<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED AUGUST 31, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
KEMPER
FLOATING RATE FUND
" ... Year to date, bank loans have been among the
best performing fixed income sectors. ... "
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
7
Portfolio Statistics
8
Portfolio of Investments
11
Report of Independent Auditors
12
Financial Statements
15
Notes to Financial Statements
19
Financial Highlights
20
Year 2000 Dividend Reinvestment Program
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER FLOATING RATE FUND
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE THREE-MONTH PERIOD ENDED AUGUST 31, 1999 (UNADJUSTED FOR ANY EARLY
WITHDRAWAL SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS B 1.23%
LIPPER LOAN PARTICIPATING FUNDS CATEGORY AVERAGE* 1.49%
- --------------------------------------------------------------------------------
</TABLE>
RETURNS 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
8/31/99 5/25/99
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER FLOATING RATE FUND CLASS B $4.99 $5.00
- --------------------------------------------------------------------------------
</TABLE>
* LIPPER ANALYTICAL SERVICES, INC. RETURNS ARE BASED UPON CHANGES IN NET ASSET
VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF SALES
CHARGES AND, IF THEY HAD, RESULTS MAY HAVE BEEN LESS FAVORABLE.
THE FUND MAY INVEST AN UNLIMITED AMOUNT OF ITS ASSETS IN LOWER AND NON RATED
INVESTMENTS, WHICH PRESENT A GREATER RISK TO PRINCIPAL AND INCOME THAN HIGHER
QUALITY INVESTMENTS.
THE LIMITED SECONDARY MARKET FOR SENIOR LOANS MEANS THE FUND MAY HAVE MORE RISK
THAN A FUND THAT INVESTS IN SECURITIES WITH A SECONDARY MARKET.
THE FUND MAY BORROW TO SATISFY QUARTERLY REPURCHASES AND TO MANAGE CASH FLOWS.
COLLATERAL MIGHT NOT ENTIRELY SATISFY THE BORROWER'S OF THE LOANS IN WHICH THE
FUND INVESTS OBLIGATIONS IN THE EVENT OF NONPAYMENT OF SCHEDULED INTEREST OR
PRINCIPAL, AND IN SOME CASES, MAY BE DIFFICULT TO LIQUIDATE ON A TIMELY BASIS.
ADDITIONALLY, A DECLINE IN THE VALUE OF THE COLLATERAL COULD CAUSE THE LOAN TO
BECOME SUBSTANTIALLY UNDER SECURED AND CIRCUMSTANCES COULD ARISE, SUCH AS THE
BANKRUPTCY OF THE BORROWER, WHICH COULD CAUSE THE VALUE OF THE FUND'S COLLATERAL
IN THE LOANS TO BE INVALIDATED.
THE FUND MAY BE UNABLE TO COMPLETELY ACCOMMODATE ALL QUARTERLY REDEMPTION
REQUESTS.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND INFORMATION FOR THE FUND AS OF
AUGUST 31, 1999.
<TABLE>
<CAPTION>
B SHARES
- ------------------------------------------------------------------------------
<S> <C>
YEAR-TO-DATE INCOME: $0.0742
- ------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0285
- ------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE+: 6.50%
- ------------------------------------------------------------------------------
</TABLE>
+ DISTRIBUTION RATES ARE HISTORICAL AND WILL FLUCTUATE.
TERMS TO KNOW
CREDIT SPREADS The credit spread is the difference in yields between higher-
quality and lower-quality bonds, typically comparing the same types of bonds.
For example, if AAA-rated corporate bonds yield 5 percent, and BBB-rated
corporate bonds yield 6 percent, the credit spread is 1 percent. When the spread
becomes less because the higher yield drops or the lower yield rises, the spread
is said to "narrow." When the opposite occurs, the spread is said to "widen."
LIBOR The London Inter Bank Offered Rate (LIBOR) is released by the British
Bankers Association (BBA) each business day in London at 11.00 BST. The
calculation is an average of the offer side rates reported to the BBA by many of
the world's leading banks. It has become the standard for the settlement of
derivative securities and most financial instruments that require rate
determination at a certain date.
SENIOR BANK LOANS Senior bank loans are commercial loans that are typically high
yielding and made by groups of financial institutions to corporations. Usually
but not always, these loans are secured by senior claims on assets, specific
collateral and strict loan covenants. Collateral that typically backs senior
loans includes buildings, equipment, inventory, accounts receivable, patents,
trademarks, and common and preferred stock in operating subsidiaries. The
interest rates of senior bank loans adjust periodically based on a benchmark
indicator of prevailing interest rates such as LIBOR.
TOTAL RETURN An investment's total return figure measures both its net
investment income and any realized price appreciation or depreciation for a
given period. Total return assumes reinvestment of all dividends and represents
the aggregate percentage or dollar value change over the period.
<PAGE> 3
ECONOMIC OVERVIEW
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER:
Interest rates have consumed investors' attention for the past six months, but
immediate concerns of rate hikes came to a halt in October when the Federal
Reserve Board declined to raise its key interest rate, the overnight bank
lending rate, for a third time this year. To gain a better understanding of how
the Fed's recent interest rate decisions affect the economic outlook for the
remainder of 1999, let's review some of the economic events of the past few
months.
Talk of rising interest rates began last spring, and on June 30 the Fed
boosted its key interest rate -- the overnight bank lending rate -- one quarter
of a point (0.25%). With this move the Fed said it was not inclined to increase
rates again soon, although it noted that it was alert to the potential emergence
of inflationary pressures that could undermine economic growth.
Talk of a second hike began in July after Fed Chairman Alan Greenspan's
commentary to the House Banking Committee, which was part of the Fed's
twice-yearly outlook report required by the Humphrey-Hawkins Full Employment and
Balanced Growth Act of 1978. While Greenspan didn't say that the Fed definitely
would raise the overnight bank lending rate at its next meeting, the tone of his
report included more warnings than expected about the need to follow the June
rate increase with another. Speculation became reality at the Aug. 24 Fed
meeting, when the Fed once again raised the overnight bank lending rate by one
quarter of a point (0.25%).
