<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED AUGUST 31, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[MORNINGSTAR RATINGS LOGO]
SEEKS HIGH CURRENT INCOME AND PRESERVATION OF CAPITAL.
Kemper Short-Term
U.S. Government Fund
"... The fund was able to provide a positive return
despite challenging market conditions. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
8
Portfolio Statistics
9
Portfolio Of Investments
11
Report Of Independent Auditor
12
Financial Statements
14
Notes To Financial Statements
18
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER SHORT TERM U.S.
GOVERNMENT FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED AUGUST 31, 1999
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 1.98%
CLASS B 1.10%
CLASS C 1.24%
LIPPER SHORT U.S. GOVERNMENT FUNDS* 2.97%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
8/31/99 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
Kemper Short-Term U.S.
Government Fund Class A $7.99 $8.19
- --------------------------------------------------------------------------------
Kemper Short-Term U.S.
Government Fund Class B $8.01 $8.21
- --------------------------------------------------------------------------------
Kemper Short-Term U.S.
Government Fund Class C $8.02 $8.22
- --------------------------------------------------------------------------------
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE PERFORMANCE. INVESTMENT
RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST. SHARES ARE NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT.
*LIPPER ANALYTICAL SERVICES, INC. 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 SHORT-TERM U.S. GOVERNMENT
FUND RANKINGS AS OF 8/31/99
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER
ADJUSTABLE RATE MORTGAGE FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-year #64 of #76 of #73 of
78 funds 78 funds 78 funds
- --------------------------------------------------------------------------------
5-year #41 of #49 of #48 of
51 funds 51 funds 51 funds
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND
AND YIELD INFORMATION FOR THE FUND AS OF
AUGUST 31, 1999.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
One-year Income: $0.3600 $0.2896 $0.3012
- --------------------------------------------------------------------------------
August Dividend: $0.0300 $0.0222 $0.0239
- --------------------------------------------------------------------------------
Annualized
Distribution Rate+: 4.51% 3.33% 3.58%
- --------------------------------------------------------------------------------
SEC Yield+: 3.65% 3.13% 3.28%
- --------------------------------------------------------------------------------
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON AUGUST 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 AUGUST 31, 1999, SHOWN AS AN ANNUALIZED PERCENTAGE OF THE MAXIMUM
OFFERING PRICE ON THAT DATE. THE SEC YIELD IS COMPUTED IN ACCORDANCE WITH THE
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 [FIXED STYLE BOX]
- --------------------------------------------------------------------------------
Source: Morningstar, Inc., Chicago, IL 312-696-6000. The Fixed-Income Style Box
placement is based on a fund's average effective maturity or duration and the
average credit rating of the bond portfolio.
THE STYLE BOXES REPRESENT 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 LONG-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. MORNINGSTAR HAS PLACED KEMPER
SHORT-TERM U.S. GOVERNMENT FUND IN THE SHORT 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.
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.
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.
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
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.
DEAR KEMPER FUNDS SHAREHOLDER:
Interest rates have consumed investors' attention for the past six months, but
immediate concerns of rate hikes came to a halt in October when the Federal
Reserve Board declined to raise its key interest rate, the overnight bank
lending rate, for a third time this year. To gain a better understanding of how
the Fed's recent interest rate decisions affect the economic outlook for the
remainder of 1999, let's review some of the economic events of the past few
months.
Talk of rising interest rates began last spring, and on June 30 the Fed
boosted its key interest rate -- the overnight bank lending rate -- one quarter
of a point (0.25%). With this move the Fed said it was not inclined to increase
rates again soon, although it noted that it was alert to the potential emergence
of inflationary pressures that could undermine economic growth.
Talk of a second hike began in July after Fed Chairman Alan Greenspan's
commentary to the House Banking Committee, which was part of the Fed's
twice-yearly outlook report required by the Humphrey-Hawkins Full Employment and
Balanced Growth Act of 1978. While Greenspan didn't say that the Fed definitely
would raise the overnight bank lending rate at its next meeting, the tone of his
report included more warnings than expected about the need to follow the June
rate increase with another. Speculation became reality at the Aug. 24 Fed
meeting, when the Fed once again raised the overnight bank lending rate by one
quarter of a point (0.25%).
While many investors were frustrated by the rate hikes when there were no
signs of inflation, Fed policymakers looked at the situation another way: If the
earlier increases were not enough to bring inflation risks into balance, a
"euphoric" rise in stocks could fuel increased consumer spending, which could
necessitate a more disruptive adjustment later. In its June and August rate
hikes, the Fed was acting promptly to prevent such an adjustment. In other
words, the Fed strongly believes that "a stitch in time saves nine" -- it wants
to be preemptive by raising interest rates and slowing the economy before an
inflation problem arises.
With two rate hikes behind them, investors began speculating about the
possibility of a third hike at the Fed's Oct. 5 meeting. There are some
indications that inflationary pressures still exist.
