<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MARCH 31, 2000
[LOGO]
Offering investors the opportunity for maximum current return from a portfolio
of U.S. government securities
KEMPER
U.S. MORTGAGE FUND
"... As the Federal Reserve raised interest rates, the income potential of
mortgage securities rose to its highest level in more than three years. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
TERMS TO KNOW
8
PORTFOLIO STATISTICS
9
PORTFOLIO OF INVESTMENTS
12
FINANCIAL STATEMENTS
15
FINANCIAL HIGHLIGHTS
17
NOTES TO FINANCIAL STATEMENTS
AT A GLANCE
KEMPER U.S. MORTGAGE FUND
TOTAL RETURNS
FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 2000 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER U.S. MORTGAGE KEMPER U.S. MORTGAGE LIPPER U.S. MORTGAGE
KEMPER U.S. MORTGAGE FUND CLASS A FUND CLASS B FUND CLASS C FUNDS CATEGORY AVERAGE*
--------------------------------- -------------------- -------------------- -----------------------
<S> <C> <C> <C>
1.42 1.05 1.08 1.63
</TABLE>
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
3/31/00 9/30/99
.........................................................
<S> <C> <C> <C> <C>
KEMPER U.S. MORTGAGE FUND
CLASS A $6.61 $6.75
.........................................................
KEMPER U.S. MORTGAGE FUND
CLASS B $6.63 $6.75
.........................................................
KEMPER U.S. MORTGAGE FUND
CLASS C $6.63 $6.75
.........................................................
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
*LIPPER, 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; IF
SALES CHARGES HAD BEEN INCLUDED, RESULTS MIGHT HAVE BEEN LESS FAVORABLE.
KEMPER U.S. MORTGAGE FUND RANKINGS
AS OF 3/31/00*
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER U.S. MORTGAGE FUNDS CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
........................................................................................
<S> <C> <C> <C> <C> <C>
1-YEAR 37 of 62 funds 60 of 62 funds 58 of 62 funds
........................................................................................
5-YEAR 20 of 47 funds 40 of 47 funds 36 of 47 funds
........................................................................................
10-YEAR N/A 13 of 13 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, 2000.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
...............................................................................................
<S> <C> <C> <C> <C> <C>
SIX-MONTH INCOME: $0.2130 $0.1789 $0.1910
...............................................................................................
MARCH DIVIDEND: $0.0355 $0.0305 $0.0324
...............................................................................................
ANNUALIZED
DISTRIBUTION RATE+: 6.44% 5.52% 5.86%
...............................................................................................
SEC YIELD+: 5.82% 5.37% 5.54%
...............................................................................................
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON MARCH 31, 2000. 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, 2000, 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.
YOUR FUND'S STYLE
MORNINGSTAR FIXED-INCOME STYLE BOX
<TABLE>
<S> <C>
[MORNINGSTAR FIXED-INCOME Source: Data provided by Morningstar, Inc.,
STYLE BOX] 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.
</TABLE>
<PAGE> 3
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 $290 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.
ECONOMIC OVERVIEW
DEAR KEMPER FUNDS SHAREHOLDER,
As spring moves along towards summer, there isn't much to complain about. For
all the yammering about the "new" economy, the old economy is doing pretty well.
Consumers may hanker for a new GPS handset or a Palm Pilot, but they lust after
a suburban mansion with a garage big enough to hold their luxury car and SUV --
and state and local governments are laying old-fashioned asphalt almost as fast
as businesses are building the information superhighway. Satisfying both old and
new desires got the economy off to a fast start in the new century -- GDP growth
rose at an annual rate of more than 5 percent in the first quarter. Even with a
modest slowdown possible in the second half, growth for the year 2000 is likely
to be close to 5 percent.
So everyone is happy, right? Well, almost everyone. Consumers seldom have felt
so confident; businesspeople seldom have behaved so expansively. But there's
still one grump: Federal Reserve Board Chairman Alan Greenspan, who's become
increasingly worried that rapid growth will bring on inflation.
Despite Greenspan's attempt to slow spending by raising interest rates,
consumers are still splurging, and they show no signs of stopping. We know this
because shoppers are buying the big-ticket items they usually purchase early in
a cycle -- items such as personal computers, mobile phones, jewelry, fancy
kitchen appliances, exercise equipment and big boats.
Why are consumers still buying despite Greenspan's attempts to slow their
splurging? There are three answers: deflation, wealth and easy credit.
Falling prices have made big-ticket items almost irresistible. Since 1997,
prices of kitchen appliances have fallen 4.5 percent, TVs and VCRs 16 percent
and sporting equipment 6.5 percent. Even auto showrooms no longer produce
sticker shock, and drivers have responded with gusto, buying a record 16.9
million cars and light trucks in 1999. 2000 is likely to be the first year in
which automotive sales top 17 million.
Some of that spending has been made possible by stock market gains: Wall
Street has handed out windfalls to almost anyone holding equities in the past
few years. But consumers who don't own stocks are also spending, thanks to a
decade of debt. Young, poor or new to America? In the 1990s, it didn't matter;
lenders still loved you. While high-income families have been borrowing less,
those lower on the income scale have been borrowing more.
But it's not just consumers that Greenspan is concerned about; businesses are
splurging as well. During 1999, businesses increased spending on computers and
peripherals by 35 percent and spending on communications equipment by 25 percent
(both after adjusting for price declines). Far from slowing down this year, we
expect investment in these two categories to accelerate -- to 40 percent growth
for computers and 30 percent growth for communications equipment.
And just like consumers, businesses are borrowing to buy. You may think that
with booming sales, entrepreneurs are cash-rich. But while 1999 saw economy-wide
earnings jump 10 percent and profits of Standard and Poor's (S&P) 500 companies
leap nearly 14 percent, internal cash covered less than 84 percent of capital
spending. With the exception of 1998, that's the lowest on record. Last year
alone, corporate debt shot up by more than 11 percent to $560 billion. New
economy companies are no exception; they have more debt than most people
realize, issuing more than half of all convertible bonds.
