treasuries,
particularly through August and September.
The culmination of this uncertainty was a 0.25 percent interest rate cut by
the Federal Reserve on September 29, which was meant to appease markets and show
America's commitment to supporting economies worldwide. Financial markets,
however, were expecting more aggressive action and reacted negatively, which
caused a drop in bond prices at the end of the fiscal year period. Another 1/4
percent rate cut followed on October 16,
5
<PAGE> 6
PERFORMANCE UPDATE
however, and global financial markets rebounded substantially.
* The Standard and Poor's 500 stock index is an unmanaged index generally
considered representative of the U.S. stock market. Returns are historical and
do not guarantee future results. Investors cannot invest in this index.
Q FOR THE ONE-YEAR PERIOD ENDED SEPTEMBER 30, 1998, THE FUND'S 8.99 PERCENT
(CLASS A SHARES, UNADJUSTED FOR ANY SALES CHARGE) RETURN SOUNDLY BEAT THE
LIPPER U.S. MORTGAGE FUND CATEGORY'S 8.30 PERCENT RETURN. HOW DID YOU MANEUVER
THE FUND IN A VOLATILE MARKET TO ACHIEVE THIS PERFORMANCE?
A There are two ways to add value in a government fund: adjusting duration to
benefit from moves in interest rates, and adjusting allocation between
Treasuries and mortgages when one or the other looks attractive. We did a
pretty good job of both this year.
As the fiscal year began, we suspected that the problems in Asia were going
to develop into a worldwide issue, and our expectation was that the
uncertainty would be a positive sign for "safe haven" investments like U.S.
government bonds. So we began to lengthen the fund's duration to help the fund
benefit more fully from an expected decline in rates. By mid-January, rates
had indeed declined as the market priced in a rosy scenario for bonds. It was
widely accepted that the Asian crises would curtail U.S. economic growth in
1998, and the market clearly anticipated that the Federal Reserve would cut
interest rates to help sustain the economy's growth. So we made the right
decision to lengthen when we did.
In January, however, despite the market's optimism, we didn't see any hard
numbers supporting the theory that U.S. growth would succumb to decreased
overseas demand. We decided then to reduce the fund's duration slightly to try
to lock in some of our profits. This strategy worked out quite well through
mid-1998.
During the second half of the fiscal year, the challenge was to adjust
allocations in the face of rapidly declining long-term interest rates.
Treasury bonds react most favorably to rate declines, because their fixed
payout becomes more attractive. Mortgages don't react as favorably, the reason
being fear of prepayment. As rates fall, homeowners refinance their mortgages,
financing with lower rates and paying off the previous higher rate mortgage.
This means that people who invest in mortgages are concerned they'll get their
higher yielding investment back too soon and have to reinvest at a lower rate.
As rates fell from July through October, we were able to trade down to
lower-coupon mortgages and avoid securities with a lot of prepayment risk. We
also boosted the fund's allocation to Treasuries and Treasury futures. This
helped us ride out the long-term rate decline in pretty good shape.
Most recently, we have boosted our mortgage allocation to a neutral
weighting, because we don't think long rates can go much lower near-term. Nor
do we think they'll trend significantly higher. So we've adopted what might be
considered a "normal" stance regarding our duration and allocation.
Q WHAT'S YOUR OUTLOOK FOR THE GOVERNMENT BOND MARKET FROM HERE?
A Last year, investors focused on events outside the United States. We expect
their focus in the year ahead to turn closer to home. Japan appears as if it
is finally taking substantive action to alleviate credit problems and repair
the banking sector. Should their efforts be successful, much of the concern
that now clouds Southeast Asian markets would be lifted. The International
Monetary Fund (IMF) also looks as if it will receive the necessary funding to
help other emerging markets, most importantly Russia and Brazil. If overseas
markets calm down, that would relieve pressure on global interest rates and
possibly allow them to move lower, which would be positive for bonds.
In the U.S., the static from foreign markets has, to this point, muddied a
very favorable environment for government bonds. Inflation remains extremely
low and economic growth, while not robust, appears to be solid and
sustainable. That would lead us to expect a slow-growth, low-inflation
environment that would be beneficial for bonds. We fully expect some
additional volatility in the markets as a few big hedge funds unwind some
overzealous currency and fixed income positions. But, overall, the investment
climate for fixed-income investors is quite favorable.
