<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED AUGUST 31, 2000
High current income consistent with preservation of capital.
KEMPER FLOATING RATE FUND
"... Income potential increased more than 20 percent during the past year, an
amount that kept pace with rising interest rates. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
7
PERFORMANCE UPDATE
10
TERMS TO KNOW
12
LARGEST SECTOR HOLDINGS
13
PORTFOLIO OF INVESTMENTS
18
FINANCIAL STATEMENTS
22
FINANCIAL HIGHLIGHTS
23
NOTES TO FINANCIAL STATEMENTS
28
REPORT OF INDEPENDENT AUDITORS
29
DIVIDEND REINVESTMENT PROGRAM
AT A GLANCE
KEMPER FLOATING RATE FUND AVERAGE
ANNUAL AND CUMULATIVE TOTAL RETURNS
FOR THE ONE-YEAR ENDING AUGUST 31, 2000 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
LIPPER LOAN PARTICIPATION FUNDS CATEGORY
KEMPER FLOATING RATE FUND CLASS B AVERAGE*
--------------------------------- ----------------------------------------
<S> <C>
5.94% 5.95%
</TABLE>
<TABLE>
<CAPTION>
LIFE OF
1-YEAR CLASS
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER FLOATING
RATE
FUND CLASS A n/a 4.90% (Since 11/1/99)
...............................................................
KEMPER FLOATING
RATE
FUND CLASS B 5.94% 5.63% (Since 5/25/99)
...............................................................
KEMPER FLOATING
RATE
FUND CLASS C n/a 4.84% (Since 11/1/99)
...............................................................
LIPPER LOAN
PARTICIPATION
FUNDS
CATEGORY AVERAGE* 5.95% n/a
...............................................................
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
KEMPER FLOATING RATE FUND
RANKINGS AS OF 8/31/00
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER LOAN PARTICIPATION FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
.............................................................
<S> <C> <C> <C> <C> <C>
1-YEAR n/a #8 of 21 funds n/a
.............................................................
</TABLE>
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
8/31/00 8/31/99
...........................................................
<S> <C> <C> <C> <C>
KEMPER FLOATING RATE $5.00)
FUND CLASS A $4.94 (as of 11/1/99
...........................................................
KEMPER FLOATING
RATE FUND CLASS B $4.92 $4.99
...........................................................
KEMPER FLOATING RATE $5.00)
FUND CLASS C $4.94 (as of 11/1/99
...........................................................
</TABLE>
*LIPPER, INC. RETURNS 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. THE FUND MAY
INVEST AN UNLIMITED AMOUNT OF ITS ASSETS IN LOWER-RATED AND NONRATED
INVESTMENTS, WHICH PRESENTS 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 REPURCHASE REQUIREMENTS AND TO MANAGE
CASH FLOWS. COLLATERAL MAY NOT ENTIRELY SATISFY THE BORROWER'S 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 UNSECURED,
AND CIRCUMSTANCES COULD ARISE, SUCH AS BANKRUPTCY OF THE BORROWER, THAT COULD
CAUSE THE FUND'S SECURITY IN THE LOANS' COLLATERAL TO BE INVALIDATED.
THE FUND MAY BE UNABLE TO COMPLETELY ACCOMMODATE ALL REDEMPTION REQUESTS.
DIVIDEND REVIEW
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND INFORMATION FOR THE FUND AS OF
AUGUST 31, 2000.
<TABLE>
<S> <C> <C> <C> <C> <C>
DIVIDEND HISTORY A SHARES B SHARES C SHARES
...............................................................
8/31/00 $0.0314 $0.0308 $0.0310
...............................................................
7/31/00 $0.0318 $0.0312 $0.0314
...............................................................
6/30/00 $0.0309 $0.0304 $0.0305
...............................................................
5/31/00 $0.0299 $0.0295 $0.0295
...............................................................
4/30/00 $0.0310 $0.0304 $0.0306
...............................................................
3/31/00 $0.0311 $0.0306 $0.0307
...............................................................
2/29/00 $0.0282 $0.0277 $0.0278
...............................................................
1/31/00 $0.0287 $0.0287 $0.0288
...............................................................
12/31/99 $0.0363 $0.0362 $0.0363
...............................................................
11/30/99 $0.0202 $0.0284 $0.0202
...............................................................
10/31/99 n/a $0.0266 n/a
...............................................................
9/30/99 n/a $0.0267 n/a
...............................................................
INCOME $0.2995 $0.3572 $0.2968
...............................................................
ANNUALIZED
DISTRIBUTION RATE:+ 7.63% 7.54% 7.53%
...............................................................
</TABLE>
+DISTRIBUTION RATES ARE HISTORICAL AND WILL FLUCTUATE.
<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:
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
[BABSON PHOTO]
KELLY D. BABSON IS LEAD PORTFOLIO MANAGER OF THE FUND. A MANAGING DIRECTOR, SHE
JOINED THE ORGANIZATION SIX YEARS AGO AND CURRENTLY DIRECTS SCUDDER KEMPER
INVESTMENTS, INC.'S PRIVATE DEBT GROUP, WHICH MANAGES INVESTMENTS IN PRIVATE
PLACEMENTS AND SENIOR BANK LOANS FOR A VARIETY OF CLIENTS. SHE IS ASSISTED BY A
TEAM OF BANK LOAN ANALYSTS. BABSON HAS AN M.B.A. FROM NEW YORK UNIVERSITY AND A
B.A. IN GOVERNMENT FROM GEORGETOWN UNIVERSITY.
KENNETH WEBER, A SENIOR VICE PRESIDENT, IS CO-PORTFOLIO MANAGER. HE HAS 15 YEARS
EXPERIENCE IN THE STRUCTURING, DISTRIBUTION AND TRADING OF FIXED-INCOME
SECURITIES. HE HAS AN M.B.A. FROM THE UNIVERSITY OF CHICAGO, A B.S. IN ECONOMICS
FROM JOHNS HOPKINS UNIVERSITY AND C.F.A. CERTIFICATION.
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 AND SHOULD NOT BE CONSIDERED AS A RECOMMENDATION OF ANY SPECIFIC
SECURITY.
KEMPER FLOATING RATE FUND PROVIDED AN INCREASED
LEVEL OF INCOME IN A RISING-INTEREST-RATE
ENVIRONMENT. KELLY BABSON SHARES HER VIEWS ON THE
BANK LOAN MARKET AND PROVIDES AN OUTLOOK FOR THE
FUND FOR THE YEAR AHEAD.
