<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED AUGUST 31, 2000
Seeks high current income and preservation of capital.
KEMPER SHORT-TERM
U.S. GOVERNMENT FUND
"This summer we decided to extend the fund's duration by roughly 10 percent to
2.1 years as economic data began to reflect a cooling economy and further
Federal Reserve action seemed unlikely."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
7
PERFORMANCE UPDATE
11
PORTFOLIO STATISTICS
12
PORTFOLIO OF INVESTMENTS
14
FINANCIAL STATEMENTS
17
FINANCIAL HIGHLIGHTS
19
NOTES TO FINANCIAL STATEMENTS
23
REPORT OF INDEPENDENT AUDITORS
AT A GLANCE
KEMPER SHORT-TERM U.S.
GOVERNMENT FUND TOTAL RETURNS
FOR THE YEAR ENDED AUGUST 31, 2000
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
LIPPER SHORT U.S.
GOVERNMENT FUNDS
CLASS A CLASS B CLASS C CATEGORY AVERAGE*
---------------------------------------------- ----------------------- ---------------------- -----------------
<S> <C> <C> <C>
5.16% 4.57% 4.43% 5.61%
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE PERFORMANCE. INVESTMENT
RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE, SO THAT SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST.
*LIPPER, INC. RANKINGS ARE BASED UPON CHANGES IN NET ASSET VALUE WITH ALL
DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF SALES CHARGES; IF SALES
CHARGES HAD BEEN INCLUDED, RESULTS MIGHT HAVE BEEN LESS FAVORABLE. SHARES ARE
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
8/31/00 8/31/99
.........................................................
<S> <C> <C> <C> <C>
KEMPER SHORT-TERM U.S.
GOVERNMENT FUND CLASS A $7.97 $7.99
.........................................................
KEMPER SHORT-TERM U.S.
GOVERNMENT FUND CLASS B $8.00 $8.01
.........................................................
KEMPER SHORT-TERM U.S.
GOVERNMENT FUND CLASS C $8.00 $8.02
.........................................................
</TABLE>
KEMPER SHORT-TERM U.S. GOVERNMENT
FUND RANKINGS AS OF 8/31/00
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> <C> <C>
1-YEAR #55 of 72 funds #62 of 72 funds #65 of 72 funds
..............................................................................
5-YEAR #45 of 52 funds #52 of 52 funds #51 of 52 funds
..............................................................................
10-YEAR #6 of 14 funds n/a n/a
..............................................................................
</TABLE>
DIVIDEND REVIEW
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF AUGUST 31, 2000.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
................................................................................................
<S> <C> <C> <C> <C> <C>
ONE-YEAR INCOME: $0.420 $0.360 $0.370
................................................................................................
AUGUST DIVIDEND: $0.0410 $0.0361 $0.0367
................................................................................................
ANNUALIZED
DISTRIBUTION RATE:+ 6.17% 5.42% 5.51%
................................................................................................
SEC YIELD:+ 5.50% 5.05% 5.07%
................................................................................................
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON AUGUST 31, 2000. DISTRIBUTION RATE
SIMPLY MEASURES THE LEVEL OF DIVIDENDS AND IS NOT A COMPLETE MEASURE OF
PERFORMANCE. THE SEC YIELD IS NET INVESTMENT INCOME PER SHARE EARNED OVER THE
MONTH ENDED AUGUST 31, 2000, SHOWN AS AN ANNUALIZED PERCENTAGE OF THE MAXIMUM
OFFERING PRICE ON THAT DATE. THE SEC YIELD IS COMPUTED IN ACCORDANCE WITH THE
STANDARDIZED METHOD PRESCRIBED BY THE SECURITIES AND EXCHANGE COMMISSION. YIELDS
AND DISTRIBUTION RATES ARE HISTORICAL AND WILL FLUCTUATE.
YOUR FUND'S STYLE
TERMS TO KNOW
MORNINGSTAR FIXED INCOME STYLE BOX(TM)
<TABLE>
<S> <C>
[MORNINGSTAR FIXED INCOME Source: Data provided by Morningstar, Inc.,
STYLE BOX] Chicago, IL, 312-696-6000. The Fixed-Income Style
Box placement is based on a fund's average
effective maturity or duration and the average
credit rating of the bond portfolio.
THE STYLE BOX REPRESENTS A SNAPSHOT OF A FUND'S
PORTFOLIO ON A SINGLE DAY. IT IS NOT AN EXACT
ASSESSMENT OF RISK AND DOES NOT REPRESENT FUTURE
PERFORMANCE. THE FUND'S PORTFOLIO CHANGES FROM
DAY TO DAY. A LONG- TERM VIEW IS REPRESENTED BY
THE FUND'S MORNINGSTAR CATEGORY, WHICH IS BASED
ON ITS ACTUAL INVESTMENT STYLE AS MEASURED BY ITS
UNDERLYING PORTFOLIO HOLDINGS. CATEGORY
PLACEMENTS OF NEW FUNDS ARE ESTIMATED. PLEASE
CONSULT THE PROSPECTUS FOR A DESCRIPTION OF
INVESTMENT POLICIES.
</TABLE>
BASIS POINT The movement of interest rates or yields expressed in hundredths of
a percent. For example, an increase in yield from 5.00 percent to 6.00 percent
is 100 basis points.
DURATION A measure of the interest-rate sensitivity of a fixed-income investment
or portfolio. The longer the duration, the greater the portfolio's sensitivity
to interest-rate fluctuations.
GROSS DOMESTIC PRODUCT (GDP) The market value of goods and services produced by
a country during a specified period. It acts as a useful gauge when measuring
the strength of an economy, especially when comparing different time periods.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period. Total return assumes the
reinvestment of all dividends and represents the aggregate percentage or
dollar-value change over the period.
<PAGE> 3
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
ECONOMIC OVERVIEW
DEAR KEMPER FUNDS SHAREHOLDER:
Times have been good. During the first half of 2000, the global economy put on
more speed than it has in over a decade. All regions participated. The United
States, of course, was still powering ahead. The growth rate in Europe was
nearly 4 percent. Asia fed off an electronics boom and a revitalized China.
