<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MARCH 31, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[LOGO]
Offering investors the opportunity for maximum current
return from a portfolio of U.S. Government Securities
KEMPER
U.S. MORTGAGE FUND
"...The fund returned 3.76 percent for the period, versus its
peer group, which returned an average of 3.6 percent.
A lot of the fund's performance came ... after we
began expanding its mortgage arena. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
SHAREHOLDERS' MEETING
8
PORTFOLIO STATISTICS
9
PORTFOLIO OF INVESTMENTS
11
FINANCIAL STATEMENTS
13
NOTES TO FINANCIAL STATEMENTS
17
FINANCIAL HIGHLIGHTS
At A GLANCE
- --------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE
FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX MONTH PERIOD ENDED MARCH 31, 1998
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Class A 3.76%
Class B 3.47%
Class C 3.51%
Lipper U.S. Mortgage Funds
Category Average* 3.60%
</TABLE>
Returns and rankings are historical and do
not represent future performance. Returns, rankings and net asset value
fluctuate. Shares are redeemable at current net asset value, which may be more
or less than original cost.
* Lipper Analytical Services, Inc. returns and rankings are based upon changes
in net asset value with all dividends reinvested and do not include the
effect of sales charges and, if they had, results may have been less
favorable.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
3/31/98 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER U.S. MORTGAGE FUND
CLASS A $7.03 $7.01
- --------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND
CLASS B $7.03 $7.00
- --------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND
CLASS C $7.03 $7.00
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE
FUND RANKINGS*
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER U.S. MORTGAGE FUNDS CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #21 of 62 funds #41 of 62 funds #38 of 62 funds
- --------------------------------------------------------------------------------
5-YEAR #17 of 41 funds #32 of 41 funds N/A
- --------------------------------------------------------------------------------
10-YEAR N/A #14 of 17 funds N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF MARCH 31, 1998.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS
INCOME: $0.2400 $0.2098 $0.2129
- --------------------------------------------------------------------------------
MARCH DIVIDEND: $0.0400 $0.0350 $0.0347
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 6.83% 5.97% 5.92%
- --------------------------------------------------------------------------------
SEC YIELD+: 5.82% 5.19% 5.35%
- --------------------------------------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on March 31, 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 March 31, 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.
TERMS TO KNOW
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR FIXED-INCOME STYLE BOX
- --------------------------------------------------------------------------------
[MATURITY QUALITY DIAGRAM]
Source: Morningstar, Inc., Chicago, IL 312-696-6000. (Morningstar Style
Box is based on a portfolio date as of March 31, 1998.) The Fixed-Income Style
Box placement is based on a fund's average effective maturity or duration and
the average credit rating of the bond portfolio.
Please note that style boxes do not represent an exact assessment of risk
and do not represent future performance. Please consult the prospectus for a
description of investment policies.
BASIS POINT The movement of interest rates or yields expressed in hundredths of
a percent.
CORRECTION A reverse movement, usually downward, in the price of a group of
stocks or the overall market. Corrections are to be expected over a long term.
DURATION A measure of the interest rate sensitivity of a portfolio,
incorporating time to maturity and coupon size. The longer the duration, the
greater the interest rate risk.
GINNIE MAE Short for Government National Mortgage Association and securities
guaranteed by that agency.
FREDDIE MAC Short for Federal Home Loan Mortgage Corporation.
FANNIE MAE Short for Federal National Mortgage Association, a publicly owned,
government sponsored organization established in 1938 to purchase both
government-backed and conventional mortgages from lenders and securitize them.
<PAGE> 3
ECONOMIC OVERVIEW
[SILVA'S 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. HE IS ALSO A MEMBER OF THE INVESTMENT POLICY AND STRATEGY COMMITTEE
FOR KEMPER FUNDS.
SILVIA HOLDS A BACHELOR OF ARTS AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND HAS 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 $200 BILLION IN ASSETS GLOBALLY FOR
MUTUAL FUND INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND
CORPORATE CLIENTS, INSURANCE COMPANIES AND PRIVATE, FAMILY AND INDIVIDUAL
ACCOUNTS. IT IS ONE OF THE 10 LARGEST MUTUAL FUND COMPLEXES IN THE UNITED
STATES.
DEAR SHAREHOLDERS,
Stable economic growth, low interest rates and sustained lower inflation have
continued to produce a beneficial market environment for investors in the second
quarter of 1998. Despite heightened sensitivity to earnings estimates and
announcements, the market continued to support financial assets. We can expect
this favorable climate to continue--in spite of the sensitivity--at least over
the shorter term.
