<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MARCH 31, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[MORNINGSTAR RATINGS LOGO]
OFFERING INVESTORS THE OPPORTUNITY FOR MAXIMUM CURRENT RETURN
FROM A PORTFOLIO OF U.S. GOVERNMENT SECURITIES
KEMPER
U.S. MORTGAGE FUND
"... After the outsized moves of the last 18 months,
we're returning to a more normal atmosphere. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
PORTFOLIO STATISTICS
8
PORTFOLIO OF INVESTMENTS
9
FINANCIAL STATEMENTS
11
NOTES TO FINANCIAL
STATEMENTS
15
FINANCIAL HIGHLIGHTS
17
SHAREHOLDERS' MEETING
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 1999
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 0.79
CLASS B 0.31
CLASS C 0.41
LIPPER U.S. MORTGAGE FUNDS CATEGORY AVERAGE* 0.71
- --------------------------------------------------------------------------------
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
3/31/99 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER U.S. MORTGAGE FUND
CLASS A $6.98 $7.15
- --------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND
CLASS B $6.97 $7.14
- --------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND
CLASS C $6.98 $7.15
- --------------------------------------------------------------------------------
</TABLE>
*LIPPER ANALYTICAL SERVICES, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES IN
NET ASSET VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF
SALES CHARGES AND, IF THEY HAD, RESULTS MAY HAVE BEEN LESS FAVORABLE.
- --------------------------------------------------------------------------------
KEMPER U.S. MORTGAGE FUND
RANKINGS AS OF 3/31/99*
- --------------------------------------------------------------------------------
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 #16 of 67 funds #52 of 67 funds #43 of 67 funds
- --------------------------------------------------------------------------------
5-YEAR #18 of 50 funds #39 of 50 funds N/A
- --------------------------------------------------------------------------------
10-YEAR N/A #14 of 15 funds N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF MARCH 31, 1999.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTH INCOME: $0.2250 $0.1915 $0.1985
- --------------------------------------------------------------------------------
MARCH DIVIDEND: $0.0375 $0.0320 $0.0332
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 6.45% 5.51% 5.71%
- --------------------------------------------------------------------------------
SEC YIELD+: 5.30% 4.32% 4.71%
- --------------------------------------------------------------------------------
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON MARCH 31, 1999. 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, 1999, 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.
TERMS TO KNOW
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR INCOME FUNDS 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. THE STYLE BOX REPRESENTS A
SNAPSHOT OF A FUND'S PORTFOLIO ON A SINGLE DAY. IT IS NOT AN EXACT ASSESSMENT OF
RISK AND DOES 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. CATEGORY PLACEMENTS OF
NEW FUNDS ARE ESTIMATED. MORNINGSTAR HAS PLACED KEMPER U.S. MORTGAGE FUND IN THE
INTERMEDIATE GOVERNMENT CATEGORY. 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. For example, an increase in yield from 5.00 percent to 5.50 percent
is 50 basis points.
GROSS DOMESTIC PRODUCT (GDP) The market value of goods and services produced by
a country during a specified period. It acts as a useful gauge when measuring
the strength of an economy, especially when comparing different time periods.
DURATION A measure of the interest rate sensitivity of a fixed income investment
or portfolio. The longer the duration, the greater the portfolio's sensitivity
to interest rate fluctuations.
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 INVESTMENTS, HE WAS WITH
THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $280 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER:
Throughout April, investor enthusiasm drove the market to its second milestone
in a year -- the Dow Jones Industrial Average rose to 11,000 just a month after
it broke 10,000 for the first time. But those gains don't tell the whole story
- -- investors in the first four months of the year have endured significant
volatility. What drove the climb to 11,000 and what, at the same time, has led
to investor anxiety?
Driving the market, in part, was consumer confidence. In the first quarter of
1999, consumer spending surged 6.7 percent -- the largest rise in 11 years. The
market's rise seems to have buoyed consumer confidence, which rose for the sixth
consecutive month in April. And, the resilience of the economy has bolstered
more optimistic expectations for the next six months.
