<PAGE> 1
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND
ANNUAL REPORT TO SHAREHOLDERS
For the year ended August 31, 1996 offering investors the opportunity
for high current income consistent with low volatility of principal
"... We favored current coupon ARM securities over Treasuries
because of the additional yield advantage they provided."
[KEMPER LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
8
Portfolio Statistics
9
Portfolio of
Investments
10
Report of
Independent Auditors
11
Financial Statements
13
Notes to
Financial Statements
18
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
For the year ended August 31, 1996
(unadjusted for any sales charge)
[BAR GRAPH]
<TABLE>
<S> <C>
CLASS A 4.55%
CLASS B 3.79%
CLASS C 3.82%
LIPPER ADJUSTABLE RATE MORTGAGE FUNDS CATEGORY AVERAGE* 3.92%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
8/31/96 8/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER ADJUSTABLE RATE U.S.
GOVERNMENT FUND CLASS A $8.22 $8.30
- --------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE U.S.
GOVERNMENT FUND CLASS B $8.23 $8.31
- --------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE U.S.
GOVERNMENT FUND CLASS C $8.24 $8.32
- --------------------------------------------------------------------------------
</TABLE>
Returns and rankings 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.
*Lipper Analytical Services, Inc. returns and rankings are based upon changes in
net asset value with all dividends reinvested and do not include the effect of
sales charges and, if they had, results may have been less favorable.
- --------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND RANKINGS*
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER ADJUSTABLE RATE MORTGAGE FUNDS
CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #43 OF #49 OF #48 OF
56 FUNDS 56 FUNDS 56 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #2 OF 16 N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF AUGUST 31, 1996.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.4486 $0.3886 $0.3913
- --------------------------------------------------------------------------------
AUGUST DIVIDEND: $0.0365 $0.0314 $0.0318
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 5.33% 4.58% 4.63%
- --------------------------------------------------------------------------------
SEC YIELD+: 5.25% 4.67% 4.64%
- --------------------------------------------------------------------------------
</TABLE>
+Current annualized distribution rate is the latest monthly dividend shown as an
annualized percentage of net asset value on August 31, 1996. Distribution rate
simply measures the level of dividends and is not a complete measure of
performance. The SEC yield is net investment income per share earned over the
month ended August 31, 1996, shown as an annualized percentage of the maximum
offering price on that date. The SEC yield is computed in accordance with a
standardized method prescribed by the Securities and Exchange Commission.
TERMS TO KNOW
AVERAGE ANNUAL TOTAL RETURN Average annual total return is a fund's total return
expressed as an annualized average, adjusted for the maximum sales charge for
Class A shares or the applicable contingent deferred sales charge in effect at
the end of the period for Class B and C shares.
ADJUSTABLE RATE MORTGAGES (ARMS) ARMs are mortgages whose interest rates adjust
periodically based on changes to a corresponding index rate. To protect the
borrower against dramatic rate increases in a short period of time, ARMs are
often originated with interest rate caps. An interest rate cap assures the
borrower that the rate will not adjust beyond a certain point within a specific
period.
DURATION Duration is a measure of the interest rate sensitivity of a
fixed-income portfolio incorporating time to maturity and coupon size. The
longer the duration, the greater the interest rate risk.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period. Total return assumes the
reinvestment of all dividends and it represents the aggregate percentage or
dollar value change over the period.
<PAGE> 3
ECONOMIC OVERVIEW
[STEPHEN B. TIMBERS PH0T0]
Stephen B. Timbers is president, chief investment and executive officer of
Zurich Kemper Investments, Inc. (ZKI). ZKI and its affiliates manage
approximately $79 billion in assets, including $45 billion in retail
mutual funds. Timbers is a graduate of Yale University and holds an M.B.A. from
Harvard University.
DEAR SHAREHOLDER,
Concerns about rising interest rates, the possibility of higher price inflation
and Federal Reserve tightening of credit continue to contribute to considerable
market volatility. But while the professional traders tend to debate over every
economic release, individuals who invest in mutual funds for the long term have
been wise to stay the course. Indeed, several recent economic measures are quite
reassuring and argue in favor of a continued healthy economy with low inflation.