To start, the Fed forecasts that the consumer price index (CPI), the average
value of an imaginary "basket" of goods and services in the economy, could rise
as much as 2.5 percent this year, up from 1.6 percent in 1998. Because CPI is
the standard measure of inflation, the Fed has to take any acceleration
seriously.
Employment growth also has the Fed worried. Job creation has exceeded the
growth of the labor force since 1993, bringing the unemployment rate down to its
lowest level since 1970. The Fed believes that if the pool of job seekers
shrinks sufficiently, upward pressures on wage costs are likely. One of the core
beliefs of modern economics is that rising wages will produce price inflation as
companies seek to pass their rising costs along to their customers. Thus far in
this economic expansion, this hasn't happened, but the Fed does not feel it can
take a chance that such good luck will last.
Gross domestic product (GDP), the value of all goods and services produced in
the United States, has been growing faster than the Fed believes it can without
causing inflation. The Fed believes that GDP can grow slightly faster than 3.0
percent per year without generating inflation. Actual 1998 GDP growth was 3.9
percent and we expect about the same in 1999.
Rapid productivity growth is the antidote to inflation. After languishing at
an average annual increase of about 1 percent in the 1970s and 1980s,
productivity growth has recently accelerated. Over the past four quarters it has
increased 2.8 percent in the entire economy and even faster in the business
sector. However, when growth slowed to under 2 percent in the second quarter,
productivity dropped back sharply. While a one-quarter dip in productivity is no
cause for worry, the Fed will be watching developments closely. Should the gains
in technology that have fostered the productivity growth slow, inflationary red
flags would go up.
Improving economic conditions around the world mean that the U.S. economy will
no longer experience declines in basic commodity and import prices that have
helped curtail inflation in recent years. Crude oil -- one of the most important
and visible commodities, used to make everything from gasoline to plastic bags
- -- is up nearly 90 percent from its February lows.
Despite these inflationary suggestions, however, signs of actual inflation
remain few and far between, and in its Oct. 5 decisions, the Fed left rates
unchanged.
The Fed did, however, shift its policy bias from neutral toward tightening.
The accompanying press release softened that a bit by noting that "such a
directive did not signify a commitment to near-term action."
Clearly the Fed is nervous, but it is willing to wait on incoming data --
including two employment reports and
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 (9/30/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 5.90 5.25 4.80 6.20
Prime rate (2) 8.25 7.75 8.50 8.50
Inflation rate (3)* 2.25 1.60 1.60 2.30
The U.S. dollar (4) -3.9 -0.2 4.40 8.70
Capital goods orders (5)* 3.00 5.60 15.60 16.20
Industrial production (5)* 2.40 1.80 3.60 5.70
Employment growth (6)* 2.20 2.40 2.70 2.40
</TABLE>
<TABLE>
<S> <C>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN (4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR
A BIG PLUS FOR FINANCIAL ASSETS. IMPACT U.S. EXPORTERS AND THE VALUE OF U.S. FIRMS'
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE FOREIGN PROFITS.
THEIR BEST BORROWERS. (5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN PERFORMANCE.
THE LAST FIVE YEARS, INFLATION HAS BEEN AS HIGH (6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE *DATA AS OF 8/30/99.
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
</TABLE>
several inflation reports -- before moving again. We expect that the Fed would
prefer to hold off from further rate hikes because of the Y2K issue: It would
prefer not to add to any potential Y2K fears or appear responsible for
Y2K-related volatility in the financial markets.
The long-term possibility of interest rate hikes is likely to be affected by
political considerations. Election primaries begin in February 2000. Will
candidates be talking about tax cuts? Medicare reform? Social Security reform?
These will be the issues to consider when we look at the economy in early- to
mid-2000.
Hopefully it will be as easy for investors to obtain information about Fed
policies at that time as it is today. The Humphrey-Hawkins hearings were created
to give Congress and the public some idea of economic growth and inflation. But
this round of Humphrey-Hawkins hearings could be the last, because the
Humphrey-Hawkins law expires this year. Although Greenspan has said he thinks it
is important for the Fed to report to Congress, and House Banking Committee
Chairman Jim Leach intends to press for a new law, there has been no move to
enact a new reporting requirement. Although the Fed could still provide
hearings, without a law forcing it to do so within a certain framework, we would
likely have no consistent basis for analyzing monetary policy.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
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 OCTOBER 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 IS LEAD PORTFOLIO MANAGER OF KEMPER SHORT-TERM U.S.
GOVERNMENT FUND. HE JOINED SCUDDER KEMPER INVESTMENTS, INC. IN MARCH 1996 AND IS
A MANAGING DIRECTOR. HE HAS 25 YEARS OF FIXED-INCOME PORTFOLIO MANAGEMENT
EXPERIENCE.
[DUGENSKE PHOTO]
JOHN DUGENSKE IS A PORTFOLIO MANAGER FOR KEMPER SHORT-TERM U.S. GOVERNMENT FUND.