6
<PAGE> 7
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED SEPTEMBER 30, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1 YEAR 5 YEAR 10 YEAR LIFE OF CLASS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER U.S. MORTGAGE FUND CLASS A 4.09% 5.36% n/a 5.67% (since 1/10/92)
- ------------------------------------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND CLASS B 5.00 5.27 7.17 7.17 (since 10/26/84)
- ------------------------------------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND CLASS C 8.30 n/a n/a 7.25 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND CLASS A
- ----------------------------------------------------------------------------------------------------------------------------------
Kemper Salomon
U.S. Brothers
Mortgage 30-Year Consumer
Fund Class GNMA Price
A1 Index' Index"
<S> <C> <C> <C>
1/10/92 10000 10000 10000
9316 9943 10102
9778 10345 10167
10117 10653 10247
10104 10760 10280
10316 11077 10413
10507 11310 10471
10652 11383 10522
10674 11477 10573
10421 11228 10674
10306 11178 10732
10314 11258 10834
12/31/94 10302 11330 10856
10835 11928 10979
11457 12549 11059
11869 12820 11109
12164 13249 11131
11909 13227 11291
11909 13309 11363
12169 13580 11443
12/31/96 12486 13994 11501
12482 14034 11603
12923 14557 11624
13296 14885 11690
13602 15320 11697
13796 15568 11762
14043 15832 11820
9/30/98 14490 16229 11849
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND CLASS B
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper Salomon
U.S. Brothers
Mortgage 30-Year Consumer
Fund Class GNMA Price
B1 Index' Index"
<S> <C> <C> <C>
10/26/84 10000.00 10000.00 10000.00
10023.50 10399.00 10000.00
10130.20 10841.00 10104.00
10455.50 11737.00 10218.00
10581.80 12045.00 10285.00
11086.20 13097.00 10380.00
11713.10 13678.00 10332.00
11782.80 13743.00 10399.00
12007.20 14279.00 10465.00
12379.80 14806.00 10494.00
12487.70 15146.00 10646.00
12289.30 14887.00 10779.00
11965.80 14449.00 10921.00
12600.20 15327.00 10959.00
12915.30 16003.00 11054.00
12976.40 16287.00 11206.00
13124.80 18843.00 11377.00
13167.80 18693.00 11443.00
13276.00 16874.00 11614.00
14108.50 18276.00 11785.00
14125.60 18528.00 11871.00
12/31/89 14667.40 19302.00 11975.00
14276.60 19282.00 12222.00
14770.30 20010.00 12336.00
14816.70 20320.00 12602.00
15710.20 21408.00 12707.00
15995.00 22011.00 12821.00
16154.10 22485.00 12915.00
17225.10 23898.00 13029.00
18384.20 24822.00 13096.00
17827.10 24681.00 13229.00
18652.30 25678.00 13314.00
19264.20 28443.00 13419.00
19202.50 26708.00 13476.00
19593.30 27498.00 13637.00
19890.30 28074.00 13713.00
20154.10 28091.00 13780.00
20128.00 29304.00 13846.00
19609.70 27585.00 13979.00
19353.00 27525.00 14055.00
19327.00 27722.00 14188.00
12/31/94 19296.00 27904.00 14217.00
20252.00 29376.00 14378.00
21342.60 30908.00 14482.00
21692.30 31573.00 14549.00
22564.50 32630.00 14577.00
22075.70 32576.00 14786.00
21995.10 32779.00 14861.00
22460.30 33470.00 14986.00
22961.80 34478.00 15062.00
22906.90 34513.00 15195.00
23663.50 35823.00 15223.00
24294.40 36827.00 15309.00
24801.10 37752.00 15316.00
25136.30 38383.00 15404.00
25528.20 39015.00 15480.00
9/30/98 26237.50 39994.00 15518.00
</TABLE>
[LINE GRAPH]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND CLASS C
- --------------------------------------------------------------------------------
Kemper Salomon
U.S. Brothers
Mortgage 30-Year Consumer
Fund Class GNMA Price
B1 Index' Index"
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9937 9954 10034
9910 10025 10129
9910 10091 10149
10388 10624 10264
10964 11177 10339
11146 11418 10386
12/31/95 11598 11800 10407
11333 11761 10556
11309 11854 10624
11532 12104 10698
12/31/96 11808 12469 10753
11783 12481 10847
12178 12965 10868
12507 13354 10929
12/31/97 12771 13653 10936
12946 13873 10997
13151 14109 11051
9/30/98 13544 14463 11078
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURNS AND
PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN ORIGINAL COST.