South America got a boost from an improved credit rating. New money pumped up
energy producers from Mexico to the Middle East.
Now for the bad news, which is that the best news is probably behind us.
Global growth peaked in the spring, and in the United States, at least, the
slowdown was abrupt. After 6 percent growth in the year ending June 30, we
estimate that the economy grew at a rate of less 3 percent rate during the
summer. It seems that expensive energy, currency volatility and more widespread
profit problems, are bringing the exuberant global economy, including the United
States, to heel. Let's explore these factors in more detail.
OIL, OIL, TOIL AND TROUBLE
Everyone's talking about oil prices, and with good reason: They have a
particularly pernicious history of disrupting the economy. Of the seven
recessions since World War II, six were preceded by a spike in crude oil prices.
Oil prices have already been strong enough for long enough to crimp growth,
and they're biting the rest of the world even harder than the United States. But
there are two factors working to our advantage. First, oil prices are still
historically low. Oil is slightly more than $30 per barrel today, but it peaked
at over $75 per barrel back in 1980 (stated in today's dollars). Second, our
dependence on oil has decreased: The United States uses only roughly half as
much oil to produce a unit of gross domestic product (GDP) as it did thirty
years ago. This gives us hope that the economy can escape recession this time
around.
What would make us worry more? Outright energy shortages or a political
crisis. If either happens, the odds of a recession occurring would rise steeply.
People panic or become excessively cautious when they have to fret. Can I fill
up my oil tank? Will there be a war? Their loss of confidence can be much more
devastating than price increases alone.
CURRENCY CONCERNS
Currency turmoil is a second danger to the economy. Central bankers have
intervened to halt the euro's decline, and they're right that the euro is
fundamentally undervalued. But intervention is a hazardous game. Let's hope they
don't convince the markets that the euro should rise a lot very quickly. A
suddenly weak dollar might make Europeans think about selling all those American
stocks and bonds they've been buying, and would greatly complicate the Fed's
inflation fight.
BUSINESS: BIG PLANS BUT PROFIT DISAPPOINTMENTS
Profit warnings escalated late this summer, and we believe there's fire amid
that smoke.
Sure, businesses have had a voracious appetite for money -- and corporate
treasurers are finding it easily. Banks increased business lending by 11.5
percent in the past year, and the bond markets are healthy, with only the lowest
credit-quality companies experiencing any difficulty issuing bonds. Capital
goods orders reflect executives' enthusiasm -- they've been accelerating since
early in the year, and in August were up more than 15 percent compared to a year
ago.
Still, we expect total capital spending to slow, from this year's estimated 14
percent to 12.5 percent in 2001. The reason? A profit squeeze is about to take
some of the edge off executives' animal spirits.
We've always been more cautious than Wall Street about 2001 profits, and our
forecast hasn't changed. Profits are likely to be flat to down next year for
several reasons. First, growth slowdown will make it harder to keep up the
productivity gains that have kept labor costs under control. Second, interest
expense will surge (thanks to higher rates and all that new debt). Third,
depreciation costs are escalating. And finally, the excessively weak euro and
higher oil costs will sap earnings.
SAVING GRACES: FISCAL POLICY AND CONSUMER SPENDING
While growth has peaked and is now slowing, we can be thankful that growth
probably won't slow too much, thanks in part to a more stimulative fiscal policy
and consumer spending.
3
<PAGE> 4
ECONOMIC OVERVIEW
ECONOMIC GUIDEPOSTS
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND
SHAREHOLDER DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR
DEFLATION, CREDIT EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON
MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR
INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE
10-YEAR TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES.
THE OTHER DATA REPORT YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (9/30/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 5.80 6.30 5.90 4.80
Prime rate (2) 9.50 9.00 8.25 8.50
Inflation rate (3)* 3.30 3.20 2.30 1.70
The U.S. dollar (4) 8.40 0.60 -3.30 4.10
Capital goods orders (5)* 16.10 8.40 1.90 15.60
Industrial production (5)* 5.80 5.30 3.10 4.40
Employment growth (6) 1.90 2.30 2.20 2.50
</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 8/31/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
Fiscal policy is likely to be more stimulative no matter who wins the
presidential election. Of course, most economists agree that the last thing this
pumped-up economy needs is another shot of stimulants -- too much stimulus,
after all, is widely believed to cause inflation. But economists aren't running
for office. Politicians are. And inflation risk is about the last thing on the
minds of politicians in the heat of their election campaigns. They want to win
votes, and the time-tested way to do so is to make promises. Whatever their
political differences, neither candidate is planning a lot of fiscal restraint.
The good news is that neither candidate's plan is likely to be enacted until
2002 at the earliest. And even then, each candidate's plan maintains a portion
of the surplus stemming from Social Security receipts -- a surplus that should
reach new heights in 2001.
Second, consumers continue to spend, spend, spend. The personal savings rate
keeps falling, from an already low 2.2 percent last year to a nearly invisible
0.1 percent this year. Critics of this admittedly squishy statistic claim it
doesn't adequately capture households' growing wealth. As it turns out, however,
the average American not only doesn't save much, but he's not getting wealthier
in leaps and bounds, either.
Net worth for the median family where the head of the household is over 45
(and where thoughts are presumably beginning to turn to retirement) rose less
than $13,000 between 1995 and 1998. That's less than a 12 percent gain during
the same three years the stock market nearly doubled and the market value of
owner-occupied homes jumped 21 percent. Why didn't the average family get
richer? Because they were borrowing and spending like crazy. House values were
up 21 percent -- but mortgage debt rose even faster, by 25 percent!
Consumers' profligacy worries many financial professionals. Some people aren't
saving enough for retirement because they have inflated expectations of future
investment returns. Other people aren't saving enough for retirement because
they don't realize just how much money they'll need. Either way, people aren't
saving.
