<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD SM
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED AUGUST 31, 1997
Offering investors teh oppoortunity for high current income consistent with low
volatility of principal
KEMPER ADJUSTABLE RATED
U.S. GOVERNMENT FUND
<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
17
FINANCIAL HIGHLIGHTS
At A GLANCE
- --------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED AUGUST 31, 1997
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Class A 6.75
Class B 5.96
Class C 5.98
Lipper Adjustable Rate
Morgage Funds Category
Average* 6.59
- --------------------------------------------------------------------------------
</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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
8/31/97 8/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND CLASS A $8.31 $8.22
- --------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND CLASS B $8.32 $8.23
- --------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND CLASS C $8.33 $8.24
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
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 #23 of 46 funds #36 of 46 funds #34 of 46 funds
- --------------------------------------------------------------------------------
5-YEAR #14 of 28 N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF AUGUST 31, 1997.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.4509 $0.3905 $0.3928
- --------------------------------------------------------------------------------
AUGUST
DIVIDEND: $0.0385 $0.0334 $0.0335
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 5.56% 4.82% 4.83%
- --------------------------------------------------------------------------------
SEC YIELD+: 5.00% 4.48% 4.52%
- --------------------------------------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on August 31, 1997. 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, 1997, 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
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR FIXED INCOME STYLE BOX
- --------------------------------------------------------------------------------
[MATURITY/QUALITY DIAGRAM]
Source: Morningstar, Inc., Chicago, IL 312-696-6000. (Morningstar Style
Box is based on a portfolio date as of August 31, 1997.) The Fixed-Income Style
Box placement is based on a fund's average effective maturity or duration and
the average credit rating of the bond portfolio.
Please note that style boxes do not represent an exact assessment of
and do not represent future performance. Please consult the prospectus for
a description of investment policies.
DURATION Duration is a measure of the interest rate sensitivity of a
fixed-income investment or portfolio. 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.
YIELD A fund's yield is a measure of the net investment income per share earned
over a specific one-month or 30-day period expressed as a percentage of the
maximum offering price of the fund's shares at the end of the period.
<PAGE> 3
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $86 BILLION IN ASSETS, INCLUDING $49 BILLION IN RETAIL MUTUAL
FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM
HARVARD UNIVERSITY.
DEAR SHAREHOLDER,
A self-regulating economy, a balanced budget agreement and a positive stock
market all have contributed to another excellent year for investors. Given the
extended length of today's bull market (which celebrated its 15th anniversary on
August 12), it is prudent to wonder whether the end is near. Our position is
that while there is a certain precariousness to today's environment, which we
will elaborate on below, we see little to suggest that there will be more than
occasional market corrections.
Bipartisan agreement to balance the federal budget by the year 2002 represents
significant progress that should benefit investors over the long term. By
reducing the burden of capital gains and eliminating certain tax loopholes, the
Taxpayer Relief Act of 1997 and the Balanced Budget Act of 1997 have the
potential to meaningfully affect behavior. Now that the ceiling has been raised
on capital gains from the sale of a home, empty nesters will be more inclined to
move out of homes and into smaller condominiums. Added investment and savings
options should help boost the country's sagging savings rate. From a social
perspective, government's action to widen the difference between the taxation
rate on capital gains and on income reflects a conscious effort to encourage
capital investment. The more people and businesses can do for themselves, the
less likely they are to rely on the government, which should help restrain
federal spending.
The maximum tax on long-term capital gains is now 20 percent versus a maximum
of approximately 40 percent on ordinary income earned by Americans in the
highest income tax brackets. This dramatic difference could have some influence
on the management of mutual funds in the future. Although few investment
decisions are based on their tax consequences, the legislation supports a "buy
and hold" approach to investing, by which a mutual fund generates investment
returns through gains on investments held 18 months or longer. Such gains are
taxed at the reduced capital gains rate. On the margin, portfolio managers
should focus on long-term investing -- the strategy that we have always
supported.
