<PAGE> 1
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND
SEMIANNUAL REPORT TO SHAREHOLDERS
FOR THE PERIOD ENDED FEBRUARY 29, 1996
OFFERING INVESTORS THE OPPORTUNITY FOR HIGH CURRENT INCOME
CONSISTENT WITH LOW VOLATILITY OF PRINCIPAL
"...To reduce the fund's exposure to prepayments,
we added Treasuries [to the portfolio]. "
<PAGE> 2
TABLE OF
CONTENTS
2
Terms to Know
3
General
Economic Overview
5
Performance Update
7
Portfolio Statistics
8
Portfolio of
Investments
9
Financial Statements
11
Notes to
Financial Statements
15
Financial Highlights
AT A GLANCE
- ----------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND TOTAL RETURNS
- ----------------------------------
FOR THE SIX-MONTH PERIOD ENDED FEBRUARY 29, 1996
(UNADJUSTED FOR ANY SALES CHARGE)
<TABLE>
<S> <C>
- ----------------------------------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND CLASS A 2.81%
- ----------------------------------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND CLASS B 2.44%
- ----------------------------------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND CLASS C 2.44%
- ----------------------------------------------------------
LIPPER ADJUSTABLE RATE
MORTGAGE FUNDS CATEGORY AVERAGE** 1.31%
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
NET ASSET VALUE
- ----------------------------------------------------------
AS OF AS OF
2/29/96 8/31/95
- ----------------------------------------------------------
<S> <C> <C>
KEMPER ADJUSTABLE
RATE U.S. GOVERNMENT
FUND CLASS A $8.30 $8.30
- ----------------------------------------------------------
KEMPER ADJUSTABLE
RATE U.S. GOVERNMENT
FUND CLASS B $8.31 $8.31
- ----------------------------------------------------------
KEMPER ADJUSTABLE
RATE U.S. GOVERNMENT
FUND CLASS C $8.32 $8.32
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND RANKINGS**
- -----------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER
ADJUSTABLE RATE MORTGAGE FUNDS CATEGORY
CLASS A CLASS B CLASS C
- -----------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #36 OF #48 OF #47 OF
64 FUNDS 64 FUNDS 64 FUNDS
- -----------------------------------------------------------------------
5-YEAR #2 OF 7 N/A N/A
- -----------------------------------------------------------------------
</TABLE>
**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.
Returns and rankings are historical and do not reflect future performance.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
DIVIDEND REVIEW
- ----------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD
INFORMATION FOR THE FUND AS OF FEBRUARY 29, 1996.
CLASS A CLASS B CLASS C
- ----------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME: $0.2318 $0.2006 $0.2015
- ----------------------------------------------------------------
FEBRUARY DIVIDEND: $0.0375 $0.0324 $0.0323
- ----------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 5.42% 4.68% 4.66%
- ----------------------------------------------------------------
SEC YIELD+: 4.68% 4.14% 4.12%
- ----------------------------------------------------------------
</TABLE>
+Current annualized distribution rate is the latest monthly dividend shown
as an annualized percentage of net asset value on February 29, 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 February 29, 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 from 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, assuming the
reinvestment of all dividends. It represents the aggregate percentage or dollar
value change over the period.
<PAGE> 3
GENERAL ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF EXECUTIVE AND CHIEF INVESTMENT OFFICER
OF ZURICH KEMPER INVESTMENTS,(ZKI) INC. 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:
Last year -- a year in which both the equity and the fixed-income markets
produced strong above-average returns -- will be a difficult year to follow.
However, based on what we see a few months into the new year, we believe 1996
also will be capable of rewarding investors. Unlike last year, however, we
expect there will be more volatility from markets and a wider range of winners
and losers in 1996. This is the time for careful decision-making.
What has changed? We continue to experience low interest rates, an
acceptable rate of economic growth and low inflation. Although certain
government reports have been late in coming due to the federal government
shutdown, there's little in the economic data that suggests cause for concern.