While many investors were frustrated by the rate hikes when there were no
signs of inflation, Fed policymakers looked at the situation another way: If the
earlier increases were not enough to bring inflation risks into balance, a
"euphoric" rise in stocks could fuel increased consumer spending, which could
necessitate a more disruptive adjustment later. In its June and August rate
hikes, the Fed was acting promptly to prevent such an adjustment. In other
words, the Fed strongly believes that "a stitch in time saves nine" -- it wants
to be preemptive by raising interest rates and slowing the economy before an
inflation problem arises.
With two rate hikes behind them, investors began speculating about the
possibility of a third hike at the Fed's Oct. 5 meeting. There are some
indications that inflationary pressures still exist.
To start, the Fed forecasts that the consumer price index (CPI), the average
value of an imaginary "basket" of goods and services in the economy, could rise
as much as 2.5 percent this year, up from 1.6 percent in 1998. Because CPI is
the standard measure of inflation, the Fed has to take any acceleration
seriously.
Employment growth also has the Fed worried. Job creation has exceeded the
growth of the labor force since 1993, bringing the unemployment rate down to its
lowest level since 1970. The Fed believes that if the pool of job seekers
shrinks sufficiently, upward pressures on wage costs are likely. One of the core
beliefs of modern economics is that rising wages will produce price inflation as
companies seek to pass their rising costs along to their customers. Thus far in
this economic expansion, this hasn't happened, but the Fed does not feel it can
take a chance that such good luck will last.
Gross domestic product (GDP), the value of all goods and services produced in
the United States, has been growing faster than the Fed believes it can without
causing inflation. The Fed believes that GDP can grow slightly faster than 3.0
percent per year without generating inflation. Actual 1998 GDP growth was 3.9
percent and we expect about the same in 1999.
Rapid productivity growth is the antidote to inflation. After languishing at
an average annual increase of about 1 percent in the 1970s and 1980s,
productivity growth has recently accelerated. Over the past four quarters it has
increased 2.8 percent in the entire economy and even faster in the business
sector. However, when growth slowed to under 2 percent in the second quarter,
productivity dropped back sharply. While a one-quarter dip in productivity is no
cause for worry, the Fed will be watching developments closely. Should the gains
in technology that have fostered the productivity growth slow, inflationary red
flags would go up.
Improving economic conditions around the world mean that the U.S. economy will
no longer experience declines in basic commodity and import prices that have
helped curtail inflation in recent years. Crude oil -- one of the most important
and visible commodities, used to make everything from gasoline to plastic bags
- -- is up nearly 90 percent from its February lows.
Despite these inflationary suggestions, however, signs of actual inflation
remain few and far between, and in its Oct. 5 decisions, the Fed left rates
unchanged.
The Fed did, however, shift its policy bias from neutral toward tightening.
The accompanying press release softened that a bit by noting that "such a
directive did not signify a commitment to near-term action."
Clearly the Fed is nervous, but it is willing to wait on incoming data --
including two employment reports and
3
<PAGE> 4
ECONOMIC OVERVIEW
ECONOMIC GUIDEPOSTS
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND
SHAREHOLDER DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR
DEFLATION, CREDIT EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON
MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR
INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE
10-YEAR TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES.
THE OTHER DATA REPORT YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (9/30/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 5.90 5.25 4.80 6.20
Prime rate (2) 8.25 7.75 8.50 8.50
Inflation rate (3)* 2.25 1.60 1.60 2.30
The U.S. dollar (4) -3.9 -0.2 4.40 8.70
Capital goods orders (5)* 3.00 5.60 15.60 16.20
Industrial production (5)* 2.40 1.80 3.60 5.70
Employment growth (6)* 2.20 2.40 2.70 2.40
</TABLE>
<TABLE>
<S> <C>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN (4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR
A BIG PLUS FOR FINANCIAL ASSETS. IMPACT U.S. EXPORTERS AND THE VALUE OF U.S. FIRMS'
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE FOREIGN PROFITS.
THEIR BEST BORROWERS. (5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN PERFORMANCE.
THE LAST FIVE YEARS, INFLATION HAS BEEN AS HIGH (6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE *DATA AS OF 8/30/99.
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
</TABLE>
several inflation reports -- before moving again. We expect that the Fed would
prefer to hold off from further rate hikes because of the Y2K issue: It would
prefer not to add to any potential Y2K fears or appear responsible for
Y2K-related volatility in the financial markets.
The long-term possibility of interest rate hikes is likely to be affected by
political considerations. Election primaries begin in February 2000. Will
candidates be talking about tax cuts? Medicare reform? Social Security reform?
These will be the issues to consider when we look at the economy in early- to
mid-2000.
Hopefully it will be as easy for investors to obtain information about Fed
policies at that time as it is today. The Humphrey-Hawkins hearings were created
to give Congress and the public some idea of economic growth and inflation. But
this round of Humphrey-Hawkins hearings could be the last, because the
Humphrey-Hawkins law expires this year. Although Greenspan has said he thinks it
is important for the Fed to report to Congress, and House Banking Committee
Chairman Jim Leach intends to press for a new law, there has been no move to
enact a new reporting requirement. Although the Fed could still provide
hearings, without a law forcing it to do so within a certain framework, we would
likely have no consistent basis for analyzing monetary policy.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
Scudder Kemper Investments Economics Group
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF SCUDDER KEMPER
INVESTMENTS, INC. AS OF OCTOBER 5, 1999, AND MAY NOT ACTUALLY COME TO PASS. THIS
INFORMATION IS SUBJECT TO CHANGE. NO PART OF THIS MATERIAL IS INTENDED AS AN
INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
PERFORMANCE UPDATE
[TRUTTER PHOTO]
JONATHAN TRUTTER IS LEAD PORTFOLIO MANAGER OF THE FUND. HE JOINED THE
ORGANIZATION IN 1989 AND CURRENTLY DIRECTS KEMPER'S BANK LOAN DEPARTMENT.