In addition, mutual funds will gain investment flexibility with the new law's
repeal of what has been called the "short/short rule." Previously, investment
companies had been subject to a 30 percent limitation on total income arising
from the sale of securities held less than three months -- or face severe tax
consequences. The lifting of this limitation provides newer funds, in
particular, with much needed maneuvering ability.
You can expect to hear more from Kemper about the implications of the new
legislation, and specifically about the tax reporting changes, over the next
several weeks and months. Overall, we believe that this legislation is something
the country can be proud of. It represents years of a commitment on the part of
the federal government to hold spending in check and refrain from creating new
programs. Expanding corporate revenues and profits in an extended period of low
inflation also contributed to making this investor-friendly environment
possible.
As we look toward the end of the year, we see little to trouble us. The
economy appears to be in excellent condition. Continuing the alternatingly
fast/slow pace that we have experienced for several months, the fast-growing
first quarter was followed by a slower second quarter. Such self-regulation has
minimized any need for the Federal Reserve Board to raise interest rates again.
We don't rule out the possibility of another hike in the fourth quarter,
however.
Inflation is very low. In spite of unemployment being the lowest we have seen
in decades, wage pressures are still manageable. Strong productivity,
attributable to technological advances and better management practices, has
produced largely non-inflationary economic growth. This environment is one of
the best in decades.
Our primary concern is the very high valuations of the stock market. All
things considered, it is difficult to see where we can go from here. With prices
at such heady levels, the market can be expected to react negatively to even
minor earnings disappointments, as we saw in August. Kemper's response to this
market is to
3
<PAGE> 4
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic Activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund
performance.
The following are some significant economic guideposts and their investment
rationale that may help your investment decision-making. The 10-year Treasury
rate and the prime rate are prevailing interest rates. The other data report
year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
NOW (09/30/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-year Treasury Rate (1) 6.21 6.89 6.53 6.04
Prime Rate (2) 8.5 8.5 8.25 8.75
Inflation rate (3) 2.22 2.76 3.07 2.54
The U.S. Dollar (4) 8.76 9.32 4.74 -1.05
Capital Goods Orders (5)* 11.11 8.1 3.77 9.42
Industrial Production (5)* 4.75 4.91 2.65 3.43
Employment Growth (6) 2.23 2.27 2.1 2.19
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6 percent. The low, moderate inflation of the
last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of August 31, 1997.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENT, INC.
remain fully invested and to reduce risk by diversifying across a wider group of
investment opportunities. Research, the first step in stock selection, is key in
this kind of a market.
Bond markets are obviously cheered by recent events, and prospects for income
investors continue to be positive. Interest rates are stable and credit quality
has not been an issue. A dwindling supply of municipal bonds has enabled
municipal investments to outperform U.S. Treasuries.
In such a fully valued domestic market, it can make sense to look to
international markets for their growth potential. The strength of the dollar
thus far this year has diminished returns but international opportunities look
bright.
With this commentary 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
Zurich Kemper Investments, Inc.
October 8, 1997
4
<PAGE> 5
[INSERT TIMBERS LETTER]
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
3
<PAGE> 6
[INSERT TIMBERS LETTER]
ECONOMIC OVERVIEW
4
<PAGE> 7
PERFORMANCE UPDATE
[VANDENBERG PHOTO]
RICHARD VANDENBERG JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN MARCH 1996 AS
A SENIOR VICE PRESIDENT OF ZKI AND PORTFOLIO CO-MANAGER OF KEMPER ADJUSTABLE
RATE U.S. GOVERNMENT FUND. VANDENBERG HAS MORE THAN 23 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, OXFORD,
OHIO, 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 U.S. GOVERNMENT FUND CLASS A SHARES PERFORMED
WELL DURING ITS FISCAL YEAR ENDED AUGUST 31, 1997, BEATING ITS PEER GROUP
AVERAGE AS MEASURED BY LIPPER ANALYTICAL SERVICES, INC. THE FUND BEAT THE
AVERAGE OF ITS PEERS' (LIPPER'S 46 ADJUSTABLE RATE MORTGAGE FUNDS) AVERAGE
ANNUAL TOTAL RETURNS FOR THE 1-YEAR, 3-YEAR AND 5-YEAR PERIODS (UNADJUSTED FOR
ANY SALES CHARGE). DURING THE REPORTING YEAR, THE ECONOMY CONTINUED TO
EXPERIENCE LOW INFLATION DESPITE MODERATE ECONOMIC GROWTH. PORTFOLIO
CO-MANAGERS ELIZABETH BYRNES AND RICHARD VANDENBERG EXPLAIN HOW THEY POSITIONED
THE FUND TO EXCEL IN THIS ECONOMIC ENVIRONMENT.