The economy expanded at a 4.2% annual rate in the second quarter, the
fastest pace since the second quarter of 1994. This robust growth is welcome in
general but has tended to roil markets, which fear strong growth will lead to
overheating and inflationary pressures. So far, however, such fears have been
largely unwarranted. With the exception of food prices, whose increases were
weather-related, there have been no significant signs of inflationary
pressures. As it has so often recently, the economy is in the process of
slowing itself down. While the Federal Reserve Board stands by ready to attempt
to moderate economic growth with either interest rate cuts or
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 (9/30/96) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10-year Teasury rate(1) 6.83 6.51 6.04 7.74
Prime rate(2) 8.25 8.25 8.75 7.75
Inflation rate(3) 3 2.9 2.81 2.61
The U.S. dollar(4) 3.32 8.94 -1.05 -5.28
Capital goods orders(5) 6.12 3.98 13.61 15.74
Industrial production(5) 3.5 2.56 1.92 6.77
Employment growth(6) 2.01 1.76 2.16 3.3
</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%. 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 August 31, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
3
<PAGE> 4
ECONOMIC OVERVIEW
increases, such intervention can run the risk of going too far in one direction.
It appears that our economy today is self-regulating.
Based on these snapshots of the economy, then, we look for a relatively calmer
remainder of the year. Our forecast calls for growth to slow down in the fourth
quarter, to result in an advance of about 2.5% for the entire year. Assuming
that bond and stock market investors concur that there is no chance of an
overheating economy or significantly rising interest rates, the markets should
relax, as well.
Our market forecast 10 months into the year is not much different from what we
forecasted in January. The bond market, which is climbing back from a decline
this year, may produce a 5% total return in 1996. The stock market, after the
correction is completed, may advance 10% to 15% for the year. Naturally, future
market conditions cannot be predicted with assurance.
In addition, we are projecting that long-term (30-year) interest rates will
hover in the 6.5% to 7.0% range. Short-term interest rates may drop below their
current levels. Finally, we would be surprised if the Federal Reserve Board
moved to adjust interest rates more than 25 basis points either way for the
remainder of the year.
Given the economic environment, we do not look for an upset in the upcoming
presidential election. Much more interesting will be which party wins the most
congressional seats. If the Democrats regain control of Congress, a bond market
sell-off could occur.
While U.S. markets are expected to provide modest returns, we continue to
advocate the benefits of diversification into alternate markets. Many overseas
markets are forecasted to grow at a rate well above our 2.5% growth expectation
for the U.S., and there are many equity and fixed-income opportunities abroad.
The value of the U.S. dollar, always a concern to international investors, will
probably not strengthen much against other currencies for the foreseeable
future.
With that as an economic backdrop, we encourage you to read the following
detailed report of your fund, including an interview with your fund's portfolio
management. Thank you for your continued support. We appreciate the opportunity
to serve your investment needs.
Sincerely,
Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
October 15, 1996
4
<PAGE> 5
PERFORMANCE UPDATE
[VANDENBERG PHOTO]
RICHARD VANDENBERG JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN MARCH 1996,
AND IS A SENIOR VICE PRESIDENT OF ZKI AND PORTFOLIO CO-MANAGER OF KEMPER
ADJUSTABLE RATE U.S. GOVERNMENT FUND. VANDENBERG HAS MORE THAN 22 YEARS OF
FIXED-INCOME PORTFOLIO MANAGEMENT EXPERIENCE. HE RECEIVED BOTH A BACHELORS
DEGREE AND M.B.A. FROM THE UNIVERSITY OF WISCONSIN.
[BYRNES PHOTO]
ELIZABETH BYRNES JOINED ZURICH KEMPER INVESTMENTS, INC. IN 1982 AND IS A FIRST
VICE PRESIDENT OF ZKI AND PORTFOLIO CO-MANAGER OF KEMPER ADJUSTABLE RATE U.S.
GOVERNMENT FUND. BYRNES RECEIVED HER B.S. DEGREE FROM MIAMI UNIVERSITY AND IS A
CERTIFIED PUBLIC ACCOUNTANT.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGEMENT
TEAM ONLY THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER.
THE MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED
ON MARKET AND OTHER CONDITIONS.
IN THE LAST TWELVE MONTHS, THE GOVERNMENT BOND MARKET SAW A PRECIPITOUS
DECLINE IN MARKET YIELDS ONLY TO BE FOLLOWED BY A SOMEWHAT STRONGER ECONOMY,
WHICH FUELED HIGHER YIELDS. BELOW, PORTFOLIO MANAGERS BETH BYRNES AND RICHARD
VANDENBERG EXPLAIN HOW THEY FINE-TUNED THE FUND'S PORTFOLIO TO OPTIMIZE ITS
PERFORMANCE IN BOTH ENVIRONMENTS.