All this debt could cause problems. Although we've increased our 2001
inflation outlook to nearly 3 percent -- an entire percentage point higher than
our prediction three months ago -- we're not particularly worried about
inflation. It's the heavy borrowing we're concerned about. Debt continues to
exceed income growth, and when Greenspan succeeds in slowing the economy with
higher interest rates (which he will succeed in doing), all of the debt American
consumers and businesses are taking on could be tricky to handle. Private
financial obligations must be paid with personal income and corporate profits.
When the economy slows, personal income stagnates and corporate profits often
fall -- which makes it harder to pay off those debts. Consumers and businesses
may have to sell their assets to pay off the debt, and they may risk going into
default.
That being the case, a gradual economic slowdown may be in everyone's best
interest. But "gradual" is the key. Both the old and new economy have a lot
riding on the Fed's ability to rein in growth softly and smoothly, because
abrupt slowdowns encourage consumers and businesses to sell assets -- and
perhaps risk bankruptcy -- to pay off debt, as described above.
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 (3/31/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.00 6.10 5.20 5.60
Prime rate (2) 9.00 8.25 7.75 8.50
Inflation rate (3)* 3.70 2.60 1.80 1.40
The U.S. dollar (4) 1.10 -0.90 -0.50 4.10
Capital goods orders (5)* 10.10 4.70 5.50 11.50
Industrial production (5)* 5.10 3.50 3.10 5.30
Employment growth (6) 2.30 2.20 2.30 2.60
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
*DATA AS OF 2/29/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
A gradual slowdown seems to be what the Fed is seeking, but for all of
Greenspan's semi-tough talk, some indicators suggest that monetary policy has
actually been lax. Broad money and credit creation have vastly exceeded economic
activity since 1995, and no central bank can allow that to continue indefinitely
without creating inflation. If we begin to see higher core inflation, the Fed
will have to deal with all that money it's created in a less gradualist
manner -- and that could get tricky. Financial turmoil accompanied each of the
Fed's last two efforts to slow the economy down. In 1994, there was a bond
market meltdown that resulted in a Mexican debt crisis. After a more timid Fed
tightening in 1997, crises in Asia were followed by problems with Russian debt,
Brazilian debt and a large American hedge fund. We don't think this is a
coincidence: The global debt market is so vast and interconnected that it's
highly vulnerable to a rise in the cost of its basic raw material -- short-term
funds.
Let's hope, then, that the Fed can slow the economy without upsetting the
financial applecart, because that could affect everyone. After all, the old
economy and the new economy are wedded in many ways. Much of the money that
flows to IPOs is available because mature industries have borrowed to carry out
mergers and share buybacks. Old economy companies are the biggest customers of
new economy products. And e-commerce sites are all about moving traditional
goods over old-fashioned highways. Despite a lot of talk about old and new,
we're all in this economy together.
Sincerely,
Scudder Kemper Investments Economics Group
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 THE ECONOMIC ADVISORS OF SCUDDER KEMPER
INVESTMENTS, INC. AS OF MAY 8, 2000, 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 LEAD PORTFOLIO MANAGER OF KEMPER U.S. MORTGAGE FUND.
VANDENBERG HAS 25 YEARS OF FIXED-INCOME PORTFOLIO MANAGEMENT EXPERIENCE.
[DOLAN PHOTO]
SCOTT DOLAN IS A PORTFOLIO MANAGER FOR U.S. MORTGAGE FUND. HE JOINED SCUDDER
KEMPER INVESTMENTS IN 1989 AND IS A VICE PRESIDENT.
[DUGENSKE PHOTO]
JOHN DUGENSKE IS A PORTFOLIO MANAGER FOR U.S. MORTGAGE FUND. HE IS A VICE
PRESIDENT OF SCUDDER KEMPER INVESTMENTS, JOINING THE FIRM IN 1998.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
KEMPER U.S. MORTGAGE FUND'S INCOME POTENTIAL GREW AS THE FEDERAL RESERVE RAISED
INTEREST RATES. MORTGAGES GENERALLY UNDERPERFORMED COMPARABLE-MATURITY TREASURY
NOTES AND BONDS DURING THE FIRST HALF OF FISCAL YEAR 2000.
Q HOW DID THE GOVERNMENT BOND MARKET PERFORM DURING THE FIRST SIX MONTHS OF
FISCAL YEAR 2000?
A Strong economic growth prompted the Federal Reserve to raise its
short-term interest-rate target three times by a total of 75 basis points (0.75
percent) to 6.00 percent. Between September 30, 1999, and March 31, 2000,
intermediate Treasury bond prices fell and yields rose. Yields for Treasury
bills increased to a greater degree than yields for long-term bonds, so that by
March 31, 2000, one-year Treasury bills yielded 6.24 percent, 40 basis points
more than 30-year Treasury bonds. Mortgage interest rates for consumers reached
their highest levels since March 1997. Still, housing and related consumer
spending activity remained brisk as many consumers turned to adjustable-rate
mortgages (ARMs). Oil prices soared past $30 a barrel. Most economists and many
bond market professionals anticipate further Fed interest-rate hikes before the
November 2000 national elections.
YIELDS ON FIVE-YEAR TREASURIES ROSE 56 BASIS POINTS BETWEEN THE END OF SEPTEMBER
1999 AND MARCH 31, 2000.
Q WHY DID SHORT-TERM BOND YIELDS RISE MORE THAN LONG-TERM YIELDS?