HE IS A VICE PRESIDENT OF SCUDDER KEMPER INVESTMENTS, JOINING THE FIRM IN 1998.
[DOLAN PHOTO]
SCOTT DOLAN IS A PORTFOLIO MANAGER FOR KEMPER SHORT-TERM U.S. GOVERNMENT FUND.
HE JOINED SCUDDER KEMPER INVESTMENTS IN 1989 AND IS A VICE PRESIDENT.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGEMENT
TEAM 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.
ANXIETY ABOUT INFLATION IN THE UNITED STATES AND GROWING CONFIDENCE IN BOND
MARKETS ABROAD HAVE COMBINED TO PUSH U.S. GOVERNMENT BOND PRICES LOWER
THROUGHOUT 1999. IN THE FOLLOWING Q&A, THE FUND'S MANAGEMENT TEAM DISCUSSES THE
BEHAVIOR OF THE U.S. GOVERNMENT BOND MARKET AND HOW THE FUND WAS POSITIONED TO
RESPOND.
Q BEFORE WE GET INTO THE SPECIFICS OF HOW THE FUND WAS MANAGED, COULD YOU
PROVIDE SOME BACKGROUND ON THE PERFORMANCE OF THE GOVERNMENT BOND MARKET DURING
THE LAST 12 MONTHS?
A Over the past year, we've witnessed a nearly unabated rise in interest
rates. The returns investors received varied widely by instrument and by
maturity. Shorter-term instruments tended to significantly outperform
longer-term ones. For example, the Lehman Long Government Bond Index* total
return for the 12-month period ended August 31 was down 4.99 percent. The
Merrill Lynch 15-Year Mortgage Index* gained 2.3 percent, which reflects that
mortgages performed better than their long-term Treasury counterparts. The
Lehman Intermediate Government Bond Index* gained 2.26 percent, indicating that
the shorter you were, the better.
The rising interest rate environment was sparked by a turnaround in
investor expectations that began last October. At that time, investors had many
reasons to favor the U.S. government market. The U.S. economy was growing well,
but inflation was subdued. Meanwhile, foreign markets, particularly those in
Asia and Latin America, were hindered by uncertainty regarding the strength of
their economies and their currencies. Thus, investors poured money into U.S.
government bonds for their relative safety and liquidity. In fact, the 30-year
Treasury bond hovered below 5 percent last October, near its historic lows.
The turnaround began when the Federal Reserve, concerned that deteriorating
fundamentals abroad could lead to a downturn in the economy at home, took an
unusual step. The Fed cut interest rates three times last fall, even though the
U.S. economy was growing well. Normally, it only cuts rates if it sees imminent
signs of a domestic economic slowdown. Nevertheless, the strategy worked. Asia
began showing signs of recovery. Potential problems in Latin American economies,
especially Brazil, began to look as if they were under control.
As a result, investors became more comfortable taking a higher degree of
risk and began moving money from the U.S. government market into other assets,
such as emerging markets. Unfortunately, this coincided with a deluge of supply
in the U.S. market. The end result was that prices on 30-year Treasury bonds
dropped as the yield moved from 4.87 percent in October 1998 to about 6.10
percent at the beginning of September 1999. The impact of these sharply higher
yields is reflected in the index returns we cited earlier. Prices on short-term
bonds also retreated, but not as drastically.
* THE LEHMAN LONG GOVERNMENT BOND INDEX IS A TOTAL RETURN INDEX CONSIDERED
GENERALLY REPRESENTATIVE OF THE MARKET FOR GOVERNMENT BONDS WITH MATURITIES
OF TEN YEARS OR MORE. THE MERRILL LYNCH 15-YEAR MORTGAGE INDEX IS A TOTAL
RETURN INDEX CONSIDERED GENERALLY REPRESENTATIVE OF THE MARKET FOR
LONG-TERM MORTGAGES. THE LEHMAN INTERMEDIATE GOVERNMENT BOND INDEX IS A
TOTAL RETURN INDEX CONSIDERED GENERALLY REPRESENTATIVE OF THE MARKET FOR
GOVERNMENT BONDS WITH MATURITIES BETWEEN THREE AND TEN YEARS. INVESTORS
CANNOT ACTUALLY INVEST IN THE INDICES.
5
<PAGE> 6
PERFORMANCE UPDATE
Q HOW DID YOU POSITION THE FUND DURING THIS PERIOD?
A Well, for this fund, you can actually think of the fiscal year as being
seven months long. As you may recall, the fund assumed its current configuration
on February 5, 1999, with the merger of Kemper Adjustable Rate Government Fund
and Kemper Short-Intermediate Government Fund. Combining the funds offered
several potential advantages: its one-to-three year maturity would enable it to
pursue high income with relatively low volatility of principal, have broader
diversification than either of the merging funds and, because of its increased
size, have the opportunity to operate at a lower cost.