Inspiring consumer confidence also were the lowest levels of inflation in a
generation. As measured by the consumer price index (CPI), inflation has been
between 1 1/2 and 2 percent, compared to approximately 4 percent in the
beginning of the 1990s and 10-12 percent in the beginning of the 1980s. Still,
inflation worries have been seeping into the market. The growing conviction that
Asian and Latin American economies are recovering is raising commodity prices,
particularly oil. The price of West Texas Intermediate oil surged from less than
$12 in February to almost $19 in early May. That alone almost guarantees a rise
in the "headline" inflation rate this year, which is the rate of inflation as
measured by the entire CPI. But it's important to note that the Federal Reserve
Board looks primarily at the core inflation rate, which is the CPI minus food
and energy -- and the core inflation rate looks as if it will remain low at
about 2 percent this year.
Also contributing to consumer confidence, short-term and long-term interest
rates remained low over the first quarter, and can be expected to remain so.
Today's Fed policy is reactive, not proactive, which means that the Fed tends to
respond to inflation only when it picks up. Consequently, we expect no changes
in short-term interest rates during May and June, and there's only a small
chance that the Fed will raise interest rates in the second half of the year.
Moreover, the federal budget surplus continues to benefit from good revenue
gains (which are based on good income gains, especially from households), good
capital gains and continued restraint in federal spending. The surplus this year
is expected to approach $100 billion.
Such a positive environment is exactly what poses risk for investors, and is
key to understanding recent volatility in the market. A stronger economy has the
potential to feed inflation fears and drive up interest rates. Events on April
30 illustrated the domino effect of investors reacting to positive economic
news, which they consider troubling at this point, more than eight years into
the economic expansion. The steady stream of positive economy's news prompted a
sell-off in the markets based on fears that the strong pace of economic growth
will eventually lead to higher inflation. The benchmark 30-year Treasury bond
fell nearly 2 points (close to $20 for a bond with a $1,000 face amount) as the
yield shot up to 5.657 percent. It was the biggest one-day plunge in bonds in
two months. Bonds, in turn, pulled stocks lower.
Where can we expect to go from here? The fundamentals by which we judge the
health of the economy suggested continued growth as we moved into the second
quarter of 1999. For example, the gross domestic product (GDP), the value of all
goods and services produced in the U.S., rose at an annual rate of 4.5 percent
in the first quarter, following a tremendous fourth-quarter surge of 6 percent.
This is very much in line with what we've grown accustomed to over the past year
- -- over the four quarters of 1998, the U.S. economy expanded by 4.3 percent.
Some people aren't surprised at all by strong GDP growth that once would have
alarmed them. That's partially because we've grown accustomed to a strong
economy in the past three or four years. But it's also because we've been able
to absorb growth without driving up inflation. That's important for investors.
If prices were rising as the economy was growing, the Fed would most likely
raise short-term interest rates, which would change the financial market
outlook. But again, that isn't happening right now.
However, we do see some vulnerability. Trade is a weak spot in the economy
right now. Exports of U.S. goods and services dropped in the first quarter while
imports soared. This reflects the fact that the U.S. is one of the few countries
financially fit enough to buy goods produced elsewhere in the world. But for as
long as less vibrant international economies are unable to buy U.S. goods, the
profitability of U.S. companies trying to export will be challenged.
When you think about it, vulnerability in regard to the international economy
is nothing new. Globally, the outlook is slightly more positive than it was a
few months ago. For example, the European markets are slowing down, which will
most likely lead to the central bank lowering interest rates in order to boost
domestic spending. In many countries in Europe, there are no fixed-rate
mortgages, only adjustable-rate mortgages. When interest rates go down,
mortgages are reduced and homeowners
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]
(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 MARCH 31, 1999.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
spend money elsewhere. This has a huge impact on consumer spending, and will
help European equities in the long term. Additionally, the situation in Japan
remains unchanged. And, problems in the emerging markets haven't had the
negative impact many people expected -- both the Mexican and Brazilian stock
markets have actually risen in the past two months.