MARK E. WITTNEBEL IS A PORTFOLIO MANAGER FOR THE FUND. HE ALSO HAS BEEN WITH THE
ORGANIZATION SINCE 1989 AND HAS WORKED IN THE INVESTMENT INDUSTRY SINCE 1980.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
KEMPER FLOATING RATE FUND COMMENCED OPERATIONS ON MAY 25, 1999. IN THE
FOLLOWING Q&A, THE INVESTMENT TEAM SHARES THEIR VIEWS ON THE FIXED-INCOME
MARKETS IN GENERAL, THE BANK LOAN MARKET IN PARTICULAR, AND THE CURRENT
POSITIONING OF THE FUND.
Q BEFORE WE GET INTO THE SPECIFICS OF THE FUND, COULD YOU GIVE SHAREHOLDERS
A QUICK SNAPSHOT OF THE FORCES THAT AFFECTED THE FIXED INCOME-MARKETS RECENTLY?
A Probably the main thing to note is that economic growth around the globe
appears to be accelerating. That's a good thing for most investors, but for bond
investors, it raises concerns over the potential for higher interest rates and
higher inflation. If inflation goes up, the fixed returns on a bond are worth
less, and its price tends to decline. That's what we've seen so far in 1999. The
U.S. economy was growing more strongly than the Federal Reserve would like, so
the Fed raised the federal funds rate twice in the last three months in an
effort to curb economic growth and keep inflation subdued. At the same time,
with many foreign economies returning to a stronger footing and higher yields
available abroad, some investors pulled money out of the U.S. Treasury market
and invested it overseas. The resulting lack of demand has pushed interest rates
in the United States steadily higher. This is the opposite of what happened at
the end of 1998. Then, investors were nervous about shaky foreign economies and
poured money into U.S. Treasuries, and the demand dragged yields down to
historically low levels.
The bottom line has been a steady rise in interest rates across the board
in the United States in 1999. To give you a sense of the returns in the market,
the Lehman Aggregate Bond Index*, a broad cross-section of government and
corporate bonds of all maturities, was down 1.84 percent year-to-date as of
August 31, 1999.
* THE LEHMAN AGGREGATE BOND INDEX IS A TOTAL RETURN INDEX INCLUDING FIXED-RATE
DEBT ISSUES RATED INVESTMENT-GRADE OR BETTER. IT CONTAINS GOVERNMENT,
CORPORATE AND MORTGAGE SECURITIES AND IS GENERALLY CONSIDERED REPRESENTATIVE
OF THE MARKET FOR INVESTMENT-GRADE BONDS AS A WHOLE.
Q WHAT HAS THIS MEANT FOR THE BANK LOAN MARKET, IN WHICH THE FUND INVESTS?
A In comparison, bank loans as an asset class have performed well. Year to
date, bank loans have been among the best performing fixed income sectors.
Because bank loans have floating rates, they tend to be much less volatile than
fixed-rate assets. When interest rates go up, the rates on these loans generally
reset higher and investors may get more income. So, while other income-oriented
asset classes have had a rough ride in 1999, the bank loan market has been one
of the few asset classes to provide positive returns.
So far, bank loans have proved to be a solid performer in this rising
interest rate environment. That supports our view that the fund has the
potential to be both a good source of current income and an outstanding
diversification tool for fixed-income investors.
Q HOW DID THE FUND PERFORM FOR THE THREE-MONTH PERIOD?
A The dividend yield as of August 31 was 6.50 percent (annualized), and we
expect that
5
<PAGE> 6
PERFORMANCE UPDATE
may increase as we go forward. For the three-month period ended August 31, 1999,
the fund's total return was 1.23 percent. When you compare that with the Lehman
Aggregate Bond Index return of - 0.79 percent for the same period, you can see
that the fund has offered investors a cushion despite a difficult market for
fixed-income investments.
Q YOU SAID YOU EXPECTED THE CURRENT YIELD TO INCREASE GOING FORWARD. WHY?
A One reason is that LIBOR (London Inter Bank Offered Rate -- see Terms To
Know on page 2) has been rising. The three-month LIBOR was 5 percent when the
fund started, and it's now approximately 5.50 percent. Most bank loans are tied
to LIBOR, and if it continues to move higher, then bank loan yields should
increase as well. Of course, LIBOR is a moving target and may vary on either
side of present levels. In addition, if we gain assets as we have been, our
larger size could allow expenses to decrease because we can spread the costs of
operating the fund over a larger shareholder base, which could translate to a
higher yield for the fund.
Q WHAT DOES THE PORTFOLIO LOOK LIKE CURRENTLY?
A We've committed to 38 names in the portfolio. We have 13 percent cash and
equivalent right now, and much of this cash is committed to deals. Also, it
looks like a good forward calendar in the fall will offer us plenty of
opportunities to buy, so we expect to be able to invest at attractive spreads.
There are no foreign credits in the portfolio right now.
Q SO FAR, THE BANK LOAN MARKET HAS PERFORMED AS ADVERTISED IN THIS RISING
RATE ENVIRONMENT. WHAT'S YOUR OUTLOOK FOR THE BOND MARKETS IN GENERAL AND THE
BANK LOAN MARKET IN PARTICULAR?
A We don't see the overall bond market getting much less volatile in the
near term. First, there's uncertainty regarding whether the Fed will raise
interest rates again. It doesn't appear that it will since, following the 25
basis point increase in August, the Fed changed its stance from a tightening
bias to a neutral bias. But if economic or labor numbers suggest continued
strong acceleration in the economy, the Fed could certainly raise rates again.
Then there's the uncertainty regarding Y2K and the effect it will have on
financial markets, if any. Once the new millennium begins, we believe investors
will react to how smoothly the transition went, so there's likely to be
additional volatility in the first quarter.