Q AND HOW WELL DID THE FUND PERFORM FOR THE YEAR AS A WHOLE?
A For the entire 12-month period ended August 31, the fund's total return
was 1.98 percent (Class A shares, unadjusted for any sales charge) versus 2.97
percent for the category average. Obviously, that doesn't sound like a lot. But
consider that long government bonds are down 7.45 percent and intermediate bonds
are down 0.32 percent over the same period. As you can see, the fund was able to
provide positive returns despite challenging market conditions. Our
underperformance for the year as a whole can be attributed to the fact that we
had a long duration (see Terms To Know, on page 2), compared with our peers,
before the merger. Now that the merger is complete and our competition is better
defined, we believe we're in a position to better perform with the peer group
consistently.
Q WHAT WAS YOUR GENERAL STRATEGY FOR MANAGING THE FUND THIS YEAR?
A Even though there was a lot of anxiety among investors, we were reasonably
certain of one thing at the beginning of the fiscal year: that rates wouldn't go
much lower. Therefore, we tried to keep the duration of the fund neutral and
worked to add performance by maintaining an overweight in mortgage-backed
securities versus Treasuries. 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. This strategy worked well
since mortgages outperformed Treasuries for the year overall. We also had some
short-term targeted interest rate trades that worked well for the fund.
Q HOW IS THE FUND POSITIONED NOW?
A We don't expect rates to move up much further from current levels, and the
market seems evenly valued at this point. With no specific area appearing
particularly attractive, we're slightly biased toward mortgage-backed
securities, since they can provide a bit more income potential than Treasuries.
Q YOU MENTIONED THAT YOU DON'T THINK RATES WILL CONTINUE TO RISE FURTHER.
WHY?
A There are several reasons. The primary one is that the Federal Reserve has
already raised short-term interest rates twice in the last three months, which
should help put the brakes on incipient inflation. Second, it appears that the
market has already priced in another hike, which may not even occur. Third, most
economists believe that the Federal Reserve will be reluctant to tighten further
because it doesn't want to constrain the banking system's liquidity given Y2K
concerns.
Q WILL Y2K HAVE AN IMPACT ON THE MARKET OR THE FUND?
A With Y2K , the perception may be more important than reality. We don't
think the coming of the millennium will cause enormous problems. But it may
create an artificially heightened level of fear, which may in turn create
opportunities in some areas of the market. We'll keep on the lookout for values
and be nimble. We won't vary terrifically from the norm because the market isn't
currently compensating us to take more risk. Rather, we'll closely monitor the
market and make incremental boosts in yield here and there that we think will
add up to nice performance over the longer term.
The big picture is that investors are able to reap about 6 percent on
short-to-intermediate-maturity AAA-rated mortgages while inflation remains
lodged near 3 percent. So, fixed income investors are getting a nice
inflation-adjusted return on their investment, and we would expect that to
continue.
6
<PAGE> 7
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED 8/31/99 (ADJUSTED FOR THE APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kemper Short-Term U.S. Government
Fund Class A -0.80% 3.89% 5.49% 5.75% (since 9/1/87)
- --------------------------------------------------------------------------------------------------
Kemper Short-Term U.S. Government
Fund Class B -1.83 3.57 N/A 3.46 (since 5/31/94)
- --------------------------------------------------------------------------------------------------
Kemper Short-Term U.S. Government
Fund Class C 1.24 3.79 N/A 3.70 (since 5/31/94)
- --------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER SHORT-TERM U.S. GOVERNMENT FUND CLASS A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER SHORT-TERM MERRILL LYNCH 1-3
US GOVERNMENT SALOMON BROTHERS 6- YEAR GOVERNMENT CONSUMER PRICE
FUND CLASS A1 MONTH T-BILL INDEX* INDEX+ INDEX++
----------------- ------------------- ----------------- --------------
<S> <C> <C> <C> <C>
9/30/87 10000 10000 10000 10000
12/31/91 14185 13715 14932 11991
12/31/96 17856 17170 19608 13792
8/31/99 19677 19545 22760 14539
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER SHORT-TERM U.S. GOVERNMENT FUND CLASS B
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER SHORT-TERM
US GOVERNMENT SALOMON BROTHERS 6- MERRILL LYNCH 1-3 YR CONSUMER PRICE
FUND CLASS B1 MONTH T-BILL* GOVT' INDEX"
----------------- ------------------- -------------------- --------------
<S> <C> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00 10000.00
12/31/95 10744.00 10873.00 11243.00 10400.00
12/31/97 11738.00 12079.00 12588.00 10936.00
8/31/99 11960.00 13110.00 13700.00 11336.00
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER SHORT-TERM U.S. GOVERNMENT FUND CLASS C
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER SHORT-TERM
US GOVERNMENT SALOMON BROTHERS 6- MERRILL LYNCH 1-3 YR CONSUMER PRICE
FUND CLASS C1 MONTH T-BILL* GOVERNMENT' INDEX"
----------------- ------------------- -------------------- --------------
<S> <C> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00 10000.00
12/31/95 10750.00 10873.00 11243.00 10400.00
12/31/97 11779.00 12079.00 12588.00 10936.00
8/31/99 12102.00 13110.00 13700.00 11336.00
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST.