Q THE FEDERAL RESERVE BOARD (THE FED) INCREASED SHORT-TERM INTEREST RATES BY
0.25 PERCENT IN MARCH. WHAT CAUSED THE FED TO ACT?
A Let's look at the fixed-income environment from the start of Kemper
Adjustable Rate U.S. Government Fund's fiscal year to the Fed's action in March.
The fund began its fiscal year, September 1996, amidst moderate economic growth,
benign inflation and stable interest rates. The fixed-income market overall was
benefiting from this environment. Relatively weak Gross Domestic Product (GDP)
figures were released that supported this economic state. The market maintained
a positive tone through the end of November. The outcome of the November
elections kept Republicans in control of Congress and the investment markets
rallied upon hearing the news. Between August 31, 1996, and November 30, 1996,
the one-year Treasury's yield declined 53 basis points to 5.37 percent.
Things started to change in December when Federal Reserve Board Chairman
Alan Greenspan commented that the market was acting with "irrational
exuberance," meaning he thought that the prices of securities might be
overvalued. In January, stronger economic growth surfaced, including
higher-than-expected fourth quarter GDP growth and better-than-expected holiday
retail sales. Investors remained cautious as it appeared likely the Fed would
move to raise interest rates to slow the economy and keep inflation under
control. Remember, strong economic growth indicates the potential for higher
inflation. Inflation is negative for bond investors as it erodes the "real"
value of fixed-income investments.
The markets' fears were realized when the Fed increased short-term
interest rates in March by 0.25 percent. This was considered a preemptive move
aimed at slowing growth in the economy to maintain a low rate of inflation. All
markets suffered with this move and yields rose and prices of bonds fell. By
the end of March, the yield on the one-year Treasury had risen to 6 percent.
In April, economic growth once again appeared to slow. As no signs of
inflation surfaced, the markets began to recover and yields tended to fall or
remain stable through August 31, the fund's fiscal year end.
5
<PAGE> 8
PERFORMANCE UPDATE
Q WHAT DID YOU DO TO KEEP THE FUND'S PERFORMANCE SOUND AMIDST THIS ACTIVITY
IN THE MARKET AND ECONOMY?
A In October 1996, in the early part of the fund's fiscal year when there
was little concern about the Fed tightening interest rates, we extended the
duration of the fund. Previously we had held a defensive position because growth
was strong. We moved to a more neutral position as growth moderated and as the
Fed passed on tightening rates in September. 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 given the same circumstances. We were not convinced, however, that
rates would continue to decline, so we were modest in our extension.
As rates fell, we bought teaser adjustable rate mortgages (ARMs) and
reduced short-duration Treasuries in the portfolio. Teaser rate ARMs perform
well as interest rates decline because they carry below market rates to attract
borrowers to an adjustable-rate rather than a fixed-rate mortgage. In January,
we sold our teaser rate ARMs at a profit. We had moved in and out of teasers to
take advantage of the sharp decline in rates that occurred at the start of the
period. We did not expect interest rate declines of that magnitude to continue,
so we began adding Government National Mortgage Association (GNMA) mortgages.