Yet, this year we must begin to consider the possibility of a recession
within the next 24 months. We have enjoyed one of the longest economic
expansions in the 20th century. By virtue of the length of the expansion alone,
it is reasonable to expect a bumpier road ahead with spurts and pockets of
strength followed by potholes. Moreover, recessions can be triggered by a
surprise not forecastable by current available data. It could take the form of
political turmoil in the Middle East, instability in Russia or even a further
downturn in Japan's economic health. Any type of surprise has the potential to
reverse the growth we have become accustomed to.
Having enjoyed an almost uninterrupted climb in 1995, the markets also are
vulnerable to correction. A key reason that stock prices have been rising is
that there have been large cash flows directed to the market. Whenever positive
liquidity is the driving force in the market -- as opposed to investors'
reactions to individual companies' fundamentals -- one has to be cautious.
Moreover, corporate earnings will not continue to grow at their earlier,
breakneck paces. In 1996, we expect profit growth to be in the single-digit.
Despite all, at this point early in the year, we think the stock market has the
potential to return close to its historical average of about 10 percent.+
Remember, of course, that in the first quarter alone the Standard & Poor's 500
Stock Index gained 5.37 percent. Our forecast assumes added stock market
volatility this year.
Our equities forecast assumes some help from the bond market. As you know,
the Federal Reserve Board began to ease short-term interest rates last year and
may ease again if weak economic data appears. The widening relationship between
short- and long-term rates at this point in the economic cycle is an intriguing
one, and one that would argue against a recession forecast. Short-term interest
rates are generally falling. Yet, rates usually rise in an economy headed
toward recession.
As is typical after a strong year in the domestic markets, many investors
will be looking overseas for superior return opportunities in 1996. This move
makes good sense to us, as well. Foreign economies' expansions often follow the
U.S. In fact, improvement abroad could help sustain this country's expansion as
it could boost the demand for exports.
The value of the dollar, having had a roller coaster year in 1995, should
settle down. Strength in foreign markets could boost those countries'
currencies, which would bring an end to the current dollar rally later
this year.
As we head toward the November presidential elections, we can expect
continued discussion from both political parties about balancing the federal
budget and related taxation issues. Frankly, we see the candidates as waging a
war in sameness -- there will be little difference between the Republican
primary platform and what President Bill Clinton has committed to about a
balanced budget. Economically as well as socially, the trend in government is
toward conservativism.
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,
/s/ Stephen B. Timbers
Stephen B. Timbers
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
April 1, 1996
+SOURCE: BASED UPON THE AVERAGE OF THE STANDARD & POOR'S 500 (S&P 500)
STOCK INDEX SINCE 1928 (TOWERS DATA SYSTEMS). THIS DATA IS HISTORICAL AND DOES
NOT REFLECT FUTURE RESULTS. THE S&P 500 IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
3
<PAGE> 4
GENERAL ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund
performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The
10-year Treasury rate and the prime rate are prevailing interest rates. The
other data report year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
<CAPTION>
Now (2/29/96) 6 Months Ago 1 year ago 2 years ago
<S> <C> <C> <C> <C>
10-year Treasury rate(1) 5.65 6.49 7.47 5.97
Prime rate(2) 8.50 8.75 9.00 6.00
Inflation rate(3) 2.60 2.90 2.87 2.52
The U.S. dollar(4) -0.57 -4.11 -5.54 -0.07
Capital goods orders(5) 11.63 7.10 23.00 15.48
Industrial production(6) 0.07 3.17 5.41 4.21
Employment growth(7) 1.18 2.03 3.15 2.49
</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 corporate profits and equity performance.
7 An influence on family income and retail sales.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
4
<PAGE> 5
PERFORMANCE UPDATE
[BEIMFORD PHOTO]
J. PATRICK BEIMFORD JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN 1976 AND IS
NOW EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER - FIXED INCOME. HE IS
ALSO PORTFOLIO CO-MANAGER OF KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND.
BEIMFORD RECEIVED A BACHELOR OF SCIENCE AND INDUSTRIAL MANAGEMENT DEGREE FROM
PURDUE UNIVERSITY AND WENT ON TO RECEIVE AN M.B.A. FROM THE UNIVERSITY OF
CHICAGO.