But don't forget that international crises have the potential to affect the
U.S. markets drastically. An increase in military spending on Kosovo by the 11
European Monetary Union (EMU) countries could force them to spend less in other
areas, which could have economic implications, including higher interest rates.
That's because many European countries have small economies and little leeway in
their budgets. Consequently, those countries finance unplanned military
expenditures by selling government bonds -- which, in Europe's small bond
market, typically raises interest rates.
The international situation alone, however, is by no means an indicator of a
U.S. slowdown -- and without any such indications, complacency may be our
greatest concern. It's easy to look at the current economic situation and behave
as if no risk exists. But when you see the market soaring and are tempted to
jump in, note that the bull market grew to records on the strength of just a few
dozen stocks, while most other stock prices were flat or actually declined.
In summary, there are concerns that the current economy is unsustainable and
we soon could see an abrupt end. In many cases, however, people are looking for
a slowdown because they are fearful growth will drive up inflation -- these are
particularly older investors who are accustomed to inflation accompanying
growth. But we currently just don't see the pressure toward inflation at all, so
there's no reason to want a slowdown. The best approach now, as in any market,
is to diversify and invest for the long term.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ JOHN E. SILVIA
John E. Silvia
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 MAY 5, 1999, AND MAY
NOT ACTUALLY COME TO PASS. THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF
THIS MATERIAL IS INTENDED AS AN INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
PERFORMANCE UPDATE
[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.
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.
DURING THE LAST SIX MONTHS, THE U.S. GOVERNMENT BOND MARKET EXPERIENCED A
TRANSITION AS INVESTORS ALTERED THE "FLIGHT-TO-QUALITY" MENTALITY THAT HAD
PUSHED BOND YIELDS DOWN TO HISTORICALLY LOW LEVELS. IN THIS REPORT, RICHARD
VANDENBERG DISCUSSES HOW THIS CHANGE IMPACTED THE MARKET AND HOW THE FUND WAS
POSITIONED TO RESPOND.
Q HOW DID THE GOVERNMENT BOND MARKET PERFORM DURING THE FIRST SIX MONTHS OF
THE FISCAL YEAR?
A The period from October 1998 to March 1999 can probably best be described
as a return to normalcy in the market, albeit a bumpy one. The returns investors
received varied substantially by instrument and by maturity. Mortgages tended to
outperform Treasuries, and the long end of the market was fairly volatile.
If you recall, 30-year Treasury bond yields in October were at or near
all-time lows. The reason was a "flight-to-quality" as investors worldwide,
anxious about the health of foreign economies, rushed to the safe haven of U.S.
Treasuries. Demand pushed yields dramatically lower on longer-maturity
instruments. Essentially, this was a culmination of an 18-month long
preoccupation with global economies that overshadowed the usual emphasis on
economic conditions at home.
As the fiscal year began in October, that mentality changed. To show America's
commitment to supporting economies worldwide, the Federal Reserve cut interest
rates twice in October. While this helped support global markets, investors
began to wonder if the cuts might spur strong growth and renewed inflation in
the U.S. long-term government bond yields responded with a sharp jump in
October, rising nearly 50 basis points from October 5 (4.72 percent) to October
23 (5.18 percent). From that point through February, the market was caught in a
tug-of-war as investors tried to determine the extent of weakness in global
economies and strength in the American economy, and how each would affect the
other. This uncertainty culminated in early March, when 30-Year Treasury yields
hit 5.70 percent, almost a 100 basis point move from their October low.
In March, we finally started to get answers to some of those nagging
questions. Asia began showing signs of recovery, and the Japanese appeared
serious about stimulating their economy. Potential problems in Latin America,
especially Brazil, now look as if they are under control and won't hurt the U.S.
economy as much as some people feared. And in America, the economy is rolling
along with 4.50 percent-5.00 percent GDP growth in the first quarter with no
signs of a substantive increase in inflation. So, after the outsized moves of
the last 18 months, we're returning to a more normal atmosphere, with yields
fluctuating in a narrow range.
Q HOW DID YOU POSITION THE FUND DURING THIS UNCERTAIN PERIOD?
