<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED FEBRUARY 29, 2000
[LOGO]
Seeks high current income and preservation of capital.
KEMPER SHORT-TERM
U.S. GOVERNMENT FUND
"... Intermediate-term securities were
the weak spot of the yield curve
for fixed-income investors. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
8
PORTFOLIO STATISTICS
9
PORTFOLIO OF
INVESTMENTS
11
FINANCIAL STATEMENTS
14
FINANCIAL HIGHLIGHTS
16
NOTES TO
FINANCIAL STATEMENTS
AT A GLANCE
KEMPER SHORT-TERM U.S.
GOVERNMENT FUND TOTAL RETURNS
FOR THE SIX-MONTH PERIOD ENDED FEBRUARY 29,
2000 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER SHORT-TERM U.S. GOVERNMENT FUND CLASS A KEMPER SHORT-TERM U.S. LIPPER SHORT U.S.
- ---------------------------------------------- KEMPER SHORT-TERM U.S. GOVERNMENT FUND CLASS GOVERNMENT FUNDS
GOVERNMENT FUND CLASS B C CATEGORY AVERAGE*
----------------------- ---------------------- -----------------
<S> <C> <C> <C>
1.62 1.43 1.37 1.82
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE PERFORMANCE.
INVESTMENT RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
*LIPPER, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES IN NET ASSET VALUE
WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF SALES CHARGES; IF
SALES CHARGES HAD BEEN INCLUDED, RESULTS MAY HAVE BEEN LESS FAVORABLE.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
2/29/00 8/31/99
.........................................................
<S> <C> <C>
KEMPER SHORT-TERM
U.S. GOVERNMENT FUND CLASS A $7.93 $7.99
.........................................................
KEMPER SHORT-TERM
U.S. GOVERNMENT FUND CLASS B $7.97 $8.01
.........................................................
KEMPER SHORT-TERM
U.S. GOVERNMENT FUND CLASS C $7.97 $8.02
.........................................................
</TABLE>
KEMPER SHORT-TERM U.S. GOVERNMENT
FUND RANKINGS AS OF 2/29/00*
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER SHORT U.S. GOVERNMENT FUNDS
CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
.............................................................................
<S> <C> <C> <C>
1-YEAR #64 of 77 funds #73 of 77 funds #72 of 77 funds
.............................................................................
5-YEAR #45 of 53 funds #53 of 53 funds #52 of 53 funds
.............................................................................
10-YEAR #8 of 14 funds n/a n/a
.............................................................................
</TABLE>
DIVIDEND AND YIELD REVIEW
THE FOLLOWING TABLE SHOWS DIVIDEND AND YIELD INFORMATION FOR THE FUND AS OF
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
................................................................................................
<S> <C> <C> <C>
SIX-MONTHS INCOME: $0.1880 $0.1541 $0.1594
................................................................................................
FEBRUARY DIVIDEND: $0.0340 $0.0290 $0.0296
................................................................................................
ANNUALIZED
DISTRIBUTION RATE:+ 5.15% 4.37% 4.46%
................................................................................................
SEC YIELD:+ 5.16% 4.56% 4.65%
................................................................................................
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON FEBRUARY 29, 2000. DISTRIBUTION RATE
SIMPLY MEASURES THE LEVEL OF DIVIDENDS AND IS NOT A COMPLETE MEASURE OF
PERFORMANCE. THE SEC YIELD IS NET INVESTMENT INCOME PER SHARE EARNED OVER THE
MONTH ENDED FEBRUARY 29, 2000, SHOWN AS AN ANNUALIZED PERCENTAGE OF THE MAXIMUM
OFFERING PRICE ON THAT DATE. THE SEC YIELD IS COMPUTED IN ACCORDANCE WITH A
STANDARDIZED METHOD PRESCRIBED BY THE SECURITIES AND EXCHANGE COMMISSION. YIELDS
AND DISTRIBUTION RATES ARE HISTORICAL AND WILL FLUCTUATE.
TERMS TO KNOW
YOUR FUND'S STYLE
MORNINGSTAR INCOME STYLE BOX
<TABLE>
<S> <C>
[MORNINGSTAR EQUITY STYLE Source: Morningstar, Inc., Chicago, IL (312)
BOX] 696-6000. The Income Style Box placement is based
on a fund's average effective maturity or
duration and the average credit rating of the
bond portfolio.
THE STYLE BOX REPRESENTS A SNAPSHOT OF A FUND'S
PORTFOLIO ON A SINGLE DAY. PLEASE NOTE THAT STYLE
BOXES DO NOT REPRESENT AN EXACT ASSESSMENT OF
RISK AND DO NOT REPRESENT FUTURE PERFORMANCE. THE
FUND'S PORTFOLIO CHANGES FROM DAY TO DAY. A
LONGER-TERM VIEW IS REPRESENTED BY THE FUND'S
MORNINGSTAR CATEGORY, WHICH IS BASED ON ITS
ACTUAL INVESTMENT STYLE AS MEASURED BY ITS
UNDERLYING PORTFOLIO HOLDINGS OVER THE PAST THREE
YEARS. MORNINGSTAR HAS PLACED KEMPER SHORT-TERM
U.S. GOVERNMENT FUND IN THE INTERMEDIATE
GOVERNMENT CATEGORY. PLEASE CONSULT THE
PROSPECTUS FOR A DESCRIPTION OF INVESTMENT
POLICIES.