A The Treasury yield curve inverted because the Fed's monetary policy pushed
up both short-and intermediate-term rates, while the decision by the Treasury to
buy back debt pushed long-term interest rates lower. Usually, long-term
government bonds provide more income potential than securities maturing in a few
years, since they involve more interest-rate risk. In February, the Treasury
announced plans to buy back some 30-year bonds from investors. This may benefit
the U.S. economy in the long run by freeing more capital for private investment,
but the Treasury's news created confusion that increased short-term bond market
volatility. Prior to the announcement, many institutional investors expected
long-term Treasury yields to rise and prices to fall sharply in 2000, and in
January they were right. However, when
U.S. TREASURY YIELDS
Yields on one-year Treasuries increased more than 100 basis points between the
end of September 1999 and March 31, 2000
[LINE GRAPH]
<TABLE>
<CAPTION>
9/30/99 3/31/00
------- -------
<S> <C> <C>
3-month 4.85 5.89
6-month 4.96 6.14
1-year 5.18 6.24
2-year 5.60 6.48
5-year 5.76 6.32
10-year 5.88 6.02
30-year 6.05 5.84
</TABLE>
SOURCE: BLOOMBERG BUSINESS NEWS.
5
<PAGE> 6
PERFORMANCE UPDATE
these investors realized that the government's action would reduce the supply of
30-year bonds, these securities suddenly became a much more prized commodity,
and long-term bond prices rebounded. Intermediate bond prices also rose, but not
nearly as much.
Q HOW DID YOU POSITION THE FUND BETWEEN SEPTEMBER 1999 AND MARCH 2000?
A By having a portion of the fund's portfolio in long-term Treasuries, the
fund benefited from the 30-year government bond's rebound even as short-term
interest rates rose. Overall, the fund provided above-average income potential
and delivered a positive total return for the six months ended March 31, 2000.
As the Fed raised short-term interest rates, the income potential of mortgage
securities rose to its highest level in more than three years.
This past winter, the mortgage market was negatively affected by comments from
the Treasury about the implicit government guarantees associated with Fannie Mae
(FNMA) and Freddie Mac (FHLMC) securities. Some bond investors also grew
concerned about the regulatory environment for Fannie Mae and Freddie Mac, two
of the largest private mortgage market participants. In general, mortgages
backed by the Government National Mortgage Association (GNMA, or Ginnie Maes)
outperformed FNMA securities and other forms of mortgage debt between September
and March. The fund's positioning of a majority of its portfolio in GNMA
securities (see Portfolio Composition) helped its performance during the first
half of fiscal year 2000.
Q HOW DID THE PORTFOLIO BEHAVE IN A HIGHER-INTEREST-RATE ENVIRONMENT?
A The fund's average maturity (see Portfolio Statistics) was shorter than
that of many of its peers and the fund's unmanaged benchmark (the Salomon
Brothers 30-Year GNMA index). This helped the fund in a climate of rapidly
rising interest rates. We were mindful of the fact that the Fed was on the move,
and we sought to maximize the fund's flexibility to respond to dynamic market
conditions. However, we were underweighted in long-term Treasuries during the
first half of fiscal year 2000, and this detracted from the fund's results.
Within the mortgage market, we focused on securities with well-defined
structures and, through our selection process, attempted to avoid exposing the
fund to adverse risks. For mortgage investors, one beneficial effect of higher
interest rates is that home owners are less likely to refinance their
properties. When many home owners refinance, it can increase the volatility of a
mortgage mutual fund's income stream.
Q IS THERE ANY WAY TO ESTIMATE HOW MUCH A GIVEN CHANGE IN INTEREST RATES CAN
AFFECT THE TOTAL RETURN FROM MORTGAGE-RELATED INVESTMENTS?
A Generally, a 100-basis-point increase in interest rates translates into a
price decline of slightly more than 1 percent for a bond or fixed-income mutual
fund that has a duration of one year. Bond prices and fixed-income mutual fund
net asset values are also affected by market factors such as credit risk and,
for mortgage securities, the risk that borrowers will prepay loans. The fund's
results since last autumn were fully in line with market conditions. Yields on
5-year Treasuries -- a benchmark for pricing many mortgage securities for
consumers -- rose 56 basis points between September 30, 1999, and March 31,
2000. Still, as you can see by the Fannie Mae Mortgage Commitment Rates chart,
mortgage rates for conventional 30-year, fixed- rate loans as of March 31 were
lower than they were five years ago.
FANNIE MAE MORTGAGE COMMITMENT RATES
(60-day, 30-year fixed-rate loans) March 31, 1995 to March 31, 2000
[LINE GRAPH]
<TABLE>
<CAPTION>
AVERAGE FANNIE MAE MORTGAGE COMMITMENT
RATE
--------------------------------------
<S> <C>
3/31/95 8.77
8.52
7.87
7.86
8.03
7.93
7.85
7.65
7.46
7.20
7.21
7.65
3/31/96 8.00
8.24
8.35
8.29
8.37
8.34
8.17
7.87
7.63
7.82
7.97
8.00
3/31/97 8.30
8.19
8.04
7.82
7.44
7.70
7.49
7.34
7.32
7.22
7.03
7.16
3/31/98 7.16
7.16
7.01
7.03
7.01
6.81
6.48
6.65
6.71
6.71
6.70
7.08
3/31/99 7.03
6.99
7.39
7.78
7.92
8.08
7.87
7.87
7.99
8.13
8.50
8.38
3/31/00 8.37
</TABLE>
SOURCE: BLOOMBERG BUSINESS NEWS. THIS CHART SHOWS THE AVERAGE LOAN RATE A HOME
BUYER COULD HAVE EXPECTED TO PAY FOR A 30-YEAR TERM, FIXED-RATE LOAN FOR A HOME
PURCHASE WITHIN 60 DAYS.
6
<PAGE> 7
PERFORMANCE UPDATE
Q WHAT'S YOUR OUTLOOK FOR BONDS AND KEMPER U.S. MORTGAGE FUND FOR THE MONTHS
AHEAD?