A Even though the market was volatile and there was a lot of anxiety among
investors, in October we were reasonably certain of one thing: that rates
wouldn't go much lower. Therefore, for most of the six-month period we kept the
duration of the fund neutral and worked
5
<PAGE> 6
PERFORMANCE UPDATE
to add performance by maintaining an overweight in mortgage-backed securities.
In part, we bought mortgages because, in an environment of steady or rising
interest rates, mortgages generally outperform Treasuries due to the yield
advantage they offer. Also, after the substantial rally in Treasuries that took
place last summer, mortgages offered excellent value. This strategy worked well
since mortgages outperformed Treasuries for the majority of the six-month
period.
We also adjusted the coupons of the mortgages we bought as market conditions
changed. The goal was to keep the fund concentrated in mortgages that offered
the best trade-off of risk and return given the market's psychology. Because the
market has been so volatile, we were somewhat defensive by moving down in
coupons. While this meant giving up a little bit in income, it also meant we
were able to provide a relatively attractive total return in a fast-changing
environment.
For example, the fund remains in the top 25 percent for the 1-year period of
U.S. Mortgage Funds tracked by Lipper Analytical Services. For the 1-year period
ended March 31, 1999 for Class A shares, the fund ranked #16 of 67 funds. (See
page one for more information.)
For various reasons, we don't think rates will rise much from here. Therefore,
we continue to maintain a higher than normal allocation to mortgages,
particularly GNMAs. We also lengthened our duration slightly versus our peer
group, which should enhance the fund's total return if we're correct in our
interest rate expectations.
Q YOU'VE SAID YOU DON'T EXPECT RATES TO GO UP MUCH FROM HERE. WHY?
A There are several reasons. First, there's been a lot of talk about the
strength of the economy and the big first quarter GDP number, but we feel a
large part of that was the traditional first quarter spending of tax refunds.
The average refund was far more than last year and we think the consumer has put
that to work already. We believe it's unlikely that this pace of growth will
continue into the summer.
Longer term, the U.S. government's fiscal surplus is starting to be felt. The
supply of new Treasury offerings will be relatively light, which should help
raise prices and lower yields.
And finally, the market is now starting to stabilize and appears to offer good
value. Inflation has been very tame. An increase in oil prices caused some
concern at the end of March, but the market was able to absorb it. With
investors able to reap about 6 percent on intermediate-maturity AAA-rated
mortgages and inflation lodged near 3 percent, fixed income investors are
getting a nice return on their investment and we would expect the stability to
continue.
6
<PAGE> 7
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 3/31/99 ON 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGED-BACKED
GNMA 72% 81%
- --------------------------------------------------------------------------------
OTHER 17 10
- --------------------------------------------------------------------------------
LONG-TERM GOVERNMENT SECURITIES 9 7
- --------------------------------------------------------------------------------
INTERMEDIATE-TERM GOVERNMENT
SECURITIES 2 2
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/99 ON 9/30/98
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 3/31/99 ON 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
LESS THAN 5 24% 59%
- --------------------------------------------------------------------------------
5-10 YEARS 64 35
- --------------------------------------------------------------------------------
11-20 YEARS 12 1
- --------------------------------------------------------------------------------
21 + YEARS -- 5
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/99 ON 9/30/98
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 3/31/99 ON 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 6.8 years 5.2 years
- --------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
7
<PAGE> 8
PORTFOLIO OF INVESTMENTS
KEMPER U.S. MORTGAGE FUND
Portfolio of Investments at March 31, 1999 (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
MORTGAGE ASSOCIATION - 71.6%
(Cost: $1,432,135)
Pass-through
certificates 6.00% 2023-2029 $ 61,326 $ 59,579
6.50 2022-2029 481,664 480,107
7.00 2012-2029 496,621 504,133
7.50 2011-2029 164,894 170,179
8.00 2008-2027 157,072 164,135
8.50 2017-2027 9,634 10,183
9.00 2008-2028 53,166 56,982
9.50 2009-2023 22,717 24,477
10.00 2016-2021 2,551 2,809
10.50 2019-2021 3,445 3,797
11.00 2019 139 152
---------------------------------------------------------------------
1,476,533
- -----------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN
MORTGAGE CORPORATION - 11.8%
(Cost: $245,123)
Pass-through
certificates 6.00 2028 34,529 33,580
6.50 2029 40,000 39,831
7.00 2028-2029 33,901 34,404
7.50 2012-2029 89,892 92,450
8.00 2017 501 522
8.50 2016-2028 26,154 27,470
9.50 2020 15,221 16,255
---------------------------------------------------------------------
244,512
- -----------------------------------------------------------------------------------------------------------------------
U.S. TREASURY
SECURITIES - 11.0%
