<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED FEBRUARY 28, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEEKS HIGH CURRENT INCOME AND PRESERVATION OF CAPITAL.
KEMPER SHORT-TERM
U.S. GOVERNMENT FUND
"... In short, the shareholders approved
a structure that should help us maximize
the fund's potential benefits. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
PORTFOLIO STATISTICS
8
SHAREHOLDERS' MEETING
9
PORTFOLIO OF INVESTMENTS
11
FINANCIAL STATEMENTS
13
NOTES TO FINANCIAL STATEMENTS
17
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER SHORT-TERM U.S. GOVERNMENT
FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED FEBRUARY 28, 1999
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 1.23
CLASS B 0.87
CLASS C 0.92
LIPPER SHORT-TERM GOVERNMENT FUND CATEGORY AVERAGE* 1.68
- --------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not guarantee future results.
investment returns and principal values will fluctuate so that shares, when
redeemed, may be worth more or less than original cost.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
2/28/99 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER SHORT-TERM U.S. GOVERNMENT FUND CLASS A $8.11 $8.19
- --------------------------------------------------------------------------------
KEMPER SHORT-TERM U.S. GOVERNMENT FUND CLASS B $8.13 $8.21
- --------------------------------------------------------------------------------
KEMPER SHORT-TERM U.S. GOVERNMENT FUND CLASS C $8.14 $8.22
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER SHORT-TERM U.S. GOVERNMENT
FUND RANKINGS AS OF 2/28/99*
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER SHORT-TERM GOVERNMENT FUNDS CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #26 of 28 funds #28 of 28 funds #28 of 30 funds
- --------------------------------------------------------------------------------
5-YEAR #20 of 21 funds N/A N/A
- --------------------------------------------------------------------------------
10-YEAR #2 of 3 funds N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
* Lipper Analytical Services, Inc. returns and rankings are based upon changes
in net asset value with all dividends reinvested and do not include the effect
of sales charges and, if they had, results may have been less favorable.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF FEBRUARY 28, 1999.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME: $.1800 $.1513 $.1554
- --------------------------------------------------------------------------------
FEBRUARY DIVIDEND: $.0300 $.0232 $.0250
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE+: 4.44% 3.42% 3.69%
- --------------------------------------------------------------------------------
SEC YIELD+: 4.30% 3.43% 3.66%
- --------------------------------------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on February 28, 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 February 28, 1999, shown as an annualized percentage of the
maximum offering price on that date. the SEC yield is computed in accordance
with a standardized method prescribed by the Securities and Exchange
Commission. Yields and distribution rates are historical and will fluctuate.
- --------------------------------------------------------------------------------
TERMS TO KNOW
- --------------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGES (ARMS) Mortgages whose interest rates adjust
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.
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.
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.
<PAGE> 3
- --------------------------------------------------------------------------------
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
[SILVIA PHOTO]
DR. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS.
SILVIA HOLDS A BACHELOR'S DEGREE AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND A MASTER'S DEGREE IN ECONOMICS FROM BROWN UNIVERSITY IN
PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER INVESTMENTS, HE WAS WITH
THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $280 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER:
If you think the first quarter of 1999 has seemed rather anticlimactic compared
to 1998, you're not alone. The year began with a quiet bang in the U.S. stock
market, with the Dow Jones Industrial Average hitting an all-time high. While
stock market volatility has continued, it seems to be phasing investors less and
less. Even global events are being taken in stride. Europe's Economic and
Monetary Union (EMU) was launched without much notice. And when Brazil's economy
recently took a turn for the worse, Wall Street was only mildly concerned. Also
contributing to today's laid-back attitude -- the impeachment trial of President
Clinton has all but fizzled into obscurity without significantly affecting the
U.S. economy or markets.
Indeed, the U.S. economy looks good. The fundamentals by which we measure the
state of the economy remain strong. We continue to see solid consumer spending
growth, continued investment spending and low inflation. This suggests that
there are no internal problems for continued U.S. economic growth.
Additionally, we can expect the Federal Reserve Board to keep short-term
interest rates steady. At both the February 3 and March 30 meetings, the Fed
left interest rates unchanged. It is likely that this "hands-off" approach will
continue at the Fed's May 18 meeting, particularly if U.S. inflation remains in
check and there is a degree of slowdown in the U.S. economy. Caution is
warranted here, though, if growth continues far above the Fed's view of
noninflationary growth. In that case, the Fed could adopt a bias to tighten.