Q THE FUND'S RETURNS FOR THE FISCAL YEAR PERIOD, SEPTEMBER 1995 THROUGH
AUGUST 1996, WERE SOMEWHAT LOWER THAN LAST FISCAL YEAR'S RETURNS. DID THE
INVESTMENT CLIMATE SHIFT OVER THE LAST 12 MONTHS?
A Yes, the investment climate has changed dramatically over the past twelve
months. At the start of this fiscal year, the economy was growing at a slow
pace, inflation was low and as a result, interest rates were declining. By
mid-year, market rates had reversed course as the economy was gaining more
momentum than had been previously anticipated and fears of a rise in inflation
were sparked.
Q WHAT CAUSED THESE CHANGES AND WHAT WAS THEIR EFFECT ON THE GOVERNMENT
MARKET?
A During the first four months of the period, there was optimism that
negotiations occurring in Washington D.C. would lead to a balanced budget
agreement, which would produce a credible plan for reducing the federal budget
deficit. In addition, economic indicators suggested that the economy was slowing
down and that the potential existed for the Federal Reserve Board (the Fed) to
lower short-term interest rates. The Fed did in fact move in December 1995 and
January 1996, to lower interest rates. This created a very favorable environment
for the government market, and bond yields declined (prices appreciated).
In February 1996, data was released which indicated that economic growth
was improving. In addition, Federal budget negotiations had broken
down. Moreover, with the start of the presidential primaries, focus moved away
from the Federal budget and deficit reduction proposals toward other issues.
This effectively eliminated the chances for a balanced budget during the first
half of 1996. As optimism about deficit reduction began to fade and the pace of
economic growth improved, bond yields began rising (prices declined).
The most dramatic rise in yields occurred in early March, when the U.S.
Department of Labor announced an unanticipated and dramatic increase in
employment growth. Many bond investors saw this data as evidence that the
economy was growing faster than its potential, or at an inflationary pace. The
news caused a sell-off in the market and yields on the two-year U.S. Treasury
jumped from 5.39 percent on March 7, 1996 to 5.74 on March 8, 1996, an increase
of 35 basis points, which was a significant move for such a short maturity
security.
During the remainder of the fiscal year, the government market traded in a
choppy pattern as
5
<PAGE> 6
PERFORMANCE UPDATE
economic indicators gave mixed signals about the ongoing pace of economic
growth. At the close of the period, the two-year Treasury yield had risen to
6.35 percent.
Q WAS PERFORMANCE IMPACTED BY RISING INTEREST RATES?
A Both the performance of the government bond market and Kemper Adjustable
Rate U.S. Government Fund were both adversely impacted by the upward tick in
interest rates that began occurring in early 1996. During the first half of the
year, we had expected interest rates to decline. With this expectation, we
positioned the fund with a longer than average duration. Remember, the longer a
fund's duration, the more sensitive it is to interest rate changes. As rates
decline, a longer duration supports more price appreciation of an asset than a
shorter duration would given the same circumstances.
Early in the year, some economic data began to suggest that the economy was
gaining some momentum. So by March, we had repositioned the fund's duration and
portfolio for a more stable interest rate environment, rather than for a
declining interest rate environment. Unfortunately, like the rest of the bond
market, we had not anticipated the strong March employment report. As a result,
the corresponding and subsequent increase in market yields hurt the fund's
performance.
On a more positive note, the higher interest rate environment that
persisted throughout the remainder of the period did provide enough
incremental income for the fund's dividend to be increased. This increase in
income generated from the higher market rates also offset some of the price
depreciation of the fund's holdings.
Q HOW DID YOU ADJUST THE PORTFOLIO TO RESPOND TO THE CHANGING MARKET
CONDITIONS?
A Our primary course of action was to shorten the duration of the fund as it
was apparent that rates would continue to rise. We shortened duration by
increasing the fund's exposure to current coupon adjustable rate mortgages
(ARMs) and by selling teaser rate ARMs and three- to five-year Treasuries. We
favored current coupon ARM securities over Treasuries because of the additional
yield advantage they provided.