Still, no one wants consumers to change their profligate ways too fast. After
all, hearty consumer spending is a prime reason America's growth has stayed on a
fast track so far. Most economists would like to see shoppers be a bit more
moderate -- but only a bit. If Americans suddenly turned thrifty, the economy
would lurch into reverse.
4
<PAGE> 5
ECONOMIC OVERVIEW
Luckily, there's little chance of that happening, unless lenders get cold
feet. So far, they're hot to trot. In the past year, mortgage lending by banks
rocketed nearly 17 percent while loans to consumers jumped 10 percent. Brokers
are selling the loans banks don't want on their balance sheets to mortgage pools
and the asset-backed securities market, where eager non-bank lenders are
snapping them up. In the past year, these markets provided $625 billion of new
credit, a leap of more than 12 percent.
With so much money at their disposal, consumers won't stay out of the shopping
centers and restaurants for long. We expect consumer spending growth to move
back above 3 percent by early next year and stay there.
OMINOUS SIGNS?
Decelerations are always tricky, to be sure. But barring some unexpected
shock, growth should pop back into the 3.5 percent to 4 percent range in 2001.
Why? Borrowing costs a little more than it did last year, but banks and the bond
market are still lending freely. Capital goods orders are strong, so there's a
lot of life left in business spending. Shoppers are a little pickier, but
they're still more interested in visiting the mall than in filling their piggy
banks. And after the election, no matter who wins, fiscal policy is likely to be
more stimulative than it has been for years. The price to pay will likely be a
rise in core inflation (inflation excluding food and energy). We expect it to
hit 3 percent next year, up from its recent rate of 2.5 percent. We believe
we'll make it safely through 2001, but investors should keep their hands on the
wheel and their eyes peeled.
Sincerely,
Kemper Distributors, Inc.
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF SCUDDER KEMPER
INVESTMENTS, INC. AS OF OCTOBER 5, 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.
5
<PAGE> 6
ECONOMIC OVERVIEW
(THIS PAGE INTENTIONALLY LEFT BLANK)
6
<PAGE> 7
PERFORMANCE UPDATE
[Vanderberg PHOTO]
RICHARD VANDENBERG IS LEAD PORTFOLIO MANAGER OF KEMPER SHORT-TERM U.S.
GOVERNMENT FUND. HE JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 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, INC., 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, INC. IN 1989 AND IS A VICE PRESIDENT.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGEMENT
TEAM ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER.
THE MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS AND SHOULD NOT BE CONSIDERED AS A RECOMMENDATION OF ANY SPECIFIC
SECURITY.
THE FEDERAL RESERVE BOARD'S RESOLVE TO FIGHT
INFLATION LED TO A SHARP INCREASE IN THE FEDERAL
FUNDS RATE AND OTHER SHORT-TERM INTEREST RATES
DURING THE PAST FISCAL YEAR. IN THE FOLLOWING
DISCUSSION, KEMPER SHORT-TERM U.S. GOVERNMENT
FUND'S MANAGEMENT TEAM DISCUSSES FUND AND MARKET
PERFORMANCE IN THIS ENVIRONMENT.
Q HOW DID THE SHORT-TERM GOVERNMENT BOND MARKET BEHAVE BETWEEN AUGUST 1999
AND AUGUST 2000?
A Strong economic growth prompted the Federal Reserve to raise its
short-term interest-rate target by 125 basis points (1.25 percent) to 6.50
percent. However, between the end of August 1999 and the end of August 2000,
long-term Treasury bond prices rose, inverting the yield curve for the first
time since the mid-1990s. By August 31, 2000, three-month Treasury bills yielded
6.30 percent, some 58 basis points more than 10-year Treasury bonds. Mortgage
interest rates for consumers reached their highest levels in five years, while
housing and related consumer spending activity remained strong. Oil prices
soared past $35 a barrel. Overall consumer prices were relatively tame, but as
the fiscal year drew to a close, many economists remained concerned about the
inflationary impact of high oil prices and natural gas shortages.
Q HOW DID KEMPER SHORT-TERM U.S. GOVERNMENT FUND PERFORM IN THIS
ENVIRONMENT?
A Kemper Short-Term U.S. Government Fund's total return of 5.16 percent (for
Class A shares, unadjusted for a sales charge) was less than the average return
of comparable mutual funds investing in short-term government securities for the
12-month period ended August 31, 2000. The unmanaged Merrill Lynch 1-3 Year
Government Bond index rose 5.76 percent for the period, while the average fund
rose 5.61 percent.
During the first half of fiscal year 2000, the fund's average duration
positioning helped it outperform in a climate of rapidly rising interest rates.
As interest rates began to decline in the spring, we increased duration.
However, the fund's defensive posture did not allow it to capture as much
capital appreciation potential as many of its peers.
Q IN WHAT TYPES OF SECURITIES DID THE FUND INVEST?
A The portfolio consisted of high-quality (AAA/Aaa-rated)* government
securities such as U.S. Treasuries, Ginnie Maes (bonds issued by the Government
National Mortgage Association, or GNMA) and agency-issued debt. 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. GNMA mortgage securities generally did well this past year 2000 because
of their superior income characteristics and because relatively few home owners
refinanced their properties.
Overall, short-term securities were the sweet spot of the yield curve for
risk-sensitive, income-oriented investors this past year. Income potential rose
sharply, and price volatility was
7
<PAGE> 8
PERFORMANCE UPDATE
modest. By positioning the fund's portfolio in securities maturing in three
years or less, we successfully avoided most of the bond market's volatility.
*SOURCE OF RATINGS: STANDARD & POOR'S AND MOODY'S
Q THE FEDERAL RESERVE HASN'T RAISED INTEREST RATES SINCE MAY. HAS THIS HAD
ANY EFFECT ON YOUR INVESTMENT DECISIONS?
A This summer we decided to extend the fund's duration (sensitivity to
interest rates) by roughly 10 percent to 2.1 years as economic data began to
reflect a cooling economy and further Federal Reserve action seemed unlikely.