[BYRNES PHOTO]
ELIZABETH BYRNES JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN 1982 AND IS
FIRST VICE PRESIDENT OF ZKI AND PORTFOLIO
CO-MANAGER OF KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND. BYRNES RECEIVED A
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.
KEMPER ADJUSTABLE RATE GOVERNMENT FUND PORTFOLIO CO-MANAGERS J. PATRICK
BEIMFORD AND ELIZABETH BYRNES EXPLAIN THE POLITICAL AND ECONOMIC EVENTS THAT
FUELED A STRONG BOND MARKET RALLY AND MORTGAGE PREPAYMENT FEARS DURING THE
FIRST PART OF THE FUND'S FISCAL YEAR. THEY DISCUSS HOW THEY ADJUSTED THE FUND'S
INVESTMENT IN TREASURIES AND ADJUSTABLE RATE MORTGAGES TO ENHANCE TOTAL RETURN,
WHILE MANAGING MORTGAGE PREPAYMENT RISK.
Q. FALLING INTEREST RATES, SLOW ECONOMIC GROWTH, AND RELATIVELY LOW INFLATION
CHARACTERIZED THE FIRST SIX MONTHS OF THE FUND'S FISCAL YEAR -- SEPTEMBER 1,
1995, THROUGH FEBRUARY 29, 1996. WHAT DID THIS MEAN FOR THE FUND'S INVESTMENTS?
A. The interest rate environment for the six month period was positive for
the fund's investments. The market rallied from September 1995, through the
middle of February 1996. Rates fell dramatically, both from optimism that a
federal budget agreement would occur and that the Federal Reserve Board would
continue to lower short-term rates. In addition, economic indicators suggested
that the economy, although growing, was not likely to gain much momentum or
move above a non-inflationary growth rate.
All of these factors created a favorable climate for the government
market, and Treasuries in particular. So favorable, that by the end of February
1996, the yield on one-year and two-year Treasuries declined to 5.22 percent
and 5.42 percent, respectively. At the start of the fiscal year, the yields
were 5.63 percent for the one-year Treasury and 5.85 percent for the two-year
Treasury.
Anticipating this rally, we had increased Treasuries to 28 percent of the
portfolio in September 1995, from 8 percent in August 1995, and reduced the
fund's adjustable rate mortgages (ARMs). Treasuries, at that point, offered
more total return potential than ARMs, whose value was threatened by concerns
of mortgage prepayments. At least 25 percent of the portfolio remained invested
in Treasuries until January, when we believed that the rally might be winding
down.
As it turned out, the timing of our move out of Treasuries was a little
early. It wasn't until February that the rally began losing steam. A stalemate
locked budget negotiations and some indicators suggested stronger economic
growth was on the horizon. Although the Fed had cut short-term interest rates
twice -- in December and January -- other interest rates started to backup
(rise). The reason for the backup was that the market had previously priced in
a budget resolution and a weaker economy, which pushed market rates even lower.
In January and February, some data indicated that the economy was improving.
Moreover, the start of the Republican party presidential primaries overshadowed
the focus on federal budget negotiations. As a result, the market's previous
economic optimism faded, causing a rise in market yields. Prepayment fears
subsided as yields began to rise, once again making ARMs a more appealing
investment than Treasuries for the fund.
5
<PAGE> 6
PERFORMANCE UPDATE
Q. HOW DID YOU MANAGE THE FUND'S MORTGAGE PREPAYMENT RISK AS INTEREST RATES
FELL DURING THE PERIOD?
A. The risk of prepayments is always more prevalent when rates fall because
borrowers are likely to refinance into fixed-rate mortgages or teaser rate
ARMs. As this happens, ARMs with higher interest rates are paid off early and
the proceeds are reinvested at lower market rates. To reduce the fund's
exposure to prepayments, we added Treasuries, which provided solid price
appreciation and accounted for approximately one quarter of the fund's
investments. We also continued to buy teaser rate and Government National
Mortgage Association (GNMA) ARMs. This mortgage strategy was one that we had
adopted at the start of the bond market rally in Spring 1995.
