<PAGE> 1
Kemper Adjustable Rate
U.S. Government Fund
Semiannual Report to Shareholders
Period Ended
February 28, 1995
Offering investors the opportunity for
high current income consistent with
low volatility of principal
[Kemper Logo]
<PAGE> 2
DEAR SHAREHOLDER:
We are pleased to provide you with an economic overview and performance for your
fund for the six-month period ended February 28, 1995. In addition, following
the overview is a question and answer interview with your fund's Portfolio
Managers.
- - ----------------------------
PERFORMANCE REVIEW
<TABLE>
<CAPTION>
- - ----------------------------------------------------------
Total Return Performance*
FOR THE SIX-MONTH PERIOD ENDED FEBRUARY 28, 1995
(UNADJUSTED FOR ANY SALES CHARGE)
<S> <C>
Kemper Adjustable Rate U.S. Government A 1.91%
Kemper Adjustable Rate U.S. Government B 1.56%
Kemper Adjustable Rate U.S. Government C 1.47%
Lipper Adjustable Mortgage Fund
Category Average** -0.91%
- - ----------------------------------------------------------
</TABLE>
Returns are historical and do not represent future performance.
Returns and net asset value fluctuate. Shares are redeemable at current net
asset value, which may be more or less than original cost.
When comparing Kemper Adjustable Rate
U.S. Government Fund A shares to all other Adjustable Mortgage funds in its
Lipper** category for the following time periods ended February 28, 1995, this
fund ranked: 1-year, 35 of 77 and 5-year, 1 of 5.
- - ----------------------
DIVIDEND REVIEW
The following table shows dividend and yield information for Kemper Adjustable
Rate U.S. Government Fund as of February 28, 1995.
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------
<S> <C> <C> <C>
A SHARES B SHARES C SHARES
-------- -------- --------
February Dividend: $0.041 $0.0355 $0.0358
Net Asset Value: $ 8.26 $ 8.26 $ 8.26
Annualized Distribution
Rate+: 5.96% 5.16% 5.20%
SEC Yield+: 5.49% 4.71% 4.75%
- - -----------------------------------------------------------------
</TABLE>
- - ---------------------------------------
GENERAL ECONOMIC OVERVIEW
Throughout 1994, rising interest rates dominated most economic discussion and
served to dampen the performance of both the income and stock markets. However,
rates have now stabilized and the markets rebounded in the first quarter of
1995, suggesting a growing comfort with the health of the economy.
Specifically, we believe that the economy is now growing at a moderate pace that
can be sustained. Higher interest rates--and we expect rates to continue to
creep up as the year progresses--appear to be having the effect of keeping
inflation under control. At the same time, rates have not risen so high or so
quickly to suggest a disruption of economic growth.
As long as long-term fixed-income markets are assured of low inflation,
increases in short-term rates should not hurt the performance of the bond
market. In fact, with inflation running at 3 percent or below, real (adjusted
for inflation) rates of return are attractive. In March, for example, a
five-year Treasury note offered a 4.50 percent real rate of
return--significantly higher than the post-World War II average real rate of
return of 1.40 percent. This relationship is a strong positive for fixed-income
investors.
MOST MARKETS REBOUNDED IN THE FIRST QUARTER
Data show the 1994 and first-quarter 1995 comparative total returns for the
domestic and international equity and U.S. and non-U.S. bond markets.
<TABLE>
<CAPTION>
1ST QUARTER
1994 1995
---- -----------
<S> <C> <C>
U.S. Stocks (1) 1.31% 9.73%
International Stocks (2) 8.06% 1.94%
U.S. Government Bonds (3) -2.85% 5.06%
Non-U.S. Government Bonds (4) 5.99% 14.44%
</TABLE>
(1) Standard & Poor's 500, an unmanaged index of common stocks that is generally
considered representative of the U.S. stock market.
(2) Morgan Stanley Capital International EAFE Index, an unmanaged index that is
generally considered a measure of international equities in 15 major world
markets excluding the U.S. and Canada.
(3) Salomon Brothers Broad Investment-Grade Bond Index, including Treasury
issues with a maturity of one year or longer (unmanaged).
(4) Salomon Brothers World Government, Non-U.S. Governments, Index, including
the performance of leading government bond markets excluding the U.S.
(unmanaged).
While there are continuing opportunities for investors, it is important to
recognize that the economic expansion is several months into its cycle.