*AVERAGE ANNUAL TOTAL RETURN MEASURES NET INVESTMENT INCOME AND CAPITAL
GAIN OR LOSS FROM PORTFOLIO INVESTMENTS OVER THE PERIODS SPECIFIED, ASSUMING
REINVESTMENT OF DIVIDENDS AND, WHERE INDICATED, ADJUSTMENT FOR THE MAXIMUM SALES
CHARGE. THE MAXIMUM SALES CHARGE FOR CLASS A SHARES IS 4.5%. FOR CLASS B SHARES,
THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE IS 4%. CLASS C SHARES HAVE NO SALES
CHARGE ADJUSTMENT, BUT REDEMPTIONS WITHIN ONE YEAR OF PURCHASE MAY BE SUBJECT TO
A CONTINGENT DEFERRED SALES CHARGE OF 1%. SHARE CLASSES INVEST IN THE SAME
UNDERLYING PORTFOLIO. AVERAGE ANNUAL TOTAL RETURN REFLECTS ANNUALIZED CHANGE
WHILE TOTAL RETURN REFLECTS AGGREGATE CHANGE. 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.
+THE SALOMON BROTHERS 30-YEAR GNMA INDEX, AN UNMANAGED INDEX, IS BASED ON TOTAL
RETURN WITH ALL DIVIDENDS REINVESTED AND IS COMPRISED OF GNMA 30-YEAR PASS
THROUGHS OF SINGLE FAMILY AND GRADUATED PAYMENT MORTGAGES. IN ORDER FOR A GNMA
COUPON TO BE INCLUDED IN THE INDEX, IT MUST HAVE AT LEAST $200 MILLION OF
OUTSTANDING COUPON PRODUCT. SOURCE IS SALOMON BROTHERS INC.
++THE CONSUMER PRICE INDEX IS A STATISTICAL MEASURE OF CHANGE, OVER TIME, IN
THE PRICES OF GOODS AND SERVICES IN MAJOR EXPENDITURE GROUPS FOR ALL URBAN
CONSUMERS. IT IS GENERALLY CONSIDERED TO BE A MEASURE OF INFLATION. SOURCE IS
TOWERSDATA.
THE FUND'S SHARES ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
ON 9/30/98 ON 9/30/97
- ---------------------------------------------------------------------------------
<S> <C> <C>
GNMA 81% 88%
- ---------------------------------------------------------------------------------
LONG-TERM GOVERNMENT SECURITIES 7 2
- ---------------------------------------------------------------------------------
INTERMEDIATE-TERM GOVERNMENT
SECURITIES 2 3
- ---------------------------------------------------------------------------------
OTHER MORTGAGE-BACKED SECURITIES 10 7
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
YEARS TO MATURITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
ON 9/30/98 ON 9/30/97
- ---------------------------------------------------------------------------------
<S> <C> <C>
LESS THAN 5 59% 15%
- ---------------------------------------------------------------------------------
5-10 YEARS 35 83
- ---------------------------------------------------------------------------------
11-20 YEARS 1 1
- ---------------------------------------------------------------------------------
OVER 21 YEARS 5 1
- ---------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 9/30/98 ON 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
AVERAGE MATURITY 5.2 years 7.2 years
- --------------------------------------------------------------------------------
</TABLE>
*Portfolio composition and holdings are subject to change.