GNMA ARMs are securities with longer durations. Duration is a measurement
of a portfolio's sensitivity to interest rates. The longer the fund's duration,
the more sensitive it is to interest rate changes. Buying these securities was
consistent with our bullish outlook that the economy would continue its
slowdown and that interest rates would continue to fall. Teaser rate ARMs also
perform well in such an environment because they carry below market or "teaser"
rates. The low rates are offered to attract borrowers to an adjustable rather
than a fixed-rate mortgage and remain in place until the ARM's first interest
rate reset date. At that time, the mortgage adjusts to a higher market rate.
When rates fall, teaser rate mortgages offer superior returns because they have
longer durations and are less susceptible to prepayments than other types of
ARMs that carry higher mortgage rates.
Q. WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE PORTFOLIO AS INTEREST RATES
BEGAN TO RISE IN FEBRUARY 1996?
A. As mentioned earlier, in January 1996, we began selling Treasuries to
reduce duration and increase the fund's holdings in ARMs. By selling Treasuries
at that point, the fund benefited from a great deal of price appreciation.
As rates started to backup in February, fears of mortgage prepayments
began to fade, making ARMs more appealing investments. In February, we began
purchasing current coupon ARMs. 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 than GNMA or teaser rate ARMs. Because of their shorter duration,
they reset to market rates more frequently and therefore provide competitive
rates of income.
Q. THE FUND'S DIVIDEND WAS REDUCED DURING THE PERIOD. WAS THIS A FACTOR OF
THE LOWER INTEREST RATE ENVIRONMENT?
A. Dividend distributions are dependent on the fund's earnings. As mentioned
earlier, Treasuries represented approximately 25 percent of the fund's
portfolio for three months of the period. When we sold the fund's higher coupon
ARMs to invest in Treasuries, we reduced the fund's income. However, we were
willing to trade that income potential to avoid the risk of prepayments and the
possibility of a lower total return.
Q. WHAT'S YOUR OUTLOOK FOR THE ARM MARKET AND KEMPER ADJUSTABLE RATE U.S.
GOVERNMENT FUND IN PARTICULAR?
A. We believe that 1996 will be a good year for the market and the fund. Our
outlook is for moderate growth with low inflation. We anticipate a more
stable interest rate environment this year, which should be positive for the
fund, and ARMs in particular. Last year, Treasuries provided a great deal of
price appreciation due to the declining interest rate environment. This year we
expect total return to come primarily from the income generated by ARMs, the
fund's core investments.
Q. WHAT COULD THREATEN YOUR OUTLOOK?
A. There would need to be a major change in economic fundamentals to change
our outlook at this point. If interest rates begin to rise quickly, we'd need to
adjust our strategy. We'd shorten the fund's duration and favor investments
that reset to market rates more frequently. On the other hand, if rates began
to fall again, we'd increase the fund's Treasury holdings again to increase its
total return potential.
6
<PAGE> 7
PORTFOLIO STATISTICS
<TABLE>
<CAPTION>
- -------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------
ON 2/29/96 ON 8/31/95
- -------------------------------------------------------
<S> <C> <C>
GOVERNMENT AGENCIES ARMS 86% 91%
- -------------------------------------------------------
FIXED RATE AGENCY SECURITIES 1 1
- -------------------------------------------------------
GOVERNMENT BONDS
- -------------------------------------------------------
SHORT-TERM 8 --
- -------------------------------------------------------
INTERMEDIATE-TERM 5 8
- -------------------------------------------------------
100% 100%
</TABLE>
[PIE CHARTS]
- - GOVERNMENT AGENCIES ARMS
- - FIXED RATE AGENCY SECURITIES
GOVERNMENT BONDS
- - SHORT-TERM
- - INTERMEDIATE-TERM
<TABLE>
<CAPTION>
- -------------------------------------------------------
DURATION
- -------------------------------------------------------
ON 2/29/96 ON 8/31/95
- -------------------------------------------------------
<S> <C> <C>
DURATION 4.2 YEARS 4.7 YEARS
- -------------------------------------------------------
</TABLE>
7
<PAGE> 8
PORTFOLIO OF INVESTMENTS
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
FEBRUARY 29, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
COUPON PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GOVERNMENT NATIONAL Adjustable rate
MORTGAGE ASSOCIATION - 33.9% mortgages 5.50-6.50% 2025 $26,337 $ 26,630
(Cost: $37,131) 5.50-6.00 2026 10,000 10,019
Pass-through
certificates 11.00 2018 500 560
---------------------------------------------------------------------------------
37,209
- ----------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Adjustable rate
MORTGAGE CORPORATION - mortgages 7.969% 2019 8,609 8,913
29.3% 7.875 2020 2,724 2,796
(Cost: $31,960) 7.875-8.50 2022 3,965 4,065
7.823 2023 2,726 2,783
7.21 2024 7,777 7,974
5.731 2026 4,819 4,905
Fixed rate collateralized
mortgage obligations 11.25 2010 473 524
11.00 2014 188 206
---------------------------------------------------------------------------------
32,166
- ----------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Adjustable rate
MORTGAGE ASSOCIATION - mortgages 7.374 2019 4,331 4,451
23.7% 7.807-8.005 2021 4,783 4,919
(Cost: $25,929) 5.699-5.90 2025 14,279 14,594
5.127 2026 1,994 2,020
---------------------------------------------------------------------------------
25,984
- ----------------------------------------------------------------------------------------------------------------------
U.S. TREASURY Notes 7.875 1996 1,500 1,515
SECURITIES - 12.8% 8.75 1997 7,000 7,369
(Cost: $14,255) 5.00-7.875 1999 4,000 4,116
Bonds 12.75 2010 727 1,066