Among the data that influenced our decision was the National Association of
Purchasing Managers' August survey of manufacturing activity, which fell to its
lowest level in more than 18 months. Another factor was slower employment growth
resulting from a recent decline in nonfarm payrolls.
U.S. Treasury Yields
Yields on short-term Treasuries rose substantially in the past year while
long-term bonds yields fell.
[BAR GRAPH]
<TABLE>
<CAPTION>
8/31/00 2/29/00 8/31/99
------- ------- -------
<S> <C> <C> <C>
3 Month 6.30 5.78 4.96
6 Month 6.37 6.02 5.21
1 Year 6.21 6.23 5.28
2 Year 6.15 6.53 5.73
5 Year 5.96 6.60 5.87
10 Year 5.72 6.41 5.98
30 Year 5.67 6.15 6.07
</TABLE>
Source: Bloomberg Business News
During the second half of fiscal year 2000, we adjusted the fund's allocations
to mortgages and Treasuries. We significantly increased the fund's position in
GNMA mortgages from 6 percent to about 25 percent as of August 31, 2000. We are
focusing on higher-coupon GNMAs -- bonds with a 9 percent coupon versus the 7
percent coupon bonds that we previously favored. We also increased the
portfolio's weighting in three- to five-year Treasuries from 7 percent to 13
percent of the portfolio this past summer.
Since February, we have also reduced the fund's weighting in high-quality
floating-rate government securities, replacing them with fixed-rate securities.
We purchased floating-rate securities as a defensive measure back when the
Federal Reserve was aggressively raising interest rates.
Q IS THERE ANY WAY TO ESTIMATE HOW MUCH A GIVEN CHANGE IN INTEREST RATES CAN
AFFECT TOTAL RETURN FROM BONDS?
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. (Operating
expenses also have an effect on mutual fund net asset values.) We think a period
of stable interest rates would be beneficial for the fund. Typically, mortgages
outperform Treasuries in a stable rate
8
<PAGE> 9
PERFORMANCE UPDATE
environment because investors are more willing to assume some risk in exchange
for higher yield. We believe the fund's increased mortgage position may serve us
well in such an environment.
Q DURING THE PAST YEAR THE TREASURY BEGAN BUYING BACK LONG-TERM BONDS, AND
THIS HELPED BOOST LONG-TERM BOND PRICES. WHAT EFFECT DO YOU THINK THE
GOVERNMENT'S BUYBACK PROGRAM WILL HAVE IN THE COMING MONTHS?
A We expect the supply of Treasuries to dwindle. Although the buybacks
involve long-term bonds and the fund's Treasury holdings are strictly
short-term, we still expect to benefit from the buybacks. During the second half
of fiscal year 2000, we purchased callable Treasuries as a way to take advantage
of the buybacks. The Treasury Department has recently included callable
Treasuries in reverse auctions, the mechanism for the buybacks.
Q WHAT'S YOUR OVERALL OUTLOOK FOR THE YEAR AHEAD?
A While it appears that the Federal Reserve has tamed inflation for the
moment and that U.S. economic growth is slowing, a lot of variables remain that
could cause a resurgence in interest rates, particularly energy, national fiscal
policy and relatively high levels of consumer consumption. Higher oil prices
usually translate into increased inflation risk. However, we are encouraged by
other strong trends in the economy that have been supportive of low inflation,
particularly high productivity levels. Another factor is that in a few weeks,
we'll see the fruits of this fall's national election, an event that has the
potential to quickly change economic, equity market and interest-rate
expectations.
At the start of fiscal year 2000, 10-year Treasuries yielded 5.98 percent, 102
basis points higher than three-month Treasury bills (4.96 percent). By August
31, 2000, the yield curve had completely inverted so that three-month Treasury
bills yielded more than any other segment of the curve. While the Treasury's
buyback program should support long-term Treasury prices in the coming months,
history has shown that the yield curve does not remain inverted for an extended
period.
If short-term interest rates fall, we believe that Kemper Short-Term U.S.
Government Fund could be in a strong position to benefit. We are comfortable
with a positioning that can allow us to provide an attractive level of income
consistent with our efforts to preserve principal. For investors seeking to
reduce the volatility of an overall bond or equity portfolio, we believe the
fund could be an attractive alternative.
9
<PAGE> 10
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED 8/31/00 (ADJUSTED FOR THE APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER SHORT-TERM
U.S. GOVERNMENT A 2.22% 3.84% 5.59% 5.70% (since 9/1/87)
...........................................................................................
KEMPER SHORT-TERM
U.S. GOVERNMENT B 1.57% 3.51% n/a 3.77% (since 5/31/94)
...........................................................................................
KEMPER SHORT-TERM
U.S. GOVERNMENT C 4.43% 3.70% n/a 3.81% (since 5/31/94)
...........................................................................................
</TABLE>
KEMPER SHORT-TERM US GOVERNMENT FUND CLASS A
Growth of an assumed $10,000 investment in Class A
shares from 9/30/87 to 8/31/00
[LINE GRAPH]
<TABLE>
<CAPTION>
KEMPER SHORT-TERM US
GOVERNMENT FUND CLASS MERRILL LYNCH 1-3 YEAR US CONSUMER PRICE
A1 GOVERNMENT INDEX* INDEX+
--------------------- ---------------------- -----------------
<S> <C> <C> <C>
9/30/87 9652 10000 10000
12/31/91 14185 14932 11991
12/31/96 17856 19608 13791
8/31/00 20693 24079 15012
</TABLE>
KEMPER SHORT-TERM US GOVERNMENT FUND CLASS B
Growth of an assumed $10,000 investment in Class B
shares from 5/31/84 to 8/31/0
[LINE GRAPH]
<TABLE>
<CAPTION>
KEMPER SHORT-TERM US
GOVERNMENT FUND CLASS MERRILL LYNCH 1-3 YEAR US CONSUMER PRICE
B1 GOVERNMENT INDEX* INDEX+
--------------------- ---------------------- -----------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
12/31/95 10744 11243 10407
12/31/97 11738 12588 10936
8/31/00 12606 14494 11704
</TABLE>
KEMPER SHORT-TERM US GOVERNMENT FUND CLASS C
Growth of an assumed $10,000 investment in Class C
shares from 5/31/94 to 8/31/99
[LINE GRAPH]
<TABLE>
<CAPTION>
KEMPER SHORT-TERM US
GOVERNMENT FUND CLASS MERRILL LYNCH 1-3 YEAR US CONSUMER PRICE
C1 GOVERNMENT INDEX* INDEX+
--------------------- ---------------------- -----------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
12/31/95 10750 11243 10407
12/31/97 11779 12588 10936
8/31/00 12638 14494 11704
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF
FUTURE RESULTS. INVESTMENT RETURNS AND
PRINCIPAL VALUES WILL FLUCTUATE, SO THAT
SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN ORIGINAL COST.