Industries such as housing and steel, which led the economy out of the
recession, cannot be expected to repeat the strong double-digit growth they
enjoyed in 1994. Now that such cyclical industries have experienced most of
their outperformance, we believe that investors' sights will shift to the
industries that produce more consistent earnings, such as consumer nondurables,
technology and selected capital goods.
1
<PAGE> 3
Picking the right sectors to invest in will be the key challenge for equity
investors during the next few quarters.
Leading international economies are lagging the U.S. economy. Japan and Germany,
whose economies typically follow U.S. growth, are not as robust as in past
cycles. This phenomenon makes international investing very complex currently.
Moreover, conditions in emerging market countries underline the importance of
careful research and experience in understanding how these markets work.
We are calm about what has been described as a dollar crisis. While it's true
that the dollar has depreciated against the Japanese yen and many European
currencies, we note that the dollar has appreciated in value against the
currency of Canada and Mexico, two of our largest trading partners.
Political leadership also has some bearing on the progress of the economy and
the state of the financial markets. In the months preceding a presidential
election year, it has not been uncommon for incumbents to attempt to stimulate
growth. Given our Republican Congress and Democratic President, however, we do
not consider this a foregone conclusion as we move closer to 1996.
With that as an economic backdrop, we encourage you to read the following
detailed report of your fund, including a question-and-answer with your fund's
portfolio managers. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
Stephen B. Timbers
Chief Investment and Executive Officer
April 10, 1995
Stephen Timbers is Chief Executive Officer and
is also Chief Investment Officer of Kemper
Financial Services, Inc. (KFS). KFS and its
[PHOTO] affiliates manage approximately $60 billion in
assets, including $42 billion in retail mutual
funds. Timbers is a graduate of Yale
University and holds a M.B.A. from Harvard
University.
* Total return measures net investment income and capital gain or loss from
portfolio investments, assuming reinvestment of all dividends. During the
periods noted, securities prices fluctuated. For additional information, see
the Prospectus and Statement of Additional Information and the Financial
Highlights at the end of this report.
** Lipper Analytical Services, Inc. performance and rankings are based upon
changes in net asset value with all dividends reinvested and do not include
the effect of sales charges and, if they had, results may have been less
favorable. Performance and rankings are historical and do not reflect future
performance.
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on February 28, 1995.
Distribution rate simply measures the level of dividends and is not a
complete measure of performance. The SEC yield is net investment income per
share earned over the month ended February 28, 1995 shown as an annualized
percentage of the maximum offering price on that date.
2
<PAGE> 4
Q&A AN INTERVIEW WITH PORTFOLIO MANAGERS PAT BEIMFORD & ELIZABETH BYRNES
[PHOTO]
J. Patrick Beimford joined Kemper Financial Services, Inc. in 1976 and is now a
Vice President and Co-Portfolio Manager of the Kemper Adjustable Rate U.S.
Government Fund. Mr. Beimford received a B.S.I.M. degree from Purdue University
and went on to receive his M.B.A. from the University of Chicago.
[PHOTO]
Elizabeth Byrnes joined Kemper Financial Services, Inc. in 1982 and is now a
Vice President and Co-Portfolio Manager of Kemper Adjustable Rate U.S.
Government Fund. Ms. Byrnes received her B.S. degree from Miami University and
is a Certified Public Accountant.
Q: THE FEDERAL RESERVE RAISED SHORT-TERM INTEREST RATES AN ADDITIONAL 1.25%
DURING THE SIX-MONTH PERIOD COVERED BY THIS REPORT, AS PART OF ITS GOAL OF
SLOWING THE ECONOMY AND KEEPING INFLATION LOW. WHAT EFFECT DID THE FED'S
ACTIONS HAVE ON THE BOND MARKET?
A: Short-term interest rates rose and long-term interest rates declined in
response to the Fed's 0.75% hike in the Federal funds rate in November. The
magnitude of the rate hike exceeded market expectations and caused a severe
flattening of the yield curve. The flattening of the curve was exacerbated
as accounts liquidated short-duration assets before year-end. In January,
interest rates declined as market participants predicted the Fed's tough
stance on inflation would pay-off.
On August 31, 1994, the yield on two-year Treasuries was 6.14%. By the end of
1994, the yield had risen to 7.70%. When we closed the six-month period on
February 28, 1995, the yield on two-year Treasuries had declined to 6.75%.