8
<PAGE> 9
KEMPER U.S. MORTGAGE FUND
Portfolio of Investments at September 30, 1998
(Dollars In Thousands)
<TABLE>
<CAPTION>
COUPON PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION - 81.2%
(Cost: $1,693,566)
Pass-through 6.00% 2023-2028 $121,380 $ 121,988
certificates 6.50 2022-2028 436,038 446,101
7.00 2012-2028 536,116 553,506
7.50 2011-2028 315,779 327,316
8.00 2008-2027 193,753 202,500
8.50 2017-2027 12,249 12,929
9.00 2008-2028 67,075 71,990
9.50 2009-2023 27,558 29,866
10.00 2016-2021 3,430 3,776
10.50 2019-2021 3,986 4,395
11.00 2019 162 179
-----------------------------------------------------------------------
1,774,546
- ------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY
SECURITIES - 12.2%
(Cost: $251,310)
Bonds 10.75 2003 35,270 44,240
12.75 2010 48,135 71,699
11.25 2014 16,690 26,615
8.125 2021 78,000 108,067
6.25 2023 12,850 14,743
-----------------------------------------------------------------------
265,364
- ------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL
MORTGAGE ASSOCIATION - 5.8%
(Cost: $125,047)
Agency Notes 6.00 2008 28,700 30,870
Pass-through 6.50 2026 464 471
certificates 8.00 2024 5,435 5,640
8.50 2026-2028 35,035 36,524
9.00 2016-2025 50,552 53,238
11.50 2018 418 458
-----------------------------------------------------------------------
127,201
- ------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL
MORTGAGE CORPORATION - 4.3%
(Cost: $92,954)
Pass-through 6.00 2028 35,000 34,984
certificates 7.00 2025-2028 23,003 23,607
7.50 2012-2028 13,722 14,125
8.00 2017 589 614
8.50 2016 178 187
9.50 2020 18,835 20,383
-----------------------------------------------------------------------
93,900
-----------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--103.5%
(Cost: $2,162,877) 2,261,011
-----------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS - 3.0%
(Cost: $66,000)
Yield--5.45% to 5.57%
Due--October 1998 66,000 66,000
-----------------------------------------------------------------------
TOTAL INVESTMENTS--106.5%
(Cost: $2,228,877) 2,327,011
-----------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(6.5)% (142,836)
-----------------------------------------------------------------------
NET ASSETS--100% $2,184,175
-----------------------------------------------------------------------
</TABLE>
- ----------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- ----------------------------------
Based on the cost of investments of $2,228,877,000 for federal income tax
purposes at September 30, 1998, the gross unrealized appreciation was
$98,860,000, the gross unrealized depreciation was $726,000 and the net
unrealized appreciation on investments was $98,134,000.
See accompanying Notes to Financial Statements.
9
PORTFOLIO OF INVESTMENTS
<PAGE> 10
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, 1998, 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 1994. 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, 1998, 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, 1998, 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 1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 13, 1998
10
<PAGE> 11
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
(In Thousands)
<TABLE>
<CAPTION>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investments, at value
(Cost: $2,228,877) $2,327,011
- --------------------------------------------------------------------------
Cash 3,499
- --------------------------------------------------------------------------
Receivable for:
Investments sold 59,573
- --------------------------------------------------------------------------
Fund shares sold 1,097
- --------------------------------------------------------------------------
Interest 18,745
- --------------------------------------------------------------------------
TOTAL ASSETS 2,409,925
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Payable for:
Dividends 4,502
- --------------------------------------------------------------------------
Investments purchased 216,261
- --------------------------------------------------------------------------
Fund shares redeemed 2,594
- --------------------------------------------------------------------------
Management fee 931
- --------------------------------------------------------------------------
Distribution services fee 238
- --------------------------------------------------------------------------
Administrative services fee 434
- --------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 669
- --------------------------------------------------------------------------
Trustees' fees 121
- --------------------------------------------------------------------------
Total liabilities 225,750
- --------------------------------------------------------------------------
NET ASSETS $2,184,175
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Paid-in capital $2,700,851
- --------------------------------------------------------------------------
Accumulated net realized loss on investments (614,810)
- --------------------------------------------------------------------------
Net unrealized appreciation on investments 98,134
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $2,184,175
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($1,812,118 / 253,562 shares outstanding) $7.15
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $7.49
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($368,234 / 51,578 shares outstanding) $7.14
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($3,823 / 535 shares outstanding) $7.15
- --------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended September 30, 1998
(In Thousands)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------
Interest income $171,993