GNMAs are securities with longer durations but that tend to be less volatile
than teaser-rate mortgages. The fund benefited from its defensive position
going into March when the Fed raised the federal funds rate. The fund not only
outperformed its peer group average in March, it also gained 0.21 percent.
Moving forward to April 1997, it became apparent that the economy was
again slowing down so we extended the duration of the fund and carried that
position through the beginning of August. Our timing of duration adjustments
had been good through the year, and in general, ARMs have performed well.
Q HOW DID THE FUND FARE IN COMPARISON WITH OTHER MARKETS?
A This fund did very well and outperformed the Salomon Brothers 6-Month
T-Bill Index*. Kemper Adjustable Rate U.S. Government Fund returned 6.75 percent
(Class A shares unadjusted for sales charge) for the one-year period, compared
with the Index, which returned 5.43 percent.
Q WILL YOU DO ANYTHING DIFFERENT IF THE FED RAISES RATES AGAIN?
A If the Fed tightens rates again, we would reduce our exposure to GNMAs.
However, we will not wait for the Fed to make a move before we act. If we see
economic data that tells us the economy is ripe for an interest rate increase,
we'll act then to help protect the fund.
Q WHAT IS YOUR OUTLOOK FOR THE GOVERNMENT BOND MARKET?
A We're keeping the fund close to a neutral duration. Growth picked up at
the end of the fiscal year, close to 4 percent GDP growth over the past several
quarters and it looks like growth for the calendar year will come in between 3
and 4 percent. We want to be cautious in case this relatively strong GDP growth
prompts the Fed to raise rates again before the end of 1997. The inflation
outlook remains very positive for the fixed-income market, and the Fed is
unlikely to raise rates as long as inflation is benign.
The fund is fully invested, meaning the fund is not keeping any cash
reserves. At the same time, we're avoiding excessive risk by being
invested in lower-risk bonds. We're favoring fully indexed seasoned ARMs. GNMA
ARMs in a flattening interest rate environment should perform well and they are
relatively inexpensive.
* 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.
6
<PAGE> 9
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED AUGUST 31, 1997 (ADJUSTED FOR THE APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR LIFE OF CLASS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT A 2.99% 3.90% 6.25% (since 9/1/87)
- ------------------------------------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT B 2.96% N/A 4.02 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT C 5.98% N/A 4.65 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class A shares from 9/1/87 to 8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
9/1/87 12/31/90 12/31/93 8/31/97
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Adjustable Rate U.S. Government
Fund Class A(1) 10000 12315 15547 18330
Salomon Brothers 6-month T-bill* 10000 10000 15641 18831
Consumer Price Index++ 10000 11696 12745 14030
- ------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class A shares from 1/1/92 to 8/3/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1/1/92 12/31/93 12/31/95 8/31/97
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper U.S. Government Securities Fund Class B(1) 10000 10739 11601 12662
Salomon Brothers 30 Year GNMA Index+ 10000 11130 12433 13876
Consumer Price Indexx++ 10000 10573 11131 11639
- ------------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class B shares from 5/31/94 to 8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/95 12/31/96 8/31/97
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper U.S. Government Securrities Fund Class C(1) 10000 10744 11155 11370
Salomon Brothers 30 Year GNMA Index+ 10000 11289 12046 12600
Consumer Price Index++ 10000 10407 10753 10881
- ------------------------------------------------------------------------------------------------------------
</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
percent, for Class B shares adjustment for the applicable contingent
deferred sales charge (CDSC) as follows: 1-year, 3 percent; 5-year, 1
percent; since inception, 0 percent and for Class C shares no adjustment for
sales charge. The maximum Class B share CDSC is 4 percent. For Class C
shares there is a 1 percent 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 January 1, 1992. 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 September 1, 1987) and the following charts represent the fund's
performance under its new objective (since January 1, 1992).