A A dual dynamic of the Fed attempting to keep inflation in check and an
overall reduction in bond supply may dictate what happens this year. We could
see another 50 basis points in rate hikes, especially since the government's
March 2000 inflation data were higher than expected.
With gross domestic product rising 7.3 percent in the fourth calendar quarter
of 1999, upward pressure on consumer prices is evident. The National Association
of Purchasing Managers index, a private barometer of business activity, was up
to 80 in March. A reading above 50 generally indicates an expanding economy.
We intend to remain somewhat defensive, with a duration slightly shorter than
our fund's peer group. We are comfortable that this positioning can allow us to
take advantage of any increase in income potential consistent with our efforts
to preserve principal. For investors seeking to reduce the volatility of an
equity portfolio or simply capture added income potential, we think the fund
could be an attractive alternative.
As we look to the rest of fiscal year 2000, we remain positive on the
mortgage-backed securities market because we think prepayment risk is likely to
remain low and because the spread, or difference in interest rates between
mortgages and Treasuries, remains attractive. As of March 31, many mortgages
offered nearly 200 basis points (2 percent) of additional income potential over
comparable-maturity Treasuries. Historically, this spread has averaged between
140 and 150 basis points.
TERMS TO KNOW
ADJUSTABLE-RATE MORTGAGE (ARM) A mortgage whose interest rate adjusts
periodically based on changes to a corresponding index rate. To help protect the
borrower against dramatic rate increases in a short period of time, ARMs are
often originated with interest-rate caps. An interest-rate cap assures the
borrower that the rate will not adjust beyond a certain point within a specific
period.
BASIS POINT The movement of interest rates or yields expressed in hundredths of
a percent. For example, an increase in yield from 5 percent to 5.50 percent is
50 basis points.
DURATION A measure of the interest-rate sensitivity of a fixed-income investment
or portfolio. The longer the duration, the greater a portfolio's sensitivity to
changes in interest rates.
FEDERAL FUNDS RATE The interest rate that banks charge each other on overnight
loans. The Federal Reserve Board's Open Market Committee sets a target rate to
either make credit more easily available or tighten monetary policy in an
attempt to avoid economic imbalances such as high inflation.
INVERTED YIELD CURVE A market phenomenon in which intermediate-term bonds
(securities with one- to 10-year maturities) have higher income potential and
current yields than long-term bonds (securities with 10- to 30-year maturities).
Historically it has occurred during a period of rising short-term interest rates
and been viewed as an indicator of a future economic slowdown.
YIELD A fund's yield is a measure of the net investment income per share earned
over a specific one-month or 30-day period expressed as a percentage of the
maximum offering price of the fund shares at the end of the period.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 3/31/00 ON 9/30/99
<S> <C> <C> <C> <C>
MORTGAGE-BACKED GNMA 52% 60%
................................................................................
FNMA/FHLMC 32 31
................................................................................
TREASURIES 11 9
................................................................................
OTHER 5 --
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
YEARS TO MATURITY
<TABLE>
<CAPTION>
ON 3/31/00 ON 9/30/99
<S> <C> <C> <C> <C>
LESS THAN 5 21% 28%
................................................................................
5-10 68 62
................................................................................
11-20 11 --
................................................................................
21+ YEARS -- 10
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
AVERAGE MATURITY
<TABLE>
<CAPTION>
ON 3/31/00 ON 9/30/99
<S> <C> <C> <C> <C>
AVERAGE MATURITY 8.3 years 8.6 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, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENT - 5.3%
Bear, Stearns Companies, 6.30% to be
repurchased at $40,021,000 on 04/03/2000* $ 40,000,000 $ 40,000,000
Chase Securities, Inc, 6.05% to be
repurchased at $50,050,417 on 04/06/2000* 50,000,000 50,000,000
State Street Bank and Trust Company, 6.05%
to be repurchased at $640,323 on
04/03/2000* 640,000 640,000
------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost: $90,640,000) 90,640,000
------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION - 52.1%***
Government National Mortgage Association
Pass-thru 6.00% with various maturities to
04/20/2029 (b)(c) 125,343,077 114,098,369
Government National Mortgage Association
Pass-thru 6.50% with various maturities to
01/15/2030 (b)(c) 321,304,910 304,842,191
Government National Mortgage Association
Pass-thru 7.00% with various maturities to
03/20/2030 (b)(c) 274,698,640 266,270,489
Government National Mortgage Association
Pass-thru 7.50% with various maturities to
02/15/2030 (b)(c) 61,892,095 61,698,476
Government National Mortgage Association
Pass-thru 8.00% with various maturities to
03/15/2030 (b)(c) 36,069,068 36,095,080
Government National Mortgage Association
Pass-thru 8.50% with various maturities to
10/15/2027 (b)(c) 53,847,967 55,222,423
Government National Mortgage Association
Pass-thru 9.00% with various maturities to
01/15/2030 (b)(c) 30,049,443 31,278,316
Government National Mortgage Association
Pass-thru 9.50% with various maturities to
01/15/2023 (b)(c) 15,891,122 16,700,576
Government National Mortgage Association
Pass-thru 10.00% with various maturities
to 02/15/2021 (b)(c) 1,832,322 2,017,272
Government National Mortgage Association
Pass-thru 10.50% with various maturities
to 09/15/2021 (b)(c) 2,278,097 2,545,061
Government National Mortgage Association
Pass-thru 11.00% with various maturities
to 04/20/2019 (b)(c) 85,700 94,243
------------------------------------------------------------------------
TOTAL GOVERNMENT NATIONAL MORTGAGE
ASSOCIATIONS
(Cost: $895,215,911) 890,862,496
------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C> <C>
U.S. TREASURY SECURITIES - 10.9%
U.S. Treasury Bond, 9.125% 05/15/2009 $ 13,900,000 $ 15,127,092
U.S. Treasury Note, 6.00% 08/15/2009 20,000,000 19,746,800
U.S. Treasury Bond, 14.00% 11/15/2011 8,800,000 12,296,592
U.S. Treasury Bond, 10.375% 11/15/2012** 40,500,000 49,795,965
U.S. Treasury Bond, 12.50% 08/15/2014 33,300,000 47,187,099
U.S. Treasury Bond, 10.625% 08/15/2015 4,050,000 5,785,182
U.S. Treasury Bond, 8.875% 02/15/2019 7,300,000 9,444,375
U.S. Treasury Bond, 8.125% 08/15/2021 21,300,000 26,185,581