As always, expectations have been at the heart of the actions and reactions
that move the markets. Expectations appear to be high, as demonstrated by a
record flow of new cash--$37.5 billion--into mutual funds in March. This record
flow surpassed the prior monthly record of $32.7 billion in net mutual fund
investing set in January 1996. Two years ago, many experts were concerned that
the bull market was close to being on its last legs. Quite remarkably today,
investors are still betting on equities. Nearly 75 percent of the new cash
flowing into mutual funds in March went into stock funds, according to the
Investment Company Institute, a trade organization that monitors the mutual
fund industry.
Unfortunately, high expectations often combine with high anxiety--today's
investors are attuned to even the smallest hint of economic change. The result
is volatility. Many who believe that our long-running bull market is too good to
be true or that stock prices are too high are wondering when the market will
reverse.
While a reversal may not be on the immediate horizon, investors are wise to
watch for several signs that change is underway: rising prices, indicating
higher inflation; repercussions of the Asian economic crisis on American
business, which could appear in the form of reduced earnings; and a continued
widening of our trade deficit, a serious imbalance caused by heightened American
demand for foreign goods and services.
On Monday, April 27, expectations were tested by reports that the Federal
Reserve Board (Fed) was considering a hike in interest rates. The markets
reacted immediately to this news, driving stock prices downward. Ultimately, we
do not anticipate that an interest rate hike will materialize in the second
quarter; however, the Fed's monetary policy meeting shortly after the release of
this overview will provide more information.
Our positive outlook for this quarter is based primarily on the current
resiliency of our marketplace. The United States appears to be firmly planted in
the middle of an economic cycle, with no evidence of detrimental pressures that
might be associated with the market's phenomenal growth. We are not seeing price
increases for goods and services or a downturn in the housing market, both of
which we might expect late in an economic cycle.
Equities have continued to reward investors. The U.S. stock market, as
measured by the Standard & Poor's 500, gained nearly 14 percent in the first
quarter of 1998 and returned more than 15 percent year-to-date as of April 30.
Bonds have also rewarded investors in terms of real return, which is total
return less the rate of inflation. The high yield and corporate debt
fixed-income markets also have performed well.
U.S. economic growth, as measured by the gross domestic product (GDP) growth
rate, was slightly above 4 percent for the first quarter. Our general
expectation for the year is that growth will increase between 2.5 and 3 percent
over last year. In other words, the economy will remain strong, but will slow
down as the year progresses.
Consumer spending and corporate fixed investments have fueled the economy's
solid growth. Spending on both capital goods and high technology has been
strong. Corporate profits have grown between 5 and 10 percent, which appears to
be acceptable in an environment of stable interest rates. U.S. employment growth
has ranged from 2 to 2.25 percent, continuing to exceed expectations. Consumer
confidence has continued to hit near all-time highs. The increase in output
prices, an indicator of inflation measured by the Consumer Price Index (CPI),
has remained at 1.5 to 2 percent.
Adding to the good news, all seems to be quiet on the domestic policy front.
At the end of February, the U.S. federal budget deficit essentially vanished.
Recent efforts to reduce the deficit, combined with higher federal revenues due
to the robust economy, have left us with an expected budget surplus of $40
billion to $50 billion for fiscal 1998. To date, our Democratic president and
Republican Congress have not agreed on any significant legislation regarding tax
credits, spending cuts or health care that could threaten the newfound federal
budget surplus.
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 (4/30/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 5.64 5.88 6.71 6.74
PRIME RATE(2) 8.5 8.5 8.5 8.25
INFLATION RATE(3)* 1.38 2.08 2.43 2.9
THE U.S. DOLLAR(4) 3.92 9.65 6.55 8.51
CAPITAL GOODS ORDERS(5)* 10.89 11.72 8.17 6.82
INDUSTRIAL PRODUCTION(5)* 4.27 5.77 4.72 3.49
EMPLOYMENT GROWTH(6)* 2.59 2.36 2.27 1.78
</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 as 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 March 31, 1998.
Can we expect a little more excitement from overseas? A full-scale global
recession from last year's Asian economic crisis seems unlikely at this point.
The crisis has yet to hurt most U.S. businesses and investors. Quite the
contrary. While the mere threat of repercussions from the Asian crisis added to
the anxiety mentioned earlier, it has also had the effect of keeping U.S.
interest rates and prices in check, making the U.S. economy all the more
attractive to investors around the world.