This year, the bank loan market has been less volatile than other classes
of fixed-income investments. We would expect that the market's good relative
performance will continue, providing there are no major credit problems. We note
that default rates are rising, but the economy remains strong, which suggests
that most companies should be able to meet their loan obligations. But for those
that don't, the market won't be kind. Therefore, solid research and selectivity
will be key. Our research department has experience built during a decade of
investing in bank loans, and our standards are very high, we don't buy 60
percent of the issues we are offered.
We're also fortunate to be able to rely on the experience of Scudder
Kemper's high yield bond department, which has been researching many of the same
types of companies for more than 20 years. Often, our bank loan borrowers are
also high-yield issuers. Our high-yield professionals can provide us with
additional research insights that we believe give us a distinct advantage over
our competitors. Between our bank loan department and our high-yield department,
we are confident that the fund can provide shareholders with the best
combination of attractive income and a relatively stable net asset value.
6
<PAGE> 7
PERFORMANCE UPDATE
TOTAL RETURN*
FOR THE PERIOD ENDED AUGUST 31, 1999 (ADJUSTED FOR THE MAXIMUM EARLY WITHDRAWAL
CHARGE)
<TABLE>
<CAPTION>
LIFE OF
CLASS
- ----------------------------------------------------------------------------------------
<S> <C> <C>
KEMPER FLOATING RATE FUND CLASS B -1.75% (since 5/25/99)
- ----------------------------------------------------------------------------------------
</TABLE>
RETURNS 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.
* TOTAL RETURN MEASURES NET INVESTMENT INCOME AND CAPITAL GAIN OR LOSS FROM
PORTFOLIO INVESTMENTS, ASSUMING REINVESTMENT OF DIVIDENDS AND, ADJUSTMENT FOR
THE MAXIMUM EARLY WITHDRAWAL CHARGE OF 3 PERCENT.
PORTFOLIO STATISTICS
PORTFOLIO LARGEST HOLDINGS*
<TABLE>
<CAPTION>
ON 8/31/99
- --------------------------------------------------------------------------------
<S> <C>
VARIABLE RATE SENIOR LOAN INTERESTS 85%
- --------------------------------------------------------------------------------
CASH EQUIVALENTS 13
- --------------------------------------------------------------------------------
OTHER 2
- --------------------------------------------------------------------------------
100%
</TABLE>
[PIE CHART]
MATURITY**
<TABLE>
<CAPTION>
ON 8/31/99
- --------------------------------------------------------------------------------
<S> <C>
YEARS TO MATURITY 5.63
- --------------------------------------------------------------------------------
MONTHS TO RESET 1.64
- --------------------------------------------------------------------------------
</TABLE>
* PORTFOLIO HOLDINGS ARE SUBJECT TO CHANGE.
** SENIOR LOANS IN THE FUND'S PORTFOLIO GENERALLY ARE SUBJECT TO MANDATORY
AND/OR OPTIONAL PREPAYMENT. AS A RESULT, THE ACTUAL REMAINING MATURITY OF
SENIOR LOANS IN THE FUND'S PORTFOLIO MAY BE SUBSTANTIALLY LESS THAN THE
STATED MATURITIES SHOWN IN THIS REPORT.
7
<PAGE> 8
PORTFOLIO OF INVESTMENTS
KEMPER FLOATING RATE FUND
PORTFOLIO OF INVESTMENTS AT AUGUST 31, 1999
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
VARIABLE RATE SENIOR LOAN INTERESTS* -- 85.0% PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS--3.6%
Nextel Finance, Term Loan C
(LIBOR plus 3.50%), 3/31/2007 $2,400,000 $ 2,403,000
-----------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--1.5%
Juno Lighting, Inc., Term Loan B
(LIBOR plus 2.50%), 6/30/2006 1,000,000 1,000,000
-----------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER
DISCRETIONARY--3.9%
Pebble Beach Co., Term Loan B
(LIBOR plus 3.25%), 7/31/2006 2,600,000 2,600,000
-----------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--3.8%
American Safety Razor, Term Loan B
(LIBOR plus 3.75%), 4/30/2007 475,000 475,000
Spartan Stores, Inc., Term Loan B
(LIBOR plus 3.25%), 3/18/2007 2,000,000 2,000,000
-----------------------------------------------------------------------------
2,475,000
- -----------------------------------------------------------------------------------------------------------------------
DURABLES--3.8%
Decrane Finance, Term Loan C
(LIBOR plus 3.25%), 4/23/2006 1,496,250 1,496,250
Transportation Manufacturing Operations,
Term Loan (LIBOR plus 3.25%), 6/16/2006 1,000,000 998,750
-----------------------------------------------------------------------------
2,495,000
- -----------------------------------------------------------------------------------------------------------------------
HEALTH--11.4%
Alliance Imaging, Inc., Term Loan D
(LIBOR plus 2.75%), 6/18/2005 2,000,000 2,000,000
Dade Behring, Term Loan B
(LIBOR plus 2.875%), 6/30/2006 750,000 751,875
Dade Behring, Term Loan C
(LIBOR plus 3.125%), 6/30/2007 750,000 751,875
Sybron International Corp., Term Loan B
(LIBOR plus 2.00%), 7/31/2004 2,000,000 2,000,000
Triad Hospitals, Term Loan B
(LIBOR plus 4.00%), 11/1/2005 1,995,000 1,995,000
-----------------------------------------------------------------------------
7,498,750
- -----------------------------------------------------------------------------------------------------------------------
MANUFACTURING--24.8%
Arteva (Kosa), Term Loan B (LIBOR plus
3.25%), 12/31/2006 1,700,000 1,704,250
Huntsman ICI Chemicals, Term Loan B
(LIBOR plus 3.00%), 6/30/2007 1,000,000 1,002,500