The U.S. budget surplus for 1998 came in at $60 billion, with another budget
surplus of between $95 billion and $105 billion expected for fiscal 1999. Growth
in the nation's gross domestic product (GDP), which represents the total value
of all goods and services produced within the U.S. economy, has remained steady.
GDP, driven by consumer spending, is expected to grow at an annualized rate of
approximately 3 to 3.5 percent in 1999. We also anticipate modest capital
spending and inventory growth.
The consumer price index (CPI) remains in the vicinity of 2 percent. However,
energy prices, which were down 6 to 7 percent last year and helped keep the CPI
down, are unlikely to remain so low this year. For 1999, inflation should
register at 2 to 2.5 percent.
Employment growth has slowed to 2 percent, but combined with real wage growth
of between 2 percent and 2.5 percent, produces real income growth between 4
percent and 5 percent. In addition, gains in household net worth, which tends to
fuel consumer spending, are on the rise. Banks appear to be only a little less
willing to lend in 1999, so the threat of a general credit crunch is minimal. As
a result of all these factors, consumer spending should continue to grow this
year.
On a less positive note, two factors need to be watched. First, corporate
profits have slowed in 1999, growing at a rate of 1 percent to 3 percent on a
year-over-year basis. As a result, we may see a slowdown in capital spending
this year. Second, the current U.S. account deficit is rising, which suggests
the U.S. economy is increasingly dependent on foreign capital inflows to finance
its economic activity. This is acceptable as long as foreign money continues to
flow in. But if foreign investors, particularly the Japanese, no longer wish to
invest in the United States, we can expect pressure on interest rates and the
dollar, as well as increased uncertainty and market volatility.
Given the events of the last two years, investors may be comforted by the fact
that the U.S. markets and economy have withstood the test of tumultuous times.
While certain countries, such as Malaysia, Indonesia, Brazil and Russia, are
still suffering from economic crises, others, including the Philippines, South
Korea, Thailand and China, continue to recover and grow. As long as the Fed and
the Group of Eight leading industrial nations (G8) are committed to avoiding
recession on national and global levels respectively, investors have a good
chance of experiencing a more stable economic environment.
At home, there has been somewhat of a slowdown in manufacturing, as reduced
U.S. exports reflect foreign economic turmoil. But the global impact of the
Asian crisis still has not hit the U.S. as hard as some analysts expected.
Indeed, Asian turmoil has not affected U.S. export
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.
<TABLE>
<CAPTION>
NOW( 3/31/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Ten Year Treasury Rate 5.23 4.81 5.65 6.69
Prime Rate 7.75 8.49 8.50 8.30
Inflation* 1.79 1.43 1.38 2.76
The U.S. Dollar* -0.54 4.31 4.88 8.58
Capital goods orders* 2.35 11.44 8.10 5.52
Industrial production * 1.88 3.56 5.05 5.86
Employment growth* 2.21 2.50 2.57 2.52
</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 February 28, 1999.
Source: Economics Department, Scudder Kemper Investments, Inc.
volumes as much as it has lowered import prices and helped reduce global
interest rates.
Ultimately, Europe's recently inaugurated EMU is likely to bring more
flexibility and growth potential for the region. European equities may be the
beneficiaries of increased spending, as governments seek to ease fiscal and
monetary policy, foster growth and reduce unemployment. It's going to be
interesting to watch as the monetary union continues to evolve. One lesson for
investors -- particularly those with international holdings -- is to diversify.
With the democratization of the world, the globalization of trade and more free
market economies at our fingertips, international markets are becoming more and
more attractive. But if you subscribe to the concept of international
investment, be cautious -- don't put all of your investment eggs in one basket
(i.e. country or region).
Other key elements to watch in 1999: the race for the next presidency and
information technology preparedness for the year 2000. And remember, while it is
nearly impossible to predict the next big crisis, preparedness through
diversification and risk control are key.
Thank you for choosing to invest with Kemper Funds. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ JOHN E. SILVIA
JOHN E. SILVIA
The information contained in this piece has been taken from sources believed to
be reliable, but the accuracy of the information is not guaranteed. The opinions
and forecasts expressed are those of Dr. John Silvia as of April 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.