---------------------------------------------------------------------------------
14,066
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.7%
(Cost: $109,275) 109,425
---------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--.3% 323
---------------------------------------------------------------------------------
NET ASSETS--100% $109,748
---------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Adjustable rate securities make up 86% of total investments at February 29,
1996. The coupon rates vary with a selected index at specified intervals and
the rates shown are the effective rates on February 29, 1996. The dates shown
represent the final maturity of the obligations.
Based on the cost of investments of $109,275,000 for federal income tax
purposes at February 29, 1996 the aggregate gross unrealized appreciation was
$454,000, the aggregate gross unrealized depreciation was $304,000 and the net
unrealized appreciation of securities was $150,000.
See accompanying Notes to Financial Statements.
8
<PAGE> 9
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 29, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------
Investments, at value
(Cost: $109,275) $109,425
- -------------------------------------------------------------------------------------------------------
Cash 318
- -------------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 199
- -------------------------------------------------------------------------------------------------------
Investments sold 13,387
- -------------------------------------------------------------------------------------------------------
Interest 1,154
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS 124,483
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------------------------------------
Payable for:
Fund shares redeemed 72
- -------------------------------------------------------------------------------------------------------
Investments purchased 14,508
- -------------------------------------------------------------------------------------------------------
Management fee 52
- -------------------------------------------------------------------------------------------------------
Administrative services fee 20
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 46
- -------------------------------------------------------------------------------------------------------
Other 37
- -------------------------------------------------------------------------------------------------------
Total liabilities 14,735
- -------------------------------------------------------------------------------------------------------
NET ASSETS $109,748
- -------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------------------------------------
Paid-in capital $119,728
- -------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (10,860)
- -------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 150
- -------------------------------------------------------------------------------------------------------
Undistributed net investment income 730
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $109,748
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- -------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($102,439,000 / 12,348,000 shares outstanding) $8.30
- -------------------------------------------------------------------------------------------------------
Maximum offering price per share (net asset value,
plus 3.63% of net asset value or 3.50% of offering price) $8.60
- -------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to contingent deferred
sales charge) per share ($5,677,000 / 683,000 shares outstanding) $8.31
- -------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
per share ($1,632,000 / 196,200 shares outstanding) $8.32
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
9
<PAGE> 10
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended February 29, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------
Interest income $4,240
- -------------------------------------------------------------------------------------------------------
Expenses:
Management fee 351
- -------------------------------------------------------------------------------------------------------
Distribution services fee 24
- -------------------------------------------------------------------------------------------------------
Administrative services fee 128
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 209
- -------------------------------------------------------------------------------------------------------
Professional fees 25
- -------------------------------------------------------------------------------------------------------
Reports to shareholders 8
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 9
- -------------------------------------------------------------------------------------------------------
Total expenses 754
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,486
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Net realized gain on sales of investments
(including options purchased) 818
- -------------------------------------------------------------------------------------------------------
Net realized loss from futures transactions (80)
- -------------------------------------------------------------------------------------------------------
Net realized gain 738
- -------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments (684)
- -------------------------------------------------------------------------------------------------------
Net gain on investments 54
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,540
- -------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
FEBRUARY 29, 1996 AUGUST 31, 1995
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ----------------------------------------------------------------------------------------------------------
Net investment income $ 3,486 9,245