Huntsman ICI Chemicals, Term Loan C
(LIBOR plus 3.25%), 6/30/2008 1,000,000 1,002,500
Lyondell Chemical, Term Loan E
(LIBOR plus 3.875%), 5/31/2006 1,995,000 2,002,482
Mueller Group, Term Loan B
(LIBOR plus 3.25%), 8/31/2006 1,000,000 1,000,000
Mueller Group, Term Loan C (LIBOR plus
3.50%), 8/31/2007 1,000,000 1,000,000
Packaging Corp. of America, Term Loan B
(LIBOR plus 3.25%), 4/12/2007 991,189 991,189
Packaging Corp. of America, Term Loan C
(LIBOR plus 3.50%), 4/12/2008 991,189 991,189
Riverwood Holding, Term Loan B (LIBOR
plus 3.00%), 2/28/2004 1,419,009 1,422,557
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Riverwood Holding, Term Loan C (LIBOR
plus 3.50%), 2/28/2004 $ 570,936 $ 572,363
Stone Container, Term Loan D (LIBOR plus
3.50%), 10/1/2003 995,683 995,683
Superior Telecom, Term Loan A
(LIBOR plus 3.00%), 11/27/2005 1,467,824 1,467,824
Tapco International Corp., Term Loan B
(LIBOR plus 3.25%), 7/31/2007 312,500 312,109
Tapco International Corp., Term Loan C
(LIBOR plus 3.50%), 7/31/2008 187,500 187,266
Terex Corp., Term Loan C (LIBOR plus
3.25%), 3/6/2006 1,672,000 1,672,000
-----------------------------------------------------------------------------
16,323,912
- -----------------------------------------------------------------------------------------------------------------------
MEDIA--5.6%
Charter Communications, Term Loan B
(LIBOR plus 2.50%), 3/18/2008 2,000,000 1,995,000
RCN Corp., Term Loan B
(LIBOR plus 3.5%), 6/3/2007 1,700,000 1,700,000
-----------------------------------------------------------------------------
3,695,000
- -----------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--5.1%
Ispat Inland, L.P., Term Loan B (LIBOR
plus 2.25%), 7/16/2005 847,859 841,500
Ispat Inland, L.P., Term Loan C (LIBOR
plus 2.75%), 7/16/2005 847,859 841,500
P & L Coal Holdings Corp., Term Loan B
(LIBOR plus 2.125%), 6/30/2006 1,700,000 1,695,750
-----------------------------------------------------------------------------
3,378,750
- -----------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--10.9%
Allied Waste Industries, Term Loan B
(LIBOR plus 2.75%), 7/31/2006 909,091 901,136
Allied Waste Industries, Term Loan C
(LIBOR plus 3.00%), 7/31/2007 1,090,909 1,081,364
American Media Operations, Term Loan B
(LIBOR plus 3.50%), 4/1/2007 1,000,000 1,001,250
Avis Rent-A-Car, Term Loan B (LIBOR plus
3.25%), 6/1/2006 500,000 495,000
Avis Rent-A-Car, Term Loan C (LIBOR plus
3.50%), 6/1/2006 500,000 495,000
Rent-A-Center, Inc., Term Loan B (LIBOR
plus 2.25%), 8/1/2006 765,000 760,219
Rent-A-Center, Inc., Term Loan C (LIBOR
plus 2.50%), 2/1/2007 935,000 929,156
SFX Entertainment, Term Loan B (LIBOR
plus 3.50%), 6/30/2006 500,000 500,000
URS Corporation, Term Loan B (LIBOR plus
3.25%), 6/9/2006 500,000 501,250
URS Corporation, Term Loan C (LIBOR plus
3.50%), 6/9/2006 500,000 501,250
-----------------------------------------------------------------------------
7,165,625
- -----------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--6.1%
Semiconductors Components, Term Loan B
(LIBOR plus 3.50%), 8/4/2006 962,963 959,352
Semiconductors Components, Term Loan C
(LIBOR plus 3.75%), 8/4/2007 1,037,037 1,033,148
Viasystems, Inc., Term Loan C (LIBOR plus
3.75%), 6/30/2005 2,000,000 1,995,000
-----------------------------------------------------------------------------
3,987,500
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MISCELLANEOUS--4.5%
Barjan Products, Term Loan B (LIBOR plus
3.50%), 5/6/2005 $1,000,000 $ 1,002,500
Felcor Lodging Trust, Inc., Term Loan
(LIBOR plus 2.50%), 4/30/2004 2,000,000 1,990,000
-----------------------------------------------------------------------------
2,992,500
-----------------------------------------------------------------------------
TOTAL VARIABLE RATE SENIOR LOAN INTERESTS
(Cost $56,151,785) 56,015,037
-----------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
COMMON STOCKS--2.2% SHARES
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pilgrim Prime Rate Trust (Cost
$1,426,485) 150,000 1,415,625
-----------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER--12.1% PRINCIPAL AMOUNT
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Home Loan Mortgage Corp., 5.42%,
9/1/1999 (Cost $8,000,000) $8,000,000 8,000,000
-----------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT--0.7%
- -----------------------------------------------------------------------------------------------------------------------
Repurchase Agreement with State Street
Bank and Trust Company dated 8/31/1999
at 5.41%, to be repurchased at $450,068
on 9/1/1999, collateralized by a
$375,000 U.S. Treasury Bond, 8.50%,
2/15/2020
(Cost $450,000) 450,000 450,000
-----------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100.0%
(Cost $66,028,270) $65,880,662
-----------------------------------------------------------------------------
</TABLE>
Based on the cost of investments of $66,028,270 for federal income tax purposes
at August 31, 1999, the gross unrealized appreciation was $27,981, the gross
unrealized depreciation was $175,589 and the net unrealized depreciation on
investments was $147,608.
*Senior loans in the fund's portfolio generally are subject to mandatory and/or
optional prepayment. As a result, the actual remaining maturity of senior loans
in the fund's portfolio may be substantially less than the stated maturities
shown in this report.
See accompanying Notes to Financial Statements.