*AVERAGE ANNUAL TOTAL RETURN MEASURES
NET INVESTMENT INCOME AND CAPITAL GAIN
OR LOSS FROM PORTFOLIO INVESTMENTS,
ASSUMING REINVESTMENT OF DIVIDENDS AND,
FOR CLASS A SHARES, ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE OF 3.5% AND, FOR
CLASS B SHARES, ADJUSTMENT FOR THE
APPLICABLE CONTINGENT DEFERRED SALES
CHARGE (CDSC) AS FOLLOWS: 1-YEAR, 3%;
5-YEAR, 1%; SINCE INCEPTION, 0%; FOR
CLASS C SHARES, NO ADJUSTMENT FOR SALES
CHARGE APPLIES. THE MAXIMUM CLASS B
SHARE CDSC IS 4%. FOR CLASS C SHARES
THERE IS A 1% CDSC ON CERTAIN
REDEMPTIONS WITHIN THE FIRST YEAR OF
PURCHASE.
PLEASE NOTE THAT KEMPER SHORT-TERM U.S.
GOVERNMENT FUND WAS PREVIOUSLY KEMPER
ENHANCED GOVERNMENT INCOME FUND. THE
FUND'S INVESTMENT OBJECTIVE AND POLICIES
WERE CHANGED ON JANUARY 1, 1992. PRIOR
TO THE CHANGES, THE FUND'S OBJECTIVE WAS
TO SEEK HIGH CURRENT RETURN BY INVESTING
PRIMARILY IN U.S. GOVERNMENT SECURITIES.
SINCE THE CHANGE, THE FUND'S OBJECTIVE
HAS BEEN TO SEEK HIGH CURRENT INCOME
CONSISTENT WITH LOW VOLATILITY OF
PRINCIPAL. THE FUND SEEKS ITS NEW
OBJECTIVE BY INVESTING PRIMARILY IN
ADJUSTABLE-RATE U.S. GOVERNMENT
SECURITIES. THE FIRST CHART REPRESENTS
THE LIFE-OF-FUND PERFORMANCE (SINCE
SEPTEMBER 1, 1987), AND THE FOLLOWING
CHARTS REPRESENT THE FUND'S PERFORMANCE
UNDER ITS NEW OBJECTIVE (SINCE JANUARY
1, 1992).
(1)PERFORMANCE INCLUDES REINVESTMENT OF
DIVIDENDS AND ADJUSTMENT FOR THE
APPLICABLE SALES CHARGE IN EFFECT AT
THE END OF THE PERIOD. IN COMPARING
KEMPER SHORT-TERM U.S. GOVERNMENT
FUND PERFORMANCE WITH THE LEHMAN
BROTHERS ADJUSTABLE RATE INDEX, YOU
SHOULD ALSO NOTE THAT THE FUND'S
PERFORMANCE REFLECTS THE MAXIMUM
SALES CHARGE, WHILE NO SUCH CHARGES
ARE REFLECTED IN THE PERFORMANCE OF
THE INDEX.
* THE MERRILL LYNCH 1-3 YEAR
GOVERNMENT INDEX IS A TOTAL-RETURN
INDEX CONSISTING OF SHORT-TERM U.S.
TREASURY SECURITIES MATURING IN 1 TO
3 YEARS WITH COUPONS HIGHER THAN
4.25%. IT IS CONSIDERED GENERALLY
REPRESENTATIVE OF THE MARKET FOR
THESE SECURITIES. SOURCE IS
WIESENBERGER(R).
+ THE U.S. CONSUMER PRICE INDEX IS A
STATISTICAL MEASURE OF CHANGE, OVER
TIME, IN THE PRICES OF GOODS AND
SERVICES IN MAJOR EXPENDITURE GROUPS
FOR ALL URBAN CONSUMERS. SOURCE IS
WIESENBERGER(R).
10
<PAGE> 11
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 8/31/00 ON 8/31/99
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES 66% 39%
................................................................................
U.S. TREASURIES 13 40
................................................................................
ASSET-BACKED SECURITIES 12 10
................................................................................
FOREIGN GOVERNMENT SECURITIES 8 10
................................................................................
CASH AND EQUIVALENTS 1 1
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
ON 8/31/00 ON 8/31/99
<S> <C> <C> <C> <C>
AVERAGE MATURITY 4.4 years 2.5 years
................................................................................