As rates rose, fears of mortgage prepayments began to fade, making current
coupon ARMs even more appealing. As the name suggests, current coupon ARMs (also
called fully-indexed ARMs) pay the current interest rate available in the market
at the time of their issue. Current coupon ARMs are attractive investments when
interest rates are stable or rising because they have shorter durations. Because
of their shorter duration, they reset to market rates more frequently and
therefore can provide competitive rates of income.
Q WHAT'S AHEAD FOR THE GOVERNMENT MARKET?
A We expect moderate economic growth to continue, but not at an inflationary
pace. Even given the current environment, it looks as if rates will remain
relatively stable through the remainder of 1996, which would be positive for the
government market and Kemper Adjustable Rate U.S. Government Fund. In such an
environment, we would continue to favor fully-indexed ARMs because of their
yield advantage over Treasuries.
Q WHAT COULD THREATEN YOUR OUTLOOK?
A The primary risk in our assumption is that economic growth would begin to
accelerate at an inflationary pace. If that were to happen, interest rates would
surely rise and we'd need to cut the fund's duration even further. But from the
current economic data available, we do not anticipate that happening.
6
<PAGE> 7
PERFORMANCE UPDATE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Returns*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED AUGUST 31, 1996 (ADJUSTED FOR THE APPLICABLE SALES CHARGE)
1-YEAR 5-YEAR LIFE OF CLASS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- - KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
CLASS A 0.90% 4.63% 6.19%
- ---------------------------------------------------------------------------------------------------
- - KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
CLASS B 0.81% N/A 2.71
- ---------------------------------------------------------------------------------------------------
- - KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
CLASS C 3.82% N/A 4.06
- ---------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER ADJUSTABLE
RATE U.S. GOVERNMENT FUND CLASS A FROM 9/1/87 TO 8/31/96
- --------------------------------------------------------------------------------
[LINE GRAPH]
<TABLE>
<CAPTION>
9/1/87 12/31/89 12/31/91 12/31/91 8/31/96
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
- - KEMPER ADJUSTABLE RATE U.S. GOVERNMENT
CLASS A1 $10,000 $11,023 $12,054 $12,745 $13,724
- - SALOMON BROTHERS
6-MONTH T-BILL** 10,000 11,988 13,600 15,641 17,863
- - CONSUMER PRICE INDEX++ 10,000 11,489 13,973 15,547 17,172
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER ADJUSTABLE
RATE U.S. GOVERNMENT FUND CLASS A FROM 1/1/92 TO 8/31/96
- --------------------------------------------------------------------------------
[LINE GRAPH]
<TABLE>
<CAPTION>
1/1/92 12/31/93 12/31/94 12/31/95 8/31/96
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
- - KEMPER ADJUSTABLE RATE U.S. GOVERNMENT
CLASS A1 $10,000 $10,739 $10,692 $11,601 $11,862
- - LEHMAN BROTHERS ADJUSTABLE RATE
MORTGAGE INDEX+ 10,000 11,130 11,131 12,433 12,851
- - CONSUMER PRICE INDEX++ 10,000 10,573 10,856 11,131 11,385
- -------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER ADJUSTABLE
RATE U.S. GOVERNMENT FUND CLASS B FROM 5/31/94 TO 8/31/96
- --------------------------------------------------------------------------------
[LINE GRAPH]
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 8/31/96
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
- - KEMPER ADJUSTABLE RATE U.S. GOVERNMENT
CLASS A1 $10,000 10,149 10,407 10,644
- - LEHMAN BROTHERS ADJUSTABLE RATE
MORTGAGE INDEX+ 10,000 10,107 11,289 10,407
- - CONSUMER PRICE INDEX++ 10,000 9,958 10,744 10,623
- ------------------------------------------------------------------------------------------------
</TABLE>
Past performance is not predictive of 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.
*Average annual total return measures net investment income and capital
gain or loss from portfolio investments, assuming reinvestment of dividends and
for Class A shares adjustment for the maximum sales charge of 3.5%, for Class B
shares adjustment for the applicable contingent deferred sales charge (CDSC) of
3% and for C shares no adjustment for sales charge. The maximum B share CDSC is
4%. For C shares purchased after 4/1/96 there is a 1% CDSC on certain
redemptions within the first year of purchase.