10
<PAGE> 11
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER FLOATING RATE FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Floating Rate Fund, as of
August 31, 1999, the related statements of operations, changes in net assets and
cash flows, and the financial highlights for the period from May 25, 1999
(commencement of operations) to August 31, 1999. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
August 31, 1999, by correspondence with the custodian and brokers. 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 audit provides 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
Floating Rate Fund at August 31, 1999, the results of its operations, the
changes in its net assets and cash flows, and the financial highlights for the
period referred to above, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 19, 1999
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF ASSETS & LIABILITIES
August 31, 1999
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------
ASSETS
- ---------------------------------------------------------------------------
Investment securities, at value (cost $66,028,270) $65,880,662
- ---------------------------------------------------------------------------
Cash 70,024
- ---------------------------------------------------------------------------
Receivable for:
Investments sold 10,055
- ---------------------------------------------------------------------------
Interest 388,609
- ---------------------------------------------------------------------------
Fund shares sold 1,133,201
- ---------------------------------------------------------------------------
Prepaid registration fees 81,039
- ---------------------------------------------------------------------------
Due from adviser 375,748
- ---------------------------------------------------------------------------
Total assets 67,939,338
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
LIABILITIES
- ---------------------------------------------------------------------------
Dividends payable 82,386
- ---------------------------------------------------------------------------
Deferred facility fees 107,792
- ---------------------------------------------------------------------------
Accrued expenses 232,006
- ---------------------------------------------------------------------------
Total liabilities 422,184
- ---------------------------------------------------------------------------
Net assets $67,517,154
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ---------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income $ 187,679
- ---------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investment securities (147,608)
- ---------------------------------------------------------------------------
Accumulated net realized gain (loss) 344
- ---------------------------------------------------------------------------
Paid-in capital 67,476,739
- ---------------------------------------------------------------------------
Net assets applicable to shares outstanding $67,517,154
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
THE PRICING OF SHARES
- ---------------------------------------------------------------------------
CLASS B SHARES
NET ASSET VALUE, offering and redemption price (subject to
early withdrawal charge) per share ($67,517,154 / 13,521,852
shares of common stock issued and outstanding, $.01 par
value, unlimited shares authorized) $4.99
- ---------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
For the period May 25, 1999 (commencement of operations) to August 31,
1999
<TABLE>
<S> <C>
- -------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------
Dividends $ 14,850
- -------------------------------------------------------------------------
Interest 821,037
- -------------------------------------------------------------------------
Facilities fees 2,202
- -------------------------------------------------------------------------
Total investment income 838,089
- -------------------------------------------------------------------------
Expenses:
Management fee 58,513
- -------------------------------------------------------------------------
Custodian, accounting and transfer agent fees and related
expenses 30,309
- -------------------------------------------------------------------------
Reports to shareholders 8,259
- -------------------------------------------------------------------------
Auditing 20,000
- -------------------------------------------------------------------------
Legal 905
- -------------------------------------------------------------------------
Registration fees 74,676
- -------------------------------------------------------------------------
Organization 124,866
- -------------------------------------------------------------------------
Distribution service fees 70,216
- -------------------------------------------------------------------------
Administrative service fees 29,257
- -------------------------------------------------------------------------
Trustees' fees and other 5,194
- -------------------------------------------------------------------------
Total expenses before expense waiver 422,195
- -------------------------------------------------------------------------
Less expenses waived and absorbed by adviser 375,748
- -------------------------------------------------------------------------
Total expenses after expense waiver 46,447
- -------------------------------------------------------------------------
NET INVESTMENT INCOME 791,642
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
- -------------------------------------------------------------------------
Net realized gain (loss) from:
Investments 344
- -------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on:
Investments (147,608)
- -------------------------------------------------------------------------
Net loss on investments (147,264)
- -------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 644,378
- -------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
FOR THE PERIOD
MAY 25, 1999
(COMMENCEMENT OF
OPERATIONS) TO
AUGUST 31, 1999
- --------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------
<S> <C>
Net investment income $ 791,642
- --------------------------------------------------------------------------------
Net realized gain (loss) 344
- --------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) on
investments (147,608)
- --------------------------------------------------------------------------------
Net increase in net assets resulting from operations 644,378
- --------------------------------------------------------------------------------
Distribution from net investment income (715,163)
- --------------------------------------------------------------------------------
Net increase from capital share transactions 67,487,939
- --------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 67,417,154
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------
Beginning of period 100,000
- --------------------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment income of $187,679) $67,517,154
- --------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS
For the period May 25, 1999 (commencement of operations) to August 31,
1999
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- ----------------------------------------------------------------------------
Investment income received $ 557,272
- ----------------------------------------------------------------------------
Payment of expenses (271,228)
- ----------------------------------------------------------------------------
Proceeds from sales and maturities of investments 192,047
- ----------------------------------------------------------------------------
Purchases of investments (57,780,028)
- ----------------------------------------------------------------------------
Net purchases of short term investments (8,450,000)
- ----------------------------------------------------------------------------
Cash provided by operating activities (65,751,937)
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- ----------------------------------------------------------------------------
Subscriptions 65,998,292
- ----------------------------------------------------------------------------
Distributions paid (net of reinvestment of dividends) (276,331)
- ----------------------------------------------------------------------------
Cash provided by financing activities 65,721,961
- ----------------------------------------------------------------------------
Increase (decrease) in cash (29,976)
- ----------------------------------------------------------------------------
Cash at beginning of period 100,000
- ----------------------------------------------------------------------------
Cash at end of period $ 70,024
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
RECONCILIATION OF NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
TO CASH PROVIDED BY OPERATING ACTIVITIES:
- ----------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 644,378
- ----------------------------------------------------------------------------
Net (increase) decrease in cost of investments (66,028,270)
- ----------------------------------------------------------------------------
Net increase (decrease) in unrealized (appreciation)
depreciation on investments 147,608
- ----------------------------------------------------------------------------
(Increase) decrease in net investment income receivable (280,817)
- ----------------------------------------------------------------------------
(Increase) decrease in receivable for investments sold (10,055)
- ----------------------------------------------------------------------------
Increase (decrease) in accrued expenses (224,781)
- ----------------------------------------------------------------------------
Cash provided by operating activities $(65,751,937)
- ----------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Floating Rate Fund (the "fund") is a
non-diversified, closed-end management investment
company organized as a Massachusetts business trust
and registered under the Investment Company Act of
1940, as amended. The fund does not intend to list
the shares for trading on any national securities
exchange.