Q: THE FUND PRIMARILY INVESTS IN ADJUSTABLE RATE MORTGAGE SECURITIES THAT ARE
ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT. HOW DID THESE SECURITIES
PERFORM RELATIVE TO THE BOND MARKET?
A: Adjustable rate mortgages (ARMs), whose maturities typically range from
one- to three-years, outperformed Treasuries of comparable maturities. The
ARM market improved when investor demand for ARMS, which was absent for
most of 1994, increased dramatically in December and continued in January
and February. Greater demand combined with lower supply added to the
attractiveness of existing mortgage securities such as ARMS.
Q: HOW DID YOU MANAGE THE FUND GIVEN THESE DEVELOPMENTS IN THE BOND MARKET?
A: As you know, we continually monitor and evaluate trends in the bond market
so that we can pursue opportunities as they arise. This being the case, we
adjusted the fund's allocation between ARMs and short-term Treasuries
throughout the period. For example, in September, we began to reduce the
fund's 92% position in ARMs. This was because we anticipated that investors
would take losses on their investments prior to year-end, and that this
selling pressure would cause mortgage yields to rise relative to Treasury
yields. By November 30, ARMs were down to 77% of assets.
This reduction in ARMs also served to shorten the fund's duration. Duration is
a measurement of a portfolio's sensitivity to interest rates and is based, in
part, on the average maturity of bonds within a portfolio. The shorter a fund's
duration the lower its sensitivity to interest rate changes. Because our
outlook was for short-term interest rates to continue to rise prior to the
Fed's meeting in November, we shortened the fund's duration to under one year.
Interest rates did in fact rise and so a shorter duration helped protect the
fund's holdings, and therefore its net asset value.
In December, our outlook for ARMs improved, and we began to reinvest in this
sector. By the end of February, 98% of the portfolio was invested in ARMs. This
higher allocation increased duration to slightly over one year, and helped the
fund since mortgages outperformed short-term Treasuries in early 1995 and
interest rates declined.
3
<PAGE> 5
"OVERALL, OUR STRATEGY OF MAINTAINING A SHORTER DURATION AT THE BEGINNING OF
THE PERIOD AND EXTENDING DURATION IN THE FINAL MONTHS WAS FAIRLY WELL TIMED,
SINCE THE TREASURY YIELD CURVE STEEPENED DURING THE FIRST THREE MONTHS OF THE
PERIOD AND LATER FLATTENED."
Q: HOW DID THESE STRATEGIES WORK FOR THE FUND?
A: For the six-month period, the fund's Class A shares advanced 1.91% while
its Lipper peer group average declined 0.91% on average. Overall, our
strategy of maintaining a shorter duration at the beginning of the period
and extending duration in the final months was fairly well timed, since the
Treasury yield curve steepened during the first three months of the period
and later flattened. The fund underperformed in December because of a lower
weighting in ARMs than its peers. However, it had exceptionally strong
performance in January because its duration was slightly longer than its
peer group during a time when interest rates declined.
Q: DO YOU THINK RATES WILL CONTINUE TO RISE, AND IF SO, HOW IS THE FUND
POSITIONED TO BUFFER THE EFFECTS?
A: While the Fed's recent statements and actions show it taking a tough stance
on inflation, it is also true that the Fed must avoid raising rates so high
that the economy goes back into recession. The Fed has shown that it will
seek to stabilize rates when it is satisfied that the economy is growing at
a steady rate of approximately 2.5% and that inflation is under control. We
expect the Fed to tighten at least one more time during the first part of
1995. Yet, we believe that another year of rate hikes as severe as 1994 is
unlikely.
The newly Republican controlled Congress also has important implications for
our interest rate outlook. The Republicans have promised to sponsor a mandate
to cut taxes, reduce government spending and the government budget
deficit. These changes would put downward pressure on interest rates and be
positive for the bond market.
We think the fund is positioned well for the remainder of 1995. Adjustable rate
mortgages, the fund's primary investment, tend to perform well in stable to
rising rate environments. These securities usually adjust at least once a year.
Currently, the average reset of the fund's holdings is 6.5 months. Because
these securities reset, they are able to adjust more quickly to prevailing
interest rates, and as a result tend to have less price movement than
securities with longer maturities. This is why the fund was able to raise its
dividend in 6 out of the past 6 months, while its net asset value was
relatively unchanged.