(Cost: $228,853)
Bonds 10.75 2003 35,270 42,111
10.375 2012 40,500 53,422
12.50 2014 33,300 50,959
11.25 2015 21,355 33,287
7.50 2016 33,500 39,337
8.125 2021 5,455 6,934
---------------------------------------------------------------------
226,050
- -----------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL
MORTGAGE ASSOCIATION - 5.6%
(Cost: $116,155)
Pass-through
certificates 5.50 2028-2029 38,341 36,214
6.00 2029 35,996 34,973
6.50 2026-2029 426 424
8.00 2024 3,821 3,972
9.00 2016-2025 38,139 40,332
11.50 2018 252 276
---------------------------------------------------------------------
116,191
---------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $2,022,266) $2,063,286
---------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $2,022,266,000 for federal income tax
purposes at March 31, 1999, the gross unrealized appreciation was $48,970,000,
the gross unrealized depreciation was $7,950,000 and the net unrealized
appreciation on investments was $41,020,000.
See accompanying Notes to Financial Statements.
8
<PAGE> 9
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1999 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investments, at value
(Cost: $2,022,266) $2,063,286
- --------------------------------------------------------------------------
Cash 497
- --------------------------------------------------------------------------
Receivable for:
Investments sold 41,246
- --------------------------------------------------------------------------
Fund shares sold 165
- --------------------------------------------------------------------------
Interest 14,789
- --------------------------------------------------------------------------
TOTAL ASSETS 2,119,983
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Payable for:
Investments purchased 110,931
- --------------------------------------------------------------------------
Fund shares redeemed 1,098
- --------------------------------------------------------------------------
Management fee 728
- --------------------------------------------------------------------------
Distribution services fee 141
- --------------------------------------------------------------------------
Administrative services fee 369
- --------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 805
- --------------------------------------------------------------------------
Trustees' fees and others 190
- --------------------------------------------------------------------------
Total liabilities 114,262
- --------------------------------------------------------------------------
NET ASSETS $2,005,721
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------
Paid-in capital $2,568,374
- --------------------------------------------------------------------------
Accumulated net realized loss on investments (603,609)
- --------------------------------------------------------------------------
Net unrealized appreciation on investments 40,956
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $2,005,721
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share ($1,764,674
/ 252,974 shares outstanding) $6.98
- --------------------------------------------------------------------------
Maximum offering price per share (net asset value, plus
4.71% of net asset value or 4.50% of offering price) $7.31
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($237,114 /
34,009 shares outstanding) $6.97
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($3,933 / 564
shares outstanding) $6.98
- --------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
9
<PAGE> 10
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended March 31, 1999 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------
Interest income $ 71,864
- ------------------------------------------------------------------------
Expenses:
Management fee 5,218
- ------------------------------------------------------------------------
Distribution services fee 1,105
- ------------------------------------------------------------------------
Administrative services fee 2,459
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 2,357
- ------------------------------------------------------------------------
Professional fees 43
- ------------------------------------------------------------------------
Reports to shareholders 217
- ------------------------------------------------------------------------
Trustees' fees and other 56
- ------------------------------------------------------------------------
Total expenses 11,455
- ------------------------------------------------------------------------
NET INVESTMENT INCOME 60,409
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------
Net realized gain on sales of investments 5,848
- ------------------------------------------------------------------------
Net realized gain from futures transactions 5,353
- ------------------------------------------------------------------------
Net realized gain 11,201
- ------------------------------------------------------------------------
Change in net unrealized appreciation on investments (57,178)
- ------------------------------------------------------------------------
Net loss on investments (45,977)
- ------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 14,432
- ------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the six months ended March 31, 1999 (unaudited) and for the year