The fund currently offers one class of shares,
Class B. Class B shares are sold without an initial
sales charge, but incur a declining early
withdrawal charge ("EWC") if the shares are
repurchased by the fund within four years of
purchase. The charge is 3.0% for shares submitted
and accepted for repurchase during the first year
after purchase, 2.5% during the second year, 2.0%
during the third year, and 1.0% during the fourth
year. There is no EWC thereafter. Class B shares
automatically convert to Class A shares six years
after issuance. The fund intends to offer its
shares continuously. The fund will make quarterly
offers to repurchase a percentage of its
outstanding shares at net asset value. Because the
fund is a closed-end investment company,
shareholders are not able to redeem their shares on
a daily basis.
The fund's financial statements are prepared in
accordance with generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by the fund in the
preparation of its financial statements.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES SECURITY VALUATION. Investments are stated at
value. Portfolio debt securities purchased with an
original maturity greater than sixty days are
valued by pricing agents approved by the officers
of the fund, whose quotations reflect
broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents
are unable to provide such quotations, the most
recent bid quotation supplied by a bona fide market
maker shall be used. Money market instruments
purchased with an original maturity of sixty days
or less are valued at amortized cost.
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,
Inc. ("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 on such market. 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
shall be used.
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
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
be maintained at such a level that the market value
is equal to at least the principal amount of the
repurchase price plus accrued interest.
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. The
fund paid no federal income taxes and no federal
income tax provision was required.
DISTRIBUTION OF INCOME AND GAINS. Approximately all
of the net investment income of the fund is
declared as a daily dividend to shareholders of
record and is distributed to shareholders monthly.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, the fund may periodically make
reclassifications among certain of its capital
accounts without impacting the net asset value of
the fund.
STATEMENT OF CASH FLOWS. Information on financial
transactions which have been settled through the
receipt and disbursement of cash is presented in
the Statement of Cash Flows. The cash amount shown
in the Statement of Cash Flows is the amount
reported as cash in the fund's Statement of Assets
and Liabilities and represents the cash position in
its custodian bank account and does not include any
short-term investments at August 31, 1999.
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. Facilities fees received are
deferred and recognized on a straight-line basis as
income over the expected life of the loans.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The fund has a management
agreement with Scudder Kemper Investments, Inc.
("Scudder Kemper") and pays a monthly investment
management fee of 1/12th of the annual rate of
0.50% of the first $1 billion of average daily net
assets, 0.49% of the next $2 billion, 0.48% of the
next $2 billion, 0.47% of the next $5 billion, and
0.45% of average daily net assets over $10 billion.
The fund incurred no management fee after an
expense waiver by Scudder Kemper for the period
ended August 31, 1999.
Scudder Kemper agreed to temporarily waive and
reimburse certain operating expenses of the fund.
Under this arrangement, Scudder Kemper waived
expenses of $375,748 for the period ended August
31, 1999.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. ("KDI"). For services under the
distribution services agreement, the fund pays KDI
a fee of 0.60% of average daily net assets of the
Class B shares pursuant to a separate
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
distribution plan for Class B shares. Pursuant to
the agreement, KDI enters into related selling
group agreements with various firms at various
rates for sales of Class B shares. In addition, KDI
receives any early withdrawal fees ("EWC") from
redemptions of Class B shares. Distribution fees
were not imposed after an expense waiver by Scudder
Kemper for the period ended August 31, 1999. There
was no EWC for the period ended August 31, 1999.
ADMINISTRATIVE SERVICES AGREEMENT. The fund has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, the fund pays KDI a fee at an
annual rate of up to 0.25% of average daily net
assets of the fund. KDI in turn has various
agreements with financial services firms that
provide these services and pays these firms based
on assets of fund accounts the firms service.
Administrative services were not imposed after an
expense waiver by Scudder Kemper for the period
ended August 31, 1999.
SHAREHOLDER SERVICES AGREEMENT. Kemper Service
Company ("KSvC") is the transfer dividend paying
and shareholder service agent of the fund. Under
the agreement, shareholder services fees of $16,950
were not imposed after an expense waiver by Scudder
Kemper for the period ended August 31, 1999.
FUND ACCOUNTING FEES. Scudder Fund Accounting
Corporation ("SFAC"), a subsidiary of Scudder
Kemper, is responsible for determining the daily
net asset value per share and maintaining the
portfolio and general accounting records of the
fund. Fund accounting fees of $12,500 were not
imposed after an expense waiver by Scudder Kemper
for the period ended August 31, 1999.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. During the period ended August 31,
1999, the fund made no payments to is officers and
incurred trustees' fees of $2,613 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the period ended August 31, 1999, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $57,780,028
Proceeds from sales 201,547
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the fund:
<TABLE>
<CAPTION>
FOR THE PERIOD MAY 25, 1999
(COMMENCEMENT OF OPERATIONS)
TO AUGUST 31, 1999
-----------------------------
SHARES AMOUNT
----------------------------------------------------------------------------
<S> <C> <C>
SHARES SOLD
Class B 13,430,492 $67,131,493
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class B 71,360 356,446
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SHARES REDEEMED
Class B -- --
----------------------------------------------------------------------------
NET INCREASE FROM CAPITAL SHARES
TRANSACTIONS $67,487,939
----------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6 INVESTING IN SENIOR
LOAN INTERESTS Senior Loans are interests in adjustable rate loans
that have a senior right to payment, which, in many
circumstances, are fully collateralized by assets
of a corporation, partnership, limited liability
company, or other business entity. Senior Loans are
often issued in connection with recapitalizations,
acquisitions, leveraged buy-outs, and refinancings.