* AVERAGE ANNUAL TOTAL RETURN MEASURES NET INVESTMENT INCOME AND CAPITAL GAIN
OR LOSS FROM PORTFOLIO INVESTMENTS, ASSUMING REINVESTMENT OF DIVIDENDS AND
FOR CLASS A SHARES ADJUSTMENT FOR THE MAXIMUM SALES CHARGE OF 3.5%, FOR
CLASS B SHARES ADJUSTMENT FOR THE APPLICABLE CONTINGENT DEFERRED SALES
CHARGE (CDSC) AS FOLLOWS: 1-YEAR, 3%; 5-YEAR, 1%; SINCE INCEPTION, 0% AND
FOR CLASS C SHARES NO ADJUSTMENT FOR SALES CHARGE. THE MAXIMUM CLASS B
SHARE CDSC IS 4%. FOR CLASS C SHARES THERE IS A 1% CDSC ON CERTAIN
REDEMPTIONS WITHIN THE FIRST YEAR OF PURCHASE.
PLEASE NOTE, ON FEBRUARY 5, 1999, KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
WAS REORGANIZED INTO KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND. KEMPER
ADJUSTABLE RATE U.S. GOVERNMENT FUND WAS THEN RENAMED KEMPER SHORT-TERM
U.S. GOVERNMENT FUND, AND ITS OBJECTIVE AND POLICIES WERE CHANGED
ACCORDINGLY. THE DATA IN THE CHART AND THE TABLE PRIOR TO FEBRUARY 5, 1999
REFLECTS THE PERFORMANCE OF THE FUND UNDER ITS FORMER NAMES, KEMPER
ENHANCED GOVERNMENT INCOME FUND (9/1/87 TO 12/31/91) AND KEMPER ADJUSTABLE
RATE U.S. GOVERNMENT FUND (1/1/92 TO 2/5/99) AND THEIR INVESTMENT
OBJECTIVE; AND SHOULD NOT BE CONSIDERED INDICATIVE OF THE FUTURE
PERFORMANCE OF THE FUND UNDER ITS CURRENT NAME AND INVESTMENT OBJECTIVE.
(1) PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS AND ADJUSTMENT FOR THE
APPLICABLE SALES CHARGE IN EFFECT AT THE END OF THE PERIOD. IN COMPARING
THE KEMPER SHORT-TERM U.S. GOVERNMENT FUND PERFORMANCE TO THE INDICES, YOU
SHOULD ALSO NOTE THAT THE FUND'S PERFORMANCE REFLECTS THE MAXIMUM SALES
CHARGE, WHILE NO SUCH CHARGES ARE REFLECTED IN THE PERFORMANCE OF THE
INDICES. BEGINNING WITH THE NEXT ANNUAL REPORT, THE MERRILL LYNCH 1-3 YEAR
GOVERNMENT INDEX, WILL BE SHOWN INSTEAD OF THE SALOMON BROTHERS 6-MONTH
T-BILL INDEX.
* SALOMON BROTHERS 6-MONTH T-BILL INDEX IS AN UNMANAGED INDEX BASED ON THE
AVERAGE MONTHLY YIELD OF A 6-MONTH TREASURY BILL. RATES OF TREASURY
OBLIGATIONS ARE FIXED AT ISSUANCE, AND PAYMENT OF PRINCIPAL AND INTEREST IS
BACKED BY THE U.S. TREASURY. MARKET VALUE WILL GENERALLY FLUCTUATE
INVERSELY WITH INTEREST RATES PRIOR TO MATURITY AND WILL EQUAL PAR AT
MATURITY. DUE TO THEIR SHORT MATURITIES, TREASURY BILLS EXPERIENCE VERY LOW
MARKET VOLATILITY. SOURCE IS SALOMON BROTHERS.
+ THE MERRILL LYNCH 1-3 YEAR GOVERNMENT INDEX IS A TOTAL-RETURN INDEX
CONSISTING OF SHORT-TERM U.S. TREASURY SECURITIES MATURING IN 1 TO 3 YEARS
WITH COUPONS HIGHER THAN 4.25%. IT IS CONSIDERED GENERALLY REPRESENTATIVE
OF THE MARKET FOR THESE SECURITIES. SOURCE IS CDA WIESENBERGER.