Q WHAT WERE THE DYNAMICS OF THE BANK LOAN AND BOND MARKETS BETWEEN AUGUST
1999 AND AUGUST 2000?
A Bank loans generally held up quite well in an environment of strong
economic growth, high volatility in equity and fixed-income markets, creeping
inflation and an aggressive Federal Reserve Board. For bonds, it was one of the
most volatile periods since 1994. The nation's unemployment rate reached 30-year
lows. Oil prices neared $35 a barrel, and consumer spending was brisk.
Unlike high-yield bonds, payments on floating-rate loans are adjusted
periodically in response to changes at the short end of the yield curve. The
steady increase we've had in the fed funds rate since August 1999 (from 5.25
percent to 6.50 percent) increased bank loan rates commensurately. At the same
time, credit markets reacted to rising levels of corporate stress and defaults
with a widening of credit spreads and heightened credit differentiation. Despite
the rise in distressed credits and the reluctance of some mutual funds to fully
use mark-to-market pricing, institutional investors continued to display strong
confidence in bank loans, given their priority claim on assets and floating rate
coupons. For much of the year, the risk/return ratios for bank loans were
attractive compared with most fixed-income investment alternatives.
Q HOW DID KEMPER FLOATING RATE FUND PERFORM IN THIS ENVIRONMENT?
A Kemper Floating Rate Fund's 12-month return of 5.94 percent (Class B
shares) was in line with the 5.95 percent return of the average loan
participation fund tracked by Lipper, Inc. The fund achieved a one-year Lipper
total return ranking of 8 among 21 loan participation funds*. During the period,
the amount of new investments into the fund increased dramatically.
Kemper Floating Rate Fund's 12-month results outpaced the 1.13 percent total
return of Lehman Brothers U.S. Corporate High Yield index, an unmanaged group of
lower-quality corporate bonds that vary in maturity. The fund's results were
also higher than the 5.71 percent, 12-month return of the Lehman Brothers 1- to
3-Year Government Bond index, an unmanaged group of high-quality bonds maturing
in less than three years. The Lehman Brothers Aggregate Bond index, a group of
long-term investment-grade bonds, rose 7.56 percent for the 12 months ended
August 31, 2000.
Kemper Floating Rate Fund's income potential increased more than 20 percent
during the past year, an amount that kept pace with rising interest rates. The
fund's distribution rate rose from 6.50 percent as of August 31, 1999, to 7.81
percent as
7
<PAGE> 8
PERFORMANCE UPDATE
of August 31, 2000. Thus, the fund maintained a more than 125-basis-point yield
advantage over the federal funds rate and a 100-basis-point yield advantage over
the six-month London Interbank Offer Rate (LIBOR, a benchmark yield for
short-term floating-rate securities) benchmark, which stood at 6.83 percent as
of August 31, 2000.
* SOURCE IS LIPPER INC.
Q
HOW STABLE WAS THE FUND'S NET ASSET VALUE DURING THE PAST YEAR?
A
For the first six months of fiscal year 2000, net asset value fell one
cent to $4.98 a share (for Class B shares). Between February 29, 2000, and
August 31, 2000, the fund's net asset value fell six cents to $4.92 (for Class B
shares). The cause of the decline during the second half of the year was a
devaluation of one loan, which we sold at a loss in July. The loan, made to
Safety-Kleen, lost value unexpectedly after the waste management company's
senior executives resigned and accounting problems surfaced at the company.
Based on our market observations, we believe other loan participation funds
investing in Safety-Kleen also suffered losses during the period. Given what we
saw as continuing uncertainties for Safety-Kleen and the limited potential for a
rebound, we decided to liquidate the position in an effort to maintain a
portfolio free of distressed securities.
Q
WHAT DOES THE KEMPER FLOATING RATE FUND PORTFOLIO LOOK LIKE CURRENTLY?
A
We've invested in loans across many industries. The fund's largest
industry position was in telecommunications as of August 31, 2000 (see Top 10
Loan Holdings and Sector Weightings chart).
Since the fund's last shareholder report in February 2000, the fund's cash
position has risen and stood at 22 percent of net assets as of August 31, 2000.
This is higher than we would have liked, and reflects the limited supply of
attractive new loans coming to market this past spring and summer. The loan
market, partly in response to some of the stresses in the high-yield bond
market, has seen a fairly significant slowdown in supply this year, with supply
down more than 30 percent from the levels of 1999, by our estimate.
We are making every effort to be fully invested while at the same time
adhering to strict credit selection guidelines. We hope that what appears to be
a resurgence of merger and buyout activity in several industrial sectors such as
automotive and packaging will provide us with increased buying opportunities
this autumn.
Keeping Up With The Fed Kemper Floating Rate Fund's Distribution Rate (Class B
shares)
June 30, 1999 to August 31, 2000
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER FLOATING RATE FUND
DISTRIBUTION RATE (CLASS B SHARES) FEDERAL FUNDS RATE
---------------------------------- ------------------
<S> <C> <C>
6/30/99 6.40 5.00
6.40 5.00
6.70 5.25
6.70 5.25
6.70 5.25
6.80 5.50
12/31/99 6.80 5.50
6.80 5.50
7.09 5.75
7.35 6.00
7.41 6.00
7.41 6.50
6/30/00 7.53 6.50
7.53 6.50
7.81 6.50
9/30/00 7.81 6.50
</TABLE>
Source: Bloomberg Business News
Past performance does not guarantee future results. Distribution rate is
calculated by taking the sum of the previous 30 days of distribution factors and
dividing this sum by the fund's net asset value as of 8/31/00. The value is then
annualized. Rates change monthly and depend on the fund's net asset value as of
8/31/00 and current distributions. Class A and Class C distribution rates were
8.02% and 7.81%, respectively, as of 8/31/00. Distribution rates and returns
will vary by class.
The federal funds rate is the interest rate banks charge each other for
overnight loans. The Federal Reserve Board regularly sets a target federal funds
rate to influence the level of U.S. economic activity. The rate is not
representative of the yield or return of any Kemper fund and changes
periodically.
Q
TELECOMMUNICATIONS AND BROADCASTING ARE CURRENTLY THE FUND'S LARGEST
SECTOR WEIGHTINGS. HOW DID THESE LOANS DO IN THE PAST YEAR?