</TABLE>
AVERAGE QUALITY The average debt rating of the underlying securities in the
fund's portfolio as compiled by independent rating services such as Moody's
Investors Service and Standard & Poor's Corp.
BASIS POINT The movement of interest rates or yields expressed in hundredths of
a percent. For example, an increase in yield from 5 percent to 5.50 percent is
50 basis points.
DURATION A measure of the interest-rate sensitivity of a portfolio,
incorporating time to maturity and coupon size. The longer a portfolio's
duration, the greater its sensitivity to interest-rate changes.
INVERTED YIELD CURVE A market phenomenon in which intermediate-term bonds
(securities with 1- to 10-year maturities) have higher income potential and
current yields than long-term bonds (securities with 10- to 30-year maturities).
Historically it has occurred during a period of rising short-term interest rates
and been viewed as an indicator of a future economic slowdown.
<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:
As we enter the second quarter of the year, there isn't much to complain about.
For all the yammering about the "new" economy, the old economy is doing pretty
well. Consumers may hanker for a new GPS handset or a Palm Pilot, but they lust
after a suburban mansion with a garage big enough to hold their luxury car and
SUV -- and state and local governments are laying old-fashioned asphalt almost
as fast as businesses are building the information superhighway. Satisfying both
old and new desires got the economy off to a fast start in the new century. Even
with a modest slowdown possible in the second half, growth for the year 2000 is
likely to be close to 5 percent.
So everyone is happy, right? Well, almost everyone. Consumers seldom have felt
so confident; businesspeople seldom have behaved so expansively. But there's
still one grump: Federal Reserve Board Chairman Alan Greenspan, who's become
increasingly worried that rapid growth will bring on inflation.
Despite Greenspan's attempt to slow spending by raising interest rates,
consumers are still splurging, and they show no signs of stopping. We know this
because shoppers are buying the big-ticket items they usually purchase early in
a cycle -- items such as personal computers, mobile phones, jewelry, fancy
kitchen appliances, exercise equipment and big boats.
Why are consumers still buying despite Greenspan's attempts to slow their
splurging? There are three answers: deflation, wealth and easy credit.
Falling prices have made big-ticket items almost irresistible. Since 1997,
prices of kitchen appliances have fallen 4.5 percent, TVs and VCRs 16 percent
and sporting equipment 6.5 percent. Even auto showrooms no longer produce
sticker shock, and drivers have responded with gusto, buying a record 16.9
million cars and light trucks in 1999. 2000 is likely to be the first year in
which automotive sales top 17 million.
Some of that spending has been made possible by stock market gains: Wall
Street has handed out windfalls to almost anyone holding equities in the past
few years. But consumers who don't own stocks are also spending, thanks to a
decade of debt. Young, poor or new to America? In the 1990s, it didn't matter;
lenders still loved you. While high-income families have been borrowing less,
those lower on the income scale have been borrowing more.
But it's not just consumers that Greenspan is concerned about; businesses are
splurging as well. During 1999, businesses increased spending on computers and
peripherals by 35 percent and spending on communications equipment by 25 percent
(both after adjusting for price declines). Far from slowing down this year, we
expect investment in these two categories to accelerate -- to 40 percent growth
for computers and 30 percent growth for communications equipment. And just like
consumers, businesses are borrowing to buy. You may think that with booming
sales, entrepreneurs are cash-rich and can afford it. But while 1999 saw
economy-wide earnings jump 10 percent and profits of Standard and Poor's (S&P)
500 companies leap nearly 14 percent, internal cash covered less than 84 percent
of capital spending. With the exception of 1998, that's the lowest on record.
Last year alone, corporate debt shot up by more than 11 percent to $560 billion.
And new economy companies are no exception; they have more debt than most people
realize, issuing more than half of all convertible bonds.
All this debt could cause problems. Although we've increased our 2001
inflation outlook to nearly 3 percent -- an entire percentage point higher than
our prediction three months ago -- we're not particularly worried about
inflation. It's the heavy borrowing we're concerned about. Debt continues to
exceed income growth, and when Greenspan succeeds in slowing the economy with
higher interest rates (which he will succeed in doing), all of the debt American
consumers and businesses are taking on could be tricky to handle. Debt is a
medley of financial obligations that must be paid with personal income and
corporate profits. When the economy slows, personal income and corporate profits
stay the same or even fall -- which makes it harder to pay off those debts.
Consumers and businesses may have to sell their assets to pay off the debt, and
they may risk going into default.