++ THE CONSUMER PRICE INDEX IS A STATISTICAL MEASURE OF CHANGE, OVER TIME, IN
THE PRICES OF GOODS AND SERVICES IN MAJOR EXPENDITURE GROUPS FOR ALL URBAN
CONSUMERS. SOURCE IS CDA WIESENBERGER.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT AGENCIES ARMS -- 70%
- --------------------------------------------------------------------------------
FIXED RATE AGENCY SECURITIES 39% 11
- --------------------------------------------------------------------------------
GOVERNMENT BONDS:
SHORT-TERM 43 1
- --------------------------------------------------------------------------------
INTERMEDIATE-TERM 7 5
- --------------------------------------------------------------------------------
CORPORATES 10 3
- --------------------------------------------------------------------------------
CASH EQUIVALENTS 1 10
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/99 ON 8/31/98
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 8/31/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 2.5 years 2.9 years
- --------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER SHORT-TERM U.S. GOVERNMENT FUND
Portfolio of Investments at August 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
INTEREST PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY (c) Notes 5.25 % 2001 $66,200 $65,652
SECURITIES - 39.5% 6.125
2007 5,750 5,731
(Cost: $79,458) 5.50 2009 8,000 7,684
-------------------------------------------------------------------------
79,067
- -------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL Pass-through 7.00 2015-2029 13,787 13,368
MORTGAGE ASSOCIATION - 23.4% certificates 9.50 2016-2020 24 26
(Cost: $48,041) 9.00 2019 45 47
6.00 2029 25,579 25,215
6.50 2028-2029 8,830 8,311
-------------------------------------------------------------------------
46,967
- -------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Fixed rate collateralized 8.50 2005 22,595 22,842
MORTGAGE ASSOCIATION - 13.0% mortgage obligations 6.00 2019 3,200 3,112
(Cost: $26,430) -------------------------------------------------------------------------
25,954
- -------------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Fixed rate collateralized 6.00 2004 5,317 5,229
MORTGAGE CORPORATION - 2.6% mortgage obligations 11.00 2014 4 4
(Cost: $5,389) -------------------------------------------------------------------------
5,233
-------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--78.5%
(Cost: $159,318) 157,221
-------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
(a)CORPORATE OBLIGATIONS - 10.1% American Express Credit 6.40 2005 5,000 4,979
(Cost: $20,701) Account Master Trust
Capital Auto Receivables 5.58 2002 9,000 8,895
Asset Trust
Chase Manhattan Auto 5.80 2003 6,500 6,421
Owner Trust
-------------------------------------------------------------------------
20,295
- -------------------------------------------------------------------------------------------------------------------------
REIGN GOVERNMENT OBLIGATIONS - 10.5% Government Trust 9.25 2001 14,092 14,616
Cost: $21,226) certificates 9.40 2002 6,189 6,388
-------------------------------------------------------------------------
21,004
- -------------------------------------------------------------------------------------------------------------------------
MONEY MARKET (b) Repurchase agreement
INSTRUMENTS - .9% State Street Bank and Trust Company 165 165
(Cost: $1,665) Dated 8/31/99, 5.41%, Due 9/1/99
Short-term notes 1,500 1,500
Federal National Mortgage Association
Yield 5.42%, Due 9/1/99
-------------------------------------------------------------------------
1,665
-------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $202,910) $ 200,185
-------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) The fund may invest up to 35% of total assets in fixed income securities
other than U.S. Government securities.
(b) Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
(c) At August 31, 1999, these securities, in part or in whole, have been
segregated to cover initial margin requirements for open futures contracts.
Based on the cost of investments of $202,725,000 for federal income tax purposes
at August 31, 1999, there was no gross unrealized appreciation, therefore the
gross and net unrealized depreciation on investments was $2,725,000.
At August 31, 1999, open futures contract purchased are as follows (in
thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
AGGREGATE FACE
FUTURES EXPIRATION CONTRACTS VALUE ($) MARKET VALUE ($)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Note September '99 120 13,200 13,240
- ----------------------------------------------------------------------------------------------------------------
Total unrealized appreciation on open futures contract 40
======
</TABLE>
See accompanying Notes to Financial Statements.