4
<PAGE> 5
- --------------------------------------------------------------------------------
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
[VANDENBERG PHOTO]
RICHARD VANDENBERG JOINED SCUDDER KEMPER INVESTMENTS, INC. IN MARCH 1996 AND IS
A MANAGING DIRECTOR. HE IS ALSO LEAD PORTFOLIO MANAGER OF KEMPER SHORT-TERM U.S.
GOVERNMENT FUND. VANDENBERG HAS 25 YEARS OF FIXED-INCOME PORTFOLIO MANAGEMENT
EXPERIENCE. HE RECEIVED A BACHELOR'S DEGREE AND M.B.A. FROM THE UNIVERSITY OF
WISCONSIN.
[DUGENSKE PHOTO]
JOHN DUGENSKE IS A VICE PRESIDENT OF SCUDDER KEMPER INVESTMENTS, JOINING THE
FIRM IN 1998. HE IS ALSO A PORTFOLIO MANAGER FOR KEMPER SHORT-TERM U.S.
GOVERNMENT FUND, HE EARNED HIS BACHELOR'S AND MASTER'S DEGREES IN MECHANICAL
ENGINEERING AND HIS M.B.A. FROM THE UNIVERSITY OF ILLINOIS.
[DOLAN PHOTO]
SCOTT DOLAN JOINED SCUDDER KEMPER INVESTMENTS IN 1989 AND IS A VICE PRESIDENT.
HE IS ALSO A PORTFOLIO MANAGER FOR KEMPER SHORT-TERM U.S. GOVERNMENT FUND. HE
RECEIVED A BACHELOR'S DEGREE IN BUSINESS ADMINISTRATION MAJORING IN FINANCE FROM
NORTHEASTERN UNIVERSITY AND AN MS DEGREE IN FINANCE FROM BOSTON COLLEGE.
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.
ON DECEMBER 17, 1998, SHAREHOLDERS OF KEMPER ADJUSTABLE RATE U.S. GOVERNMENT
FUND APPROVED A NEW INVESTMENT OBJECTIVE AND NEW POLICIES FOR THE FUND. ON
JANUARY 15, 1999, SHAREHOLDERS OF KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
APPROVED A REORGANIZATION WHEREBY KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
AND KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND WERE EFFECTIVELY MERGED. THE
RESULTING COMBINED FUND, KEMPER SHORT-TERM U.S. GOVERNMENT FUND, WILL PURSUE
HIGH CURRENT INCOME AND PRESERVATION OF CAPITAL. THE REORGANIZATION OCCURRED ON
FEBRUARY 5, 1999. WE EXPECT THE COMBINED FUND TO PROVIDE AN ATTRACTIVE TRADE-OFF
BETWEEN RISK AND RETURN FOR CONSERVATIVE INVESTORS, AND THAT THE FUND WILL
PURSUE ITS OBJECTIVE WITH POTENTIALLY LOWER EXPENSES BY VIRTUE OF ITS INCREASED
ASSET SIZE. BELOW THE FUND'S MANAGERS DISCUSS THEIR STRATEGIES FOR MANAGING THE
COMBINED FUND, AND THEIR OUTLOOK FOR THE COMING MONTHS.
Q NORMALLY, WE'D START OUR QUESTION-AND-ANSWER SESSION WITH A WORD ABOUT
THE FUND'S PERFORMANCE. BUT SINCE THE FUND WAS REORGANIZED NEAR THE END OF THE
REPORTING PERIOD, IT'S A BIT PREMATURE TO TALK ABOUT RETURNS VERSUS ITS PEERS.
INSTEAD, COULD YOU RECAP HOW AND WHY THE TWO FUNDS, WHICH THIS TEAM ALSO
MANAGED, WERE REORGANIZED INTO KEMPER SHORT-TERM U.S. GOVERNMENT FUND?
A Certainly. We'll start with the Short-Intermediate Government Fund.
Despite a reasonably good record of investment performance, the fund was unable
to garner sufficient assets to operate efficiently. This was largely due to the
fact that shorter-term and longer-term securities have offered a better
trade-off between risk and return than intermediate-term securities over the
past few years. So there wasn't an overwhelming amount of investor interest in
the fund.
Also, because of its modest asset size, the fund's relatively small
number of investors were required to shoulder the costs associated with
maintaining a mutual fund, including management fees, the expense of producing
shareholder reports, the cost of record-keeping and providing statements, etc.