That being the case, a gradual economic slowdown may be in everyone's best
interest. But "gradual" is the key. Both the old and new economy have a lot
riding on the Fed's ability to rein in growth softly and smoothly, because
abrupt slowdowns encourage consumers and businesses to sell assets -- and
perhaps risk bankruptcy -- to pay off debt, as described above.
A gradual slowdown seems to be what the Fed is seeking, but for all of
Greenspan's semi-tough talk, some
3
<PAGE> 4
ECONOMIC OVERVIEW
ECONOMIC GUIDEPOSTS
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND
SHAREHOLDER DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR
DEFLATION, CREDIT EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON
MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR
INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE
10-YEAR TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES.
THE OTHER DATA REPORT YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (3/31/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.3 5.9 5.2 5.6
Prime rate (2) 9 8.25 7.75 8.5
Inflation rate (3)* 3.2 2.3 1.7 1.4
The U.S. dollar (4) 0.6 -3.3 -0.1 4.9
Capital goods orders (5)* 7.7 1.9 5.6 7.3
Industrial production (5)* 5.6 3.1 2.9 5.4
Employment growth (6) 2.3 2.1 2.3 2.6
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
*DATA AS OF 2/29/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
indicators suggest that monetary policy has actually been lax. Broad money and
credit creation have vastly exceeded economic activity since 1995, and no
central bank can allow that to continue indefinitely without creating inflation.
If we begin to see higher core inflation, the Fed will have to deal with all
that money it's created in a less gradualist manner -- and that could get
tricky. Financial turmoil accompanied each of the Fed's last two efforts to slow
the economy down. In 1994, there was a bond market meltdown that resulted in a
Mexican debt crisis. After a more timid Fed tightening in 1997, crises in Asia
were followed by problems with Russian debt, Brazilian debt and a large American
hedge fund. We don't think this is a coincidence: The global debt market is so
vast and interconnected that it's highly vulnerable to a rise in the cost of its
basic raw material -- short-term funds.
Let's hope, then, that the Fed can slow the economy without upsetting the
financial applecart, because that could affect everyone. After all, the old
economy and the new economy are wedded in many ways. Much of the money that
flows to IPOs is available because mature industries have borrowed to carry out
mergers and share buybacks. Old economy companies are the biggest customers of
new economy products. And e-commerce sites are all about moving traditional
goods over old-fashioned highways. Despite a lot of talk about old and new,
we're all in this economy together.
Sincerely,
Scudder Kemper Investments Economics Group
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF SCUDDER KEMPER
INVESTMENTS, INC. AS OF MARCH 29, 2000, AND MAY NOT ACTUALLY COME TO PASS. THIS
INFORMATION IS SUBJECT TO CHANGE. NO PART OF THIS MATERIAL IS INTENDED AS AN
INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
PERFORMANCE UPDATE
[VANDENBERG PHOTO]
RICHARD VANDENBERG 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 MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
YIELDS HAVE RISEN SHARPLY SINCE LAST AUGUST AS THE
FEDERAL RESERVE INCREASED INTEREST RATES 50 BASIS
POINTS. IN THIS REPORT, JOHN DUGENSKE DISCUSSES HOW
INCREASED BOND MARKET VOLATILITY AFFECTED THE FUND
AND HOW KEMPER SHORT-TERM U.S. GOVERNMENT FUND IS
POSITIONED FOR THE COMING MONTHS.
Q HOW DID THE FUND PERFORM VERSUS ITS BENCHMARK AND WHY?
A Kemper Short-Term U.S. Government Fund's results were less than the 1.89%
return of the unmanaged Merrill Lynch 1-to 3-Year Government Bond Index (a group
of short-term mortgage, Treasury and agency securities) for the six-month period
ended February 29, 2000. The fund outperformed its benchmark in October 1999 and
January 2000, periods of weakness for Treasury securities, but underperformed by
a greater margin during Treasury rallies, particularly in February 2000.
Q HOW DID THE GOVERNMENT BOND MARKET PERFORM DURING THE FIRST SIX MONTHS OF
FISCAL YEAR 2000?
A It was the most volatile period since 1994. Strong economic growth
prompted the Federal Reserve to raise its short-term interest-rate target on
November 16 and February 2 by a total of 50 basis points (0.50 percent) to 5.75
percent. Between the end of August 1999 and the end of February 2000, Treasury
bond prices fell and yields rose sharply. Yields for Treasury bills increased to
a greater degree than yields for long-term bonds, so that by February 29, 2000,
one-year Treasury bills yielded 6.23 percent, eight basis points more than
30-year Treasury bonds. Mortgage interest rates for consumers reached their
highest levels since March 1997, but housing and related consumer spending
activity remained brisk. Oil prices soared past $30 a barrel. Most economists
and many bond market professionals anticipate further Fed interest-rate hikes
before the November 2000 national elections.
Q WHY DID SHORT-TERM BOND YIELDS RISE MORE THAN LONG-TERM YIELDS?