A
The fund's holdings in these sectors did especially well. Several of our
borrowers were acquired by higher-rated companies, resulting in a refinancing of
their debt. Our focus on top-tier names in the rapidly evolving
telecommunications sector helped us avoid some problems as the funding dynamics
of the capital-intensive telecom sector changed following a major correction in
telecom equities this past spring. The easy access to capital that this sector
enjoyed has dried up. Lending standards are tighter, and potential investors are
evaluating new issues with a fine-tooth comb, rejecting firms that lack solid
business plans. Our approach continues to favor established companies with
stable management teams, solid business plans, strategic asset value and
adequate funding.
Given the fast-growth scenario that many telecom companies are
8
<PAGE> 9
PERFORMANCE UPDATE
employing and the positive prospects going forward, we're very comfortable with
a relative overweighting in this sector.
Q HAVE YOU MADE ANY MAJOR CHANGES IN THE PORTFOLIO SINCE YOU BECAME LEAD
PORTFOLIO MANAGER THIS PAST APRIL?
A We are fortunate that with one exception, Safety-Kleen, the portfolio we
inherited appears sound. Therefore, our core positioning has not changed since
April. We have hired three additional analysts in Boston to fill vacancies and
have further refined our disciplined investment process. In our view, the key to
adding value to the portfolio is through careful fundamental research.
In evaluating loans, we look for sound business and industry fundamentals,
solid management teams, relatively stable cash flow and strong equity
sponsorship. Recently, we have also added some quantitative risk assessment
tools to supplement our credit analysis.
Q HOW DOES THE FUND'S INVESTMENT STRATEGY AND LOAN PRICING POLICY DIFFER
FROM SOME OF ITS PEERS?
A Some bank loan mutual funds invest in a mix of bank loans and high-yield
corporate bonds to increase income potential. Given the investment objective of
this fund, we refrain from this strategy because it adds interest-rate risk to
the portfolio, as well as the potential for greater price volatility, and we
believe many of the fund's shareholders have included the fund in their asset
allocation mix specifically to reduce the effect volatility can have on their
portfolios.
To place a value on loans in the portfolio, we use mark-to-market pricing (see
Terms To Know, on page 10). Some funds use this method for only a portion of
their portfolios and instead rely on "fair-value pricing," a more subjective way
of pricing loans. We think mark-to-market pricing helps us maintain a more
current net asset value.
Q WHEN INTEREST RATES CHANGE, HOW DOES IT AFFECT THE INCOME POTENTIAL OF
LOANS IN THE PORTFOLIO?
A Rates on floating-rate loans can be reset higher or lower, usually once
every few months, depending on the direction of interest rates. As of August 31,
2000, most loans in the fund's portfolio had reset provisions that have the
potential to change a borrower's payments every three months. In some ways, a
corporate borrower is in a position analogous to that of a home owner with an
adjustable-rate mortgage. The borrower benefits from a drop in rates, while it
is the lender that benefits from an increase in rates.
Q WHAT'S YOUR 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. Oil prices
have not retreated, natural gas shortages loom for the winter ahead, and the
unemployment rate remains near historic lows. In a few short weeks, we'll also
see the fruits of this fall's national election, an event that has the potential
to change economic, equity market and interest-rate expectations.
In our view, more bond market volatility lies ahead. 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 6.30 percent,
58 basis points more than 10-year bonds. While the Treasury Department's ongoing
buyback program will undoubtedly 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 interest rates rise again, we believe that Kemper Floating
Rate Fund's ability to capture added income from bank loans while striving for a
relatively stable net asset value will be more attractive than ever.
9
<PAGE> 10
TERMS TO KNOW
CREDIT SPREAD The difference in yield between higher-quality and lower-quality
bonds of similar duration, 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."
FEDERAL FUNDS RATE The interest rate that banks charge each other on overnight
loans. The Federal Reserve Board's Open Market Committee sets a target rate to
either make credit more easily available or tighten monetary policy in an
attempt to avoid economic imbalances such as high inflation.
MARK-TO-MARKET PRICING Mark-to-market pricing is an objective way to establish
the value of loans in a floating-rate fund's portfolio. In using this method, a
fund's management team relies on independent agents who monitor and record daily
fluctuations in the value of loans.
SENIOR BANK LOANS Senior bank loans are commercial loans that are typically high
yielding and made by groups of financial institutions to corporations. Usually,
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.
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.
10
<PAGE> 11
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED AUGUST 31, 2000
(ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR CLASS
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER FLOATING RATE FUND CLASS A n/a 4.90% (since 11/1/99)
....................................................................................................
KEMPER FLOATING RATE FUND CLASS B 3.47% 3.73 (since 5/25/99)
....................................................................................................
KEMPER FLOATING RATE FUND CLASS C n/a 3.85 (since 11/1/99)
....................................................................................................
</TABLE>
KEMPER FLOATING RATE FUND
Growth of an assumed $10,000 investment in Class B
shares from 5/31/99 to 8/31/00
[LINE GRAPH]
<TABLE>
<CAPTION>
KEMPER FLOATING RATE LEHMAN BROTHERS US CONSUMER PRICE
FUND CLASS B1 AGGREGATE BOND INDEX+ INDEX++
-------------------- --------------------- -----------------
<S> <C> <C> <C>
5/31/99 10000 10000 10000
9/30/99 10177 10036 10102
3/31/00 10482 10245 10295
8/31/00 10483 10670 10387
</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 MAXIMUM EARLY
WITHDRAWAL OF 3 PERCENT.
(1)PERFORMANCE INCLUDES REINVESTMENT OF
DIVIDENDS AND ADJUSTMENT FOR THE
CONTINGENT DEFERRED SALES CHARGE IN
EFFECT AT THE END OF THE PERIOD FOR
CLASS B SHARES. IN COMPARING KEMPER
FLOATING RATE FUND CLASS B SHARE
PERFORMANCE WITH THE LEHMAN BROTHERS
AGGREGATE BOND INDEX AND U.S.
CONSUMER PRICE INDEX, YOU SHOULD
ALSO NOTE THAT THE FUND'S
PERFORMANCE REFLECTS THE APPLICABLE
SALES CHARGE, WHILE NO SUCH CHARGES
ARE REFLECTED IN THE PERFORMANCE OF
THE INDICES.
+THE LEHMAN BROTHERS AGGREGATE BOND
INDEX IS A TOTAL-RETURN INDEX THAT
INCLUDES FIXED-RATE DEBT ISSUES RATED
INVESTMENT GRADE OR BETTER. IT
CONTAINS GOVERNMENT, CORPORATE AND
MORTGAGE SECURITIES CONSIDERED
REPRESENTATIVE OF THE MARKET FOR
INVESTMENT-GRADE BONDS AS A WHOLE.
SOURCE: 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:
WIESENBERGER(R).