In the global economy, the U.S. dollar continues to appreciate in value
compared to other currencies. In fact, more capital is flowing into U.S. markets
as investors generally avoid Asia. Europe has also been benefiting from the
crisis. Canada, which is a commodity-producing exporter, has been somewhat
negatively affected as commodity prices have fallen.
Other major developments abroad include the final selection of countries to
participate in Europe's single currency next year. Many European countries are
adopting more restrictive fiscal policy and reducing inflation in anticipation
of the momentous European Economic and Monetary Union (EMU). But after the EMU
is established in 1999, tensions may indeed mount as countries work to adapt to
the new structure.
As we approach the turn of the century, one caveat remains: Don't
underestimate the potential of the Year 2000 computer code problem. It appears
that a significant number of federal government agencies will not meet the
criteria necessary to avoid the problem. Many businesses are revealing that
billions of dollars are being spent on the situation. Some experts say a global
recession is in store. Others adamantly disagree. In any event, we may indeed
see a reduction in capital spending toward the end of 1998 and the first half of
next year as companies focus on fixing existing computers rather than on
purchasing new equipment. We'll keep you posted!
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ JOHN E. SILVIA
JOHN E. SILVIA
May 8, 1998
4
<PAGE> 5
PERFORMANCE UPDATE
[VANDENBERG PHOTO]
RICHARD VANDENBERG JOINED SCUDDER KEMPER INVESTMENTS, INC. IN MARCH 1996 AND IS
A MANAGING DIRECTOR. HE IS THE PORTFOLIO MANAGER OF KEMPER U.S. MORTGAGE FUND.
VANDENBERG HAS 25 YEARS OF FIXED-INCOME PORTFOLIO MANAGEMENT EXPERIENCE. HE
RECEIVED BOTH 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.
KEMPER U.S. MORTGAGE FUND ONCE AGAIN TURNED IN STRONG PERFORMANCE FOR THE
LATEST SEMIANNUAL PERIOD. THIS LATEST SUCCESS IS DUE IN LARGE PART TO AN
INCREASED PROPORTION OF MORTGAGE HOLDINGS AND NEW ALLOCATION STRATEGY THAT
INCLUDES NON-GINNIE MAE MORTGAGES. PORTFOLIO MANAGER DICK VANDENBERG DISCUSSES
HOW HE MANAGED THE FUND WITH AN EYE ON THE UNFOLDING ASIAN CRISIS.
Q HOW DID ECONOMIC CONDITIONS AFFECT THE BOND MARKETS OVER THE SIX-MONTH
PERIOD FROM OCTOBER 1, 1997 THROUGH MARCH 31, 1998?
A The force most affecting the markets over the past six months was the
Asian financial crisis. The unfolding problems in Southeast Asia instigated a
major correction in the stock market on October 27, 1997 when the stock market
lost 7 percent of its value. The market recovered within a few weeks, so the
impact of the tumble was short-lived. The Asian crisis, however, continued,
tempering the outlook for economic growth. Asia's perceived impact on the U.S.
economy caused Wall Street to lower its estimates of 1998 economic activity by
about 1 percent and enhanced the outlook for continued low inflation for 1998.
In reality, both the Asian crisis and the market tumble were good for
fixed-income securities, causing rates to fall somewhat. Problems in the stock
market usually have a positive effect on bonds because investors flee toward
quality and safety. The thought is that if there is a major meltdown in the
stock market, the Federal Reserve System is going to be the provider of
liquidity as the last resort. Also, in a financial crisis the Fed will hold
rates steady or maybe even lower them. So during that period of time we had a
slight drop in interest rates and, therefore, the prices of fixed-income
securities rose.
Q HOW DID YOU POSITION KEMPER U.S. MORTGAGE FUND IN LIGHT OF THE ASIAN
CRISIS?
A When we began to suspect that the problems in Asia were going to develop
into a worldwide issue, we started to lengthen our durations, thinking that this
was going to be positive for bonds. We were preparing for a drop in interest
rates. We tracked the peer group though for the first part of the rally because
most of them had also gone long. We didn't start pulling ahead of the group
until the beginning of December.
By mid-January interest rate levels reflected all the good news for
bonds. It was widely accepted that there was an Asian crisis and that the
crisis would diminish Gross Domestic Product (GDP) growth in 1998. But people
began to suspect that the economy was still going to grow, and it became
more apparent that the Federal Reserve Board (the Fed) wasn't going to move
immediately to lower interest rates. We decided then to reduce the duration
slightly to try to lock in some of the profits. From mid-January on, that
strategy worked out quite well.