In the case of Kemper Adjustable Rate U.S. Government Fund, changes were
needed because adjustable rate mortgages (ARMs) are not attractive investments
at the present time. Currently, they are experiencing a "no-win" situation: no
supply, no demand. As interest rates have declined over the last few years, ARM
owners have tended to refinance their ARMs into fixed-rate mortgages to lock in
an attractive low rate. Therefore, the pool of ARMs in which the fund could
invest was shrinking. In addition, as assets came into the fund when its ARMs
were paid ahead of schedule, there were very few attractively priced ARMs
available in which to reinvest the proceeds.
Therefore, the Boards of the funds recommended a two-step plan to help
resolve these issues: 1) combine the funds to provide the "critical mass" of
assets necessary to operate efficiently, and 2) adopt in
5
<PAGE> 6
- --------------------------------------------------------------------------------
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
the merged fund a wider range of investment options and an average maturity
range of 1-3 years, which may enhance the fund's potential to perform well in
volatile markets.
The goal was to create a fund that will pursue high income with low
volatility of principal, will have broader diversification and because of its
increased size, have the opportunity to operate at a lower cost.
Q HOW DO YOU PLAN TO RUN THE COMBINED FUND?
A The fund will typically have a duration of about 1.5 years, which
provides much of the yield of longer-maturity instruments, but with
substantially less potential risk. We also plan to make the most of the fund's
flexibility. We can look for opportunities with a variety of mortgage-backed
securities, asset-backed securities and U.S. Treasuries. Wherever we believe
the trade-off of risk and return is most attractive, we have the ability to
invest and get the potentially best possible balance for our shareholders.
For example, we had a slightly heavier bias towards mortgages than U.S.
Treasuries earlier in the year, but mortgages have rallied to the point where we
feel we've squeezed most of the value from them. So we're looking for attractive
possibilities in the short end of the U.S. Treasury market. In addition, we
believe the changes approved by the fund's shareholders will enable us to make
the most of our management style.
Q IN WHAT WAY?
A Our approach at Scudder Kemper Investments is to monitor the economy and
the markets carefully and take very measured risks, evaluating every security in
terms of its risk/reward potential. This close attention to detail and our
ability to eke out incremental value even in tight markets is where we believe
we can add the most value. We have a lot of experience managing assets using
this approach, and the fund's flexibility now gives us more ways to make our
management style benefit investors.
Another advantage is that, compared to the former ARM fund, the merged
fund's benchmark will be much more clearly defined. Adjustable rate funds vary
widely in terms of their ARM requirements and their ability to invest in other
types of securities. Therefore, it was difficult in the past to compare our
performance to our peer group and assess how well we were doing. It will be much
easier to measure Kemper Short-Term U.S. Government Fund's performance versus
its peers. And we'll be able to establish a far more accurate benchmark against
which we can monitor the fund's results and adjust the portfolio to improve
those results. For example, the fund's Lipper category should change from the
ARM category to the Short-Term Government Fund category. These funds are far
more similar to each other than ARM funds.
In short, the shareholders approved a structure that should help us
maximize the fund's potential benefits. We're confident that they will be very
pleased with their decision to support the proposal to change the name of the
fund, investment objectives and fund policies.
Q WHAT'S YOUR OUTLOOK FOR THE SHORT-TERM GOVERNMENT MARKET?
A Over the last six months, the government bond market has experienced a
shift from a preoccupation with events overseas to closer attention to the
economy at home. There has been a lot of price volatility associated with this
change in focus, even at the usually docile short end of the market. We believe
volatility will continue to trouble the market as investors wrestle with the
tension between a weak global economy and a strong U.S. economy. Inflation,
however, remains subdued and commodity prices for the most part remain
historically low. So while bond prices and yields may continue to bounce around,
we think they'll do so within a broad range and that no fundamental change in
the interest rate environment is likely. Again, the fund's flexibility enhances
our ability to use market turbulence to our advantage. If certain securities
begin to look very rich or very cheap in light of investor overreaction, we now
have greater opportunity to make such anomalies benefit our shareholders.