(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 rates 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> 10
PERFORMANCE UPDATE
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class C shares from 5/31/94 to 8/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
5/31/94 12/31/95 12/31/96 8/31/97
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemper Adjustable Rate U.S. Government Fund
Class C(1) 10000 10750 11180 11595
Lehman Brothers Adjustable Rate Index+ 10000 11289 12046 12600
Consumer Price Index++ 10000 10407 12600 10881
</TABLE>
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
[PIE GRAPH] [PIE CHART]
ON 8/31/97 ON 8/31/96
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT AGENCIES ARMS 91% 82%
- ------------------------------------------------------------------------------------------------------------------
FIXED RATE AGENCY SECURITIES 1 1
- ------------------------------------------------------------------------------------------------------------------
GOVERNMENT BONDS:
- ------------------------------------------------------------------------------------------------------------------
SHORT-TERM 8 11
- ------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM -- 6
- ------------------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
DURATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
ON 8/31/97 ON 8/31/96
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DURATION 3.6 years 3.1 years
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
8
<PAGE> 11
PORTFOLIO OF INVESTMENTS
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
PORTFOLIO OF INVESTMENTS AT AUGUST 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
INTEREST PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY Notes 9.25% 1998 $ 3,500 $ 3,610
SECURITIES - 23.2% 9.125 1999 4,000 4,203
(Cost: $19,125) 6.75 1999 3,000 3,039
6.25 1999 4,000 4,019
7.75 2000 4,000 4,150
------------------------------------------------------------------------
19,021
- ------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Adjustable rate 7.745-8.103 2022 18,601 19,308
MORTGAGE CORPORATION - mortgages (a) 7.826-7.882 2023 6,531 6,747
45.3% 7.944 2025 6,455 6,688
(Cost: $36,862) 7.572 2026 3,911 4,050
Fixed rate collateralized 11.25 2010 263 286
mortgage obligations 11.00 2014 72 72
------------------------------------------------------------------------
37,151
- ------------------------------------------------------------------------------------------------------------------
GOVERNMENT Adjustable rate 7.375 2022 6,044 6,213
NATIONAL MORTGAGE mortgages (a) 6.00-7.00 2027 18,000 18,228
ASSOCIATION - 30.3%
(Cost: $24,814) Pass-through 11.00 2018 344 381
certificates
------------------------------------------------------------------------
24,822
- ------------------------------------------------------------------------------------------------------------------
FEDERAL Adjustable rate 7.376 2019 3,403 3,495
NATIONAL MORTGAGE mortgages (a) 7.923 2021 1,708 1,776
ASSOCIATION - 15.9% 7.939 2023 2,643 2,746
(Cost: $12,948) 7.716 2025 4,790 4,985
------------------------------------------------------------------------
13,002
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--114.7%
(Cost: $93,749) 93,996
------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(14.7)% (12,029)
------------------------------------------------------------------------
NET ASSETS--100% $ 81,967
------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Adjustable rate securities. The interest rates on these securities vary with
a selected index at specified intervals and the rates shown above are the
effective rates on August 31, 1997. The dates shown represent the final maturity
of the obligations.
Based on the cost of investments of $93,749,000 for federal income tax purposes
at August 31, 1997, the gross unrealized appreciation was $415,000, the gross
unrealized depreciation was $168,000 and the net unrealized appreciation on
investments was $247,000.
See accompanying Notes to Financial Statements.