------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost: $193,165,774) 185,568,686
------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL
MORTGAGE ASSOCIATION - 16.9%
Federal National Mortgage Association
5.50% with various maturities to
02/01/2029 (b)(c) 10,779,808 9,482,862
Federal National Mortgage Association
6.00% with various maturities to
07/01/2029 (b)(c) 30,655,329 28,863,908
Federal National Mortgage Association
6.50% with various maturities to
02/01/2030 (b)(c) 98,746,961 92,613,028
Federal National Mortgage Association
7.00% with various maturities to
12/01/2029 (b)(c) 60,086,235 58,927,014
Federal National Mortgage Association
7.50% with various maturities to
12/01/2014 (b)(c) 68,279,865 68,061,700
Federal National Mortgage Association
8.00% with various maturities to
12/01/2024 (b)(c) 2,932,715 2,953,488
Federal National Mortgage Association
9.00% with various maturities to
10/01/2025 (b)(c) 26,548,533 27,394,866
Federal National Mortgage Association
11.50%, 10/01/2025 (b)(c) 182,519 204,421
------------------------------------------------------------------------
TOTAL FEDERAL NATIONAL MORTGAGE
ASSOCIATION
(Cost: $292,664,738) 288,501,287
------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN
MORTGAGE CORPORATION - 14.8%
Federal Home Loan Mortgage Corp. 6.50%
with various maturities to 08/01/2029
(b)(c) 1,684,794 1,614,166
Federal Home Loan Mortgage Corp. 7.00%
with various maturities to 12/01/2029
(b)(c) 78,441,862 76,099,915
Federal Home Loan Mortgage Corp. 7.50%
with various maturities to 03/01/2030
(b)(c) 112,097,413 111,347,080
Federal Home Loan Mortgage Corp. 8.00%
with various maturities to 02/01/2017
(b)(c) 33,372,474 33,504,292
</TABLE>
10 The accompanying notes are an integral part of the financial statements.
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corp. 8.50%
with various maturities to 12/01/2028
(b)(c) $ 18,042,159 $ 18,369,962
Federal Home Loan Mortgage Corp. 9.50%,
10/01/2020 (b)(c) 10,892,904 11,439,252
------------------------------------------------------------------------
TOTAL FEDERAL HOME LOAN MORTGAGE
CORPORATION
(Cost: $256,003,783) 252,374,667
------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost: $1,637,050,206) 1,617,307,136
------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO
(Cost: $1,727,690,206) (a) $1,707,947,136
------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
* Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
** At March 31, 2000, these securities, in part or in whole, have been
segregated to cover initial margin requirements for open futures contracts.
*** The investments in mortgage-backed securities of the Government National
Mortgage Association are interests in separate pools of mortgages. All
separate investments in each of these issues which have similar coupon rates
have been aggregated for presentation purposes in the Investment Portfolio.
Effective maturities of these investments will be shorter than stated
maturities due to prepayments.
(a) The cost for federal income tax purposes was $1,727,690,206. At March 31,
2000, the net unrealized depreciation for all securities based on tax cost
was $19,743,070. This consisted of aggregate gross unrealized appreciation
for all investments in which there was an excess of value over tax cost of
$17,397,189 and aggregate gross unrealized depreciation for all investments
in which there was an excess of tax cost over value of $37,140,259.
(b) At March 31, 2000, these pools, in part or whole, have been segregated to
cover when-issued or forward delivery pools.
(c) When-issued or forward delivery pools included.
At March 31, 2000, open futures contracts purchased are as follows:
<TABLE>
<CAPTION>
AGGREGATE
FUTURES EXPIRATION CONTRACTS FACE VALUE($) MARKET VALUE($)
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note June 21, 2000 536 (52,513,395) (52,796,000)
-------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note June 1, 2000 790 (76,309,721) (77,481,718)
-------------------------------------------------------------------------------------------------------------------
U.S. Long Bond Note June 21, 2000 146 14,218,376 14,262,375
-------------------------------------------------------------------------------------------------------------------
Total unrealized depreciation on open futures
contracts (1,410,603)
-------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
as of March 31, 2000 (unaudited)
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value,
(Cost: $1,727,690,206) $1,707,947,136
------------------------------------------------------------------------------
Receivable for investments sold 277,933,636
------------------------------------------------------------------------------
Interest receivable 12,043,999
------------------------------------------------------------------------------
Receivable for Fund shares sold 9,799
------------------------------------------------------------------------------
Other assets 242,276
------------------------------------------------------------------------------
TOTAL ASSETS 1,998,176,846
------------------------------------------------------------------------------
LIABILITIES
Due to custodian bank 4,228,029
------------------------------------------------------------------------------
Payable for when issued and forward delivery pools 417,417,829
------------------------------------------------------------------------------
Payable for Fund shares redeemed 4,781,371
------------------------------------------------------------------------------
Payable for daily variation margin on open futures contracts 285,219
------------------------------------------------------------------------------
Accrued management fee 683,839
------------------------------------------------------------------------------
Other accrued expenses 2,562,975
------------------------------------------------------------------------------
Total liabilities 429,959,262
------------------------------------------------------------------------------
NET ASSETS, AT VALUE $1,568,217,584
------------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income (loss) $ 5,761,375
------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investment securities (19,743,070)
------------------------------------------------------------------------------
Futures (1,410,603)
------------------------------------------------------------------------------
Accumulated net realized gain (loss) (633,171,094)
------------------------------------------------------------------------------
Paid-in capital 2,216,780,976
------------------------------------------------------------------------------
NET ASSETS, AT VALUE $1,568,217,584
------------------------------------------------------------------------------
NET ASSET VALUE AND OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($1,481,254,774 / 223,939,417 shares outstanding) $6.61