ended September 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------------
Net investment income $ 60,409 144,491
- -----------------------------------------------------------------------------------------------
Net realized gain 11,201 53,220
- -----------------------------------------------------------------------------------------------
Change in net unrealized appreciation (57,178) (5,231)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 14,432 192,480
- -----------------------------------------------------------------------------------------------
Distribution from net investment income (65,075) (148,396)
- -----------------------------------------------------------------------------------------------
Net decrease from capital share transactions (127,811) (357,734)
- -----------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (178,454) (313,650)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
NET ASSETS
- -----------------------------------------------------------------------------------------------
Beginning of period 2,184,175 2,497,825
- -----------------------------------------------------------------------------------------------
END OF PERIOD $2,005,721 2,184,175
- -----------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
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, 1999)
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. Lacking any sales, the options
contract is valued at the calculated mean. Lacking
any calculated mean, 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
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. 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 beyond the normal
settlement period. 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
11
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
segregate cash or other liquid assets equal to the
value of the securities purchased.
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.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper), and pays a monthly investment
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 $5,218,000 for the six
months ended March 31, 1999.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions retained by KDI in
connection with the distribution of Class A shares
for the six months ended March 31, 1999 are
$17,000.
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 Rule 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 and CDSC received by KDI
for the six months ended March 31, 1999 are
$1,295,000.
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
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
'financial services firms that provide these
services and pays these firms based on assets of
fund accounts the firms service. Administrative
services fees paid by the fund to KDI for the six
months ended March 31, 1999 are $2,459,000, of
which $15,000 was paid by KDI to affiliates.
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
$1,561,000 for the six months ended March 31, 1999.
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,
1999, the fund made no direct payments to its
officers and incurred trustees' fees of $20,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended March 31, 1999, investment
transactions (excluding short-term instruments are
as follows (in thousands):
Purchases $1,603,109
Proceeds from sales 1,749,568
- --------------------------------------------------------------------------------
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, 1999 SEPTEMBER 30, 1998
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
---------------------------------------------------------------------------------
Class A 2,245 $ 15,903 4,079 $ 25,320
---------------------------------------------------------------------------------
Class B 1,607 11,320 4,837 33,684
---------------------------------------------------------------------------------
Class C 82 581 222 1,553
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
---------------------------------------------------------------------------------
Class A 4,844 34,063 9,729 68,880
---------------------------------------------------------------------------------
Class B 792 5,564 2,592 18,428
---------------------------------------------------------------------------------
Class C 10 69 12 106
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
SHARES REDEEMED
---------------------------------------------------------------------------------
Class A (21,305) (150,261) (53,052) (374,209)
---------------------------------------------------------------------------------
Class B (6,330) (44,603) (19,074) (130,852)
---------------------------------------------------------------------------------
Class C (63) (447) (91) (644)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
CONVERSION OF SHARES
---------------------------------------------------------------------------------
Class A 13,628 96,033 39,860 281,271
---------------------------------------------------------------------------------
Class B (13,638) (96,033) (39,907) (281,271)
---------------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE TRANSACTIONS $(127,811) $(357,734)
---------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The fund has entered into exchange traded financial
futures contracts in order to take advantage of
anticipated market conditions and, as such, bears
the risk that arises from owning these contracts.