11
<PAGE> 12
LARGEST SECTOR HOLDINGS
LARGEST SECTOR HOLDINGS*
Kemper Floating Rate Fund Largest Loan Holdings as of 8/31/00
<TABLE>
<CAPTION>
SECTOR WEIGHTINGS PERCENT
<S> <C> <C>
------------------------------------------------------------------------
CASH EQUIVALENTS
1. 22.4%
------------------------------------------------------------------------
MANUFACTURING
2. 19.4%
------------------------------------------------------------------------
COMMUNICATIONS
3. 18.0%
------------------------------------------------------------------------
MEDIA
4. 8.5%
------------------------------------------------------------------------
SERVICE INDUSTRIES
5. 8.2%
------------------------------------------------------------------------
CONSUMER DISCRETIONARY
6. 6.2%
------------------------------------------------------------------------
HEALTH
7. 4.6%
------------------------------------------------------------------------
METALS & MINERALS
8. 3.0%
------------------------------------------------------------------------
TELECOMMUNICATIONS
9 2.2%
------------------------------------------------------------------------
OTHER
10. 1.7%
------------------------------------------------------------------------
CONSUMER STAPLES
11. 1.4%
------------------------------------------------------------------------
DURABLES
12. 1.4%
------------------------------------------------------------------------
TRANSPORTATION
13. 1.4%
------------------------------------------------------------------------
TECHNOLOGY
14. 1.1%
------------------------------------------------------------------------
CONSTRUCTION
15. 0.5%
------------------------------------------------------------------------
</TABLE>
*Portfolio holdings are subject to change.
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
KEMPER FLOATING RATE FUND
Portfolio of Investments at August 31, 2000
<TABLE>
<CAPTION>
REPURCHASE AGREEMENTS--0.3% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
State Street Bank and Trust Company, dated
8/31/2000 at 6.57%, to be repurchased at
$476,083 on 9/1/2000
(Cost $476,000)(b) $ 476,000 $ 476,000
----------------------------------------------------------------------------------
<CAPTION>
COMMERCIAL PAPER--22.1%
<S> <C> <C> <C> <C> <C>
Abbott Labs, 6.44%, 9/6/2000 3,000,000 2,997,317
Bell South Corp., 6.46%, 9/7/2000 5,749,000 5,742,800
Coca Cola, 6.47%, 9/12/2000 4,500,000 4,491,104
Federal National Mortgage Association,
6.47%, 9/6/2000 5,000,000 4,995,507
Fcar Owner Trust, 6.47%, 9/1/2000 7,000,000 7,000,000
Ford Motor Credit, 6.50%, 9/8/2000 5,500,000 5,493,060
Merrill Lynch & Co., 6.49%, 9/5/2000 3,000,000 2,997,843
Pitney Bowes Credit Corp., 6.46%, 9/8/2000 5,000,000 4,993,719
----------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost $38,711,350) 38,711,350
----------------------------------------------------------------------------------
<CAPTION>
VARIABLE RATE SENIOR LOAN INTERESTS*--75.9%
<S> <C> <C> <C> <C> <C>
COMMUNICATIONS--18.0%
American Cellular Corp.:
Term Loan B (LIBOR plus 2.75%), 3/31/2008 1,400,000 1,401,750
Term Loan C (LIBOR plus 3.00%), 3/31/2009 1,600,000 1,602,000
American Towers, Term Loan B (LIBOR plus
3.25%), 12/31/2007 3,000,000 3,030,000
Centennial Cellular:
Term Loan B (LIBOR plus 3.25%), 5/31/2007 1,488,670 1,493,332
Term Loan C (LIBOR plus 3.50%), 11/30/2007 1,488,665 1,493,306
Clearnet PCS, Inc., Secured Loan
(LIBOR plus 1.75%), 7/9/2007 2,000,000 1,915,000
Cincinnati Bell, Term Loan B
(LIBOR plus 2.25%), 12/30/2006 2,000,000 2,003,750
Crown Castle Operating Co., Term Loan B
(LIBOR plus 2.75%), 3/31/2008 1,000,000 1,005,000
Dobson Operating Co., Term Loan B
(LIBOR plus 3.00%), 12/31/2007 995,000 992,512
Global Crossing Holdings Ltd., Term Loan B
(LIBOR plus 2.75%), 7/31/2006 4,000,000 4,025,000
Level 3 Communications, Term Loan B
(LIBOR plus 3.50%), 1/15/2008 1,000,000 1,004,375
McLeodUSA, Inc., Term Loan B
(LIBOR plus 3.00%), 5/30/2008 3,000,000 3,005,625
Nextel Finance:
Term Loan B (LIBOR plus 3.38%), 6/30/2008 2,000,000 2,012,500
Term Loan C (LIBOR plus 3.63%), 12/31/2008 2,000,000 2,012,500
Nextlink Communications, Term Loan B
(LIBOR plus 3.25%), 6/30/2007 2,000,000 2,000,000
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Rural Cellular Corp.:
Term Loan B (LIBOR plus 3.00%), 10/3/2008 $ 500,000 $ 498,750
Term Loan C (LIBOR plus 3.25%), 4/3/2009 500,000 498,750
Voicestream PCS Holdings, Term Loan B
(LIBOR plus 3.00%), 2/25/2009 1,500,000 1,496,250
----------------------------------------------------------------------------------
31,490,400
-------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--0.5%
Juno Lighting, Inc., Term Loan B
(PRIME plus 3.25%), 6/30/2006 825,600 821,472
----------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY--6.2%
FelCor Lodging Trust, Inc., Term Loan
(LIBOR plus 2.50%), 4/30/2004 1,994,667 1,984,693
Meristar Hospitality, Term Loan B
(LIBOR plus 2.00%), 12/31/2004 1,430,404 1,426,828
Outsourcing Solution, Term Loan B
(LIBOR plus 4.00%), 6/30/2006 992,500 985,056
Pebble Beach Co., Term Loan B
(LIBOR plus 3.00%), 7/31/2006 1,966,000 1,972,144
Six Flags Theme Parks, Term Loan B
(LIBOR plus 3.25%), 11/30/2005 2,500,000 2,518,750
Washington Football Inc.:
Term Loan (LIBOR plus 2.88%), 7/31/2004 1,920,000 1,921,200
Term Loan A (LIBOR plus 1.50%), 7/31/2004 80,000 80,050
----------------------------------------------------------------------------------
10,888,721
-------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--1.4%
American Safety Razor, Term Loan B
(LIBOR plus 3.75%), 4/30/2007 471,438 471,438
Spartan Stores, Inc., Term Loan B
(LIBOR plus 2.25%), 3/18/2007 1,993,333 1,985,689
----------------------------------------------------------------------------------
2,457,127
-------------------------------------------------------------------------------------------------------------------------