Please note the Kemper Adjustable Rate U.S. Government Fund was previously the
Kemper Enhanced Government Income Fund. The fund's investment objective and
policies were changed on 1/1/92. Prior to the changes, the fund's objective was
to seek high current return by investing primarily in U.S. Government
securities. Since the change, the fund's objective has been to seek high current
income consistent with low volatility of principal. The fund seeks its new
objective by investing primarily in adjustable rate U.S. Government securities.
The first chart represents the life of fund performance (since 9/1/87) and the
following charts represent the fund's performance under its new objective (since
1/1/92).
(1)Performance includes reinvestment of dividends and adjustment for the
applicable sales charge in effect at the end of the period. In comparing the
Kemper Adjustable Rate U.S. Government Fund performance to the Lehman Brothers
Adjustable Rate Index, you should also note that the fund's performance reflects
the maximum sales charge, while no such charges are reflected in the performance
of the index.
**Salomon Brothers 6-month T-Bill Index is an unmanaged index based on the
average monthly yield of a 6-month Treasury Bill. Rates of Treasury obligations
are fixed at issuance, and payment of principal and interest is backed by the
U.S. Treasury. Market value will generally fluctuate inversely with interest
rates prior to maturity and will equal par at maturity. Due to their short
maturities, Treasury Bills experience very low market volatility.
+The Lehman Brothers Adjustable Rate Index is a broad market capitalization
index of the agency Adjustable Rate Mortgage market. All securities in the index
have coupons that periodically adjust based on a spread over a published index,
and all are government agency guaranteed. Source is Lehman Brothers.
++The 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.
7
<PAGE> 8
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER ADJUSTABLE
RATE U.S. GOVERNMENT FUND CLASS C FROM 5/31/94 TO 8/31/96
- --------------------------------------------------------------------------------
[LINE GRAPH]
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 8/31/96
<S> <C> <C> <C> <C>
- - KEMPER ADJUSTABLE RATE U.S.
GOVERNMENTAL C1 $10,000 $ 9,973 $10,750 $10,940
- - LEHMAN BROTHERS ADJUSTABLE RATE
MORTGAGE INDEX+ 10,000 10,107 11,289 11,669
- - CONSUMER PRICE INDEX++ 10,000 10,149 10,407 10,644
</TABLE>
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
[PIE CHART]
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
ON 8/31/96 ON 8/31/95
<S> <C> <C>
GOVERNMENT AGENCIES ARMS 82% 91%
- -----------------------------------------------------------------------------------
FIXED RATE AGENCY SECURITIES 1 1
- -----------------------------------------------------------------------------------
GOVERNMENT BONDS:
SHORT-TERM 11 --
- -----------------------------------------------------------------------------------
INTERMEDIATE-TERM 6 8
- -----------------------------------------------------------------------------------
100% 100%
<CAPTION>
DURATION
ON 8/31/96 ON 8/31/95
- ---------------------------------------------------------------------------------
<S> <C> <C>
DURATION 3.1 YEARS 4.7 YEARS
- ---------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
Portfolio of Investments at August 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
COUPON PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY Notes 8.875% 1997 $ 4,000 $ 4,126
SECURITIES - 23.2% 9.00-9.25 1998 17,000 17,820
(Cost: $22,181)
==================================================================================
21,946
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Adjustable rate 7.972 2019 7,978 8,292
MORTGAGE CORPORATION - mortgages (a) 7.875 2020 2,144 2,204
68.9% 7.132-7.875 2022 18,867 19,288
(Cost: $64,984) 7.365-7.689 2023 12,358 12,604
7.51 2024 6,568 6,740
7.346 2025 10,059 10,298
7.00 2026 5,000 5,098
Fixed rate 11.25 2010 425 467
collateralized 11.00 2014 98 106
mortgage obligations
==================================================================================
65,097
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Adjustable rate 6.999 2019 3,963 4,068
MORTGAGE ASSOCIATION - mortgages (a) 7.652-7.767 2021 4,237 4,373
13.1% 5.90 2025 3,846 3,936
(Cost: $12,342)
==================================================================================
12,377
- ---------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL Pass-through 11.00 2018 434 480
MORTGAGE ASSOCIATION - certificates
.5%
(Cost: $487)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--105.7%
(Cost: $99,994) 99,900
==================================================================================
LIABILITIES, LESS CASH AND OTHER ASSETS--(5.7)% (5,423)
==================================================================================
NET ASSETS--100% $94,477
==================================================================================
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Adjustable rate securities. The coupon rates on these securities vary with a
selected index at specified intervals and the rates shown above are the
effective rates on August 31, 1996. The dates shown represent the final maturity
of the obligations.