A Usually, long-term government bonds provide more income potential than
securities maturing in a year or less since they involve more interest-rate
risk. This pattern held true in the late summer and autumn of 1999. However, the
Treasury yield curve inverted as the new millennium began because of several
factors, the most significant of which were the Fed's interest-rate hikes and a
decision by the Treasury to reduce the amount of long-term debt outstanding. In
February, the Treasury announced plans to buy back some 30-year bonds from
investors. This may benefit the U.S. economy in the long run by freeing more
capital for private investment, but the Treasury's news created confusion that
increased short-term bond market volatility. Prior to the announcement, some
institutional investors made large bets that long-term Treasury prices would
fall sharply in 2000, and in January they were right. However, when these
investors realized that the government's action would reduce the supply of
30-year bonds, these securities suddenly became a much more prized commodity,
and long-term bond prices rebounded.
5
<PAGE> 6
PERFORMANCE UPDATE
Overall, intermediate-term securities were the weak spot of the yield curve
(see chart -- U.S. Treasury Yields/August 31, 1999 vs. February 29, 2000 on page
6) for fixed-income investors. Income potential rose sharply, and price
volatility was modest. By positioning the fund's portfolio in securities
maturing in two years or less, we successfully avoided most of the bond market's
volatility, preserved capital, provided above-average income potential and
delivered a positive total return for the six months ended February 29, 2000.
Q HOW DID YOU POSITION THE FUND BETWEEN AUGUST 1999 AND FEBRUARY 2000?
A For part of the period, the fund's average duration (see Portfolio
Statistics on page 8) was shorter than that of most of its peers and the fund's
unmanaged benchmark (the Merrill Lynch 1-3 Year Government Index). This helped
the fund outperform in a climate of rapidly rising interest rates especially in
January 2000. We were mindful of the fact that the Fed was on the move, and we
sought to maximize the fund's flexibility to respond to dynamic market
conditions. We were underweighted in Treasuries during the first half of fiscal
year 2000. We added to the fund's holdings of high-quality, asset-backed
securities and collateralized mortgage obligations (CMOs) during the period
because of the above-average income potential and relative value that these
securities offered. Within the mortgage market, we focused on securities with
well-defined structures and, through our selection process, attempted to avoid
exposing the fund to adverse risks. Mortgage securities generally outperformed
Treasuries during the first half of fiscal year 2000 because of their superior
income characteristics and because relatively few home owners refinanced their
properties.
Q IS THERE ANY WAY TO ESTIMATE HOW MUCH A GIVEN CHANGE IN INTEREST RATES CAN
AFFECT THE TOTAL RETURN FROM A FIXED-INCOME INVESTMENT?
A Generally, a 100-basis-point increase in interest rates translates into a
price decline of slightly more than 1 percent for a bond or fixed-income mutual
fund that has a duration of one year. Bond prices and fixed-income mutual fund
net asset values are also affected by market factors such as credit risk and,
for mortgage securities, the risk that borrowers will prepay loans. The fund's
results since last summer were fully in line with market conditions. Yields on
two-year Treasuries rose 80 basis points between August 1999 and February 2000
while the fund's net asset value per share
[BAR GRAPH]
<TABLE>
<CAPTION>
8/31/99 2/29/00
------- -------
<S> <C> <C>
30 Year 6.07 6.15
10 Year 5.98 6.42
5 Year 5.87 6.60
2 Year 5.73 6.53
1 Year 5.28 6.23
6 Month 5.21 6.02
3 Month 4.96 5.77
</TABLE>
6
<PAGE> 7
PERFORMANCE UPDATE
declined 6 cents to $7.93 a share, or 3/4 of one percent (for Class A shares)
during the period.
Q WHAT'S YOUR OUTLOOK FOR BONDS AND KEMPER SHORT-TERM U.S. GOVERNMENT FUND
FOR THE MONTHS AHEAD?
A A dual dynamic of the Fed attempting to keep inflation in check and an
overall reduction in bond supply may dictate what happens this year. We could
easily see another 50 basis points in rate hikes, but we are reserving judgment
until we see more economic data. We intend to remain somewhat defensive, with a
duration slightly shorter than the fund's benchmark. We are comfortable that
this positioning can allow us to take advantage of any increase in income
potential consistent with our efforts to preserve principal. For investors
seeking to reduce the volatility of their overall bond or equity portfolio or
simply capture added income potential, we think the fund could be an attractive
alternative.
Over the past several years, even small whiffs of inflation from one or two
government statistics that deviate from analysts' expectations have caused bond
prices to rise or fall substantially in a single day. We believe these
overreactions should eventually subside. For that to happen, however, we believe
that the bond market will need to be convinced that the Fed has succeeded in
keeping consumer inflation from accelerating much beyond a 3 percent annual rate
and that commodity prices such as oil are unlikely to move much higher than
current levels. In such an environment, we believe it is more prudent for bond
investors to give up some income potential in return for an added measure of
stability.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 2/29/00 ON 8/31/99
<S> <C> <C>
GNMA 6% 23%
................................................................................
OTHER MORTGAGE-BACKED SECURITIES 61 16
................................................................................
FOREIGN GOVERNMENT SECURITIES 10 10
................................................................................