AVERAGE DURATION 2.1 years 1.9 years
--------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
KEMPER SHORT-TERM U.S. GOVERNMENT FUND
Portfolio of Investments at August 31, 2000
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS--0.9% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
REPURCHASE AGREEMENT--0.1%
State Street Bank and Trust Company, 6.57%, to be
repurchased at $119,022 on 9/1/2000 (b) $ 119,000 $ 119,000
--------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
SHORT-TERM NOTES--0.8%
Student Loan Marketing Association, 6.51%,
09/1/2000 1,400,000 1,400,000
--------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $1,519,000) 1,519,000
--------------------------------------------------------------------------------------
<CAPTION>
U.S. TREASURY OBLIGATIONS--13.3%
<S> <C> <C> <C> <C> <C>
U.S. Treasury Bonds:
6.5%, 2/15/2010 9,150,000 9,553,149
10.375%, 11/15/2012 3,100,000 3,853,207
U.S. Treasury Notes:
6.125%, 8/15/2007 3,600,000 3,628,692
6.75%, 5/15/2005 4,500,000 4,639,230
--------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $21,364,116) 21,674,278
--------------------------------------------------------------------------------------
<CAPTION>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATIONS--25.3%
<S> <C> <C> <C> <C> <C>
Government National Mortgage Association
Pass-thrus:
6.5% with various maturities to 7/15/2029 209,335 200,896
6.92%, 9/20/2024 2,187,310 2,194,134
7% with various maturities to 1/15/2029 1,220,179 1,197,910
8% with various maturities to 7/15/2015 1,999,999 2,039,999
8.5% with various maturities to 9/1/2030 490,987 502,878
9% with various maturities to 9/1/2030 33,938,481 35,147,620
9.5% with various maturities to 11/15/2020 21,864 22,862
--------------------------------------------------------------------------------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATIONS
(Cost $41,169,178) 41,306,299
--------------------------------------------------------------------------------------
<CAPTION>
U. S. GOVERNMENT AGENCY PASS-THRUS--40.9%
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corp.:
6% with various maturities to 12/15/2009 29,935,716 29,483,455
6.75% with various maturities to 8/15/2016 3,000,000 2,979,360
6.77% with various maturities to 5/25/2030 8,617,347 8,624,079
7.06% with various maturities to 6/25/2016 2,000,000 1,996,562
11% with various maturities to 12/1/2014 1,392 1,399
Federal National Mortgage Association:
5.5%, 2/25/2021 11,151,006 10,788,598
6% with various maturities to 1/20/2019 3,200,000 3,114,976
6.5%, 9/17/09 5,000,000 4,818,750
6.75% with various maturities to 8/15/2002 3,000,000 3,003,270
7% with various maturities to 7/15/2005 1,900,000 1,917,803
--------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY PASS-THRUS
(Cost $67,304,392) 66,728,252
--------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
ASSET BACKED(C)--12.1% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
MISCELLANEOUS--5.4%
Coast-Plymouth Tax Lien Capital, LLC, 6.76%,
11/15/2004 $ 1,810,759 $ 1,802,267
EQCC Home Equity Loan Trust, 6.88%, 7/15/2014 5,120,000 5,097,574
Residential Asset Securities Corp., 7.18%,
1/25/2025 2,000,000 1,983,438
--------------------------------------------------------------------------------------
8,883,279
-----------------------------------------------------------------------------------------------------------------------------
AUTOMOBILE RECEIVABLES--4.2%
Capital Automobile Receivable Asset Trust,
Series 1999-1 A2, 5.58%, 6/15/2002 3,668,362 3,645,435
Ford Credit Auto Owner Trust, Series 2000-C, A4,
7.24%, 2/15/2004 1,400,000 1,410,934
Toyota Auto Receivables Owner Trust,
Series 2000-C, A4, 7.21%, 4/15/2007 1,800,000 1,813,781
--------------------------------------------------------------------------------------
6,870,150
-----------------------------------------------------------------------------------------------------------------------------
CREDIT CARD RECEIVABLES--2.5%
Discover Card Master Trust I, Series 1996-4 A,
6.994%, 10/16/2013 1,600,000 1,608,992
MBNA Master Credit Card Trust, 6.899%,
8/15/2003 2,500,000 2,500,000
--------------------------------------------------------------------------------------
4,108,992
--------------------------------------------------------------------------------------
TOTAL ASSET BACKED
(Cost $19,936,139) 19,862,421
--------------------------------------------------------------------------------------
<CAPTION>
FOREIGN GOVERNMENT OBLIGATIONS--7.5%
<S> <C> <C> <C> <C> <C>
Government Trust Certificates:
9.25%, 11/15/2001 8,917,940 9,072,756
9.4%, 5/15/2002 3,115,374 3,150,578
--------------------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $12,597,341) 12,223,334
--------------------------------------------------------------------------------------
<CAPTION>
NUMBER OF
PURCHASED OPTIONS--0.0% CONTRACTS
<S> <C> <C> <C> <C> <C>
Euro Put Option, strike price at 92.75, expires
9/15/2001 (cost $71,200) 200 2,500
--------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100.0%
(Cost $163,961,366) (a) 163,316,084
--------------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost for federal income tax purposes was $164,038,928. At August 31,
2000, net unrealized depreciation for all securities based on tax cost was
$722,844. This consisted of gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$1,190,673 and gross unrealized appreciation for all securities in which
there was an excess market value over tax cost of $467,829.
(b) Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
(c) The Fund may invest up to 35% of its total assets in fixed income
securities other than U.S. Government securities.