At the time the fund enters into a futures
contract, it is required to make a margin deposit
with its custodian. Subsequently, payments are made
on a daily basis between the fund and the broker as
the market value of the futures contract fluctuates
and are recorded for financial reporting purposes
as unrealized gains or losses by the fund. At March
31, 1999, the market value of assets pledged by the
fund to cover margin requirements for open futures
positions was $3,866,000. 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, 1999 (in thousands):
<TABLE>
<CAPTION>
UNREALIZED
FACE EXPIRATION GAIN/(LOSS)
TYPE AMOUNT MONTH AT 3/31/99
--------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Notes $68,297 June '99 $ 38
--------------------------------------------------------------------------------
U.S. Treasury Bonds 65,465 June '99 (102)
--------------------------------------------------------------------------------
TOTAL $ (64)
--------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------------------
CLASS A
-------------------------------------------------------------
SIX MONTHS YEAR ENDED TWO MONTHS
ENDED SEPTEMBER 30, ENDED YEAR ENDED
MARCH 31, ------------------ SEPTEMBER 30, JULY 31,
1999 1998 1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.15 7.01 6.91 7.13 7.06 6.96
- --------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .21 .44 .52 .49 .08 .53
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.15) .17 .10 (.19) .08 .09
- --------------------------------------------------------------------------------------------------------
Total from investment operations .06 .61 .62 .30 .16 .62
- --------------------------------------------------------------------------------------------------------
Less distribution from net investment
income .23 .47 .52 .52 .09 .52
- --------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.98 7.15 7.01 6.91 7.13 7.06
- --------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) .79% 8.99 9.26 4.28 2.23 9.48
- --------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------
Expenses .97% .97 .96 .97 .94 .89
- --------------------------------------------------------------------------------------------------------
Net investment income 5.00% 6.46 7.23 6.98 6.87 7.77
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------
CLASS B
-------------------------------------------------------------
SIX MONTHS YEAR ENDED TWO MONTHS
ENDED SEPTEMBER 30, ENDED YEAR ENDED
MARCH 31, ------------------ SEPTEMBER 30, JULY 31,
1999 1998 1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.14 7.00 6.91 7.12 7.05 6.96
- --------------------------------------------------------------------------------------------------------
Income from investment operations Net
investment income .18 .40 .45 .44 .07 .47
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.16) .14 .10 (.19) .08 .09
- --------------------------------------------------------------------------------------------------------
Total from investment operations .02 .54 .55 .25 .15 .56
- --------------------------------------------------------------------------------------------------------
Less distribution from net investment
income .19 .40 .46 .46 .08 .47
- --------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.97 7.14 7.00 6.91 7.12 7.05
- --------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) .31% 8.00 8.17 3.54 2.09 8.44
- --------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------
Expenses 1.87% 1.19 1.83 1.80 1.79 1.75
- --------------------------------------------------------------------------------------------------------
Net investment income 4.10% 5.52 6.36 6.15 6.02 6.91
- --------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
CLASS C
-------------------------------------------------------------------------
SIX MONTHS YEAR ENDED TWO MONTHS
ENDED SEPTEMBER 30, ENDED YEAR ENDED
MARCH 31, ------------------ SEPTEMBER 30, JULY 31,
1999 1998 1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.15 7.00 6.90 7.12 7.05 6.95
- --------------------------------------------------------------------------------------------------------------------
Income from investment operations: Net
investment income .18 .40 .46 .43 .07 .48
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.15) .16 .10 (.19) .08 .09
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations .03 .56 .56 .24 .15 .57
- --------------------------------------------------------------------------------------------------------------------
Less distribution from net investment
income .20 .41 .46 .46 .08 .47
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.98 7.15 7.00 6.90 7.12 7.05
- --------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) .41% 8.30 8.45 3.47 2.10 8.65
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------------
Expenses 1.67% 1.73 1.71 1.72 1.69 1.71
- --------------------------------------------------------------------------------------------------------------------
Net investment income 4.30% 5.70 6.48 6.23 6.12 6.95
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------------------------------
SIX MONTHS TWO MONTHS
ENDED YEAR ENDED SEPTEMBER 30, ENDED YEAR ENDED
MARCH 31, --------------------------------- SEPTEMBER 30, JULY 31,
1999 1998 1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of period (in
thousands) $2,005,721 2,184,175 2,497,825 2,960,135 3,493,052 3,528,329
- --------------------------------------------------------------------------------------------------------------------
Portfolio of turnover rate (annualized) 146% 172 235 391 249 573
- --------------------------------------------------------------------------------------------------------------------
</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. Data for the period ended March 31, 1999 is unaudited.