DURABLES--1.4%
DeCrane Finance, Term Loan C
(LIBOR plus 3.50%), 4/23/2006 1,481,242 1,466,430
Transportation Manufacturing Operations,
Term Loan (LIBOR plus 3.25%), 6/16/2006 990,000 950,143
----------------------------------------------------------------------------------
2,416,573
-------------------------------------------------------------------------------------------------------------------------
HEALTH--4.6%
Charles River Labs, Term Loan B
(LIBOR plus 3.75%), 9/30/2007 945,000 948,544
Stryker Corp.:
Term Loan B (LIBOR plus 2.50%),
12/31/2005 1,488,617 1,494,199
Term Loan C (LIBOR plus 2.75%), 12/31/2006 733,189 735,938
Sybron International Corp., Term Loan B
(LIBOR plus 2.00%), 7/31/2004 2,992,500 2,985,019
Triad Hospitals, Term Loan B
(LIBOR plus 4.00%), 11/01/2005 1,974,819 1,977,992
----------------------------------------------------------------------------------
8,141,692
-------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--19.4%
Dura Operating Corp., Term Loan B
(LIBOR plus 2.50%), 3/31/2006 4,987,500 5,003,086
Flowserve Corp., Term Loan B
(LIBOR plus 3.50%), 6/30/2008 1,000,000 1,000,313
Huntsman Corp., Term Loan C
(LIBOR plus 3.00%), 12/31/2005 1,500,000 1,501,875
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Huntsman ICI Chemicals:
Term Loan B (LIBOR plus 3.00%), 6/30/2007 $1,485,000 $ 1,498,922
Term Loan C (LIBOR plus 3.25%), 6/30/2008 1,485,000 1,498,922
Kerr Group, Term Loan B
(LIBOR plus 3.25%), 3/31/2006 997,500 995,375
Kosa (Arteva), Term Loan B
(LIBOR plus 3.25%), 12/31/2006 1,672,581 1,678,853
Lyondell Chemical, Term Loan E
(LIBOR plus 3.88%), 5/31/2006 1,975,000 2,051,531
Mail-Well, Inc., Term Loan B
(LIBOR plus 2.50%), 3/31/2007 1,995,000 2,001,234
Mueller Group:
Term Loan B (LIBOR plus 3.25%),
8/31/2006 990,000 997,425
Term Loan C (LIBOR plus 3.50%),
8/31/2007 990,000 999,638
OM Group, Term Loan B
(LIBOR plus 3.00%), 3/31/2007 997,500 998,747
Packaging Corp. of America, Term Loan B
(LIBOR plus 3.25%), 4/12/2007 1,809,524 1,815,179
Riverwood Holding:
Term Loan B (LIBOR plus 3.00%),
2/28/2004 1,404,723 1,409,113
Term Loan C (LIBOR plus 3.50%),
2/28/2004 568,024 569,798
SPX Corporation, Term Loan B
(LIBOR plus 2.25%), 9/30/2006 995,000 1,000,597
Stone Container, Term Loan D
(LIBOR plus 3.50%), 10/1/2003 2,995,683 3,008,611
Synthetic Industries, Term Loan B
(LIBOR plus 3.50%), 12/01/2007 1,000,000 965,000
Tapco International Corp.:
Term Loan B (LIBOR plus 3.00%),
7/31/2007 309,375 309,375
Term Loan C (LIBOR plus 3.25%),
7/31/2008 185,625 185,625
Tenneco Automotive:
Term Loan B (LIBOR plus 3.25%),
10/31/2007 1,250,000 1,243,750
Term Loan C (LIBOR plus 3.50%),
4/30/2008 1,250,000 1,243,750
Terex Corp., Term Loan C
(LIBOR plus 3.25%), 3/6/2006 1,966,705 1,956,872
----------------------------------------------------------------------------------
33,933,591
-------------------------------------------------------------------------------------------------------------------------
MEDIA--8.5%
CC 6 Operating Company, Term Loan B
(LIBOR plus 2.75%), 11/12/2008 2,500,000 2,507,812
Century Holdings, L.L.C., Term Loan B
(LIBOR plus 3.00%), 6/30/2009 1,000,000 1,000,000
Charter Communications, Term Loan B
(LIBOR plus 2.50%), 3/18/2008 2,000,000 1,991,250
Corus Entertainment, Term Loan B
(LIBOR plus 3.00%), 9/1/2007 990,000 997,425
Falcon Cable Communications, Term Loan C
(PRIME plus 2.25%), 12/31/2007 1,907,910 1,888,831
Lamar Media Co.:
Term Loan B (LIBOR plus 2.25%),
8/1/2006 2,000,000 2,007,500
Incremental Series B-1 (LIBOR plus 2.25%),
8/1/2006 1,000,000 1,003,750
</TABLE>
The accompanying notes are an integral part of the financial statements. 15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Pegasus Media & Communications, Term Loan B
(LIBOR plus 3.50%), 4/30/2005 $1,000,000 $ 1,001,250
Sinclair Broadcasting:
Revolver (PRIME plus 1.00%),
9/15/2005 222,183 215,518
Term Loan (PRIME Plus 1.00%),
9/15/2005 279,930 278,880
Weekly Reader, Term Loan B
(LIBOR plus 4.00%), 12/31/2006 992,500 977,613
Young Broadcasting, Inc., Term Loan B
(LIBOR plus 3.00%), 11/30/2006 1,000,000 1,007,500
----------------------------------------------------------------------------------
14,877,329
-------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--3.0%
Ispat Inland, L.P.:
Term Loan B
(LIBOR plus 2.25%), 7/16/2005 839,295 809,919
Term Loan C (LIBOR plus 2.75%), 7/16/2005 839,295 809,919
P&L Coal Holdings Corp., Term Loan B
(LIBOR plus 2.13%), 6/30/2006 1,615,000 1,615,000
UCAR International, Term Loan B
(LIBOR plus 2.75%), 12/31/2007 1,993,333 1,985,858
----------------------------------------------------------------------------------
5,220,696
-------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--8.2%
Allied Waste Industries:
Term Loan B
(LIBOR plus 2.75%), 7/31/2006 909,091 870,455
Term Loan C (LIBOR plus 3.00%), 7/31/2007 1,090,909 1,044,545
Barjan Products, Term Loan B
(PRIME plus 3.50%), 5/6/2005 990,000 987,526
Casella Waste Systems, Term Loan B
(LIBOR plus 3.63%), 12/31/2006 1,000,000 970,000
Iron Mountain, Term Loan B
(LIBOR plus 2.75%), 2/28/2006 2,000,000 2,016,250
Rent-A-Center, Inc.:
Term Loan B
(LIBOR plus 2.00%), 8/1/2006 756,056 749,440
Term Loan C (LIBOR plus 2.25%), 2/1/2007 925,325 917,229
Rent-Way, Inc., Term Loan B
(LIBOR plus 3.50%), 12/31/2006 1,992,500 1,989,058
Safety-Kleen Corp.:
Term Loan B
(PRIME plus 2.75%), 4/3/2005** 1,362,760 449,711
Term Loan C (PRIME plus 3.00%), 4/3/2006** 1,362,760 449,711
Stericycle Inc., Term Loan B (Prime plus
3.50%), 11/30/2006 936,375 943,398
United Rentals, Inc. Term Loan C
(LIBOR plus 2.50%), 6/30/2006 2,000,000 1,972,500
URS Corp.:
Term Loan B
(LIBOR plus 3.50%), 6/9/2006 495,000 495,000
Term Loan C (LIBOR plus 3.25%), 6/9/2006 495,000 495,000
----------------------------------------------------------------------------------