6
<PAGE> 7
- --------------------------------------------------------------------------------
PORTFOLIO STATISTICS
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 2/28/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
FIXED RATE AGENCY SECURITIES 38% 11%
- --------------------------------------------------------------------------------
GOVERNMENT BONDS:
- --------------------------------------------------------------------------------
SHORT-TERM 29 1
- --------------------------------------------------------------------------------
INTERMEDIATE-TERM 14 5
- --------------------------------------------------------------------------------
CASH EQUIVALENTS 11 10
- --------------------------------------------------------------------------------
CORPORATES 8 3
- --------------------------------------------------------------------------------
GOVERNMENT AGENCIES ARMS -- 70
================================================================================
100% 100%
</TABLE>
[PIE CHART] [PIE CHART] - Fixed rate agency securities
ON 2/28/99 ON 8/31/98 Government bonds
- Short-term
- intermediate-term
- Cash equivalents
- Corporates
- Government agencies ARMs
- --------------------------------------------------------------------------------
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 2/28/99 ON 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 3.4 years 2.9 years
================================================================================
</TABLE>
*Portfolio composition and holdings are subject to change.
7
<PAGE> 8
- --------------------------------------------------------------------------------
SHAREHOLDERS' MEETING
- --------------------------------------------------------------------------------
SPECIAL SHAREHOLDERS' MEETING
On December 17, 1998, a special shareholders' meeting was held and adjourned to
January 15, 1999. Kemper Short-Term U.S. Government Fund shareholders were asked
to vote on two separate issues: approval of the new Investment Management
Agreement between the fund and Scudder Kemper Investments, Inc., and to modify
or eliminate certain policies and to eliminate the shareholder approval
requirements as to certain other matters. The following are the results.
1) Approval of the new Investment Management Underwriting of securities
Agreement between the fund and Scudder
Kemper Investments, Inc. This item was For Against Abstain
approved.
3,632,503 315,320 533,973
For Against Abstain
Investment in real estate
5,112,330 194,546 443,067
For Against Abstain
2) To modify or eliminate certain policies
and to eliminate the shareholder approval 3,625,201 322,623 533,973
requirements as to certain other matters.
These items were approved. Purchase of commodities
New investment objectives and policies For Against Abstain
For Against Abstain 3,623,966 323,857 533,973
3,631,835 315,989 533,973 Lending
Investment policies For Against Abstain
For Against Abstain 3,620,872 326,952 533,973
3,631,835 315,989 533,973 Margin purchases and short sales
Diversification For Against Abstain
For Against Abstain 3,616,131 331,692 533,973
3,632,503 315,320 533,973 Pledging of assets
Borrowing For Against Abstain
For Against Abstain 3,620,736 327,088 533,973
3,626,554 321,269 533,973 Purchases of securities
Senior securities For Against Abstain
For Against Abstain 3,630,495 317,329 533,973
3,632,503 315,320 533,973 Purchases of options and warrants
Concentration For Against Abstain
For Against Abstain 3,613,927 333,896 533,973
3,632,503 315,320 533,973
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
Kemper Short-term U.S. Government Fund
Portfolio of Investments at February 28, 1999 (unaudited)
(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 SECURITIES - 42.9%
(Cost: $108,120)
Notes 4.625% 2000 $58,000 $ 57,465
5.375 2000 14,200 14,240
5.75 2002 18,000 18,276
6.625 2007 6,000 6,471
Bonds 8.75 2008 9,500 10,754
---------------------------------------------------------------------
107,206
- -------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION - 14.0%
(Cost: $35,267)
Adjustable rate
mortgages(a) 6.625 2022 21 21
Pass-through
certificates 7.00 2015-2029 34,276 34,717
9.50 2016-2018 22 23
11.00 2018 243 264
9.00 2019 68 73
9.50 2020 8 9
---------------------------------------------------------------------
35,107
- -------------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN
MORTGAGE CORPORATION - 13.7%
(Cost: $34,451)
Fixed rate
collateralized 11.00 2014 6 6
mortgage obligations 5.962 2020 9,730 9,770
6.075 2021 18,636 18,723
6.00 2028 5,851 5,862
---------------------------------------------------------------------
34,361
- -------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL
MORTGAGE ASSOCIATION - 10.3%
(Cost: $26,164)
Fixed rate
collateralized 8.50 2005 10,000 10,269
mortgage obligations 5.50 2008 12,463 12,221
6.00 2019 3,200 3,186
---------------------------------------------------------------------
25,676
---------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--80.9%
(Cost: $204,002) 202,350
---------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
(b)CORPORATE OBLIGATIONS - 8.2%
(Cost: $20,609)
American Express Credit
Account Master Trust 6.40 2005 4,920 5,017
Capital Auto Receivables
Asset Trust 5.58 2002 9,000 8,993
Chase Manhattan Auto
Owner Trust 5.80 2003 6,500 6,527
---------------------------------------------------------------------
20,537
- -------------------------------------------------------------------------------------------------------------------------
MONEY MARKET
INSTRUMENTS - 10.9%
(Cost: $27,138)
Yield--4.72% to 4.75%
Due--March 1999
Federal Home Loan Bank 7,000 6,988
Federal Home Loan Mortgage Corp. 7,000 6,978
Federal National Mortgage Association 13,200 13,172
---------------------------------------------------------------------
27,138
---------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $251,749) $250,025
---------------------------------------------------------------------
</TABLE>
See accompanying Notes to Portfolio of Investments.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Adjustable rate security. The interest rate on this security varies with
its selected index at specified intervals and the rate shown above is the
effective rate on February 28, 1999. The date shown represents the final
maturity of the obligation.