- ------------------------------------------------------------------------
Expenses:
Management fee 11,862
- ------------------------------------------------------------------------
Distribution services fee 3,992
- ------------------------------------------------------------------------
Administrative services fee 5,518
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 5,328
- ------------------------------------------------------------------------
Professional fees 55
- ------------------------------------------------------------------------
Reports to shareholders 635
- ------------------------------------------------------------------------
Trustees' fees and other 112
- ------------------------------------------------------------------------
Total expenses 27,502
- ------------------------------------------------------------------------
NET INVESTMENT INCOME 144,491
- ------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------
Net realized gain on sales of investments 55,624
- ------------------------------------------------------------------------
Net realized loss from futures transactions (2,404)
- ------------------------------------------------------------------------
Net realized gain 53,220
- ------------------------------------------------------------------------
Change in net unrealized appreciation on investments (5,231)
- ------------------------------------------------------------------------
Net gain on investments 47,989
- ------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $192,480
- ------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1998 1997
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------------
Net investment income $ 144,491 188,363
- -----------------------------------------------------------------------------------------------
Net realized gain (loss) 53,220 (5,898)
- -----------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation (5,231) 48,933
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 192,480 231,398
- -----------------------------------------------------------------------------------------------
Net equalization charges -- (7,042)
- -----------------------------------------------------------------------------------------------
Distribution from net investment income (148,396) (192,807)
- -----------------------------------------------------------------------------------------------
Net decrease from capital share transactions (357,734) (493,859)
- -----------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (313,650) (462,310)
- -----------------------------------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------------------------------
Beginning of year 2,497,825 2,960,135
- -----------------------------------------------------------------------------------------------
END OF YEAR (including undistributed
net investment income of $32,468
for the year ended September 30, 1997) $2,184,175 2,497,825
- -----------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper U.S. Mortgage Fund (the 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,
1998) 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 SECURITY VALUATION. Investments are stated at
value. Portfolio debt securities with remaining
maturities greater than sixty days are valued by
pricing agents approved by the officers of the
Fund, which quotations reflect broker/dealer-
supplied valuations and electronic data processing
techniques. If the pricing agents are unable to
provide such quotations, the most recent bid
quotation supplied by a bona fide market maker
shall be used. An exchange-traded options contract
on securities, futures and other financial
instruments is valued at its most recent sale price
on such exchange. If no sales occurred, the options
contract is valued at the calculated mean between
the most recent bid and asked quotations. If there
are no such bid and asked quotations, the options
contract is valued at the most recent bid quotation
in the case of a purchased options contract, or the
most recent asked quotation in the case of a
written options contract. An options contract on
securities and other financial instruments traded
over-the-counter is valued at the most recent bid
quotation in the case of a purchased options
contract and at the most recent asked quotation in
the case of a written options contract. Futures
contracts are valued at the most recent settlement
price. All other securities are valued at their
fair value as determined in good faith by the
Valuation Committee of 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, 1998, the Fund
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
had $211,283,000 in purchase commitments
outstanding (10% 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 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's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies, and to distribute
all of its taxable income to its shareholders.
Accordingly, the Fund paid no federal income taxes
and no federal income tax provision was required.
At September 30, 1998, the Fund had a tax basis net
loss carryforward of approximately $612,745,000,
which may be applied against any realized net
taxable gains of each succeeding year until fully
utilized or it will expire during the period 2000
through 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. Prior to October 1, 1997,
the Fund used equalization accounting to keep a
continuing shareholder's per share interest in
undistributed net investment income unaffected by
shareholder activity. This was accomplished by
allocating a portion of the proceeds from sales and
the cost of redemptions of fund shares to
undistributed net investment income. As of October
1, 1997, the Fund discontinued using equalization.