9
<PAGE> 12
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, 1997, 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 1993. 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, 1997, 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, 1997, 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 1993, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 16, 1997
10
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
<S> <C>
Investments, at value
(Cost: $93,749) $ 93,996
- ------------------------------------------------------------------------
Cash 863
- ------------------------------------------------------------------------
Receivable for:
Fund shares sold 139
- ------------------------------------------------------------------------
Investments sold 4,874
- ------------------------------------------------------------------------
Interest 922
- ------------------------------------------------------------------------
TOTAL ASSETS 100,794
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Payable for:
Dividends 118
- ------------------------------------------------------------------------
Fund shares redeemed 272
- ------------------------------------------------------------------------
Investments purchased 18,311
- ------------------------------------------------------------------------
Management fee 38
- ------------------------------------------------------------------------
Distribution services fee 5
- ------------------------------------------------------------------------
Administrative services fee 15
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 36
- ------------------------------------------------------------------------
Trustees' fees 32
- ------------------------------------------------------------------------
Total liabilities 18,827
- ------------------------------------------------------------------------
NET ASSETS $ 81,967
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $ 91,703
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (10,640)
- ------------------------------------------------------------------------
Net unrealized appreciation on investments 247
- ------------------------------------------------------------------------
Undistributed net investment income 657
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 81,967
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($73,504 / 8,849 shares outstanding) $8.31
- ------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 3.63% of
net asset value or 3.50% of offering price) $8.61
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($7,404 / 890 shares outstanding) $8.32
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($1,059 / 127 shares outstanding) $8.33
- ------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1997
(IN THOUSANDS)
<TABLE>
- -------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------
<S> <C>
Interest income $6,048
- -------------------------------------------------------------------------------------------
Expenses:
Management fee 493
- -------------------------------------------------------------------------------------------
Distribution services fee 60
- -------------------------------------------------------------------------------------------
Administrative services fee 189
- -------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 336
- -------------------------------------------------------------------------------------------
Professional fees 50
- -------------------------------------------------------------------------------------------
Reports to shareholders 26
- -------------------------------------------------------------------------------------------
Trustees' fees and other 19
- -------------------------------------------------------------------------------------------
Total expenses 1,173
- -------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 4,875
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- -------------------------------------------------------------------------------------------
Net realized gain on sales of investments (including
options purchased) 403
- -------------------------------------------------------------------------------------------
Net realized gain from futures transactions 119
- -------------------------------------------------------------------------------------------
Net realized gain 522
- -------------------------------------------------------------------------------------------
Change in net unrealized depreciation on investments 341
- -------------------------------------------------------------------------------------------
Net gain on investments 863
- -------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,738
- -------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
- -------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 4,875 6,197
- -------------------------------------------------------------------------------------------
Net realized gain (loss) 522 (20)
- -------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation 341 (928)
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 5,738 5,249
- -------------------------------------------------------------------------------------------
Net equalization charges (127) (272)
- -------------------------------------------------------------------------------------------
Distribution from net investment income (4,810) (6,117)
- -------------------------------------------------------------------------------------------
Net decrease from capital share transactions (13,311) (34,140)
- -------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (12,510) (35,280)
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------
Beginning of year 94,477 129,757
- -------------------------------------------------------------------------------------------
END OF YEAR (including undistributed net investment income
of $657 and $718, respectively) $ 81,967 94,477
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
12
<PAGE> 15
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 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, 1997) 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. All
shares of the Fund have equal rights with respect
to voting, dividends and assets, subject to class
specific preferences.
- --------------------------------------------------------------------------------
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 financial futures
and options are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Over-the-counter
traded fixed income options are valued based upon
prices provided by market makers. 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.
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, 1997, the Fund had $13,443,000 in
purchase commitments outstanding (16% 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
13
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
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, 1997, amounting to approximately
$10,622,000, is available to offset future taxable
gains. If not applied, the loss carryover expires
during the period 1998 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), 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 $493,000 for the year
ended August 31, 1997.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Zurich Kemper Distributors,
Inc. (ZKDI). Underwriting commissions paid in
connection with the distribution of Class A shares
are as follows:
<TABLE>
<CAPTION>
COMMISSIONS
RETAINED COMMISSIONS ALLOWED
BY ZKDI BY ZKDI TO FIRMS
----------- --------------------
<S> <C> <C>
Year ended August 31, 1997 $8,000 58,000
</TABLE>
For services under the distribution services
agreement, the Fund pays ZKDI a fee of .75% of
average daily net assets of the Class B and Class C
shares. Pursuant to the agreement, ZKDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, ZKDI 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>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES
RECEIVED BY PAID BY ZKDI
ZKDI TO FIRMS
----------------- ---------------------
<S> <C> <C>
Year ended August 31, 1997 $91,000 120,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with ZKDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays ZKDI a fee at an annual rate of up to
.25% of average daily net assets of each class.