16
<PAGE> 17
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 17, 1998, a special shareholders' meeting was held. Kemper U.S.
Mortgage Fund shareholders were asked to vote on two separate issues: approval
of the new Investment Management Agreement between the fund and Scudder Kemper
Investments, Inc., and to modify or eliminate certain policies and to eliminate
the shareholder approval requirement as to certain other matters. The following
are the results.
1) Approval of the new Investment Management Agreement between the fund and
Scudder Kemper Investments, Inc. This item was approved.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
174,957,304 3,553,218 8,886,971
</TABLE>
2) To modify or eliminate certain policies and to eliminate the shareholder
approval requirements as to certain other matters. These items were approved.
Investment objectives
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,671,102 8,423,624 14,177,965 37,124,802
</TABLE>
Investment policies
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,649,534 8,437,530 14,185,627 37,124,802
</TABLE>
Diversification
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,802,752 8,284,312 14,185,627 37,124,802
</TABLE>
Borrowing
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,593,996 8,498,343 14,180,352 37,124,802
</TABLE>
Senior securities
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,800,323 8,292,016 14,180,352 37,124,802
</TABLE>
Concentration
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,806,227 8,280,837 14,185,627 37,124,802
</TABLE>
Underwriting of securities
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,823,803 8,263,261 14,185,627 37,124,802
</TABLE>
Investment in real estate
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,670,771 8,421,568 14,180,352 37,124,802
</TABLE>
Purchase of commodities
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,535,040 8,552,024 14,185,627 37,124,802
</TABLE>
Lending
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,641,841 8,445,223 14,185,627 37,124,802
</TABLE>
Margin purchases and short sales
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,337,269 8,749,795 14,185,627 37,124,802
</TABLE>
Purchases of securities of related issuers
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,686,248 8,400,816 14,185,627 37,124,802
</TABLE>
Restricted and illiquid securities
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,481,948 8,605,116 14,185,627 37,124,802
</TABLE>
Purchases of securities
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,716,024 8,371,040 14,185,627 37,124,802
</TABLE>
Purchases of options and warrants
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,544,875 8,542,189 14,185,627 37,124,802
</TABLE>
Investment for the purpose of exercising control or management
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,608,020 8,484,318 14,180,352 37,124,802
</TABLE>
17
<PAGE> 18
SHAREHOLDERS' MEETING
Investment in mineral exploration
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,256,612 8,835,727 14,180,352 37,124,802
</TABLE>
Investment in issuers with short histories
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,150,639 8,936,425 14,185,627 37,124,802
</TABLE>
Investment in other investment companies
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
127,541,740 8,545,324 14,185,627 37,124,802
</TABLE>
Investment other than in accordance with objectives and policies
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
126,959,067 9,127,997 14,185,627 37,124,802
</TABLE>
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
<S> <C> <C>
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY RICHARD L. VANDENBERG
Chairman and Trustee President Vice President
LEWIS A. BURNHAM PHILIP J. COLLORA MAUREEN E. KANE
Trustee Vice President Assistant Secretary
and Secretary
DONALD L. DUNAWAY CAROLINE PEARSON
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
ROBERT B. HOFFMAN ELIZABETH C. WERTH
Trustee ANN M. MCCREARY Assistant Secretary
Vice President
DONALD R. JONES BRENDA LYONS
Trustee ROBERT C. PECK, JR. Assistant Treasurer
Vice President
THOMAS W. LITTAUER
Trustee and Vice President KATHRYN L. QUIRK
Vice President
SHIRLEY D. PETERSEN
Trustee FRANK J. RACHWALSKI, JR.
Vice President
WILLIAM P. SOMMERS
Trustee LINDA J. WONDRACK
Vice President
</TABLE>
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------
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 STATE STREET BANK AND TRUST COMPANY
TRANSFER AGENT 225 Franklin Street
Boston, MA 02109
INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
- ----------------------------------------------------------------------------------------------
PRINCIPAL KEMPER DISTRIBUTORS, INC.
UNDERWRITERS 222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
</TABLE>
[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 (5/21/99) 1074040