CORPORATE OBLIGATION SECURITIES 16 10
................................................................................
U.S. TREASURY SECURITIES 7 40
................................................................................
CASH AND EQUIVALENTS -- 1
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/29/00 ON 8/31/99
YEARS TO MATURITY
<TABLE>
<CAPTION>
ON 2/29/00 ON 8/31/99
<S> <C> <C>
1-5 YEARS 67% 72%
................................................................................
6-10 YEARS 21 22
................................................................................
11-20 YEARS 12 5
................................................................................
CASH AND EQUIVALENTS -- 1
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
AVERAGE MATURITY
<TABLE>
<CAPTION>
ON 2/29/00 ON 8/31/99
<S> <C> <C>
AVERAGE MATURITY 2.9 years 2.5 years
- --------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER SHORT-TERM U.S. GOVERNMENT FUND
Portfolio of Investments Semiannual ended February 29, 2000 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENT - 0.1%
State Street bank and Trust Company, 5.74% to be
repurchased at $149,024 on 03/01/2000 (b)
(Cost $149,000) $ 149,000 $ 149,000
------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS - 7.3%
U.S. Treasury Bond, 6.00%, 8/15/2009 5,100,000 4,906,353
U.S. Treasury Bond, 6.50%, 2/15/2010 7,500,000 7,544,550
------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost: $12,401,116) 12,450,903
------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATIONS - 6.1%
Government National Mortgage Association Pass-thru
6.18% with various maturities to 09/20/2024 25,559,517 2,552,318
Government National Mortgage Association Pass-thru
6.50% with various maturities to 07/15/2029 229,264 219,389
Government National Mortgage Association Pass-thru
7.00% with various maturities to 01/15/2029 8,030,194 7,699,860
Government National Mortgage Association Pass-thru
9.00% with various maturities to 05/15/2019 32,433 33,781
Government National Mortgage Association Pass-thru
9.50% with various maturities to 11/15/2020 22,261 23,443
------------------------------------------------------------------------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATIONS
(Cost: $11,291,667) 10,528,791
------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
OBLIGATIONS - 46.5%
Federal Home Loan Mortgage Corp.
5.95%, 01/01/2031 10,988,761 10,997,346
Federal Home Loan Mortgage Corp.
5.96%, 11/25/2029 24,975,279 24,998,693
Federal Home Loan Mortgage Corp.
6.00% with various maturities to 12/15/2009 30,422,798 29,827,059
Federal Home Loan Mortgage Corp.
6.025%, 12/25/2029 8,927,987 8,933,354
Federal Home Loan Mortgage Corp.
6.75%, 12/01/2029 3,000,000 2,966,719
Federal Home Loan Mortgage Corp.
7.06%, 06/25/2016 2,000,000 1,981,875
Federal Home Loan Mortgage Corp.
11.00%, 12/01/2014 2,873 2,873
------------------------------------------------------------------------------
TOTAL GOVERNMENT AGENCY OBLIGATIONS
(Cost: $80,278,456) 79,707,919
------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE
OBLIGATIONS - 14.4%
Fannie Mae, Series 1998-58 PW, 5.50%, 02/25/2021 12,332,899 11,833,802
Fannie Mae, Series 1998-49 PE, 6.00%, 01/20/2019 3,200,000 3,074,000
Fannie Mae, Series G94-10 PD, 6.50%, 09/17/2009 5,000,000 4,743,750
Fannie Mae, Series B100-14, 7.25%, 01/15/2010 5,000,000 5,006,250
------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost: $25,095,543) 24,657,802
------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C> <C>
CORPORATE OBLIGATIONS - 16.0%(a)
Capital Auto Receivables Asset Trust, Series
1999-1, 5.58%, 06/15/2002 $ 4,000,000 $ 3,952,500
Discover Card Master Trust I, Series 1996-4,
6.379%, 10/16/2013 1,600,000 1,612,000
EQCC Home Equity Loan Trust, Series, 1996-4,
6.88%, 07/15/2014 5,120,000 5,116,800
Greenpoint Home Equity Loan Trust, Series 1999-2,
6.265%, 12/15/2025 2,500,000 2,502,344
MBNA Master Credit Card Trust, Series 1996-C,
6.165%, 08/15/2003 2,500,000 2,500,000
Solomon Brothers Mortgage Securities VII, Series
2000-LB1, 6.219%, 02/25/2030 2,000,000 1,997,500
Coast-Plymouth Tax Lien Capital, LLC, Series
1999-A, 6.76%, 11/15/2004 2,374,733 2,354,969
HFC Home Equity Loan Asset Backed Certificates,
Series 1999-1, 6.95%, 10/23/2023 14,000,000 1,391,688
Residential Asset Securities Corp., Series
1999-KS3, 7.18%, 01/25/2025 2,000,000 1,981,563
CNL Funding, Series 1999-1, 7.295%, 03/18/2010 1,575,177 1,535,305
Sears Credit Account Master Trust, 6.45%,
11/17/2009 2,000,000 1,920,625
------------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(Cost: $27,587,763) 27,365,294
------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS
- 9.6%
Government Trust Certificates, 9.25%, 11/15/2001 11,330,746 11,517,476
Government Trust Certificates, 9.40%, 05/15/2002 4,835,563 4,926,424
------------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost: $16,920,371) 16,443,900
------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $173,723,916) (c) $171,303,609
------------------------------------------------------------------------------
</TABLE>
NOTE 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) The cost for federal income tax purposes was $173,723,916. At February 29,
2000, net unrealized depreciation for all securities bases on tax cost was
$2,420,307. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of value over tax cost of
$73,989 and aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over value of $2,494,296.