Q: GIVEN THE FED'S ACTIONS SO FAR, WHAT IS YOUR OUTLOOK FOR INFLATION AND THE
BOND MARKET IN 1995?
A: We think that 1995 will continue to be another challenging year for the
bond market as both the Fed and investors continue to be on guard for an
increase in inflation. Nevertheless, our outlook for 1995 is positive. The
Fed's tightening throughout 1994 should moderate growth in 1995 to a level
well below that of 1994. In the past, the Fed has waited for signs of
inflation to emerge before it has moved to raise interest rates. In this
case the Fed has raised rates in anticipation of a rise in inflation.
Because of this vigilant, preemptive strategy, few people expect that the
rise in inflation will be significant. This should benefit bond holders in
the long run.
4
<PAGE> 6
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
PORTFOLIO OF INVESTMENTS February 28, 1995
(Dollars in thousands)
U.S. GOVERNMENT OBLIGATIONS
<TABLE>
<CAPTION>
Coupon Principal
FEDERAL HOME LOAN MORTGAGE CORPORATION--58.9% Rate Maturity Amount Value
------------ -------- --------- --------
<S> <C> <C> <C> <C>
(Cost: $91,843)
- - ---------------------------------------------------------------------------------------------------------------------------------
Adjustable Rate Mortgages 7.485-7.525% 2018 $ 6,741 $ 6,929
- - ---------------------------------------------------------------------------------------------------------------------------------
7.308 2019 9,185 9,440
- - ---------------------------------------------------------------------------------------------------------------------------------
7.626 2020 4,127 4,225
- - ---------------------------------------------------------------------------------------------------------------------------------
7.61 2021 2,985 3,054
- - ---------------------------------------------------------------------------------------------------------------------------------
6.183-7.527 2022 52,186 52,978
- - ---------------------------------------------------------------------------------------------------------------------------------
6.128-7.629 2023 7,458 7,551
- - ---------------------------------------------------------------------------------------------------------------------------------
Collateralized Mortgage Obligations
Fixed Rate 10.00 1995 2,000 2,021
- - ---------------------------------------------------------------------------------------------------------------------------------
11.25 2010 516 561
- - ---------------------------------------------------------------------------------------------------------------------------------
11.00 2014 341 365
- - ---------------------------------------------------------------------------------------------------------------------------------
Floating Rate 6.625 1997 4,375 4,358
- - ---------------------------------------------------------------------------------------------------------------------------------
91,482
FEDERAL NATIONAL MORTGAGE ASSOCIATION--11.6%
(Cost: $17,997)
- - ---------------------------------------------------------------------------------------------------------------------------------
Adjustable Rate Mortgages 6.446-6.909 2021 5,066 5,191
- - ---------------------------------------------------------------------------------------------------------------------------------
7.493 2022 7,637 7,735
- - ---------------------------------------------------------------------------------------------------------------------------------
7.149 2023 5,085 5,182
- - ---------------------------------------------------------------------------------------------------------------------------------
18,108
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--28.3%
(Cost: $43,299)
- - ---------------------------------------------------------------------------------------------------------------------------------
Adjustable Rate Mortgages 7.50 2024 9,974 10,214
- - ---------------------------------------------------------------------------------------------------------------------------------
6.50-8.00 2025 32,390 33,076
- - ---------------------------------------------------------------------------------------------------------------------------------
Pass-through Certificates 11.00 2018 579 629
- - ---------------------------------------------------------------------------------------------------------------------------------
43,919
U.S. TREASURY NOTES--10.4%
(Cost: $16,483)
- - ---------------------------------------------------------------------------------------------------------------------------------
11.25 1995 10,000 10,106
- - ---------------------------------------------------------------------------------------------------------------------------------
9.25 1996 6,000 6,141
- - ---------------------------------------------------------------------------------------------------------------------------------
16,247
RESOLUTION TRUST CORPORATION--1.4%
(Cost: $2,251)
- - ---------------------------------------------------------------------------------------------------------------------------------
Adjustable Rate Mortgages 7.213 2021 2,244 2,210
- - ---------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENT--4.5%
Enserch Corporation
Yield-6.148%
Due-March 1995
(Cost: $6,969) 7,000 6,969
- - ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--115.1%
(Cost: $178,842) 178,935
- - ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES LESS OTHER ASSETS--(15.1)% (23,542)
- - ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS--100% $155,393
- - ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $178,842,000 for federal income tax purposes
at February 28, 1995 the aggregate gross unrealized appreciation was $1,124,000,
the aggregate gross unrealized depreciation was $1,031,000 and the net
unrealized appreciation of securities was $93,000.