------------------------------------------------------------------------------
Maximum offering price per share (100/95.50 of $6.61) $6.92
------------------------------------------------------------------------------
CLASS B SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($83,851,976 /
12,642,364 shares outstanding) $6.63
------------------------------------------------------------------------------
CLASS C SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($3,110,834 /
469,412 shares outstanding) $6.63
------------------------------------------------------------------------------
</TABLE>
12 The accompanying notes are an integral part of the financial statements.
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended March 31, 2000 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 1,268,793
----------------------------------------------------------------------------
Interest 60,319,693
----------------------------------------------------------------------------
Total income 61,588,486
----------------------------------------------------------------------------
Expenses:
Management fee 4,474,223
----------------------------------------------------------------------------
Services to shareholders 1,524,260
----------------------------------------------------------------------------
Custodian fees 35,231
----------------------------------------------------------------------------
Distribution services fees 419,456
----------------------------------------------------------------------------
Administrative service fees 2,109,454
----------------------------------------------------------------------------
Auditing 59,561
----------------------------------------------------------------------------
Legal 31,503
----------------------------------------------------------------------------
Trustees' fees 23,058
----------------------------------------------------------------------------
Reports to shareholders 345,949
----------------------------------------------------------------------------
Registration fees 29,014
----------------------------------------------------------------------------
Other 85,459
----------------------------------------------------------------------------
Total expenses, before expense reductions 9,137,168
----------------------------------------------------------------------------
Expense reductions (54,021)
----------------------------------------------------------------------------
Total expenses, after expense reductions 9,083,147
----------------------------------------------------------------------------
NET INVESTMENT INCOME 52,505,339
----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investment (20,800,206)
----------------------------------------------------------------------------
Futures (4,302,408)
----------------------------------------------------------------------------
Written options (166,601)
----------------------------------------------------------------------------
(25,269,215)
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period on:
Investments (6,649,809)
----------------------------------------------------------------------------
Futures (1,157,700)
----------------------------------------------------------------------------
(7,807,509)
----------------------------------------------------------------------------
Net gain (loss) on investment transactions (33,076,724)
----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 19,428,615
----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
MARCH 31, ENDED
2000 SEPTEMBER 30,
(UNAUDITED) 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
--------------------------------------------------------------------------------------------------------
Net investment income $ 52,505,339 $ 116,818,700
--------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (25,269,215) 6,601,355
--------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period (7,807,509) (113,699,164)
--------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 19,428,615 9,720,891
--------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
--------------------------------------------------------------------------------------------------------
Class A (50,067,831) (110,867,263)
--------------------------------------------------------------------------------------------------------
Class B (2,791,876) (11,958,079)
--------------------------------------------------------------------------------------------------------
Class C (91,257) (214,925)
--------------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 61,735,643 249,986,278
--------------------------------------------------------------------------------------------------------
Reinvestment of distributions 32,482,299 74,165,296
--------------------------------------------------------------------------------------------------------
Cost of shares redeemed (298,754,966) (588,730,241)
--------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions (204,537,024) (264,578,667)
--------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets (238,059,373) (377,898,043)
--------------------------------------------------------------------------------------------------------
Net assets at beginning of period 1,806,276,957 2,184,175,000
--------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $5,761,375 and $6,207,000,
respectively) $1,568,217,584 $1,806,276,957
--------------------------------------------------------------------------------------------------------
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
the period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
CLASS A
SIX MONTHS YEAR ENDED SEPTEMBER 30, TWO MONTHS
ENDED ----------------------------- ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30, JULY 31,
2000 1999 1998 1997 1996 1995 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 6.75 7.15 7.01 6.91 7.13 7.06 6.96
--------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.21(a) 0.42(a) 0.44 0.52 0.49 0.08 0.53
--------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.14) (0.38) 0.17 0.10 (0.19) 0.08 0.09
--------------------------------------------------------------------------------------------------------------------
Total from investment operations .07 0.04 0.61 0.62 0.30 0.16 0.62
--------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.21) (0.44) (0.47) (0.52) (0.52) (0.09) (0.52)
--------------------------------------------------------------------------------------------------------------------
Total distributions (0.21) (0.44) (0.47) (0.52) (0.52) (0.09) (0.52)
--------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 6.61 6.75 7.15 7.01 6.91 7.13 7.06
--------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) 1.42** 0.59 8.99 9.26 4.28 2.23** 9.48
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 1,481 1,661 1,812 1,773 1,908 2,037 2,014
--------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) 1.03* 1.02 0.97 0.96 0.97 0.94* 0.89
--------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.03* 1.02 0.97 0.96 0.97 0.94* 0.89
--------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 6.29* 6.04 6.46 7.23 6.98 6.87* 7.77
--------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 187* 151 172 235 391 249* 573
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
SIX MONTHS YEAR ENDED SEPTEMBER 30, TWO MONTHS
ENDED ----------------------------- ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30, JULY 31,
2000 1999 1998 1997 1996 1995 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 6.75 7.14 7.00 6.91 7.12 7.05 6.96
--------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.18(a) 0.34(a) 0.40 0.45 0.44 0.07 0.47
--------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.12) (0.37) 0.14 0.10 (0.19) 0.08 0.09
--------------------------------------------------------------------------------------------------------------------