(b) The fund may invest up to 35% of total assets in fixed income securities
other than U.S. Government Securities.
Based on the cost of investments of $251,749,000 for federal income tax purposes
at February 28, 1999, the gross unrealized appreciation was $11,000, the gross
unrealized depreciation was $1,735,000 and the net unrealized depreciation on
investments was $1,724,000.
See accompanying Notes to Financial Statements.
10
<PAGE> 11
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $251,749) $250,025
- ------------------------------------------------------------------------
Cash 159
- ------------------------------------------------------------------------
Receivable for:
Fund shares sold 2,098
- ------------------------------------------------------------------------
Investments sold 14,807
- ------------------------------------------------------------------------
Interest 2,117
- ------------------------------------------------------------------------
TOTAL ASSETS 269,206
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Payable for:
Fund shares redeemed 1,910
- ------------------------------------------------------------------------
Investments purchased 35,453
- ------------------------------------------------------------------------
Management fee 82
- ------------------------------------------------------------------------
Distribution services fee 39
- ------------------------------------------------------------------------
Administrative services fee 31
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 129
- ------------------------------------------------------------------------
Trustees' fees and other 116
- ------------------------------------------------------------------------
Total liabilities 37,760
- ------------------------------------------------------------------------
NET ASSETS $231,446
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $243,968
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (10,655)
- ------------------------------------------------------------------------
Net unrealized depreciation on investments (1,543)
- ------------------------------------------------------------------------
Net investment loss (324)
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $231,446
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share ($150,829 /
18,600 shares outstanding) $8.11
- ------------------------------------------------------------------------
Maximum offering price per share (net asset value, plus
2.89% of net asset value or 2.75% of offering price) $8.34
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($71,952 /
8,845 shares outstanding) $8.13
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($8,665 /
1,064 shares outstanding) $8.14
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- ----------------------------------------------------------------------------------------------------------
Interest income $ 2,374
- ----------------------------------------------------------------------------------------------------------
Expenses:
Management fee 231
- ----------------------------------------------------------------------------------------------------------
Distribution services fee 63
- ----------------------------------------------------------------------------------------------------------
Administrative services fee 92
- ----------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 153
- ----------------------------------------------------------------------------------------------------------
Professional fees 40
- ----------------------------------------------------------------------------------------------------------
Reports to shareholders 45
- ----------------------------------------------------------------------------------------------------------
Trustees' fees and other 20
- ----------------------------------------------------------------------------------------------------------
Total expenses 644
- ----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,730
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
- ----------------------------------------------------------------------------------------------------------
Net realized loss on sales of investments (743)
- ----------------------------------------------------------------------------------------------------------
Change in net unrealized depreciation on investments (1,382)
- ----------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on future
transactions 181
- ----------------------------------------------------------------------------------------------------------
Change in net unrealized depreciation (1,301)
- ----------------------------------------------------------------------------------------------------------
Net loss on investments (1,944)
- ----------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (214)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28, 1999 YEAR ENDED
(UNAUDITED) AUGUST 31, 1998
- ----------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 1,730 3,564
- ----------------------------------------------------------------------------------------------------------
Net realized loss (743) (218)
- ----------------------------------------------------------------------------------------------------------
Change in net unrealized depreciation (1,201) (589)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (214) 2,757
- ----------------------------------------------------------------------------------------------------------
Distribution from net investment income (2,054) (3,759)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions 164,407 (11,658)
- ----------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 162,139 (12,660)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------------------------------
Beginning of period 69,307 81,967
- ----------------------------------------------------------------------------------------------------------
END OF PERIOD $231,446 69,307
- ----------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Short-Term U.S. Government Fund (the "fund")
is an open-end management investment company
organized as a business trust under the laws of
Massachusetts. The fund was previously known as
Kemper Adjustable Rate U.S. Government Fund until
February 5, 1999, when it revised its investment
policies and acquired the net assets of Kemper
Short-Intermediate Government Fund in a tax-free
exchange.