Because of a limited secondary market for Senior
Loans, the fund may be limited in its ability to
sell portfolio holdings at the price at which they
are valued by the fund to generate gains, avoid
losses, or to meet repurchase requests.
- --------------------------------------------------------------------------------
7 COMMITMENTS The fund can invest in certain Variable Rate Senior
Loan agreements that include the obligation to make
additional loans in certain circumstances. The fund
reserves against such contingent obligations by
segregating cash, liquid securities and liquid
Senior Loans. At August 31, 1999, the fund had
unfunded loan commitments of approximately
$328,000.
- --------------------------------------------------------------------------------
8 REPURCHASE OFFERS As a matter of fundamental policy, the fund will
offer to repurchase from 5% to 25% of its common
shares at net asset value at three month intervals.
The deadline for the repurchase offers will be a
business day in the months of February, May, August
and November. The price applicable to each
repurchase offer will be determined no later than
14 calendar days after each repurchase request
deadline (or, if not a business day, the next
business day). The first repurchase offer is
scheduled to occur in November 1999. Fund shares,
when submitted for repurchase, may be worth more or
less than their original cost.
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------
CLASS B
----------------
FOR THE PERIOD
FROM MAY 25, 1999
(COMMENCEMENT OF
OPERATIONS) TO
AUGUST 31, 1999(A)
- ------------------------------------------------------------------------------
<S> <C>
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------
Net asset value, beginning of period $ 5.00
- ------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.09
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (0.03)
- ------------------------------------------------------------------------------
Total from investment operations 0.06
- ------------------------------------------------------------------------------
Less distribution from net investment income (0.07)
- ------------------------------------------------------------------------------
Net asset value, end of period $ 4.99
- ------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)(B) 1.23%
- ------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------
Expenses absorbed by the fund 0.38%
- ------------------------------------------------------------------------------
Net investment income 6.53%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------
Expenses 3.48%
- ------------------------------------------------------------------------------
Net investment income 3.43%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------
Net assets at end of period (in millions) $ 67
- ------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 2.2%
- ------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive its management fee and
absorb certain operating expenses of the fund. The other ratios to average net
assets are computed without this expense waiver or absorption.
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been waived.
19
<PAGE> 20
YEAR 2000
YEAR 2000 ISSUE (UNAUDITED)
Like other registered investment companies and financial and business
organizations worldwide, the fund could be adversely affected if computer
systems on which the fund relies, which primarily include those used by the
Adviser, its affiliates and other service providers, are unable to process
correctly date-related information on and after January 1, 2000. This risk is
commonly called the Year 2000 Issue. Failure to address successfully the Year
2000 Issue could result in interruptions to and other material adverse effects
on the fund's business and operations. The Adviser has commenced a review of the
Year 2000 Issue as it may affect the fund and is taking steps it believes are
reasonably designed to address the Year 2000 Issue, although there can be no
assurances that these steps will be sufficient. In addition, there can be no
assurances that the Year 2000 Issue will not have an adverse effect on the
companies whose securities are held by the fund or on global markets or
economies generally.
DIVIDEND REINVESTMENT PROGRAM
DIVIDEND REINVESTMENT PROGRAM (UNAUDITED)
The fund's Dividend Reinvestment Program (the "Program") allows participating
shareholders to reinvest all dividends and capital gain distributions in
additional shares of the fund. Shares purchased by participants in the Program
in connection with the reinvestment of dividends will be issued by the fund at
net asset value. Generally for Federal income tax purposes, shareholders
receiving additional shares under the Program will be treated as having received
a distribution equal to the amount payable to them in cash as a distribution had
the shareholder not participated in the Program. All distributions to
shareholders whose shares are registered in their own names automatically will
be paid in shares, unless the shareholder elects to receive the distributions in
cash. Shareholders may elect to receive dividends and capital gain distributions
in cash by notifying KSvC, as Program Agent. Additional information about the
Program may be obtained from KSvC at 1-800-641-1048. If your shares are
registered in the name of a broker-dealer or other nominee (an "intermediary"),
you must contact the intermediary regarding its status under the Program,
including whether the intermediary will participate in the Program on your
behalf. No fees or expenses are imposed on shareholders by the fund or KSvC for
participants in the Program.
20
<PAGE> 21
NOTES
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
JAMES E. AKINS MARK S. CASADY
Trustee President MAUREEN E. KANE
Assistant Secretary
JAMES R. EDGAR PHILIP J. COLLORA
Trustee Vice President and CAROLINE PEARSON
Secretary Assistant Secretary
ARTHUR R. GOTTSCHALK
Trustee JOHN R. HEBBLE BRENDA LYONS
Treasurer Assistant Treasurer
FREDERICK T. KELSEY
Trustee ANN M. MCCREARY
Vice President
THOMAS W. LITTAUER
Trustee and Vice President ROBERT C. PECK, JR.
Vice President
KATHRYN L. QUIRK
Trustee and Vice President JOHNATHAN TRUTTER
Vice President
FRED B. RENWICK
Trustee MARK WITTNEBEL
Vice President
CORNELIA M. SMALL
Trustee LINDA J. WONDRACK
Vice President
JOHN G. WEITHERS
Trustee
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LEGAL COUNSEL DECHERT PRICE AND RHOADS
1775 Eye Street N.W.
Washington D.C. 20006
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TRANSFER AGENT KEMPER SERVICE COMPANY
AND SHAREHOLDER P.O. Box 419557
SERVICE AGENT Kansas City, MO 64141
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CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02109
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INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
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PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world(SM)
Printed in the U.S.A. on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Floating Rate Fund prospectus.
KFRF - 2 (10/25/99) 1090160