See accompanying Notes to Financial Statements.
5
<PAGE> 7
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1995
(in thousands)
<TABLE>
<S> <C>
ASSETS
- - -------------------------------------------------------
Investments, at value
(Cost: $178,842) $178,935
- - -------------------------------------------------------
Receivable for:
Fund shares sold 12
- - -------------------------------------------------------
Investments sold 13,388
- - -------------------------------------------------------
Interest 1,929
- - -------------------------------------------------------
Total assets 194,264
- - -------------------------------------------------------
LIABILITIES AND NET ASSETS
- - -------------------------------------------------------
Cash overdraft 5,536
- - -------------------------------------------------------
Payable for:
Fund shares redeemed 271
- - -------------------------------------------------------
Investments purchased 32,846
- - -------------------------------------------------------
Management fee 75
- - -------------------------------------------------------
Administrative services fee 24
- - -------------------------------------------------------
Custodian and transfer agent fees and
related expenses 80
- - -------------------------------------------------------
Other 39
- - -------------------------------------------------------
Total liabilities 38,871
- - -------------------------------------------------------
Net assets $155,393
- - -------------------------------------------------------
ANALYSIS OF NET ASSETS
- - -------------------------------------------------------
Excess of amounts received from
issuance of shares over amounts paid
on redemptions of shares on account
of capital $165,957
- - -------------------------------------------------------
Accumulated net realized loss on
sales of investments (11,890)
- - -------------------------------------------------------
Unrealized appreciation of investments 93
- - -------------------------------------------------------
Undistributed net investment income 1,233
- - -------------------------------------------------------
Net assets applicable to shares
outstanding $155,393
- - -------------------------------------------------------
THE PRICING OF SHARES
- - -------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($149,309,748 / 18,085,593
shares outstanding) $8.26
- - -------------------------------------------------------
Maximum offering price per share
(net asset value, plus 3.63% of net
asset value or 3.50% of offering price) $8.56
- - -------------------------------------------------------
CLASS B SHARES
Net asset value, offering price and
redemption price (subject to contingent
deferred sales charge) per share
($4,878,606 / 590,978 shares
outstanding) $8.26
- - -------------------------------------------------------
CLASS C SHARES
Net asset value, offering price and
redemption price per share ($1,204,536 /
145,754 shares outstanding) $8.26
- - -------------------------------------------------------
See accompanying Notes to Financial Statements.
</TABLE>
STATEMENT OF OPERATIONS
Six months ended February 28, 1995
(in thousands)
<TABLE>
<S> <C>
INTEREST INCOME $ 5,933
- - -------------------------------------------------------
EXPENSES
- - -------------------------------------------------------
Management fee 485
- - -------------------------------------------------------
Administrative services fee 164
- - -------------------------------------------------------
Distribution services fee 21
- - -------------------------------------------------------
Custodian and transfer agent
fees and related expenses 224
- - -------------------------------------------------------
Professional fees 16
- - -------------------------------------------------------
Reports to shareholders 30
- - -------------------------------------------------------
Trustees' fees and other 4
- - -------------------------------------------------------
944
- - -------------------------------------------------------
Net investment income 4,989
- - -------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
- - -------------------------------------------------------
Net realized loss on
sales of investments (3,236)
- - -------------------------------------------------------
Net realized loss from
futures transactions (362)
- - -------------------------------------------------------
Net realized loss (3,598)
- - -------------------------------------------------------
Net change in balance of unrealized
depreciation of investments 1,412
- - -------------------------------------------------------
Net loss on investments (2,186)
- - -------------------------------------------------------
Net increase in net assets resulting
from operations $ 2,803
- - -------------------------------------------------------
</TABLE>
6
<PAGE> 8
STATEMENT OF CHANGES IN NET ASSETS
(in thousands)
<TABLE>
<CAPTION>
Six months
ended Year ended
February 28, August 31,
1995 1994
------------ ----------
<S> <C> <C>
OPERATIONS
- - ---------------------------------------------------------
Net investment income $ 4,989 8,947
- - ---------------------------------------------------------
Net realized loss on
investments (3,598) (4,926)
- - ---------------------------------------------------------
Net change in unrealized
depreciation 1,412 (2,831)
- - ---------------------------------------------------------
Net increase in net assets
resulting from operations 2,803 1,190
- - ---------------------------------------------------------
Net equalization (charges)
credits (369) 36
- - ---------------------------------------------------------
Distribution from net
investment income (4,750) (10,570)
- - ---------------------------------------------------------
Net decrease from capital
share transactions (45,106) (535)
- - ---------------------------------------------------------
Total decrease in net assets (47,422) (9,879)
- - ---------------------------------------------------------
NET ASSETS
- - ---------------------------------------------------------
Beginning of period 202,815 212,694
- - ---------------------------------------------------------
End of period $155,393 202,815
- - ---------------------------------------------------------
Undistributed net investment
income at end of period $ 1,233 1,363
- - ---------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE FUND
The Fund currently offers three classes of shares. Class A shares are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial or a contingent deferred sales charge
but are subject to higher ongoing expenses than Class A shares and do not
convert into another class. The Fund may offer Class I shares and no such shares
are outstanding as of February 28, 1995. Each share represents an identical
interest in the investments of the Fund and has the same rights.
2. SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION
Investments are stated at value. Fixed income securities are valued by using
market quotations, or independent pricing services that use prices provided by
market makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics. Exchange traded fixed
income options are valued at the last sale price unless there is no sale price,
in which event prices provided by market makers are used. Over-the-counter
traded fixed income options are valued based upon prices provided by market
makers. Financial futures and options thereon are valued at the settlement price
established each day by the board of trade or exchange on which they are traded.
Other securities and assets are valued at fair value as determined in good faith
by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME
Investment transactions are accounted for on the trade date (date the order to
buy or sell is executed). Interest income is recorded on the accrual basis and
includes premium and discount amortization of money market instruments and
mortgage-backed securities; it also includes original issue and market discount
amortization on long-term fixed income securities. Realized gains and losses
from investment transactions are reported on an identified cost basis. Realized
and unrealized gains and losses on financial futures and options are included in
net realized and unrealized gain (loss) on investments, as appropriate.
The Fund may purchase securities with delivery or payment to occur at a later
date. At the time the Fund enters into a commitment to purchase a security, the
transaction is recorded and the value of the security is reflected in the net
asset value. The value of the security may vary with market fluctuations. No
interest accrues to the Fund until payment takes place. At the time the Fund
enters into this type of transaction it is required to
designate cash or other liquid assets equal to the
value of the securities purchased. At February 28, 1995 the Fund had $27,782,000
in purchase commitments
7
<PAGE> 9
outstanding (18% of net assets) with a corresponding amount of assets
designated.
FUND SHARE VALUATION
Fund shares are sold and redeemed on a continuous basis at net asset value (plus
an initial sales charge on most sales of Class A Shares). Proceeds payable on
redemption of Class B shares will be reduced by the amount of any applicable
contingent deferred sales charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is determined as of the earlier
of 3:00 p.m. Chicago time or the close of the Exchange. The net asset value per
share is determined separately for each class by dividing the Fund's net assets
attributable to that class by the number of shares of the class outstanding.
FEDERAL INCOME TAXES AND DIVIDENDS TO SHAREHOLDERS
The Fund has complied with the special provisions of the Internal Revenue Code
available to investment companies and therefore no federal income tax provision
is required. The accumulated net realized loss on sales of investments for
federal income tax purposes at February 28, 1995, amounting to approximately
$11,883,000, is available to offset future taxable gains. If not applied, the
loss carryover expires during the period 1997 through 2003.
Differences in dividends per share are due to different class expenses.
Dividends payable to its shareholders are recorded by the Fund on the
ex-dividend date.
On March 15, 1995, the following per share dividends were declared, payable
March 31, 1995 to shareholders of record on March 16, 1995.
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C>
- - ----------------------------------------------------------------
Income $.042 $.0355 $.0364
- - ----------------------------------------------------------------
</TABLE>
Distributions are determined in accordance with income tax principles which may
treat certain transactions differently from generally accepted accounting
principles.
EQUALIZATION ACCOUNTING
A portion of proceeds from sales and cost of redemptions of Fund shares is
credited or charged to undistributed net investment income so that income per
share available for distribution is not affected by sales or redemptions of
shares.