- ----------------------------------------------------------------------------------------------------------
Net realized gain (loss) 738 (3,301)
- ----------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation (684) 2,153
- ----------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,540 8,097
- ----------------------------------------------------------------------------------------------------------
Net equalization charges (178) (591)
- ----------------------------------------------------------------------------------------------------------
Distribution from net investment income (3,482) (9,118)
- ----------------------------------------------------------------------------------------------------------
Net decrease from capital share transactions (19,889) (71,446)
- ----------------------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (20,009) (73,058)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------------------------------
Beginning of period 129,757 202,815
- ----------------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment
income of $730 and $904, respectively) $109,748 129,757
- ----------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
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 currently 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 February 29, 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
fixed income securities. Realized gains and losses
from investment transactions are reported on an
identified cost basis.
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
February 29, 1996 the Fund had $10,155,000 in
purchase commitments outstanding (9.3% of net
assets), with a corresponding amount of assets
segregated.
11
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
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 (and Class C shares after April 1,
1996) 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 during the six
months ended February 29, 1996. The accumulated net
realized loss on sales of investments for federal
income tax purposes at February 29, 1996, amounting
to approximately $10,848,000, is available to
offset future taxable gains. If not applied, the
loss carryover expires during the period 1997
through 2004.
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.
- --------------------------------------------------------------------------------
3 TRANSACTIONS
WITH AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI) (formerly known as Kemper Financial Services,
Inc.) 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 $351,000 for the six
months ended February 29, 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>
Six months ended
February 29, 1996 $ 7,000 54,000 --
</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
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
charges (CDSC) from redemptions of Class B 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 Class B 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>
Six months ended February
29, 1996 $29,000 26,000 3,000
</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>
Six months ended February
29, 1996 $ 128,000 128,000 3,000
</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. For the six months ended
February 29, 1996, the transfer agent remitted
shareholder service fees to KSvC of $161,000.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
For the six months ended February 29, 1996, the
Fund made no payments to its officers and incurred
trustees' fees of $8,000 to independent trustees.
- --------------------------------------------------------------------------------
4
INVESTMENT
TRANSACTIONS For the six months ended February 29, 1996,
investment transactions (excluding short-term
instruments) are as follows (in thousands):
Purchases $196,635
Proceeds from sales 220,486
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED AUGUST 31,
FEBRUARY 29, 1996 1995
--------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
-----------------------------------------------------------------------------
Class A 2,757 $22,722 4,898 $ 39,971
-----------------------------------------------------------------------------
Class B 170 1,420 605 4,993
-----------------------------------------------------------------------------
Class C 81 674 169 1,399
-----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-----------------------------------------------------------------------------
Class A 290 2,411 737 6,072
-----------------------------------------------------------------------------
Class B 13 110 24 195
-----------------------------------------------------------------------------
Class C 3 31 6 49
-----------------------------------------------------------------------------
SHARES REDEEMED
-----------------------------------------------------------------------------
Class A (5,610) (46,389) (14,546) (119,011)
-----------------------------------------------------------------------------
Class B (82) (685) (478) (3,932)
-----------------------------------------------------------------------------
Class C (22) (183) (142) (1,182)
-----------------------------------------------------------------------------
CONVERSION OF SHARES
-----------------------------------------------------------------------------
Class A -- -- 31 262
-----------------------------------------------------------------------------
Class B -- -- (31) (262)
-----------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE TRANSACTIONS $(19,889) $ (71,446)
-----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
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 owning 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 the broker as the market value
of the futures contract changes. At February 29,
1996, the market value of assets segregated by the
Fund was $5,496,000 for the following financial
futures contracts owned by the Fund.