Based on the cost of investments of $99,994,000 for federal income tax purposes
at August 31, 1996, the gross unrealized appreciation was $262,000, the gross
unrealized depreciation was $356,000 and the net unrealized depreciation of
securities was $94,000.
See accompanying Notes to Financial Statements.
9
<PAGE> 10
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Adjustable Rate U.S.
Government Fund as of August 31, 1996, the related statement of operations for
the year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
fiscal periods since 1992. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
August 31, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our 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
Adjustable Rate U.S. Government Fund at August 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the fiscal periods since 1992, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 16, 1996
10
<PAGE> 11
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------
Investments, at value
(Cost: $99,994) $ 99,900
- -------------------------------------------------------------------------------------------------------
Cash 1,028
- -------------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 11
- -------------------------------------------------------------------------------------------------------
Investments sold 7,797
- -------------------------------------------------------------------------------------------------------
Interest 1,220
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS 109,956
=======================================================================================================
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------------------------------------
Payable for:
Dividends 126
- -------------------------------------------------------------------------------------------------------
Fund shares redeemed 55
- -------------------------------------------------------------------------------------------------------
Investments purchased 15,168
- -------------------------------------------------------------------------------------------------------
Management fee 43
- -------------------------------------------------------------------------------------------------------
Administrative services fee 16
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 37
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 34
- -------------------------------------------------------------------------------------------------------
Total liabilities 15,479
- -------------------------------------------------------------------------------------------------------
NET ASSETS $ 94,477
=======================================================================================================
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------------------------------------
Paid-in capital $105,477
- -------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (11,624)
- -------------------------------------------------------------------------------------------------------
Net unrealized depreciation on investments (94)
- -------------------------------------------------------------------------------------------------------
Undistributed net investment income 718
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 94,477
=======================================================================================================
THE PRICING OF SHARES
- -------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($86,993,000 / 10,578,000 shares outstanding) $8.22
- -------------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 3.63% of
net asset value or 3.50% of offering price) $8.52
- -------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($6,298,000 / 765,000 shares outstanding) $8.23
- -------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($1,186,000 / 144,000 shares outstanding) $8.24
=======================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------
Interest income $7,561
- -------------------------------------------------------------------------------------------------------
Expenses:
Management fee 627
- -------------------------------------------------------------------------------------------------------
Distribution services fee 51
- -------------------------------------------------------------------------------------------------------
Administrative services fee 230
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 378
- -------------------------------------------------------------------------------------------------------
Professional fees 37
- -------------------------------------------------------------------------------------------------------
Reports to shareholders 23
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 18
- -------------------------------------------------------------------------------------------------------
Total expenses 1,364
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 6,197
=======================================================================================================
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Net realized gain on sales of investments (including options purchased) 80
- -------------------------------------------------------------------------------------------------------
Net realized loss from futures transactions (100)
- -------------------------------------------------------------------------------------------------------
Net realized loss (20)
- -------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments (928)
- -------------------------------------------------------------------------------------------------------
Net loss on investments (948)
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,249
=======================================================================================================
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1996 1995
<S> <C> <C>
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
Net investment income $ 6,197 9,245
- ---------------------------------------------------------------------------------------------------------
Net realized loss (20) (3,301)
- ---------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation (928) 2,153
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 5,249 8,097
- ---------------------------------------------------------------------------------------------------------
Net equalization charges (272) (591)
- ---------------------------------------------------------------------------------------------------------
Distribution from net investment income (6,117) (9,118)
- ---------------------------------------------------------------------------------------------------------
Net decrease from capital share transactions (34,140) (71,446)
- ---------------------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (35,280) (73,058)
=========================================================================================================
NET ASSETS
- ---------------------------------------------------------------------------------------------------------
Beginning of year 129,757 202,815
- ---------------------------------------------------------------------------------------------------------
END OF YEAR (including undistributed net investment income
of $718,000 and $904,000, respectively) $ 94,477 129,757
=========================================================================================================
</TABLE>
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Adjustable Rate U.S. Government Fund is an
open-end management investment company organized as
a business trust under the laws of Massachusetts.