3. TRANSACTIONS WITH AFFILIATES
MANAGEMENT AGREEMENT
The Fund has a management agreement with Kemper Financial Services, Inc. (KFS)
and pays a management fee at an annual rate of .55% of the first $250 million of
average daily net assets declining gradually to .40% of average daily net assets
in excess of $12.5 billion. For the six months ended February 28, 1995 the Fund
paid a management fee of $485,000.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT
The Fund has an underwriting and distribution services agreement with Kemper
Distributors, Inc. (KDI). Before February 1, 1995, KFS was the Fund's principal
underwriter and distributor. As principal underwriter for the Fund, KDI (as
successor to KFS) retained commissions of $18,000 for the six months ended
February 28, 1995 for sales of Class A shares, after allowing $87,000 as
commissions to retail firms, of which $28,000 was paid to firms affiliated with
KDI. For services under the distribution services agreement, the Fund pays KDI a
fee of .75% of average daily net assets of the Class B and Class C shares.
Pursuant to the agreement, KDI enters into related selling group agreements with
various firms that provide distribution services to investors. KDI compensates
these firms at various rates for sales of Class B and Class C shares. During the
six months ended February 28, 1995, the Fund incurred a distribution services
fee for Class B and Class C shares of $21,000, and KDI paid $88,000 for
commissions and distribution fees to firms, including $39,000 to firms
affiliated with KDI. In addition, KDI received $17,000 of contingent deferred
sales charges.
ADMINISTRATIVE SERVICES AGREEMENT
The Fund has an administrative services agreement with KDI. Before February 1,
1995, KFS was the Fund's administrator. For providing information and
administrative services to shareholders, the Fund pays KDI a fee at an annual
rate of up to .25% of average daily net assets. KDI in turn has various
arrangements with financial services firms that provide these services and pays
these firms based on assets of Fund accounts the firms service. For the six
months ended February 28, 1995, the Fund incurred an administrative services fee
of $164,000 and KDI (as successor to KFS) paid $174,000 to firms, including
$42,000 that was paid to firms affiliated with KDI.
CUSTODIAN AND TRANSFER AGENT AGREEMENTS
The Fund has a custodian agreement and a transfer agent agreement with Investors
Fiduciary Trust Company (IFTC), which was 50% owned by KFS until January 31,
1995, when KFS completed the sale of IFTC to a third party. For the six months
ended February 28, 1995, the Fund incurred custodian and transfer agent fees of
$200,000 (excluding related expenses). Pursuant to a services' agreement with
IFTC, Kemper Service Company (KSvC), an affiliate of KFS, is the shareholder
service agent of the Fund. For the six months ended February 28, 1995, IFTC
remitted shareholder service fees of $208,000 to KSvC.
OFFICERS AND TRUSTEES
Certain officers or trustees of the Fund are also officers or directors of KFS.
For the six months ended February 28, 1995, the Fund made no payments to its
officers and incurred trustees' fees of $4,000 to independent trustees.
8
<PAGE> 10
4. INVESTMENT TRANSACTIONS
For the six months ended February 28, 1995, investment transactions (excluding
short term instruments) are as follows (in thousands):
<TABLE>
<S> <C>
Purchases $327,157
- - ------------------------------------------------------------
Proceeds from sales 356,285
- - ------------------------------------------------------------
</TABLE>
5. CAPITAL SHARE TRANSACTIONS
The following table summarizes the activity in capital shares of the Fund (in
thousands):
<TABLE>
<CAPTION>
Six months
ended
February 28, Year ended
1995 August 31, 1994
----------------- -------------------
Shares Amount Shares Amount
------ -------- ------- ---------
<S> <C> <C> <C> <C>
Shares sold:
Class A 3,056 $ 23,961 13,585 $ 114,850
- - ------------------------------------------------------------------
Class B 436 3,584 492 4,113
- - ------------------------------------------------------------------
Class C 91 747 116 973
- - ------------------------------------------------------------------
Shares issued in
reinvestment of
dividends:
Class A 393 3,224 892 7,682
- - ------------------------------------------------------------------
Class B 10 84 1 14
- - ------------------------------------------------------------------
Class C 3 25 -- --
- - ------------------------------------------------------------------
Shares redeemed:
Class A (9,155) (73,721) (15,198) (127,781)
- - ------------------------------------------------------------------
Class B (317) (2,604) (31) (261)
- - ------------------------------------------------------------------
Class C (49) (406) (15) (125)