10
<PAGE> 11
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER SHORT-TERM U.S. GOVERNMENT FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Short-Term U.S. Government
Fund as of August 31, 1999, the related statement of operations for the year
then ended, the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the fiscal
periods since 1995. These financial statements and financial highlights are the
responsibility of the fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
August 31, 1999, by correspondence with the custodian and broker. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Short-Term U.S. Government Fund at August 31, 1999, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the fiscal periods since 1995, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 19, 1999
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $202,910) $200,185
- ------------------------------------------------------------------------
Cash 1
- ------------------------------------------------------------------------
Receivable for:
Fund shares sold 114
- ------------------------------------------------------------------------
Interest 2,092
- ------------------------------------------------------------------------
Daily variation margin on open futures contracts 17
- ------------------------------------------------------------------------
TOTAL ASSETS 202,409
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES
- ------------------------------------------------------------------------
Payable for:
Fund shares redeemed 445
- ------------------------------------------------------------------------
Dividends 158
- ------------------------------------------------------------------------
Management fee 123
- ------------------------------------------------------------------------
Distribution services fee 30
- ------------------------------------------------------------------------
Administrative services fee 45
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 118
- ------------------------------------------------------------------------
Trustees' fees and other 76
- ------------------------------------------------------------------------
Total liabilities 995
- ------------------------------------------------------------------------
NET ASSETS, AT MARKET VALUE $201,414
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income $ 207
- ------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investments (2,725)
- ------------------------------------------------------------------------
Futures 40
- ------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (12,248)
- ------------------------------------------------------------------------
Paid-in capital 216,140
- ------------------------------------------------------------------------
NET ASSETS, AT MARKET VALUE $201,414
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share ($142,776 /
17,876 shares outstanding) $7.99
- ------------------------------------------------------------------------
Maximum offering price per share (net asset value, plus
2.89% of net asset value or 2.75% of offering price) $8.22
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($50,573 /
6,311 shares outstanding) $8.01
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($8,065 /
1,005 shares outstanding) $8.02
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended August 31, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
NET INVESTMENT INCOME
- -----------------------------------------------------------------------
Interest income $ 8,975
- -----------------------------------------------------------------------
Expenses:
Management fee 889
- -----------------------------------------------------------------------
Distribution services fee 357
- -----------------------------------------------------------------------
Administrative services fee 364
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 604
- -----------------------------------------------------------------------
Trustees' fees 24
- -----------------------------------------------------------------------
Reports to shareholders 107
- -----------------------------------------------------------------------
Auditing 35
- -----------------------------------------------------------------------
Legal 30
- -----------------------------------------------------------------------
Other 13
- -----------------------------------------------------------------------
Total expenses 2,423
- -----------------------------------------------------------------------
NET INVESTMENT INCOME 6,552
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized gain (loss) from:
Investments (3,505)
- -----------------------------------------------------------------------
Futures 361
- -----------------------------------------------------------------------
(3,144)
- -----------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on:
- -----------------------------------------------------------------------
Investments (2,383)
- -----------------------------------------------------------------------
Futures 40
- -----------------------------------------------------------------------
(2,343)
- -----------------------------------------------------------------------
Net gain (loss) on investments (5,487)
- -----------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 1,065
- -----------------------------------------------------------------------
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------
1999 1998
- -------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 6,552 3,564
- -------------------------------------------------------------------------------------------
Net realized gain (loss) (3,144) (218)
- -------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) (2,343) (589)
- -------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 1,065 2,757
- -------------------------------------------------------------------------------------------
Distribution from net investment income (6,480) (3,759)
- -------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions 137,522 (11,658)
- -------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 132,107 (12,660)
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------
Beginning of year 69,307 81,967
- -------------------------------------------------------------------------------------------
END OF YEAR $201,414 69,307
- -------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF
THE FUND Kemper Short-Term U.S. Government 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. The fund
is organized as a Massachusetts business trust. The
fund was previously known as Kemper Adjustable Rate
U.S. Government Fund until February 5, 1999, when
it revised its investment policies. On February 5,
1999, the fund acquired the net assets of Kemper
Short-Intermediate Government Fund, amounting to
$169.8 million, and issued 20.8 million shares in a
tax-free reorganization. The aggregate net assets
of the fund immediately after the reorganization
were $234.8 million.
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 August 31, 1999) are offered to a limited
group of investors, are not subject to initial or
contingent deferred sales charges and generally
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.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES SECURITY VALUATION. Investments are stated at
value. 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
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
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.
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 as a temporary substitute
for purchasing selected investments and to lock in
the purchase price of a security which it expects
to purchase in the near future. In addition, the
fund also sold interest rate futures to hedge
against declines in the value of portfolio
securities as a temporary substitute for selling
selected investments.
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. 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.
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 August 31, 1999, the fund had a net tax basis
loss carryforward of approximately $9,204,000,
which may be applied against any realized net
taxable gains of each succeeding year until fully
utilized or it will expire during the period 1999
through 2007. In addition, from November 1, 1997
through August 31, 1999 the fund incurred
approximately $2,820,000 of net realized capital
losses. As permitted by tax regulations, the fund
intends to elect to defer these losses and treat
them as arising in the fiscal year ended August 31,
2000.
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.
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
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 and premiums
are amortized for both tax and financial reporting
purposes.
- --------------------------------------------------------------------------------
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 $889,000 for the year
ended August 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 year ended August 31,
1999 are $5,000.
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 year ended August 31, 1999 are $523,000.
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 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 year ended August 31, 1999 are
$364,000.