10 The accompanying notes are an integral part of the financial statements.
<PAGE> 11
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
February 29, 2000
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $173,723,916) $171,303,609
- ----------------------------------------------------------------------------
Cash 635
- ----------------------------------------------------------------------------
Receivable for investments sold 9,602,114
- ----------------------------------------------------------------------------
Interest receivable 810,068
- ----------------------------------------------------------------------------
Receivable for Fund shares sold 1,242,101
- ----------------------------------------------------------------------------
Other assets 15,999
- ----------------------------------------------------------------------------
TOTAL ASSETS 182,974,526
- ----------------------------------------------------------------------------
LIABILITIES
Payable for Fund shares redeemed 2,009,082
- ----------------------------------------------------------------------------
Accrued management fee 111,800
- ----------------------------------------------------------------------------
Other accrued expenses 410,098
- ----------------------------------------------------------------------------
Total liabilities 2,530,980
- ----------------------------------------------------------------------------
NET ASSETS, AT VALUE $180,443,546
- ----------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income $ 883,419
- ----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
securities (2,420,307)
- ----------------------------------------------------------------------------
Accumulated net realized gain (loss) (14,530,092)
- ----------------------------------------------------------------------------
Paid-in capital 196,510,526
- ----------------------------------------------------------------------------
NET ASSETS, AT VALUE $180,443,546
- ----------------------------------------------------------------------------
NET ASSET VALUE AND OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($131,370,823 / 16,563,684 shares outstanding of
beneficial interest,
$.01 par value, unlimited number of shares authorized) $7.93
- ----------------------------------------------------------------------------
Maximum offering price per share (100/97.25 of $7.93) $8.15
- ----------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($42,426,674 / 5,325,911 shares outstanding of beneficial
interest,
$.01 par value, unlimited number of shares authorized) $7.97
- ----------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($6,646,049 / 833,898 shares outstanding of beneficial
interest,
$.01 par value, unlimited number of shares authorized) $7.97
- ----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended February 29, 2000
(UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest Income $ 6,645,487
- ---------------------------------------------------------------------------
Expenses:
Management fee 549,437
- ---------------------------------------------------------------------------
Services to shareholders 263,758
- ---------------------------------------------------------------------------
Custodian fees 5,907
- ---------------------------------------------------------------------------
Distribution fees 216,116
- ---------------------------------------------------------------------------
Administrative service fees 241,018
- ---------------------------------------------------------------------------
Auditing 16,200
- ---------------------------------------------------------------------------
Legal 15,367
- ---------------------------------------------------------------------------
Trustees' fees and expenses 11,178
- ---------------------------------------------------------------------------
Reports to shareholders 105,575
- ---------------------------------------------------------------------------
Registration fees 32,416
- ---------------------------------------------------------------------------
Other 50,186
- ---------------------------------------------------------------------------
Total expenses, before expense reductions 1,507,158
- ---------------------------------------------------------------------------
Expense reductions (7,743)
- ---------------------------------------------------------------------------
Total expenses, after expense reductions 1,499,415
- ---------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 5,146,072
- ---------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments (2,167,681)
- ---------------------------------------------------------------------------
Futures (113,811)
- ---------------------------------------------------------------------------
(2,281,492)
- ---------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on:
Investments 304,798
- ---------------------------------------------------------------------------
Futures (40,430)
- ---------------------------------------------------------------------------
264,368
- ---------------------------------------------------------------------------
Net gain (loss) on investment transactions (2,017,124)