The Fund offers four 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 sales
charge but are subject to higher ongoing expenses
than Class A shares and, for shares sold on or
after April 1, 1996, a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C Shares do not convert
into another class. Class I shares (none sold
through August 31, 1996) are offered to a limited
group of investors, are not subject to initial or
contingent deferred sales charges and have lower
ongoing expenses than other classes. Differences in
class expenses will result in the payment of
different per share income dividends by class. 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 discount amortization on
all fixed income securities and premium
amortization on mortgage-backed securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 segregate cash or other liquid assets
equal to the value of the securities purchased. At
August 31, 1996 the Fund had $5,132,000 in purchase
commitments outstanding (5% of net assets), with a
corresponding amount of assets segregated.
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 and Class C 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. 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
August 31, 1996, amounting to approximately
$11,606,000, is available to offset future taxable
gains. If not applied, the loss carryover expires
during the period 1997 through 2005.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income monthly and
any net realized capital gains annually, which are
recorded on the ex-dividend date. Dividends are
determined in accordance with income tax principles
which may treat certain transactions differently
than 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.
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI), and pays a management fee at an annual rate
of .55% of the first $250 million of average daily
net assets declining to .40% of average daily net
assets in excess of $12.5 billion. The Fund
incurred a management fee of $627,000 for the year
ended August 31, 1996.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS ----------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Year ended August 31, 1996 $11,000 88,000 --
</TABLE>
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
at various rates for sales of Class B and Class C
shares. In addition, KDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees and
commissions paid in connection with the sale of
Class B and Class C shares and the CDSC received in
connection with the redemption of such shares are
as follows:
<TABLE>
<CAPTION>
COMMISSIONS AND
DISTRIBUTION FEES
DISTRIBUTION FEES PAID BY KDI
AND CDSC RECEIVED ------------------------------
BY KDI TO ALL FIRMS TO AFFILIATES
----------------- ------------- --------------
<S> <C> <C> <C>
Year ended August 31, 1996 $70,000 65,000 5,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. 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 (ASF) paid
are as follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY -----------------------------
THE FUND TO KDI TO ALL FIRMS TO AFFILIATES
---------------- ------------- -------------
<S> <C> <C> <C>
Year ended August 31, 1996 $230,000 231,000 5,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of $302,000
for the year ended August 31, 1996.
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
For the year ended August 31, 1996, the Fund made
no payments to its officers and incurred trustees'
fees of $15,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended August 31, 1996, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $337,779
Proceeds from sales 370,173
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------
SHARES 1996 AMOUNT SHARES 1995 AMOUNT
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------
SHARES SOLD
----------------------------------------------------------------------------
Class A 3,196 $26,308 4,898 $ 39,971
----------------------------------------------------------------------------
Class B 352 2,925 605 4,993
----------------------------------------------------------------------------
Class C 126 1,046 169 1,399
----------------------------------------------------------------------------
SHARES ISSUED IN
REINVESTMENT OF
DIVIDENDS
----------------------------------------------------------------------------
Class A 500 4,138 737 6,072
----------------------------------------------------------------------------
Class B 27 224 24 195
----------------------------------------------------------------------------
Class C 6 51 6 49
----------------------------------------------------------------------------
SHARES REDEEMED
----------------------------------------------------------------------------
Class A (8,043) (66,310) (14,546) (119,011)
----------------------------------------------------------------------------
Class B (182) (1,513) (478) (3,932)
----------------------------------------------------------------------------
Class C (122) (1,009) (142) (1,182)
----------------------------------------------------------------------------
CONVERSION OF SHARES
----------------------------------------------------------------------------
Class A 14 113 31 262
----------------------------------------------------------------------------
Class B (14) (113) (31) (262)
----------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE
TRANSACTIONS $(34,140) $ (71,446)
----------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The Fund has entered into exchange traded financial
futures contracts to take advantage of anticipated
market conditions and bears the risk that arises
from entering into these contracts.
At the time the Fund enters into a futures
contract, it is required to segregate liquid assets
with its custodian. Subsequently, gain or loss is
recognized and payments are made on a daily basis
between the Fund and its broker as the market value
of the futures contract changes. At August 31,
1996, the market value of assets segregated by the
Fund was $6,517,000 for the following financial
futures contracts owned by the Fund.