Beginning in the new year, we boosted our mortgage allocation slightly. We
didn't think that rates were going to rise or fall very much. Two offsetting
forces were keeping rates contained in a fairly narrow, 0.5 percent range. The
positive force was the Asian crisis. It hadn't yet affected the U.S. economy
5
<PAGE> 6
PERFORMANCE UPDATE
measurably, but we knew inflation would be very much contained because domestic
companies were not going to have the flexibility to raise prices in the
foreseeable future. We also felt the crisis would have a negative impact on the
robust European economy. So all of the things that drove interest rates to these
near-record low yield levels were still in place. Offsetting that, though, was
the fact that the market had previously expected the Federal Reserve Bank to
ease rates. Bond prices actually reflected expectations of at least a 25 basis
point drop in short-term interest rates. Such an easing now seemed unlikely.
Since the market reflected so much good news, we felt that it was fully
priced, so we began to cut back on our exposure duration-wise, and we again
raised our allocation in mortgages. By the end of March we were about 92 percent
invested in mortgages. And for our new peer group, that's probably
over-invested.
Q WHY THE NEW PEER GROUP? WILL IT CHANGE THE WAY YOU MANAGE THE FUND?
A It's actually the peer group that Lipper has placed us in for a long time,
while we were measuring ourselves against a peer group of Ginnie Mae mortgage
funds. We adopted our new peer group in January because it is more inclusive of
all mortgage types, not exclusively Ginnie Maes. It includes Freddie Macs and
Fannie Maes and some other products. The new group also better reflects the size
of the fund and measures our Class A share performance. It's made managing the
fund more challenging, but it should prove to be productive.
Q HOW DID THE FUND PERFORM DURING THIS PERIOD?
A The fund's Class A shares (unadjusted for any sales charge) returned 3.76
percent for the six-month period, versus its peer group, which returned an
average of 3.6 percent. A lot of the fund's performance came during the first
quarter, after we began expanding its mortgage arena. We're hopeful our adjusted
management style will continue to provide above average performance.
Q WHAT IS YOUR OUTLOOK FOR THE GOVERNMENT MORTGAGE MARKET?
A When you're talking about any government bond fund we have to talk about
Fed policy. In Federal Reserve Chairman Alan Greenspan's Humphrey-Hawkins
testimony February 4, 1998, he indicated that the Fed's outlook was fairly
evenly balanced. Although domestic growth was strong, he indicated that he felt
the Asian impact had not yet hit the domestic economy, and that when it did he
expected domestic growth to moderate. He also noted that inflation was low and
he did not expect it to pick up in the near term.
The general feeling after his speech was that the Federal Reserve Bank was
probably going to be on hold for a while and that it would probably watch the
economic numbers that are released this second quarter as carefully as the rest
of us. The Fed will be monitoring economic activity for signs of the Asian
impact. The particular questions it will be seeking answers for include when the
economy starts to overheat, will the Asian impact be strong enough to moderate
growth, and whether or not the problems in Asia cause our own economy to falter.
The economic numbers will determine whether the Fed adjusts rates and in what
direction.
At the same time, we're coming into a seasonal pattern when interest rates
typically fall. This pattern is related to the Treasury calendar. Typically, the
U.S. Treasury is a large net borrower in the first quarter and then it pays down
debt in the second quarter. Sometimes the swing is as much as $50 billion or
more. This time the swing in Treasury financing is friendly for the Treasury
market in terms of supply. We would expect rates to at least be stable and
possibly fall to the low end of the trading range, which would be around 5.6
percent to 5.75 percent in terms of long Treasuries. We wouldn't expect long
Treasury yields to rise above 6 percent during the course of this quarter
either.
All in all, we think its going to be a fairly friendly quarter. We don't
expect a lot of movement one way or another except for the bias toward slightly
lower rates because of the seasonal pay down pattern in the Treasury financing
calendar.
Q HOW HAVE YOU POSITIONED THE KEMPER U.S. MORTGAGE FUND TO TAKE ADVANTAGE OF
THIS?
A We are actively looking to add more conventional mortgages and fewer
Ginnie Maes to the portfolio. We haven't jumped into that game plan yet though.
Today, Ginnie Maes are quite cheap relative to conventionals, so we don't want
to sell them just yet.
I think the fund will do well especially as we begin to diversify more
among the different mortgage products. You'll probably see a higher allocation
to Freddie Mac and Fannie Mae securities and a slightly lower allocation
to Ginnie Mae securities and maybe a little bit higher position in Treasury
securities
6
<PAGE> 7
PERFORMANCE UPDATE
rather than mortgages. That's in part due to the new peer group we're operating
within as of the beginning of the year.