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
As of August 31, 2000
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $163,961,366) $163,316,084
----------------------------------------------------------------------------
Cash 675
----------------------------------------------------------------------------
Receivable for Fund shares sold 110,391
----------------------------------------------------------------------------
Receivable for investments sold 6,182,337
----------------------------------------------------------------------------
Interest receivable 1,218,340
----------------------------------------------------------------------------
Other assets 141
----------------------------------------------------------------------------
TOTAL ASSETS 170,827,968
----------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased 6,228,750
----------------------------------------------------------------------------
Payable for Fund shares redeemed 825,755
----------------------------------------------------------------------------
Accrued management fee 105,076
----------------------------------------------------------------------------
Other accrued expenses and payables 271,820
----------------------------------------------------------------------------
Total liabilities 7,431,401
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $163,396,567
----------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income $ 214,535
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (645,282)
----------------------------------------------------------------------------
Accumulated net realized gain (loss) (15,155,859)
----------------------------------------------------------------------------
Paid-in capital 178,983,173
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $163,396,567
----------------------------------------------------------------------------
NET ASSET VALUE
CLASS A SHARES
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($121,333,551 / 15,228,804 outstanding shares of
beneficial interest, $.01 par value, unlimited number of
shares authorized) $7.97
----------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE (100/97.25 of $7.97) $8.20
----------------------------------------------------------------------------
CLASS B SHARES
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to
contingent deferred sales charge) per share ($34,952,443 +
4,366,973 outstanding shares of beneficial interest, $.01
par value, unlimited number of shares authorized) $8.00
----------------------------------------------------------------------------
CLASS C SHARES
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to
contingent deferred sales charge) per share ($7,110,573 +
888,957 outstanding shares of beneficial interest, $.01
par value, unlimited number of shares authorized) $8.00
----------------------------------------------------------------------------
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended August 31, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $12,297,351
---------------------------------------------------------------------------
Expenses:
Management fee 1,026,842
---------------------------------------------------------------------------
Services to shareholders 461,305
---------------------------------------------------------------------------
Custodian fee 10,132
---------------------------------------------------------------------------
Distribution services fees 382,902
---------------------------------------------------------------------------
Administrative services fees 432,195
---------------------------------------------------------------------------
Auditing 57,669
---------------------------------------------------------------------------
Legal 2,566
---------------------------------------------------------------------------
Trustees' fees and expenses 11,570
---------------------------------------------------------------------------
Reports to shareholders 170,994
---------------------------------------------------------------------------
Registration fees 133,252
---------------------------------------------------------------------------
Other 7,707
---------------------------------------------------------------------------
Total expenses, before expense reductions 2,697,134
---------------------------------------------------------------------------
Expense reductions (15,187)
---------------------------------------------------------------------------
Total expenses, after expense reductions 2,681,947
---------------------------------------------------------------------------
NET INVESTMENT INCOME 9,615,404
---------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments (2,722,592)
---------------------------------------------------------------------------
Futures (154,482)
---------------------------------------------------------------------------
(2,877,074)
---------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on:
Investments 2,079,823
---------------------------------------------------------------------------
Futures (40,530)
---------------------------------------------------------------------------
2,039,293
---------------------------------------------------------------------------
Net gain (loss) on investment transactions (837,781)
---------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 8,777,623
---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------
2000 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ 9,615,404 6,552,357
-----------------------------------------------------------------------------------------------------
Net realized gain (loss) (2,877,074) (3,143,969)
-----------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period 2,039,293 (2,342,900)
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 8,777,623 1,065,488
-----------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A (7,151,664) (4,932,995)
-----------------------------------------------------------------------------------------------------
Class B (1,909,007) (1,334,327)
-----------------------------------------------------------------------------------------------------
Class C (306,521) (212,821)
-----------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 179,074,092 96,716,671
-----------------------------------------------------------------------------------------------------
Reinvestment of distributions 7,422,481 5,078,364
-----------------------------------------------------------------------------------------------------
Cost of shares redeemed (223,924,494) (134,054,592)
-----------------------------------------------------------------------------------------------------
Shares issued in acquisition -- 169,781,407
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions (37,427,921) 137,521,850
-----------------------------------------------------------------------------------------------------
Increase (decrease) in net assets (38,017,490) 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 of $214,535 and $207,084, respectively) $ 163,396,567 201,414,057
-----------------------------------------------------------------------------------------------------
</TABLE>
16 The accompanying notes are an integral part of the financial statements.
<PAGE> 17
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
YEAR ENDED AUGUST 31,
---------------------------------------------
2000 1999 1998 1997 1996
<S> <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
---------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .43(b) .38(b) .41 .45 .46
---------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.03) (.22) (.11) .09 (.09)
---------------------------------------------------------------------------------------------------
Total from investment operations .40 .16 .30 .54 .37
---------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.42) (.36) (.42) (.45) (.45)
---------------------------------------------------------------------------------------------------
Total distributions (.42) (.36) (.42) (.45) (.45)
---------------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.97 7.99 8.19 8.31 8.22
---------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (A) 5.16 1.98 3.68 6.75 4.55
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 121,334 142,776 60,856 73,504 86,993
---------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.26 1.24 1.36 1.25 1.15
---------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.25 1.24 1.36 1.25 1.15
---------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 5.34 4.27 4.79 5.50 5.49
---------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 283 336 149 249 272
---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
YEAR ENDED AUGUST 31,
----------------------------------------
2000 1999 1998 1997 1996
<S> <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
----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .37(b) .31(b) .36 .39 .40
----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.02) (.22) (.11) .09 (.09)
----------------------------------------------------------------------------------------------
Total from investment operations .35 .09 .25 .48 .31
----------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.36) (.29) (.36) (.39) (.39)
----------------------------------------------------------------------------------------------
Total distributions (.36) (.29) (.36) (.39) (.39)
----------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.00 8.01 8.21 8.32 8.23
----------------------------------------------------------------------------------------------
TOTAL RETURN (%) (A) 4.57 1.10 3.06 5.96 3.79
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 34,952 50,573 7,108 7,404 6,298
----------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.94 2.08 1.99 1.93 1.89
----------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.93 2.08 1.99 1.93 1.89
----------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 4.66 3.43 4.16 4.82 4.75
----------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 283 336 149 249 272
----------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
YEAR ENDED AUGUST 31,
--------------------------------------
2000 1999 1998 1997 1996
<S> <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
-------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .37(b) .32(b) .36 .39 .40
-------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.02) (.22) (.11) .09 (.09)
-------------------------------------------------------------------------------------------
Total from investment operations .35 .10 .25 .48 .31
-------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.37) (.30) (.36) (.39) (.39)
-------------------------------------------------------------------------------------------
Total distributions (.37) (.30) (.36) (.39) (.39)
-------------------------------------------------------------------------------------------
Net asset value, end of period $8.00 8.02 8.22 8.33 8.24
-------------------------------------------------------------------------------------------
TOTAL RETURN (%) (A) 4.43 1.24 3.10 5.98 3.82
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 7,111 8,065 1,343 1,059 1,186
-------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.95 1.94 1.95 1.88 1.89
-------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.94 1.94 1.95 1.88 1.89
-------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 4.64 3.57 4.20 4.87 4.75
-------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 283 336 149 249 272
-------------------------------------------------------------------------------------------
</TABLE>
NOTES:
(a) Total return does not reflect the effect of any sales charges.