- ---------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 3,128,948
- ---------------------------------------------------------------------------
</TABLE>
12 The accompanying notes are an integral part of the financial statements.
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
FEBRUARY 29, ENDED
2000 AUGUST 31,
(UNAUDITED) 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ 5,146,072 6,552,357
- ----------------------------------------------------------------------------------------------
Net realized gain (loss) (2,281,492) (3,143,969)
- ----------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period 264,368 (2,342,900)
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 3,128,948 1,065,488
- ----------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
- ----------------------------------------------------------------------------------------------
Class A (3,369,668) (4,932,995)
- ----------------------------------------------------------------------------------------------
Class B (958,671) (1,334,327)
- ----------------------------------------------------------------------------------------------
Class C (141,398) (212,821)
- ----------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 106,067,195 96,716,671
- ----------------------------------------------------------------------------------------------
Reinvestment of distributions 3,537,965 5,078,364
- ----------------------------------------------------------------------------------------------
Cost of shares redeemed (129,234,882) (134,054,592)
- ----------------------------------------------------------------------------------------------
Shares issued in acquisition -- 169,781,407
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions (19,629,722) 137,521,850
- ----------------------------------------------------------------------------------------------
Increase (decrease) in net assets (20,970,511) 132,107,195
- ----------------------------------------------------------------------------------------------
Net assets at beginning of period 201,414,057 69,306,862
- ----------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income (loss) of $883,419 and $207,084,
respectively) $ 180,443,546 201,414,057
- ----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE> 14
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLES INCLUDE SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
CLASS A
SIX MONTHS
ENDED
FEBRUARY 29, YEAR ENDED AUGUST 31,
2000 -----------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 7.99 8.19 8.31 8.22 8.30 8.33
- ---------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .21(b) .38 .41 .45 .46 .48
- ---------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.08) (.22) (.11) .09 (.09) (.04)
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations .13 .16 .30 .54 .37 .44
- ---------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.19) (.36) (.42) (.45) (.45) (.47)
- ---------------------------------------------------------------------------------------------------------------
Total distributions (.19) (.36) (.42) (.45) (.45) (.47)
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.93 7.99 8.19 8.31 8.22 8.30
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (A) 1.62** 1.98 3.68 6.75 4.55 5.52
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL
DATA Net assets, end of period ($ in thousands) 131,376 85,224 72,608 83,688 97,892 133,643
- ---------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.32* 1.24 1.36 1.25 1.15 1.10
- ---------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.32* 1.24 1.36 1.25 1.15 1.10
- ---------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 5.34* 4.27 4.79 5.50 5.49 5.76
- ---------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 509* 336 149 249 272 308
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
SIX MONTHS
ENDED
FEBRUARY 29, YEAR ENDED AUGUST 31,
2000 ------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 8.01 8.21 8.32 8.23 8.31 8.32
- ----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .19(b) .31 .36 .39 .40 .43
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.08) (.22) (.11) .09 (.09) (.04)
- ----------------------------------------------------------------------------------------------------------
Total from investment operations .11 .09 .25 .48 .31 .39
- ----------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.15) (.29) (.36) (.39) (.39) (.40)
- ----------------------------------------------------------------------------------------------------------
Total distributions (.15) (.29) (.36) (.39) (.39) (.40)
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.97 8.01 8.21 8.32 8.23 8.31
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (A) 1.43** 1.10 3.06 5.96 3.79 4.84
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 42,428 45,398 7,278 7,419 6,383 4,860
- ----------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.98* 2.08 1.99 1.93 1.89 1.85
- ----------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.97* 2.08 1.99 1.93 1.89 1.85
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 4.69* 3.43 4.16 4.82 4.75 5.01
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 509* 336 149 249 272 308
- ----------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
SIX MONTHS
ENDED
FEBRUARY 29, YEAR ENDED AUGUST 31,
2000 -----------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 8.02 8.22 8.33 8.24 8.32 8.33
- ----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .19(b) .32 .36 .39 .40 .43
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.08) (.22) (.11) .09 (.09) (.04)
- ----------------------------------------------------------------------------------------------------------
Total from investment operations .11 .10 .25 .48 .31 .39
- ----------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.16) (.30) (.36) (.39) (.39) (.40)
- ----------------------------------------------------------------------------------------------------------
Total distributions (.16) (.30) (.36) (.39) (.39) (.40)
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.97 8.02 8.22 8.33 8.24 8.32
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (A) 1.37** 1.24 3.10 5.98 3.82 4.89
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 6,646 6,895 1,371 1,059 1,202 1,114
- ----------------------------------------------------------------------------------------------------------
Ratio of expense before expense reductions (%) 1.91* 1.94 1.95 1.88 1.89 1.79
- ----------------------------------------------------------------------------------------------------------
Ratio of expense after expense reductions (%) 1.91* 1.94 1.95 1.88 1.89 1.79
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 4.75* 3.57 4.20 4.87 4.75 5.07
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 509* 336 149 249 272 308
- ----------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
* Annualized
** Not Annualized
(a) Total return does not reflect the effect of sales charges.
(b) Based on monthly average shares outstanding during the period.
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1
SIGNIFICANT
ACCOUNTING POLICIES 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 organized
as a Massachusetts business trust. 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 February 29, 2000) are offered to a limited
group of investors, are not subject to initial or
contingent deferred sales charges and have lower
ongoing expenses than other classes.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of the Fund have
equal rights with respect to voting subject to
class specific arrangements.