We're also going to focus a bit more on current and discount coupons and a
little less on premium coupon mortgages. That's because we don't think the price
of premium mortgages really reflects the high degree of paydowns that are likely
to occur over the next couple of months with the new low yields in the
marketplace. We think high coupon mortgages will probably underperform slightly
and we want to be a bit underweighted there.
SHAREHOLDERS MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 3, 1997, a special shareholders' meeting was held and adjourned as
necessary. Kemper U.S. Mortgage Fund shareholders were asked to vote on five
separate issues: election of the nine members to the Board of Trustees,
ratification of Ernst & Young LLP as independent auditors, approval of new
investment management agreement with Scudder Kemper Investments, Inc., approval
of changes in the fund's fundamental investment policies to permit a
master/feeder fund structure and approval of a new rule 12b-1 distribution plan
with Zurich Kemper Distributors, Inc. for Class B shares and Class C shares. The
following are the results for each issue:
1) Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
David W. Belin 372,832,981 8,048,482
Lewis A. Burnham 373,128,591 7,752,872
Donald L. Dunaway 373,043,751 7,837,712
Robert B. Hoffman 373,123,371 7,758,092
Donald R. Jones 373,062,367 7,819,097
Shirley D. Peterson 372,956,252 7,925,211
Daniel Pierce 373,059,408 7,822,055
William P. Sommers 373,106,072 7,775,392
Edmond D. Villani 373,000,661 7,880,803
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the current fiscal year.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
368,655,365 3,181,901 9,044,198
</TABLE>
3) Approval of new investment management agreement with Scudder Kemper
Investments, Inc.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
190,973,476 4,872,838 8,354,264
</TABLE>
4) Approval of changes in the fund's fundamental investment policies to permit a
master/feeder fund structure.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
181,431,963 7,654,744 13,433,793 9,140,597
</TABLE>
5) To approve a new rule 12b-1 distribution plan with Zurich Kemper
Distributors, Inc.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
Class B 48,276,957 1,537,442 2,920,548 8,639,700
Class C 193,102 0 8,654 4,280
</TABLE>
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 3/31/98 ON 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE-BACKED SECURITIES
- --------------------------------------------------------------------------------
GNMA 83% 88%
- --------------------------------------------------------------------------------
OTHER 13 7
- --------------------------------------------------------------------------------
LONG-TERM GOVERNMENT SECURITIES 3 2
- --------------------------------------------------------------------------------
INTERMEDIATE-TERM GOVERNMENT SECURITIES 1 3
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/98 ON 9/30/97
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 3/31/98 ON 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
LESS THAN 5 25% 15%
- --------------------------------------------------------------------------------
5-10 72 83
- --------------------------------------------------------------------------------
11-20 2 1
- --------------------------------------------------------------------------------
21 + YEARS 1 1
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
ON 3/31/98 ON 9/30/97
[PIE CHART] [PIE CHART]
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 3/31/98 ON 3/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 5.8 years 7.2 years
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER U.S. MORTGAGE FUND
Portfolio of Investments at March 31, 1998 (unaudited)
(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 $ 1,380 $ 1,338
MORTGAGE ASSOCIATION - 82.9% Certificates 6.50 2022-2028 320,374 317,861
(Cost: $1,830,302) 7.00 2016-2028 474,485 479,863
7.50 2017-2028 486,508 499,597
8.00 2008-2027 453,119 470,699
8.50 2017-2027 15,650 16,532
9.00 2008-2028 82,937 89,224
9.50 2009-2023 33,433 36,275
10.00 2016-2021 4,330 4,767
10.50 2019-2021 5,081 5,602
11.00 2019 184 203
--------------------------------------------------------------------------
1,921,961
- ---------------------------------------------------------------------------------------------------------------------
U.S. TREASURY Notes 5.75 2002 20,500 20,558
SECURITIES - 9.3% Bonds 10.75 2003 35,270 42,914
(Cost: $214,409) 12.75 2010 76,835 109,070
10.625 2015 14,850 22,261
6.25 2023 20,500 21,118
--------------------------------------------------------------------------
215,921
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Pass-through 6.50 2026 484 479
MORTGAGE ASSOCIATION - 5.2% Certificates 7.00 2026-2028 41,670 42,087
(Cost: $119,412) 8.00 2024 7,305 7,566
9.00 2016-2025 66,343 70,324
11.50 2018 423 464
--------------------------------------------------------------------------
120,920
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Pass-through 7.00 2025-2028 24,750 24,998
MORTGAGE CORPORATION - 4.2% Certificates 8.00 2017 753 785
(Cost: $96,577) 8.50 2016-2027 44,130 46,145
9.50 2020 22,981 24,798
--------------------------------------------------------------------------
96,726
--------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--101.6%
(Cost: $2,260,700) 2,355,528
--------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE Dated January and March, 1998. Collateralized by Federal Home Loan
AGREEMENTS - 2.8% Mortgage Corporation and Federal National Mortgage Association securities
which are monitored daily to ensure their market value exceeds the
carrying value of the repurchase agreement.