(b) Based on monthly average shares outstanding during the period.
18
<PAGE> 19
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 August 31, 2000) are offered to a limited
group of investors, are not subject to initial or
contingent deferred sales charges and have lower
ongoing expenses than other classes.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of the Fund have
equal rights with respect to voting subject to
class specific arrangements.
The Fund's financial statements are prepared in
accordance with accounting principles generally
accepted in the United States which require the use
of management estimates. The policies described
below are followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Portfolio debt securities
purchased with an original maturity greater than
sixty days are valued by pricing agents approved by
the officers of the Fund, whose quotations reflect
broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents
are unable to provide such quotations, the most
recent bid quotation supplied by a bona fide market
maker shall be used. Money market instruments
purchased with an original maturity of sixty days
or less are valued at amortized cost. All other
securities are valued at their fair value as
determined in good faith by the Valuation Committee
of the Board of Trustees.
REPURCHASE AGREEMENTS. The Fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
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, 2000, the Fund had a net tax basis
capital loss carryforward of approximately
$13,222,000, which may be applied against any
realized net taxable gains of each succeeding year
until fully utilized or until August 31, 2008
($3,776,000), August 31, 2007 ($603,000), August
31, 2006 ($129,000), August 31, 2004 ($1,623,000),
August 31, 2003 ($6,308,000) and August 31, 2002
($783,000), the respective expiration dates,
whichever occurs first. In addition, from November
1, 1999 through August 31, 2000 the Fund incurred
approximately $1,926,000 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,
2001.
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.
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date. Interest income is recorded on the
accrual basis. 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 year ended August 31, 2000, investment
transactions (excluding short-term instruments and
U.S. Government obligations) are as follows:
Purchases $209,919,384
Proceeds from sales 183,769,251
Investment transactions of U.S. Government
obligations are as follows:
Purchases $325,471,216
Proceeds from sales 322,001,825
--------------------------------------------------------------------------------
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 $1,026,842 for the
year ended August 31, 2000. This was equivalent to
an annualized effective rate of .55% of the Fund's
daily net assets.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions retained by KDI in
connection with the distribution of Class A shares
for the year ended August 31, 2000 are $5,712.
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares pursuant to separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the year ended August 31, 2000 are $621,387.
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 year ended August 31, 2000 are
$432,195, of which $20,099 is unpaid at August 31,
2000.
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 $398,604
for the year ended August 31, 2000 of which $59,788
is unpaid at August 31, 2000.
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or trustees of
Scudder Kemper. For the year ended August 31, 2000,
the Fund made no payments to its officers and
incurred trustees' fees of $11,570 to independent
trustees.
--------------------------------------------------------------------------------
4
CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
2000 1999
------------------------------ -----------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 17,286,556 $ 137,748,853 7,809,297 $ 63,403,954
-----------------------------------------------------------------------------------------
Class B 2,737,825 21,932,244 1,410,547 12,232,670
-----------------------------------------------------------------------------------------
Class C 1,102,989 8,828,244 637,877 5,191,940
-----------------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 704,009 5,594,343 464,912 3,760,082
-----------------------------------------------------------------------------------------
Class B 202,646 1,618,022 141,260 1,146,262
-----------------------------------------------------------------------------------------
Class C 26,321 210,115 21,180 172,020
-----------------------------------------------------------------------------------------
SHARES REDEEMED
Class A (21,962,410) (174,869,758) (11,507,455) (93,320,089)
-----------------------------------------------------------------------------------------
Class B (3,564,918) (28,509,936) (2,401,364) (19,499,695)
-----------------------------------------------------------------------------------------
Class C (1,245,781) (9,980,048) (656,732) (5,346,701)
-----------------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 1,324,576 10,564,751 1,961,348 15,888,107
-----------------------------------------------------------------------------------------
Class B (1,319,536) (10,564,751) (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 $ (37,427,921) $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 year
ended August 31, 2000, the Fund's custodian and
transfer agent fees were reduced by $2,956 and
$12,231, respectively, under these arrangements.
--------------------------------------------------------------------------------
6
LINE OF CREDIT The Fund and several Kemper funds (the
"Participants") share in a $750 million revolving
credit facility with Chase Manhattan Bank for
temporary or emergency purposes, including the
meeting of redemption requests that otherwise might
require the untimely disposition of securities. The
Participants are charged an annual commitment fee
that is allocated, pro rata based upon net assets,
among each of the Participants. Interest is
calculated based on the market rates at the time of
the borrowing. The Fund may borrow up to a maximum
of 33 percent of its assets under the agreement.
22
<PAGE> 23
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER SHORT TERM U.S. GOVERNMENT FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Short Term U.S. Government
Fund as of August 31, 2000, and the related statements of operations for the
year then ended, and changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the fiscal periods
since 1996. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of August 31, 2000, by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Short Term U.S. Government Fund at August 31, 2000, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the fiscal periods since 1996 to conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
Chicago, Illinois
October 18, 2000
23
<PAGE> 24
TRUSTEES&OFFICERS
<TABLE>
<S> <C> <C>
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
Chairman
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
</TABLE>
<TABLE>
<S> <C>
.............................................................................................
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
.............................................................................................
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 219557
Kansas City, MO 64121
.............................................................................................
CUSTODIAN AND STATE STREET BANK AND TRUST COMPANY
TRANSFER AGENT 225 Franklin Street
Boston, MA 02109
.............................................................................................
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
</TABLE>
KEMPER FUNDS LOGO Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Income Fund prospectus.
KSTGF - 2(10/25/00) 1122290
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