- - ------------------------------------------------------------------
Net decrease from capital
share transactions $(45,106) $ (535)
- - ------------------------------------------------------------------
</TABLE>
9
<PAGE> 11
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------------------------
Six months July 1,
ended Year ended August 31, 1991 to Year ended
February 28, --------------------------- August 31, June 30,
1995 1994 1993 1992 1991 1991
------------ ----- ---- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.33 8.68 8.63 8.37 8.21 8.21
- - ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .23 .34 .47 .63 .13 .79
- - ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments (.08) (.29) .02 .22 .17 .02
- - ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .15 .05 .49 .85 .30 .81
- - ---------------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .22 .40 .44 .59 .14 .81
- - ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.26 8.33 8.68 8.63 8.37 8.21
- - ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%): 1.91 .59 5.87 10.56 3.62 10.33
- - ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (%):
Expenses 1.05 .93 .21 .28 1.09 1.07
- - ---------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 5.68 3.96 5.44 7.02 9.45 9.62
- - ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Class B Class C
----------------------------- -----------------------------
Six months May 31, Six months May 31,
ended 1994 to ended 1994 to
February 28, August 31, February 28, August 31,
1995 1994 1995 1994
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.32 8.37 $ 8.33 8.37
- - ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .20 .07 .20 .08
- - ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments (.08) (.04) (.08) (.04)
- - ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .12 .03 .12 .04
- - ---------------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .18 .08 .19 .08
- - ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.26 8.32 $ 8.26 8.33
- - ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%): 1.56 .34 1.47 .47
- - ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (%):
Expenses 1.82 1.96 1.83 1.88
- - ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 4.95 3.36 4.94 3.52
- - ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Six months July 1,
ended Year ended August 31, 1991 to Year ended
February 28, ------------------------------------ August 31, June 30,
SUPPLEMENTAL DATA FOR ALL CLASSES: 1995 1994 1993 1992 1991 1991
------------ -------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of period (in
thousands) $155,393 202,815 212,694 174,967 76,749 75,012
- - ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 368 533 138 309 228 259
- - ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
KFS agreed to waive its management fee and absorb certain operating expenses of
the Fund through December 31, 1992. Thereafter, these expenses were gradually
reinstated through January 31, 1994. Without this agreement, the ratio of
expenses to average net assets and the ratio of net investment income to average
net assets for Class A shares would have been .99% and 3.90%, respectively, for
the year ended August 31, 1994, .95% and 4.71%, respectively, for the year ended
August 31, 1993, and .90% and 6.40%, respectively, for the year ended August 31,
1992.
Ratios have been determined on an annualized basis. Total return is not
annualized and does not reflect the effect of any sales charges.
10
<PAGE> 12
[KEMPER LOGO]
KEMPER FINANCIAL SERVICES, INC.
120 South LaSalle Street
Chicago, IL 60603
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
Trustees Officers
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR.
President and Trustee Vice President
DAVID W. BELIN ELIZABETH A. BYRNES
Trustee Vice President
LEWIS A. BURNHAM JOHN E. PETERS
Trustee Vice President
DONALD L. DUNAWAY PHILIP J. COLLORA
Trustee Vice President and
Secretary
ROBERT B. HOFFMAN CHARLES F. CUSTER
Trustee Vice President and
Assistant Secretary
DONALD R. JONES JEROME L. DUFFY
Trustee Treasurer
DAVID B. MATHIS ELIZABETH C. WERTH
Trustee Assistant Secretary
WILLIAM P. SOMMERS
Trustee
- - -----------------------------------------------------------
Legal Counsel Custodian and Transfer Agent
VEDDER, PRICE, KAUFMAN INVESTORS FIDUCIARY
& KAMMHOLZ TRUST COMPANY
222 North LaSalle Street 127 West 10th Street
Chicago, IL 60601 Kansas City, MO 64105
Shareholder Service Agent
KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
800-621-1048
Investment Manager
KEMPER FINANCIAL SERVICES, INC.
Principal Underwriter
KEMPER DISTRIBUTORS, INC.
120 South LaSalle Street
Chicago, IL 60603
[RECYCLED PAPER LOGO]
Printed on Recycled Paper
This report is not to be distributed unless 237860
KARGF-3 (4/95) preceded or accompanied Printed in
by a Kemper Fixed Income Funds prospectus the U.S.A.