Nikko Securities Co. International, Inc. $ 25,000 $ 25,000
(held at The Bank of New York,
subcustodian)
5.53%, 4/7/98
Nomura 40,000 40,000
(held at The Bank of New York,
subcustodian)
5.61%, 4/3/98
-----------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS--2.8%
(Cost: $65,000) 65,000
-----------------------------------------------------------------------------
TOTAL INVESTMENTS--104.4%
(Cost: $2,325,700) 2,420,528
-----------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(4.4)% (102,584)
-----------------------------------------------------------------------------
NET ASSETS--100% $2,317,944
-----------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $2,325,700,000 for federal income tax
purposes at March 31, 1998, the gross unrealized appreciation was $96,502,000,
the gross unrealized depreciation was $1,674,000 and the net unrealized
appreciation on investments was $94,828,000.
10
<PAGE> 11
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investments, at value
(Cost: $2,325,700) $2,420,528
- --------------------------------------------------------------------------
Cash 1,164
- --------------------------------------------------------------------------
Receivable for:
Investments sold 355
- --------------------------------------------------------------------------
Fund shares sold 7
- --------------------------------------------------------------------------
Interest 18,923
- --------------------------------------------------------------------------
TOTAL ASSETS 2,440,977
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Payable for:
Investments purchased 118,795
- --------------------------------------------------------------------------
Fund shares redeemed 1,802
- --------------------------------------------------------------------------
Management fee 996
- --------------------------------------------------------------------------
Distribution services fee 340
- --------------------------------------------------------------------------
Administrative services fee 462
- --------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 511
- --------------------------------------------------------------------------
Trustees' fees 127
- --------------------------------------------------------------------------
Total liabilities 123,033
- --------------------------------------------------------------------------
NET ASSETS $2,317,944
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------
Paid-in capital $3,072,016
- --------------------------------------------------------------------------
Accumulated net realized loss on investments (876,263)
- --------------------------------------------------------------------------
Net unrealized appreciation on investments 94,828
- --------------------------------------------------------------------------
Undistributed net investment income 27,363
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $2,317,944
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($1,781,776 / 253,402 shares outstanding) $7.03
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net asset value or 4.50%
of offering price) $7.36
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($532,708 / 75,829 shares outstanding) $7.03
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($3,460 / 492 shares outstanding) $7.03
- --------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
- -----------------------------------------------------------------------
<S> <C>
NET INVESTMENT INCOME
- -----------------------------------------------------------------------
Interest income $90,674
- -----------------------------------------------------------------------
Expenses:
Management fee 6,154
- -----------------------------------------------------------------------
Distribution services fee 2,360
- -----------------------------------------------------------------------
Administrative services fee 2,872
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 2,609
- -----------------------------------------------------------------------
Professional fees 21
- -----------------------------------------------------------------------
Reports to shareholders 417
- -----------------------------------------------------------------------
Trustees' fees and other 86
- -----------------------------------------------------------------------
Total expenses 14,519
- -----------------------------------------------------------------------
NET INVESTMENT INCOME 76,155
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized gain on sales of investments 19,089
- -----------------------------------------------------------------------
Net realized gain from futures transactions 757
- -----------------------------------------------------------------------
Net realized gain 19,846
- -----------------------------------------------------------------------
Change in net unrealized appreciation on investments (8,537)
- -----------------------------------------------------------------------
Net gain on investments 11,309
- -----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $87,464
- -----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
MARCH 31, YEAR ENDED
1998 SEPTEMBER 30,
(UNAUDITED) 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ----------------------------------------------------------------------------------------------------
Net investment income $ 76,155 188,363
- ----------------------------------------------------------------------------------------------------
Net realized gain (loss) 19,846 (5,898)
- ----------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation (8,537) 48,933
- ----------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 87,464 231,398
- ----------------------------------------------------------------------------------------------------
Net equalization charges (2,310) (7,042)
- ----------------------------------------------------------------------------------------------------
Distribution from net investment income (78,950) (192,807)
- ----------------------------------------------------------------------------------------------------