14,349,823
</TABLE>
16 The accompanying notes are an integral part of the financial statements.
<PAGE> 17
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
TECHNOLOGY--1.1%
Semiconductors Components, Term Loan B:
(LIBOR plus 3.50%), 8/4/2006 $ 962,963 $ 970,787
(LIBOR plus 3.75%), 8/4/2007 1,037,037 1,045,463
----------------------------------------------------------------------------------
2,016,250
-------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS--2.2%
RCN Corp., Term Loan B
(LIBOR plus 3.50%), 6/3/2007 2,700,000 2,646,000
Superior Telecom, Term Loan A
(LIBOR plus 3.00%), 11/27/2005 1,269,227 1,262,881
----------------------------------------------------------------------------------
3,908,881
-------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.4%
Kansas City Southern Railway Co., Term Loan
B (LIBOR plus 3.00%), 1/31/2007 1,000,000 1,006,250
RailAmerica, Term Loan B
(LIBOR plus 3.25%), 2/28/2007 1,484,342 1,491,763
----------------------------------------------------------------------------------
2,498,013
----------------------------------------------------------------------------------
TOTAL VARIABLE RATE SENIOR LOAN INTERESTS
(Cost $134,949,149) 133,020,568
----------------------------------------------------------------------------------
<CAPTION>
COMMON STOCKS--1.7% SHARES
<S> <C> <C> <C> <C> <C>
Pilgrim Prime Rate Trust
(Cost $3,197,505) 350,000 3,062,500
----------------------------------------------------------------------------------
TOTAL INVESTMENTS PORTFOLIO--100.0%
(Cost $177,334,004)(a) $175,270,418
----------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
* 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.
** Loan is in default.
(a) The cost for federal income tax purposes was $177,334,004. At August 31,
2000, the net unrealized depreciation for all securities based on tax cost
was $2,063,586. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess market value over tax cost
of $441,851 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over market value of $2,505,437.
(b) Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
The accompanying notes are an integral part of the financial statements. 17
<PAGE> 18
FINANCIAL STATEMENTS
STATEMENT OF ASSETS & LIABILITIES
As of August 31, 2000
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $177,334,004) $175,270,418
----------------------------------------------------------------------------
Cash 1,828,822
----------------------------------------------------------------------------
Interest receivable 1,336,211
----------------------------------------------------------------------------
Receivable for Fund shares sold 267,645
----------------------------------------------------------------------------
TOTAL ASSETS 178,703,096
----------------------------------------------------------------------------
LIABILITIES
Dividends payable 40,847
----------------------------------------------------------------------------
Deferred facility fees 225,739
----------------------------------------------------------------------------
Payable for Fund shares redeemed 108
----------------------------------------------------------------------------
Accrued management fee 198,761
----------------------------------------------------------------------------
Other accrued expenses and payables 451,451
----------------------------------------------------------------------------
Total liabilities 916,906
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $177,786,190
----------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income $ 288,714
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
securities (2,063,586)
----------------------------------------------------------------------------
Accumulated net realized gain (loss) (360,080)
----------------------------------------------------------------------------
Paid-in capital 179,921,142
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $177,786,190
----------------------------------------------------------------------------
NET ASSET VALUE
CLASS A SHARES
NET ASSET VALUE, offering and redemption price per share
($8,340,021 / 1,688,594 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $4.94