<TABLE>
<CAPTION>
FACE EXPIRATION LOSS AT
TYPE AMOUNT POSITION MONTH 8/31/96
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury
Note $5,988,000 Long Sept. '96 $(15,000)
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------
CLASS A
-----------------------------------------------
YEAR ENDED AUGUST 31,
-----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------
Net asset value, beginning of year $8.30 8.33 8.68 8.63 8.37
- ---------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .48 .34 .47 .63
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.09) (.04) (.29) .02 .22
- ---------------------------------------------------------------------------------------------------
Total from investment operations .37 .44 .05 .49 .85
- ---------------------------------------------------------------------------------------------------
Less distribution from net investment income .45 .47 .40 .44 .59
- ---------------------------------------------------------------------------------------------------
Net asset value, end of year $8.22 8.30 8.33 8.68 8.63
- ---------------------------------------------------------------------------------------------------
TOTAL RETURN 4.55% 5.52 .59 5.87 10.56
- ---------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------------------
Expenses 1.15% 1.10 .93 .21 .28
- ---------------------------------------------------------------------------------------------------
Net investment income 5.49 5.76 3.96 5.44 7.02
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------- -----------------------------------------
CLASS B CLASS C
------------------------------------- -----------------------------------------
MAY 31, MAY 31,
YEAR ENDED AUGUST 31, 1994 TO YEAR ENDED AUGUST 31, 1994 TO
--------------------- AUGUST 31, --------------------- AUGUST 31,
1996 1995 1994 1996 1995 1994
------- ----- ---------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------ -----------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------ -----------------------------------------
Net asset value, beginning of period $8.31 8.32 8.37 8.32 8.33 8.37
- ------------------------------------------------------------------------------ -----------------------------------------
Income from investment operations:
Net investment income .40 .43 .07 .40 .43 .08
- ------------------------------------------------------------------------------ -----------------------------------------
Net realized and unrealized loss (.09) (.04) (.04) (.09) (.04) (.04)
- ------------------------------------------------------------------------------ -----------------------------------------
Total from investment operations .31 .39 .03 .31 .39 .04
- ------------------------------------------------------------------------------ -----------------------------------------
Less distribution from net investment
income .39 .40 .08 .39 .40 .08
- ------------------------------------------------------------------------------ -----------------------------------------
Net asset value, end of period $8.23 8.31 8.32 8.24 8.32 8.33
============================================================================== =========================================
TOTAL RETURN (NOT ANNUALIZED) 3.79% 4.84 .34 3.82 4.89 .47
- ------------------------------------------------------------------------------ -----------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------ -----------------------------------------
Expenses 1.89% 1.85 1.96 1.89 1.79 1.88
- ------------------------------------------------------------------------------ -----------------------------------------
Net investment income 4.75 5.01 3.36 4.75 5.07 3.52
- ----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $94,477 129,757 202,815 212,694 174,967
- -----------------------------------------------------------------------------------------------------
Portfolio turnover rate 272% 308 533 138 309
- -----------------------------------------------------------------------------------------------------
</TABLE>
NOTES: ZKI agreed to waive its management fee and absorb certain operating
expenses during a portion of the fiscal year ended August 31, 1992. Thereafter,
these expenses were gradually reinstated from December 31, 1992 through January
31, 1994. Without this agreement, the ratios of expenses and net investment
income to average net assets for Class A shares would have been .99% and 3.90%
for the year ended August 31, 1994, .95% and 4.70% for the year ended August 31,
1993, and .90% and 6.40% for the year ended August 31, 1992.
Total return does not reflect the effect of any sales charges.
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES&OFFICERS
TRUSTEES
STEPHEN B. TIMBERS
President and Trustee
DAVID W. BELIN
Trustee
LEWIS A. BURNHAM
Trustee
DONALD L. DUNAWAY
Trustee
ROBERT B. HOFFMAN
Trustee
DONALD R. JONES
Trustee
DOMINIQUE P. MORAX
Trustee
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
OFFICERS
J. PATRICK BEIMFORD, JR.
Vice President
ELIZABETH A. BYRNES
Vice President
CHARLES R. MANZONI, JR.
Vice President
JOHN E. NEAL
Vice President
RICHARD L. VANDENBERG
Vice President
PHILIP J. COLLORA
Vice President
and Secretary
JEROME L. DUFFY
Treasurer
ELIZABETH C. WERTH
Assistant Secretary
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
http://www.kemper.com
[RECYCLE LOGO]
Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Fund prospectus.
[KEMPER FUNDS LOGO]
1023310
KARGF - 2 (10/96) Printed in the U.S.A.