Net decrease from capital share transactions (186,085) (493,859)
- ----------------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (179,881) (462,310)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------------------------
Beginning of period 2,497,825 2,960,135
- ----------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed
net investment income of
$27,363 and $32,468, respectively) $2,317,944 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 March 31, 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 INVESTMENT VALUATION. Investments are stated at
value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Financial futures and options are
valued at the settlement price established each day
by the board of trade or exchange on which they are
traded. Over-the-counter traded fixed income
options are valued based upon prices provided by
market makers. Other securities and assets are
valued at fair value as determined in good faith by
the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes discount amortization on
all fixed income securities and premium
amortization on mortgage-backed securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
The Fund may purchase securities with delivery or
payment to occur at a later date. At the time the
Fund enters into a commitment to purchase a
security, the transaction is recorded and the value
of the security is reflected in the net asset
value. The value of the security may vary with
market fluctuations. No interest accrues to the
Fund until payment takes place. At the time the
Fund enters into this type of transaction it is
required to segregate cash or other liquid assets
equal to the value of the securities purchased. At
March 31, 1998 the Fund had $117,899,000 in
purchase commitments outstanding (5% of net
assets), with a corresponding amount of assets
segregated.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
by dividing the Fund's net assets attributable to
that class by the number of shares of the class
outstanding.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies for the six
months ended March 31, 1998. The accumulated net
realized loss on sales of investments for federal
income tax purposes at March 31, 1998, amounting to
approximately $874,198,000, is available to offset
future taxable gains. If not applied, $275,760,000
of the loss carryover expires in 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 INVESTMENT MANAGER COMBINATION. Effective December
31, 1997, Zurich Insurance Company, the parent of
Zurich Kemper Investments, Inc. (ZKI), acquired a
majority interest in Scudder, Stevens & Clark, Inc.
(Scudder), another major investment manager. As a
result of this transaction, the operations of ZKI
were combined with Scudder to form a new global
investment organization named Scudder Kemper
Investments, Inc. (Scudder Kemper). The transaction
resulted in the termination of the Fund's
investment management agreement with ZKI, however,
a new investment management agreement between the
Fund and Scudder Kemper was approved by the Fund's
Board of Trustees and by the Fund's shareholders.
The new management agreement, which was effective
December 31, 1997, is the same in all material
respects as the previous management agreement,
except that Scudder Kemper is the new investment
adviser to the Fund. In addition, the names of the
Fund's principal underwriter and shareholder
service agent were changed to Kemper Distributors,
Inc. (KDI) and Kemper Service Company (KSvC),
respectively.
MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper, 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 $6,154,000 for the six months
ended March 31, 1998.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with 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>
Six months ended March 31, 1998 $18,000 143,000
</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
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
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
RECEIVED BY KDI PAID BY KDI TO FIRMS
----------------- ---------------------
<S> <C> <C>
Six months ended March 31, 1998 $2,759,000 343,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, the Fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. KDI in turn has various
agreements with financial services firms that
provide these services and pays these firms based
on assets of Fund accounts 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>
Six months ended March 31, 1998 $2,872,000 2,871,000 32,000
</TABLE>
SHAREHOLDER SERVICES AGENT AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
KSvC is the shareholder service agent of the Fund.
Under the agreement, KSvC received shareholder
services fees of $1,732,000 for the six months
ended March 31, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the six months ended March 31,
1998, the Fund made no payments to its officers and
incurred trustees' fees of $23,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended March 31, 1998, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $2,145,649
Proceeds from sales 2,467,994
15
<PAGE> 16
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,
1998 1997
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------
SHARES SOLD
--------------------------------------------------------------------------------
Class A 1,735 $ 10,316 2,806 $ 18,135
--------------------------------------------------------------------------------
Class B 1,807 12,475 3,168 22,086
--------------------------------------------------------------------------------
Class C 132 935 207 1,429
--------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
--------------------------------------------------------------------------------
Class A 4,935 34,398 11,133 77,149
--------------------------------------------------------------------------------
Class B 1,555 10,924 5,110 35,406
--------------------------------------------------------------------------------
Class C 6 45 9 64
--------------------------------------------------------------------------------
SHARES REDEEMED
--------------------------------------------------------------------------------