This change has no effect on the Fund's net assets,
net asset value per share or distributions to
shareholders. Discontinuing the use of equalization
accounting will result in simpler financial
statements. The cumulative effect of the
discontinuance of equalization accounting was to
decrease undistributed net investment income and
increase paid-in capital previously reported
through September 30, 1997 by $31,536,000.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a monthly management fee
of 1/12 of the 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 $11,862,000 for the year ended September 30,
1998.
ZURICH/B.A.T MERGER. On September 7, 1998, Zurich
Insurance Company (Zurich), majority owner of
Scudder Kemper, entered into an agreement with
B.A.T Industries p.l.c. (B.A.T) pursuant to which
the financial services businesses of B.A.T were
combined with Zurich's businesses to form a new
global insurance and financial services company
known as Zurich Financial Services.
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
Upon consummation of the transaction, the Fund's
investment management agreement with Scudder Kemper
was deemed to have been assigned and, therefore,
terminated. The Board of Trustees of the Fund has
approved a new investment management agreement with
Scudder Kemper, which is substantially identical to
the former investment management agreement, except
for the dates of execution and termination. The
Board of Trustees of the Fund will seek shareholder
approval of the new investment management agreement
through a proxy solicitation that is currently
scheduled to conclude in mid-December.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS
RETAINED BY ALLOWED BY KDI
KDI TO FIRMS
--------------- --------------
<S> <C> <C>
Year ended September 30, 1998 $35,000 272,000
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares pursuant to separate 12b-1 plans for the
Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees, CDSC and commissions
related to Class B and Class C shares are as
follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES PAID
RECEIVED BY KDI BY KDI TO FIRMS
----------------- ----------------------
<S> <C> <C>
Year ended September 30, 1998 $4,727,000 568,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of Fund accounts the firms
service. Administrative services fees (ASF) paid
are as follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY -----------------------------
THE FUND TO KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------- -------------
<S> <C> <C> <C>
Year ended September 30, 1998 $5,518,000 5,521,000 53,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of
$3,302,000 for the year ended September 30, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the year ended September 30,
1998, the Fund made no payments to its officers and
incurred trustees' fees of $47,000 to independent
trustees.
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended September 30, 1998, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $4,157,927
Proceeds from sales 4,614,630
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1998 1997
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 4,079 $ 25,320 2,806 $ 18,135
--------------------------------------------------------------------------------
Class B 4,837 33,684 3,168 22,086
--------------------------------------------------------------------------------
Class C 222 1,553 207 1,429
--------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 9,729 68,880 11,133 77,149
--------------------------------------------------------------------------------
Class B 2,592 18,428 5,110 35,406
--------------------------------------------------------------------------------
Class C 12 106 9 64
--------------------------------------------------------------------------------
SHARES REDEEMED
Class A (53,052) (374,209) (59,510) (408,055)
--------------------------------------------------------------------------------
Class B (19,074) (130,852) (34,898) (239,589)
--------------------------------------------------------------------------------
Class C (91) (644) (69) (484)
--------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 39,860 281,271 22,409 153,714
--------------------------------------------------------------------------------
Class B (39,907) (281,271) (22,425) (153,714)
--------------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE TRANSACTIONS $(357,734) $(493,859)
--------------------------------------------------------------------------------
</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 the Fund enters into a futures
contract, it is required to make a margin deposit
with its custodian. Subsequently, gain or loss is
recognized and payments are made on a daily basis
between the Fund and its broker as the market value
of the futures contract fluctuates. At September
30, 1998, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $3,464,000. 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, 1998 (in thousands):
<TABLE>
<CAPTION>
FACE EXPIRATION
TYPE AMOUNT MONTH LOSS
------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Notes $97,400 December '98 $ (655)
------------------------------------------------------------------------------
U.S. Treasury Bonds 95,591 December '98 (1,564)
------------------------------------------------------------------------------