----------------------------------------------------------------------------
CLASS B SHARES
NET ASSET VALUE, offering and redemption price (subject to
early withdrawal charge) per share ($119,902,169 /24,389,873
outstanding shares of beneficial interest, $.01 par value,
unlimited number of shares authorized) $4.92
----------------------------------------------------------------------------
CLASS C SHARES
NET ASSET VALUE, offering and redemption price (subject to
early withdrawal charge) per share ($49,544,000 / 10,039,054
outstanding shares of beneficial interest, $.01 par value,
unlimited number of shares authorized) $4.94
----------------------------------------------------------------------------
</TABLE>
18 The accompanying notes are an integral part of the financial statements.
<PAGE> 19
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended August 31, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $11,517,472
---------------------------------------------------------------------------
Dividends 154,100
---------------------------------------------------------------------------
Facilities fees 44,968
---------------------------------------------------------------------------
Total Income 11,716,540
---------------------------------------------------------------------------
Expenses:
Management fee 659,555
---------------------------------------------------------------------------
Services to shareholders 137,073
---------------------------------------------------------------------------
Custodian and accounting fees 88,586
---------------------------------------------------------------------------
Distribution services fees 767,502
---------------------------------------------------------------------------
Administrative services fees 329,778
---------------------------------------------------------------------------
Auditing 98,415
---------------------------------------------------------------------------
Legal 155,502
---------------------------------------------------------------------------
Trustees' fees and expenses 11,587
---------------------------------------------------------------------------
Reports to shareholders 28,244
---------------------------------------------------------------------------
Registration fees 342,189
---------------------------------------------------------------------------
Other 6,858
---------------------------------------------------------------------------
Total expenses, before expense reductions 2,625,289
---------------------------------------------------------------------------
Expense reductions (375,154)
---------------------------------------------------------------------------
Total expenses, after expense reductions 2,250,135
---------------------------------------------------------------------------
NET INVESTMENT INCOME 9,466,405
---------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from investments (360,080)
---------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on investments (1,915,978)
---------------------------------------------------------------------------
Net gain (loss) on investment transactions (2,276,058)
---------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 7,190,347
---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 19
<PAGE> 20
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 25, 1999
(COMMENCEMENT
YEAR ENDED OF OPERATIONS)
AUGUST 31, 2000 TO AUGUST 31, 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 9,466,405 791,642
--------------------------------------------------------------------------------------------------------
Net realized gain (loss) (360,080) 344
--------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period (1,915,978) (147,608)
--------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 7,190,347 644,378
--------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A (303,042) --
--------------------------------------------------------------------------------------------------------
Class B (7,304,627) (715,163)
--------------------------------------------------------------------------------------------------------
Class C (1,845,368) --
--------------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 122,707,729 67,131,493
--------------------------------------------------------------------------------------------------------
Reinvestment of distributions 5,793,765 356,446
--------------------------------------------------------------------------------------------------------
Cost of shares redeemed (15,969,768) --
--------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions 112,531,726 67,487,939
--------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets 110,269,036 67,417,154
--------------------------------------------------------------------------------------------------------
Net assets at beginning of period 67,517,154 100,000
--------------------------------------------------------------------------------------------------------
Net assets at end of period (including undistributed net
investment income of $288,714 and $187,679, respectively) $177,786,190 67,517,154
--------------------------------------------------------------------------------------------------------
</TABLE>
20 The accompanying notes are an integral part of the financial statements.
<PAGE> 21
FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS
For the year ended August 31, 2000
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Investment income received $ 10,886,885
-----------------------------------------------------------------------------
Payment of expenses (1,375,142)
-----------------------------------------------------------------------------
Proceeds from sales and maturities of investments 34,222,883
-----------------------------------------------------------------------------
Purchases of investments (115,153,027)
-----------------------------------------------------------------------------
Net purchases of short term investments (30,725,615)
-----------------------------------------------------------------------------
Cash provided by (used in) operating activities (102,144,016)
-----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from Fund share activity 107,603,625
-----------------------------------------------------------------------------
Distributions paid (net of reinvestment of dividends) (3,700,811)
-----------------------------------------------------------------------------
Cash provided by (used in) financing activities 103,902,814
-----------------------------------------------------------------------------
Increase (decrease) in cash 1,758,798
-----------------------------------------------------------------------------
Cash at beginning of period 70,024
-----------------------------------------------------------------------------
Cash at end of period $ 1,828,822
-----------------------------------------------------------------------------
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 7,190,347
-----------------------------------------------------------------------------
Net (increase) decrease in cost of investments (111,305,734)
-----------------------------------------------------------------------------
Net increase (decrease) in unrealized appreciation
(depreciation) on investments 1,915,978
-----------------------------------------------------------------------------
(Increase) decrease in net investment income receivable (829,655)
-----------------------------------------------------------------------------
(Increase) decrease in receivable for investments sold 10,055
-----------------------------------------------------------------------------
Increase (decrease) in accrued expenses and payables 874,993
-----------------------------------------------------------------------------
Cash provided by (used in) operating activities $(102,144,016)
-----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 21
<PAGE> 22
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
FOR THE PERIOD FROM
NOVEMBER 1, 1999
(COMMENCEMENT OF
OPERATIONS) TO
AUGUST 31, 2000
<S> <C> <C>
Net asset value, beginning of period $5.00
-------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (a) .32
-------------------------------------------------------------------------
Net realized and unrealized gain(loss) on
investment transactions (.08)
-------------------------------------------------------------------------
Total from investment operations .24
-------------------------------------------------------------------------
Less distribution from:
Net investment income (.30)
-------------------------------------------------------------------------
Total distributions (.30)
-------------------------------------------------------------------------
Net asset value, end of period $4.94
-------------------------------------------------------------------------
TOTAL RETURN (%) (B) 4.86**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 8
-------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.28*
-------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.26*
-------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 7.86*
-------------------------------------------------------------------------
Portfolio turnover rate (%) 32*
-------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
FOR THE PERIOD FOR THE PERIOD FROM
FROM MAY 25, NOVEMBER 1, 1999
(COMMENCEMENT OF (COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO OPERATIONS) TO
AUGUST 31, 2000 AUGUST 31, 1999 AUGUST 31, 2000
<S> <C> <C> <C> <C>
Net asset value, beginning of period $4.99 5.00 5.00
----------------------------------------------------------------------------------- -------------------
Income (loss) from investment operations:
Net investment income (loss) (a) .36 .09 .31
----------------------------------------------------------------------------------- -------------------
Net realized and unrealized gain (loss) on
investment transactions (.07) (.03) (.07)
----------------------------------------------------------------------------------- -------------------
Total from investment operations .29 .06 .24
----------------------------------------------------------------------------------- -------------------
Less distribution from:
Net investment income (.36) (.07) (.30)
----------------------------------------------------------------------------------- -------------------
Total distributions (.36) (.07) (.30)
----------------------------------------------------------------------------------- -------------------
Net asset value, end of period $4.92 4.99 $4.94
----------------------------------------------------------------------------------- -------------------
TOTAL RETURN (%) (B) (C) 5.82 1.23** 4.80**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in millions) 120 68 50
----------------------------------------------------------------------------------- -------------------
Ratio of expenses before expense reductions (%) 2.03 3.48* 1.87*
----------------------------------------------------------------------------------- -------------------
Ratio of expenses after expense reductions (%) 1.71 0.38* 1.70*
----------------------------------------------------------------------------------- -------------------
Ratio of net investment income (loss) (%) 7.13 6.53* 7.38*
----------------------------------------------------------------------------------- -------------------
Portfolio turnover rate (%) 32 2* 32*
----------------------------------------------------------------------------------- -------------------
</TABLE>
NOTES:
* Annualized
** Not annualized
(a) Based on monthly average shares outstanding during the period
(b) Total return would have been lower had certain expenses not been waived
(c) Total return does not reflect the effect of any sales charges
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES Kemper Floating Rate Fund (the "Fund") is
registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as a closed-end,
non-diversified management investment company
organized as a Massachusetts business trust. The
Fund does not intend to list the shares for trading
on any national securities exchange.