The fund offers four classes of shares. Class A
shares are sold to investors subject to an initial
sales charge. Class B shares are sold without an
initial sales charge but are subject to higher
ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C Shares do not convert
into another class. Class I shares (none sold
through February 28, 1999) are offered to a limited
group of investors, are not subject to initial or
contingent deferred sales charges and typically
have lower ongoing expenses than other classes.
Differences in class expenses will result in the
payment of different per share income dividends by
class. All shares of the fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES SECURITY VALUATION. Investments are stated at
value. Portfolio debt securities with remaining
maturities greater than sixty days are valued by
pricing agents approved by the officers of the
fund, 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. Futures contracts are
valued at the most recent settlement price. All
other securities are valued at their fair value as
determined in good faith by the Valuation Committee
of the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis and includes discount
amortization on all fixed income securities and
premium amortization on mortgage-backed securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the close of the Exchange. The net
asset value per share is determined separately for
each class by dividing the fund's net assets
attributable to that class by the number of shares
of the class outstanding.
FEDERAL INCOME TAXES. The fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies, and to distribute
all of its taxable income to its
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
shareholders. Accordingly, the fund paid no federal
income taxes and no federal income tax provision
was required.
At August 31, 1998, the fund had a net tax basis
loss carryforward of approximately $9,652,000,
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 2006. In addition, from November 1, 1997
through August 31, 1998 the fund incurred
approximately $125,000 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,
1999.
DIVIDENDS TO SHAREHOLDERS. The fund declares and
pays dividends of net investment income monthly and
any net realized capital gains annually, which are
recorded on the ex-dividend date. Dividends are
determined in accordance with income tax principles
which may treat certain transactions differently
than generally accepted accounting principles.
- --------------------------------------------------------------------------------
3 TRANSACTIONS
WITH AFFILIATES MANAGEMENT AGREEMENT. The fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper), and pays a monthly investment
management fee of 1/12 of the annual rate of .55%
of the first $250 million of average daily net
assets declining to .40% of average daily net
assets in excess of $12.5 billion. The fund
incurred a management fee of $231,000 for the six
months ended February 28, 1999.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the six months ended February
28, 1999 are $4,000.
For services under the distribution services
agreement, the fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares pursuant to separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the six months ended February 28, 1999 are
$110,000.
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 six months ended February 28, 1999 are
$92,000.
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 shareholder services fees of $113,000
for the six months ended February 28, 1999.
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. For the six months ended February
28, 1999, the fund made no direct payments to its
officers and incurred trustees' fees of $9,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended February 28, 1999,
investment transactions (excluding short-term
instruments) are as follows (in thousands):
Purchases $519,749
Proceeds from sales 356,946
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
FEBRUARY 28, AUGUST 31,
1999 1998
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 4,355 $ 35,260 1,939 $ 15,939
------------------------------------------------------------------------------
Class B 466 4,582 540 4,466
------------------------------------------------------------------------------
Class C 313 2,548 172 1,427
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 145 1,451 296 2,440
------------------------------------------------------------------------------
Class B 30 242 32 261
------------------------------------------------------------------------------
Class C 5 40 7 56
------------------------------------------------------------------------------
SHARES REDEEMED
Class A (5,321) (43,354) (3,734) (30,799)
------------------------------------------------------------------------------
Class B (494) (4,040) (516) (4,267)
------------------------------------------------------------------------------
Class C (257) (2,103) (143) (1,181)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 273 2,232 81 669
------------------------------------------------------------------------------
Class B (273) (2,232) (81) (669)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
(A) 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 $164,407 $(11,658)
------------------------------------------------------------------------------
</TABLE>
(a) 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 exchange. The
aggregate net assets of the fund immediately after
the exchange were $234.8 million.