Total from investment operations .06 (0.03) 0.54 0.55 0.25 0.15 0.56
--------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.18) (0.36) (0.40) (0.46) (0.46) (0.08) (0.47)
--------------------------------------------------------------------------------------------------------------------
Total distributions (0.18) (0.36) (0.40) (0.46) (0.46) (0.08) (0.47)
--------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 6.63 6.75 7.14 7.00 6.91 7.12 7.05
--------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) 1.05** (0.47) 8.00 8.17 3.54 2.09** 8.44
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 84 142 368 722 1,051 1,454 1,513
--------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) 1.83* 2.13 1.91 1.83 1.80 1.79* 1.75
--------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.83* 2.13 1.91 1.83 1.80 1.79* 1.75
--------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 5.49* 4.93 5.52 6.36 6.15 6.02* 6.91
--------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 187* 151 172 235 391 249* 573
--------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
SIX MONTHS YEAR ENDED SEPTEMBER 30, TWO MONTHS
ENDED ----------------------------- ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30, JULY 31,
2000 1999 1998 1997 1996 1995 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 6.75 7.15 7.00 6.90 7.12 7.05 6.95
------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.19(a) 0.37(a) 0.40 0.46 0.43 0.07 0.48
------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment transactions (.12) (0.39) 0.16 0.10 (0.19) 0.08 0.09
------------------------------------------------------------------------------------------------------------------
Total from investment operations .07 (0.02) 0.56 0.56 0.24 0.15 0.57
------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.19) (0.38) (0.41) (0.46) (0.46) (0.08) (0.47)
------------------------------------------------------------------------------------------------------------------
Total distributions (0.19) (0.38) (0.41) (0.46) (0.46) (0.08) (0.47)
------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 6.63 6.75 7.15 7.00 6.90 7.12 7.05
------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) 1.08** (0.22)% 8.30 8.45 3.47 2.10** 8.65
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 3 3 4 3 2 1 1
------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) 1.61* 1.78 1.73 1.71 1.72 1.69* 1.71
------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) 1.61* 1.78 1.73 1.71 1.72 1.69* 1.71
------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 5.71* 5.28 5.70 6.48 6.23 6.12* 6.95
------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 187* 151 172 235 391 249* 573
------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of any sales charge.
* Annualized
** Not Annualized
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES Kemper U.S. Mortgage Fund (the "Fund") is
registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open end,
diversified management investment company organized
as a Massachusetts business trust.
The Fund offers multiple classes of shares. Class A
shares are offered to investors subject to an
initial sales charge. Class B shares are offered
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 offered 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, 2000) 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.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of the Fund have
equal rights with respect to voting subject to
class specific arrangements.
The Fund's financial statements are prepared in
accordance with generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Portfolio debt securities
purchased with an original maturity greater than
sixty days are valued by pricing agents approved by
the officers of the Fund, whose 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. Money market instruments
purchased with an original maturity of sixty days
or less are valued at amortized cost.
All other securities are valued at their fair value
as determined in good faith by the Valuation
Committee of the Board of Trustees.
REPURCHASE AGREEMENTS. The Fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
OPTIONS. An option contract is a contract in which
the writer of the option grants the buyer of the
option the right to purchase from (call option), or
sell to (put option), the writer a designated
instrument at a specified price within a specified
period of time. Certain options, including options
on indices, will
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
require cash settlement by the Fund if the option
is exercised. During the period, the Fund purchased
put options on securities as a hedge against
potential adverse price movements in the value of
portfolio assets.
The liability representing the Fund's obligation
under an exchange traded written option or
investment in a purchased option is valued at the
last sale price or, in the absence of a sale, the
mean between the closing bid and asked prices or at
the most recent asked price (bid for purchased
options) if no bid and asked price are available.
Over-the-counter written or purchased options are
valued using dealer supplied quotations. Gain or
loss is recognized when the option contract expires
or is closed.
If the Fund writes a covered call option, the Fund
foregoes, in exchange for the premium, the
opportunity to profit during the option period from
an increase in the market value of the underlying
security above the exercise price. If the Fund
writes a put option it accepts the risk of a
decline in the market value of the underlying
security below the exercise price. Over-the-counter
options have the risk of the potential inability of
counterparties to meet the terms of their
contracts. The Fund's maximum exposure to purchased
options is limited to the premium initially paid.
In addition, certain risks may arise upon entering
into option contracts including the risk that an
illiquid secondary market will limit the Fund's
ability to close out an option contract prior to
the expiration date and that a change in the value
of the option contract may not correlate exactly
with changes in the value of the securities or
currencies hedged.
FUTURES CONTRACTS. A futures contract is an
agreement between a buyer or seller and an
established futures exchange or its clearinghouse
in which the buyer or seller agrees to take or make
a delivery of a specific amount of a financial
instrument at a specified price on a specific date
(settlement date). During the period, the Fund
purchased interest rate futures to manage the
duration of the portfolio. In addition, the Fund
also sold interest rate futures to hedge against
declines in the value of portfolio securities.
Upon entering into a futures contract, the Fund is
required to deposit with a financial intermediary
an amount ("initial margin") equal to a certain
percentage of the face value indicated in the
futures contract. Subsequent payments ("variation
margin") are made or received by the Fund dependent
upon the daily fluctuations in the value of the
underlying security and are recorded for financial
reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction,
the Fund will realize a gain or loss equal to the
difference between the value of the futures
contract to sell and the futures contract to buy.
Futures contracts are valued at the most recent
settlement price.
Certain risks may arise upon entering into futures
contracts, including the risk that an illiquid
secondary market will limit the Fund's ability to
close out a futures contract prior to the
settlement date and that a change in the value of a
futures contract may not correlate exactly with the
changes in the value of the securities or
currencies hedged. When utilizing futures contracts
to hedge, the Fund gives up the opportunity to
profit from favorable price movements in the hedged
positions during the term of the contract.