The Fund's financial statements are prepared in
accordance with generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Investments are stated at value
determined as of the close of regular trading on
the New York Stock Exchange. Securities which are
traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on
the exchange on which the security is traded most
extensively. If no sale occurred, the security is
then valued at the calculated mean between the most
recent bid and asked quotations. If there are no
such bid and asked quotations, the most recent bid
quotation is used. Securities quoted on the Nasdaq
Stock Market ("Nasdaq"), for which there have been
sales, are valued at the most recent sale price
reported. If there are no such sales, the value is
the most recent bid quotation. Securities which are
not quoted on Nasdaq but are traded in another
over-the-counter market are valued at the most
recent sale price, or if no sale occurred, at the
calculated mean between the most recent bid and
asked quotations on such market. If there are no
such bid and asked quotations, the most recent bid
quotation shall be used.
Portfolio debt securities purchased with an
original maturity greater than sixty days are
valued by pricing agents approved by the officers
of the Trust, whose quotations reflect
broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents
are unable to provide such quotations, the
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
most recent bid quotation supplied by a bona fide
market maker shall be used. Money market
instruments purchased with an original maturity of
sixty days or less are valued at amortized cost.
All other securities are valued at their fair value
as determined in good faith by the Valuation
Committee of the Board of Trustees.
REPURCHASE AGREEMENTS. The Fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
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 or
currencies hedged. When utilizing futures contracts
to hedge, the Fund gives up the opportunity to
profit from favorable price movements in the hedged
positions during the term of the contract.
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.
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
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.
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.
- --------------------------------------------------------------------------------
2
PURCHASES AND SALES
OF SECURITIES For the six months ended February 29, 2000,
investment transactions (excluding short-term
instruments) are as follows:
Purchases $484,403,906
Proceeds from sales 509,435,807
- --------------------------------------------------------------------------------
3
TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper). The Fund 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 $549,437 for the six
months ended February 29, 2000.
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 29, 2000 are
$2,985.
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 29, 2000 are
$359,432.
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with Kemper
Distributors, Inc. (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. KDI in turn has
various agreements with financial services firms
that provided 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 29, 2000 are
$241,018, of which $45,672 is unpaid.
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
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 $219,123
for the six months ended February 29, 2000 of which
$119,784 is unpaid.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the six months ended February
29, 2000, the Fund made no payments to its officers
and incurred trustees' fees of $11,178 to
independent trustees.
- --------------------------------------------------------------------------------
4
CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 29, AUGUST 31,
2000 1999
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 10,034,874 $ 80,047,169 7,809,297 $ 63,403,954
----------------------------------------------------------------------------------------
Class B 1,964,032 15,759,654 1,410,547 12,232,670
----------------------------------------------------------------------------------------
Class C 575,597 4,618,327 637,877 5,191,940
----------------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 331,043 2,634,414 464,912 3,760,082
----------------------------------------------------------------------------------------
Class B 100,964 807,127 141,260 1,146,262
----------------------------------------------------------------------------------------
Class C 12,060 96,424 21,180 172,020
----------------------------------------------------------------------------------------
SHARES REDEEMED
Class A (12,384,008) (98,718,586) (11,507,455) (93,320,089)
----------------------------------------------------------------------------------------
Class B (2,346,979) (18,781,069) (2,401,364) (19,499,695)
----------------------------------------------------------------------------------------
Class C (759,186) (6,093,182) (656,732) (5,346,701)
----------------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 705,701 5,642,045 1,961,348 15,888,107
----------------------------------------------------------------------------------------
Class B (703,063) (5,642,045) (1,955,588) (15,888,107)
----------------------------------------------------------------------------------------
SHARES ISSUED IN ACQUISITION
Class A -- -- 11,717,372 95,496,510
----------------------------------------------------------------------------------------
Class B -- -- 8,250,594 67,407,255
----------------------------------------------------------------------------------------
Class C -- -- 839,764 6,877,642
----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $(19,629,722) $137,521,850
----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
5
EXPENSE OFF-SET
ARRANGEMENT The Fund has entered into arrangements with its
custodian whereby credits realized as a result of
uninvested cash balances were used to reduce a
portion of the Fund's expenses. During the six
months ended February 29, 2000, the Fund's
custodian and transfer agent fees were reduced by
$1,850 and $5,893, respectively, under these
arrangements.
19
<PAGE> 20
TRUSTEES&OFFICERS
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TRUSTEES OFFICERS
JOHN W. BALLANTINE MARK S. CASADY RICHARD L. VANDENBERG
Trustee President Vice President
LEWIS A. BURNHAM PHILIP J. COLLORA LINDA J. WONDRACK
Trustee Vice President and Vice President
Secretary
LINDA C. COUGHLIN MAUREEN E. KANE
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
DONALD L. DUNAWAY CAROLINE PEARSON
Trustee ANN M. MCCREARY Assistant Secretary
Vice President
ROBERT B. HOFFMAN BRENDA LYONS
Trustee KATHRYN L. QUIRK Assistant Treasurer
DONALD R. JONES Vice President
Trustee
THOMAS W. LITTAUER
Trustee and
Vice President
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
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.............................................................................................
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
.............................................................................................
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 219557
Kansas City, MO 64121
.............................................................................................
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02109
.............................................................................................
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
.............................................................................................
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
.............................................................................................
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com
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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 - 3(4/25/00) 1108440