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The fund has entered into exchange traded financial
futures contracts in order to take advantage of
anticipated market conditions and, as such, bears
the risk that arises from owning these contracts.
At the time the fund enters into a futures
contract, it is required to make a margin deposit
with its custodian. Subsequently, payments are made
on a daily basis between the fund and the broker as
the market value of the futures contract fluctuates
and are recorded for financial reporting purposes
as unrealized gains or losses by the fund. At
February 28, 1999, the market value of assets
pledged by the fund to cover margin requirements
for open futures positions was $248,000. The fund
also had liquid assets in excess of the face amount
of open futures positions at February 28, 1999:
<TABLE>
<CAPTION>
UNREALIZED
FACE EXPIRATION GAIN AT
TYPE AMOUNT POSITION MONTH 2/28/99
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Note $7,982,000 Long March '99 $181,000
</TABLE>
16
<PAGE> 17
FINANCIAL Highlights
<TABLE>
<CAPTION>
----------------------------------------
CLASS A
----------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, -------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------
Net asset value, beginning of period $8.19 8.31 8.22 8.30 8.33
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .14 .41 .45 .46 .48
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.04) (.11) .09 (.09) (.04)
- --------------------------------------------------------------------------------------
Total from investment operations .10 .30 .54 .37 .44
- --------------------------------------------------------------------------------------
Less distribution from net investment income .18 .42 .45 .45 .47
- --------------------------------------------------------------------------------------
Net asset value, end of period $8.11 8.19 8.31 8.22 8.30
- --------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.23% 3.68 6.75 4.55 5.52
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------
Expenses 1.35% 1.36 1.25 1.15 1.10
- --------------------------------------------------------------------------------------
Net investment income 4.03% 4.79 5.50 5.49 5.76
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
CLASS B
----------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, -------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------
Net asset value, beginning of period $8.21 8.32 8.23 8.31 8.32
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .11 .36 .39 .40 .43
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.04) (.11) .09 (.09) (.04)
- --------------------------------------------------------------------------------------
Total from investment operations .07 .25 .48 .31 .39
- --------------------------------------------------------------------------------------
Less distribution from net investment income .15 .36 .39 .39 .40
- --------------------------------------------------------------------------------------
Net asset value, end of period $8.13 8.21 8.32 8.23 8.31
- --------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) .87% 3.06 5.96 3.79 4.84
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------
Expenses 2.08% 1.99 1.93 1.89 1.85
- --------------------------------------------------------------------------------------
Net investment income 3.30% 4.16 4.82 4.75 5.01
- --------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------
CLASS C
--------------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, -------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------
Net asset value, beginning of period $8.22 8.33 8.24 8.32 8.33
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .12 .36 .39 .40 .43
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.04) (.11) .09 (.09) (.04)
- ---------------------------------------------------------------------------------------
Total from investment operations .08 .25 .48 .31 .39
- ---------------------------------------------------------------------------------------
Less distribution from net investment
income .16 .36 .39 .39 .40
- ---------------------------------------------------------------------------------------
Net asset value, end of period $8.14 8.22 8.33 8.24 8.32
- ---------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) .92% 3.10 5.98 3.82 4.89
- ---------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------
Expenses 1.99% 1.95 1.88 1.89 1.79
- ---------------------------------------------------------------------------------------
Net investment income 3.39% 4.20 4.87 4.75 5.07
- ---------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, --------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in
thousands) $231,446 69,307 81,967 94,477 129,757
- ------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 517% 149 249 272 308
- ------------------------------------------------------------------------------------------------
</TABLE>
Total return does not reflect the effect of any sales charges. Data for the
period ended February 28, 1999 is unaudited.
Per share data for the six months ended February 28, 1999 is determined based on
average shares outstanding.
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY RICHARD L. VANDENBURG
Chairman and 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 ELIZABETH C. WERTH
Trustee ROBERT C. PECK, JR. Assistant Secretary
Vice President
THOMAS W. LITTAUER BRENDA LYONS
Trustee and KATHRYN L. QUIRK Assistant Treasurer
Vice President Vice President
SHIRLEY D. PETERSON
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 AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania Avenue
Kansas City, MO 64105
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com
[KEMPER FUNDS LOGO]
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 - 3 (4/19/99) 1071080