<TABLE>
<CAPTION>
FACE AMOUNT EXPIRATION
TYPE (IN THOUSANDS) POSITION MONTH
-----------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Securities $5,420 Long June '96
</TABLE>
14
<PAGE> 15
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------
SIX MONTHS JULY 1,
ENDED 1991 TO
FEBRUARY 29, 1996 YEAR ENDED AUGUST 31, AUGUST 31,
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.30 8.33 8.68 8.63 8.37 8.21
- --------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .23 .48 .34 .47 .63 .13
- --------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) -- (.04) (.29) .02 .22 .17
- --------------------------------------------------------------------------------------------------------------
Total from investment operations .23 .44 .05 .49 .85 .30
- --------------------------------------------------------------------------------------------------------------
Less distribution
from net investment income .23 .47 .40 .44 .59 .14
- --------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.30 8.30 8.33 8.68 8.63 8.37
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.81% 5.52 .59 5.87 10.56 3.62
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------
Expenses 1.15% 1.10 .93 .21 .28 1.09
- --------------------------------------------------------------------------------------------------------------
Net investment income 5.50 5.76 3.96 5.44 7.02 9.45
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
----------------------------------------- ------------------------------------------
SIX MONTHS MAY 31, SIX MONTHS MAY 31,
ENDED YEAR ENDED 1994 TO ENDED YEAR ENDED 1994 TO
FEBRUARY 29, AUGUST 31, AUGUST 31, FEBRUARY 29, 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 .20 .43 .07 .20 .43 .08
- ----------------------------------------------------------------------------------- ------------------------------------------
Net realized and unrealized loss -- (.04) (.04) -- (.04) (.04)
- ----------------------------------------------------------------------------------- ------------------------------------------
Total from investment operations .20 .39 .03 .20 .39 .04
- ----------------------------------------------------------------------------------- ------------------------------------------
Less distribution
from net investment income .20 .40 .08 .20 .40 .08
- ----------------------------------------------------------------------------------- ------------------------------------------
Net asset value, end of period $ 8.31 8.31 8.32 8.32 8.32 8.33
- ----------------------------------------------------------------------------------- ------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.44% 4.84 .34 2.44 4.89 .47
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses 1.84% 1.85 1.96 1.85 1.79 1.88
- ----------------------------------------------------------------------------------- ------------------------------------------
NET INVESTMENT INCOME 4.81 5.01 3.36 4.80 5.07 3.52
- ----------------------------------------------------------------------------------- ------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS JULY 1,
ENDED 1991 TO
FEBRUARY 29, YEAR ENDED AUGUST 31, AUGUST 31,
1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of period
(in thousands) $109,748 129,757 202,815 212,694 174,967 76,749
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 254% 308 533 138 309 228
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
15
<PAGE> 16
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR. JEROME L. DUFFY
President and Trustee Vice President Treasurer
DAVID W. BELIN ELIZABETH A. BYRNES ELIZABETH C. WERTH
Trustee Vice President Assistant Secretary
LEWIS A. BURNHAM JOHN E. NEAL
Trustee Vice President
DONALD L. DUNAWAY JOHN E. PETERS
Trustee Vice President
ROBERT B. HOFFMAN RICHARD L. VANDENBERG
Trustee Vice President
DONALD R. JONES PHILIP J. COLLORA
Trustee Vice President
Secretary
DOMINIQUE P. MORAX
Trustee CHARLES F. CUSTER
Vice President and
SHIRLEY D. PETERSON Assistant Secretary
Trustee
WILLIAM P. SOMMERS
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
1-800-621-1048
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
120 South LaSalle Street Chicago, IL 60603
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.
KARGF - 3 (4/96) KEMPER LOGO
1013510
Printed in the U.S.A.