MORTGAGE DOLLAR ROLLS. The Fund may enter into
mortgage dollar rolls in which the Fund sells
mortgage-backed securities for delivery in the
current month and simultaneously contracts to
repurchase similar, but not identical,
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
securities on a fixed date. The Fund receives
compensation as consideration for entering into the
commitment to repurchase. The compensation is paid
in the form of a fee which is recorded as deferred
income and amortized to income over the roll
period, or alternatively, a lower price for the
security upon its repurchase. Mortgage dollar rolls
may be renewed with a new sale and repurchase price
and a cash settlement made at each renewal without
physical delivery of the securities subject to the
contract.
WHEN ISSUED/DELAYED DELIVERY SECURITIES. 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 segregate cash or
other liquid assets at least equal to the amount of
the commitment.
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, 1999, the Fund had a net tax basis
capital loss carryforward of approximately
$604,550,000 which may be applied against any
realized net taxable capital gains of each
succeeding year until fully utilized or until
September 30, 2000 ($19,544,000) or September 30,
2002 ($476,489,000) or September 30, 2003
($69,280,000) or September 30, 2005 ($39,237,000),
the expiration date.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made monthly.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the Fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital
accounts without impacting the net asset value of
the Fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Dividend income is recorded on
the ex-dividend date. Realized gains and losses
from investment transactions are recorded on an
identified cost basis. All discounts are accreted
for both tax and financial reporting purposes.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other
Trust expenses are allocated between the Funds in
proportion to their relative net assets.
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2 PURCHASE & SALES
OF SECURITIES For the six months ended March 31, 2000, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $1,634,710,006
Proceeds from sales 1,866,444,131
The aggregate face value of futures contracts
opened and closed during the period was
$1,345,468,098 and $1,370,702,241 respectively.
--------------------------------------------------------------------------------
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 $4,474,223 for the six
months ended March 31, 2000, which was equivalent
to an annualized effective rate of .53%.
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, 2000 are $10,863.
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
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 charge
("CDSC") from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the six months ended March 31, 2000 are
$579,963, of which $64,165 is unpaid at March 31,
2000.
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of Fund accounts the firms
service. Administrative services fees paid by the
Fund to KDI for the six months ended March 31, 2000
are $2,109,454, of which $471,376 is unpaid at
March 31, 2000. In addition $11,125 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
$1,309,303 for the six months ended March 31, 2000,
of which $218,217 is unpaid at March 31, 2000.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. During the six months ended March
31, 2000, the Fund made no payments to its officers
and incurred trustees' fees of $23,058 to
independent trustees.
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, 2000 SEPTEMBER 30, 1999
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 10,617,814 $ 26,720,408 5,809,957 $ 40,205,609
-------------------------------------------------------------------------------------
Class B 697,231 4,643,725 4,289,138 29,510,690
-------------------------------------------------------------------------------------
Class C 32,252 215,712 163,823 1,140,369
-------------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDEND
Class A 8,421,612 30,383,131 9,536,152 66,005,190
-------------------------------------------------------------------------------------
Class B 308,042 2,047,275 1,160,295 8,066,579
-------------------------------------------------------------------------------------
Class C 7,812 51,893 13,513 93,527
-------------------------------------------------------------------------------------
SHARES REDEEMED
Class A (45,663,420) (235,798,709) (48,571,621) (336,467,281)
-------------------------------------------------------------------------------------
Class B (4,843,170) (32,362,276) (10,293,608) (71,708,162)
-------------------------------------------------------------------------------------
Class C (65,646) (438,183) (217,342) (1,491,723)
-------------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 4,510,551 30,155,798 25,716,372 179,129,610
-------------------------------------------------------------------------------------
Class B (4,510,573) (30,155,798) (25,742,991) (179,063,075)
-------------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARES TRANSACTIONS $(204,537,024) $(264,578,667)
-------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
5 EXPENSE OFF-SET
ARRANGEMENTS The Fund has entered into arrangements with its
custodian and transfer agent whereby credits
realized as a result of uninvested cash balances
were used to reduce a portion of the Fund's
expenses. During the period, the Fund's custodian
and transfer agent fees were reduced by $161 and
$53,860, respectively, under these arrangements.
--------------------------------------------------------------------------------
6 LINE OF CREDIT The Fund and several Kemper Funds (the
"Participants") share in a $750 million revolving
credit facility for temporary or emergency
purposes, including the meeting of redemptions
requests that otherwise might require the untimely
disposition of securities. The Participants are
charged an annual commitment fee which is allocated
pro rata among each of the Participants. Interest
is calculated based on the market rates at the time
of the borrowing. The Fund may borrow up to a
maximum of 33 percent of its net assets under the
agreement.
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES&OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
JOHN W. BALLANTINE MARK S. CASADY MAUREEN E. KANE
Trustee President Assistant Secretary
LEWIS A. BURNHAM PHILIP J. COLLORA CAROLINE PEARSON
Trustee Vice President Assistant Secretary
and Secretary
LINDA C. COUGHLIN BRENDA LYONS
Trustee JOHN R. HEBBLE Assistant Treasurer
Treasurer
DONALD L. DUNAWAY
Trustee ANN M. MCCREARY
Vice President
ROBERT B. HOFFMAN
Trustee KATHRYN L. QUIRK
Vice President
DONALD R. JONES
Trustee FRANK L. RACHWALSKI, JR.
Vice President
THOMAS W. LITTAUER
Trustee and Vice President LINDA J. WONDRACK
Vice President
SHIRLEY D. PETERSON
Trustee RICHARD L. VANDENBERG
Vice President
WILLIAM P. SOMMERS
Trustee
</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 219557
Kansas City, MO 64121
.............................................................................................
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02109
.............................................................................................
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
.............................................................................................
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
.............................................................................................
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 (5/28/00) 1111850
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