The Fund currently offers multiple classes of
shares. Class A shares are offered to certain
investors without an initial sales charge. Class A
shares are available only to investors
participating in a fee based investment advisory or
agency commission program and upon conversion from
Class B and Class C shares. Class B shares are
offered without an initial sales charge, but are
subject to higher ongoing expenses than Class A
shares and 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. Class C
shares are offered without an initial sales charge,
are subject to higher ongoing expenses than Class A
shares and an EWC of 1.0% within one year of
purchase. Class C shares automatically convert to
Class A shares ten 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.
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. Investments are stated at value
determined as of the close of regular trading on
the New York Stock Exchange. Securities which are
traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on
the exchange on which the security is traded most
extensively. If no sale occurred, the security is
then valued at the calculated mean between the most
recent bid and asked quotations. If there are no
such bid and asked quotations, the most recent bid
quotation is used. Securities quoted on the Nasdaq
Stock Market, 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, or if no sale occurred, at
the calculated mean between the most recent bid
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
and asked quotations on such market. If there are
no such bid and asked quotations, the most recent
bid quotation shall be used.
Portfolio debt securities purchased with an
original maturity greater than sixty days are
valued by pricing agents approved by the officers
of the Fund, whose quotations reflect
broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents
are unable to provide such quotations, the security
is then valued at the calculated mean between the
most recent bid and asked quotations 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.
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. At August 31,
2000, the Fund had a net tax basis capital loss
carryforward of approximately $6,000 which may be
applied against any realized net taxable capital
gains of each succeeding year until fully utilized
or until August 31, 2008, the expiration date,
whichever occurs first. From November 1, 1999
through August 31, 2000, the Fund incurred
approximately $355,000 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. 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 financials
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
24
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
Liabilities and represents the cash position in its
custodial bank account and does not include any
short-term investments at August 31, 2000.
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 average life of the loans.
--------------------------------------------------------------------------------
2 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 a management fee of $557,775
after an expense waiver by Scudder Kemper for the
year ended August 31, 2000.
Scudder Kemper agreed to temporarily waive and
reimburse certain operating expenses of the Fund.
Under this arrangement, Scudder Kemper waived
expenses of $255,359 for the year ended August 31,
2000.
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 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 and EWC fees incurred by the
Fund for the year ended August 31, 2000 are
$750,470 after an expense waiver of $255,359 by
Scudder Kemper, of which $37,058 is unpaid at
August 31, 2000.
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 fees incurred by the Fund
for the year ended August 31, 2000 are $329,778, of
which $240,192 is unpaid at August 31, 2000.
SHAREHOLDER SERVICES AGREEMENT. Kemper Service
Company ("KSvC") is the transfer, dividend paying
and shareholder service agent of the Fund. Under
the agreement, KSvC received shareholder services
fees of $127,673 for the year ended August 31,
2000.
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 incurred by the Fund for
the year ended
25
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
August 31, 2000 are $65,909, of which the entire
amount is unpaid at August 31, 2000.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or trustees of
Scudder Kemper. During the year ended August 31,
2000, the Fund made no payments to its officers and
incurred trustees' fees of $11,587 to independent
trustees.
--------------------------------------------------------------------------------
3 PURCHASES AND SALES
OF SECURITIES For the year ended August 31, 2000, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $115,153,027
Proceeds from sales 34,212,828
--------------------------------------------------------------------------------
4 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
FOR THE YEAR ENDED OPERATIONS) TO
AUGUST 31, 2000 AUGUST 31, 1999
-------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 1,808,710 $ 9,010,387 -- --
------------------------------------------------------------------------------
Class B 12,481,360 62,061,530 3,430,492 $67,131,493
------------------------------------------------------------------------------
Class C 10,362,521 51,635,812 -- --
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 41,957 208,108 -- --
------------------------------------------------------------------------------
Class B 845,394 4,190,389 71,360 356,446
------------------------------------------------------------------------------
Class C 281,292 1,395,268 -- --
------------------------------------------------------------------------------
SHARES REDEEMED
Class A (162,073) (802,462) -- --
------------------------------------------------------------------------------
Class B (2,458,733) (12,171,920) -- --
------------------------------------------------------------------------------
Class C (604,759) (2,995,386) -- --
------------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARES
TRANSACTIONS $112,531,726 $67,487,939
------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
5 EXPENSE OFF-SET
ARRANGEMENTS The Fund has entered into arrangements with its
custodian and transfer agent 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 $6,835 and $11,180, respectively, under
these arrangements.
26
<PAGE> 27
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. For the year ended August 31, 2000
the Fund had unfunded loan commitments of
approximately $4,482,042.
--------------------------------------------------------------------------------
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). Fund shares, when submitted for
repurchase, may be worth more or less than their
original cost. For the year ended August 31, 2000,
3,225,565 shares were repurchased.
27
<PAGE> 28
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, 2000, and the related statements of operations, changes in net
assets, cash flows and the financial highlights for the periods indicated
herein. 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
Floating Rate Fund at August 31, 2000, the results of its operations, the
changes in its net assets and the financial highlights for the periods indicated
herein in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
Chicago, Illinois
October 20, 2000
28
<PAGE> 29
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.
29
<PAGE> 30
NOTES
30
<PAGE> 31
NOTES
31
<PAGE> 32
<TABLE>
TRUSTEES&OFFICERS
<S> <C> <C>
TRUSTEES OFFICERS
JAMES E. AKINS MARK S. CASADY
Trustee President
LINDA C. COUGHLIN PHILLIP J. COLLORA
Trustee Vice President and
Secretary
JAMES R. EDGAR
Trustee JOHN R. HEBBLE
Treasurer
ARTHUR R. GOTTSCHALK
Trustee KELLY D. BABSON
Vice President
FREDERICK T. KELSEY
Trustee ANN M. MCCREARY
Vice President
THOMAS W. LITTAUER
Chairman, Trustee and LINDA J. WONDRACK
Vice President Vice President
KATHRYN L. QUIRK MAUREEN E. KANE
Trustee and Vice President Assistant Secretary
FRED B. RENWICK CAROLINE PEARSON
Trustee Assistant Secretary
JOHN G. WEITHERS BRENDA LYONS
Trustee Assistant Treasurer
</TABLE>
<TABLE>
<S> <C>
.............................................................................................
LEGAL COUNSEL DECHERT
1775 Eye Street N.W.
Washington, D.C. 20006
.............................................................................................
TRANSFER AGENT KEMPER SERVICE COMPANY
AND SHAREHOLDER P.O. Box 219557
SERVICE AGENT Kansas City, MO 64121
.............................................................................................
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
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
www.kemper.com
</TABLE>
[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 (10/25/00) 1122310
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