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 transfer agency fees of $345,000 for
the year ended August 31, 1999.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. For the year ended August 31, 1999,
the fund made no direct payments to its officers
and incurred trustees' fees of $24,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended August 31, 1999, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $805,279
Proceeds from sales 865,760
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1999 1998
----------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 7,809 $ 63,404 1,939 $ 15,939
------------------------------------------------------------------------------
Class B 1,411 12,233 540 4,466
------------------------------------------------------------------------------
Class C 638 5,192 172 1,427
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 465 3,760 296 2,440
------------------------------------------------------------------------------
Class B 141 1,146 32 261
------------------------------------------------------------------------------
Class C 21 172 7 56
------------------------------------------------------------------------------
SHARES REDEEMED
Class A (11,507) (93,320) (3,734) (30,799)
------------------------------------------------------------------------------
Class B (2,401) (19,499) (516) (4,267)
------------------------------------------------------------------------------
Class C (657) (5,347) (143) (1,181)
------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 1,961 15,888 81 669
------------------------------------------------------------------------------
Class B (1,956) (15,888) (81) (669)
------------------------------------------------------------------------------
SHARES ISSUED IN ACQUISITION
Class A 11,717 95,496 -- --
------------------------------------------------------------------------------
Class B 8,251 67,407 -- --
------------------------------------------------------------------------------
Class C 840 6,878 -- --
------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $ 137,522 $(11,658)
------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------
CLASS A
YEAR ENDED AUGUST 31,
-------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------
Net asset value, beginning of year $8.19 8.31 8.22 8.30 8.33
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .38 .41 .45 .46 .48
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.22) (.11) .09 (.09) (.04)
- --------------------------------------------------------------------------------
Total from investment operations .16 .30 .54 .37 .44
- --------------------------------------------------------------------------------
Less distribution from net investment
income .36 .42 .45 .45 .47
- --------------------------------------------------------------------------------
Net asset value, end of year $7.99 8.19 8.31 8.22 8.30
- --------------------------------------------------------------------------------
TOTAL RETURN 1.98% 3.68 6.75 4.55 5.52
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Expenses 1.24% 1.36 1.25 1.15 1.10
- --------------------------------------------------------------------------------
Net investment income 4.27% 4.79 5.50 5.49 5.76
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------
CLASS B
YEAR ENDED AUGUST 31,
-------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------
Net asset value, beginning of year $8.21 8.32 8.23 8.31 8.32
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .31 .36 .39 .40 .43
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.22) (.11) .09 (.09) (.04)
- --------------------------------------------------------------------------------
Total from investment operations .09 .25 .48 .31 .39
- --------------------------------------------------------------------------------
Less distribution from net investment
income .29 .36 .39 .39 .40
- --------------------------------------------------------------------------------
Net asset value, end of year $8.01 8.21 8.32 8.23 8.31
- --------------------------------------------------------------------------------
TOTAL RETURN 1.10% 3.06 5.96 3.79 4.84
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Expenses 2.08% 1.99 1.93 1.89 1.85
- --------------------------------------------------------------------------------
Net investment income 3.43% 4.16 4.82 4.75 5.01
- --------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------
CLASS C
YEAR ENDED AUGUST 31,
---------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------
Net asset value, beginning of year $8.22 8.33 8.24 8.32 8.33
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .32 .36 .39 .40 .43
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.22) (.11) .09 (.09) (.04)
- ---------------------------------------------------------------------------------------
Total from investment operations .10 .25 .48 .31 .39
- ---------------------------------------------------------------------------------------
Less distribution from net investment income .30 .36 .39 .39 .40
- ---------------------------------------------------------------------------------------
Net asset value, end of year $8.02 8.22 8.33 8.24 8.32
- ---------------------------------------------------------------------------------------
TOTAL RETURN 1.24% 3.10 5.98 3.82 4.89
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------
Expenses 1.94% 1.95 1.88 1.89 1.79
- ---------------------------------------------------------------------------------------
Net investment income 3.57% 4.20 4.87 4.75 5.07
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -----------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $201,414 69,307 81,967 94,477 129,757
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate 336% 149 249 272 308
- -----------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges. Per share
data for the year ended August 31, 1999 is determined based on average shares
outstanding.
TAX INFORMATION
Please consult a tax adviser if you have questions about federal or state income
tax laws, or how to prepare your tax returns. If you have specific questions
about your Kemper Fund account, please call 1-800-621-1048.
19
<PAGE> 20
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
JOHN W. BALLANTINE MARK S. CASADY RICHARD L. VANDENBURG
Trustee President Vice President
LEWIS A. BURNHAM PHILIP J. COLLORA LINDA J. WONDRACK
Trustee Vice President and Vice President
Secretary
DONALD L. DUNAWAY MAUREEN E. KANE
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
ROBERT B. HOFFMAN CAROLINE PEARSON
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 KATHRYN L. QUIRK
Vice President Vice President
SHIRLEY D. PETERSON
Trustee
CORNELIA SMALL
Trustee
WILLIAM P. SOMMERS
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
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 UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com
[KEMPER FUNDS LOGO] LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
PRINTED ON RECYCLED PAPER IN THE U.S.A.
THIS REPORT IS NOT TO BE DISTRIBUTED
UNLESS PRECEDED OR ACCOMPANIED BY A
KEMPER INCOME FUND PROSPECTUS.
KSTGF - 2 10/25/99 1090150