Class A (26,169) (182,245) (59,510) (408,055)
--------------------------------------------------------------------------------
Class B (10,693) (72,668) (34,898) (239,589)
--------------------------------------------------------------------------------
Class C (38) (265) (69) (484)
--------------------------------------------------------------------------------
CONVERSION OF SHARES
--------------------------------------------------------------------------------
Class A 19,955 140,803 22,409 153,714
--------------------------------------------------------------------------------
Class B (19,970) (140,803) (22,425) (153,714)
--------------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE TRANSACTIONS $(186,085) $(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 March 31,
1998, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $13,636,000. 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, 1998:
<TABLE>
<CAPTION>
FACE EXPIRATION
TYPE AMOUNT MONTH GAIN/(LOSS)
----------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bond $22,086,000 June '98 $ 80,000
----------------------------------------------------------------------------
U.S. Treasury Notes 142,291,000 June '98 129,000
----------------------------------------------------------------------------
Eurodollar 5,846,000 September '98 (21,000)
----------------------------------------------------------------------------
TOTAL $188,000
----------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------------------
CLASS A
----------------------------------------------------------
YEAR ENDED
SIX MONTHS SEPTEMBER TWO MONTHS YEAR ENDED
ENDED 30, ENDED JULY 31,
MARCH 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 .22 .52 .49 .08 .53 .51
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .04 .10 (.19) .08 .09 (.59)
- ---------------------------------------------------------------------------------------------------
Total from investment operations .26 .62 .30 .16 .62 (.08)
- ---------------------------------------------------------------------------------------------------
Less distribution from net investment
income .24 .52 .52 .09 .52 .52
- ---------------------------------------------------------------------------------------------------
Net asset value, end of period $7.03 7.01 6.91 7.13 7.06 6.96
- ---------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.76% 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 6.56% 7.23 6.98 6.87 7.77 7.00
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------
CLASS B
----------------------------------------------------------
SIX MONTHS YEAR ENDED TWO MONTHS YEAR ENDED
ENDED SEPTEMBER 30, ENDED JULY 31,
MARCH 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 .20 .45 .44 .07 .47 .45
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .04 .10 (.19) .08 .09 (.59)
- ----------------------------------------------------------------------------------------------------
Total from investment operations .24 .55 .25 .15 .56 (.14)
- ----------------------------------------------------------------------------------------------------
Less distribution from net investment
income .21 .46 .46 .08 .47 .46
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $7.03 7.00 6.91 7.12 7.05 6.96
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.47% 8.17 3.54 2.09 8.44 (2.00)
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------
Expenses 1.86% 1.83 1.80 1.79 1.75 1.79
- ----------------------------------------------------------------------------------------------------
Net investment income 5.67% 6.36 6.15 6.02 6.91 6.27
- ----------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
CLASS C
-------------------------------------------------------------------------------------
SIX MONTHS TWO MONTHS YEAR
ENDED YEAR ENDED SEPTEMBER 30, ENDED ENDED MAY 31 TO
MARCH 31, ---------------------------- 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 .20 .46 .43 .07 .48 .07
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .04 .10 (.19) .08 .09 (.04)
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .24 .56 .24 .15 .57 .03
- -----------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment
income .21 .46 .46 .08 .47 .07
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.03 7.00 6.90 7.12 7.05 6.95
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.51% 8.45 3.47 2.10 8.65 .47
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------------------------------------------
Expenses 1.70% 1.71 1.72 1.69 1.71 1.55
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 5.83% 6.48 6.23 6.12 6.95 6.46
- -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS TWO MONTHS
ENDED YEAR ENDED SEPTEMBER 30, ENDED YEAR ENDED JULY 31,
MARCH 31, ------------------------- SEPTEMBER 30, -------------------------
1998 1997 1996 1995 1995 1994
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (in
thousands) $2,317,944 2,497,825 2,960,135 3,493,052 3,528,329 4,158,066
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 170% 235 391 249 573 963
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges. Data for
the period ended March 31, 1998 is unaudited.
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK CASADY RICHARD L. VANDENBERG
Chairman and Trustee President Vice President
DAVID W. BELIN PHILIP J. COLLORA LINDA J. WONDRACK
Trustee Vice President, Secretary Vice President
and Treasurer
LEWIS A. BURNHAM JOHN R. HEBBLE
Trustee JERALD K. HARTMAN Assistant Treasurer
Vice President
DONALD L. DUNAWAY MAUREEN E. KANE
Trustee THOMAS W. LITTAUER Assistant Secretary
Vice President
ROBERT B. HOFFMAN CAROLINE PEARSON
Trustee ANN M. MCCREARY Assistant Secretary
Vice President
DONALD R. JONES ELIZABETH C. WERTH
Trustee ROBERT C. PECK, JR. Assistant Secretary
Vice President
SHIRLEY D. PETERSON
Trustee KATHRYN L. QUIRK
Vice President
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
Kansas City, MO 64105
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER FUNDS LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
Printed 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 - 3 (5/98) 1047070