TOTAL $(2,219)
------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED TWO MONTHS YEAR ENDED
SEPTEMBER 30, ENDED JULY 31,
------------------- SEPTEMBER 30, ------------
1998 1997 1996 1995 1995 1994
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.01 6.91 7.13 7.06 6.96 7.56
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .44 .52 .49 .08 .53 .51
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .17 .10 (.19) .08 .09 (.59)
- ----------------------------------------------------------------------------------------------
Total from investment operations .61 .62 .30 .16 .62 (.08)
- ----------------------------------------------------------------------------------------------
Less distribution from net investment
income .47 .52 .52 .09 .52 .52
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $7.15 7.01 6.91 7.13 7.06 6.96
- ----------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.99% 9.26 4.28 2.23 9.48 (1.21)
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses .97% .96 .97 .94 .89 .99
- ----------------------------------------------------------------------------------------------
Net investment income 6.46% 7.23 6.98 6.87 7.77 7.00
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
YEAR ENDED TWO MONTHS YEAR ENDED
SEPTEMBER 30, ENDED JULY 31,
------------------- SEPTEMBER 30, ------------
1998 1997 1996 1995 1995 1994
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.00 6.91 7.12 7.05 6.96 7.56
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .40 .45 .44 .07 .47 .45
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .14 .10 (.19) .08 .09 (.59)
- ----------------------------------------------------------------------------------------------
Total from investment operations .54 .55 .25 .15 .56 (.14)
- ----------------------------------------------------------------------------------------------
Less distribution from net investment
income .40 .46 .46 .08 .47 .46
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $7.14 7.00 6.91 7.12 7.05 6.96
- ----------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.00% 8.17 3.54 2.09 8.44 (2.00)
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.91% 1.83 1.80 1.79 1.75 1.79
- ----------------------------------------------------------------------------------------------
Net investment income 5.52% 6.36 6.15 6.02 6.91 6.27
- ----------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------------------
TWO MONTHS YEAR
YEAR ENDED SEPTEMBER 30, ENDED ENDED MAY 31 TO
----------------------------------------- SEPTEMBER 30, JULY 31, JULY 31,
1998 1997 1996 1995 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $7.00 6.90 7.12 7.05 6.95 6.99
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .40 .46 .43 .07 .48 .07
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .16 .10 (.19) .08 .09 (.04)
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .56 .56 .24 .15 .57 .03
- -----------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment
income .41 .46 .46 .08 .47 .07
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.15 7.00 6.90 7.12 7.05 6.95
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 8.30% 8.45 3.47 2.10 8.65 .47
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.73% 1.71 1.72 1.69 1.71 1.55
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 5.70% 6.48 6.23 6.12 6.95 6.46
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED SEPTEMBER 30, ENDED YEAR ENDED JULY 31,
----------------------------------- SEPTEMBER 30, -------------------------
1998 1997 1996 1995 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of period (in
thousands) $2,184,175 2,497,825 2,960,135 3,493,052 3,528,329 4,158,066
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 172% 235 391 249 573 963
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges. Per share
data was determined based on average shares outstanding during the year ended
September 30, 1998.
- --------------------------------------------------------------------------------
TAX INFORMATION
- --------------------------------------------------------------------------------
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Kemper Fund account, please call 1-800-621-1048.
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY KATHRYN L. QUIRK
Chairman and Trustee President Vice President
DAVID W. BELIN PHILIP J. COLLORA LINDA J. WONDRACK
Trustee Vice President Vice President
and Secretary
LEWIS A. BURNHAM MAUREEN E. KANE
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
DONALD L. DUNAWAY CAROLINE PEARSON
Trustee JERARD K. HARTMAN Assistant Secretary
Vice President
ROBERT B. HOFFMAN ELIZABETH C. WERTH
Trustee THOMAS W. LITTAUER Assistant Secretary
Vice President
DONALD R. JONES BRENDA LYONS
Trustee ANN M. MCCREARY Assistant Treasurer
Vice President
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
EDMOND D. VILLANI
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania Avenue
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT ERNST & YOUNG LLP
AUDITORS 233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
PRINCIPAL KEMPER DISTRIBUTORS, INC.
UNDERWRITERS 222 South Riverside PlazaChicago, IL 60606
KEMPER FUNDS LOGO Long-term investing in a short-term world(SM)
Printed in the U.S.A. on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Fund prospectus.
KUSMF - 2 (11/98) 1059710
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