ZKDI in
14
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
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 ASF PAID BY ZKDI
THE FUND TO ZKDI TO FIRMS
----------------- -----------------
<S> <C> <C>
Year ended August 31, 1997 $189,000 188,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Zurich Kemper Service Company (ZKSvC) is the
shareholder service agent of the Fund. Under the
agreement, ZKSvC received shareholder services fees
of $249,000 for the year ended August 31, 1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
For the year ended August 31, 1997, the Fund made
no direct payments to its officers and incurred
trustees' fees of $15,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended August 31, 1997, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $241,278
Proceeds from sales 247,926
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 1,089 $ 8,931 3,196 $ 26,308
-----------------------------------------------------------------------------
Class B 626 5,196 352 2,925
-----------------------------------------------------------------------------
Class C 82 680 126 1,046
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-----------------------------------------------------------------------------
Class A 369 3,054 500 4,138
-----------------------------------------------------------------------------
Class B 33 271 27 224
-----------------------------------------------------------------------------
Class C 7 55 6 51
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
SHARES REDEEMED
-----------------------------------------------------------------------------
Class A (3,198) (26,282) (8,043) (66,310)
-----------------------------------------------------------------------------
Class B (523) (4,338) (182) (1,513)
-----------------------------------------------------------------------------
Class C (106) (878) (122) (1,009)
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
CONVERSION OF SHARES
-----------------------------------------------------------------------------
Class A 11 93 14 113
-----------------------------------------------------------------------------
Class B (11) (93) (14) (113)
-----------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE TRANSACTIONS $(13,311) $(34,140)
-----------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The Fund has entered into exchange traded financial
futures contracts in order to protect itself from
anticipated market conditions and, as such, bears
the risk that arises from entering into these
contracts.
At the time the Fund enters into a futures
contract, it is required to make a margin deposit
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 fluctuates. At August 31,
1997, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $89,000. The Fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures position open
at August 31, 1997:
<TABLE>
<CAPTION>
FACE EXPIRATION GAIN AT
TYPE AMOUNT MONTH 8/31/97
-------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Note $5,080,000 Sep '97 $9,000
</TABLE>
16
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------
Class A
YEAR ENDED AUGUST 31,
----------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------
Net asset value, beginning of year $8.22 8.30 8.33 8.68 8.63
- ------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .45 .46 .48 .34 .47
- ------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .09 (.09) (.04) (.29) .02
- ------------------------------------------------------------------------------------------------
Total from investment operations .54 .37 .44 .05 .49
- ------------------------------------------------------------------------------------------------
Less distribution from net investment income .45 .45 .47 .40 .44
- ------------------------------------------------------------------------------------------------
Net asset value, end of year $8.31 8.22 8.30 8.33 8.68
- ------------------------------------------------------------------------------------------------
TOTAL RETURN 6.75% 4.55 5.52 .59 5.87
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------
Expenses 1.25% 1.15 1.10 .93 .21
- ------------------------------------------------------------------------------------------------
Net investment income 5.50% 5.49 5.76 3.96 5.44
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------- ---------------------------------------
Class B Class C
---------------------------------------- ---------------------------------------
MAY 31 MAY 31
YEAR ENDED AUGUST 31, TO YEAR ENDED AUGUST 31, TO
--------------------------- AUGUST 31, -------------------------- AUGUST 31,
1997 1996 1995 1994 1997 1996 1995 1994
- ----------------------------------------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------- ---------------------------------------
Net asset value, beginning of period $8.23 8.31 8.32 8.37 8.24 8.32 8.33 8.37
- ----------------------------------------------------------------------------------- ---------------------------------------
Income from investment operations:
Net investment income .39 .40 .43 .07 .39 .40 .43 .08
- ----------------------------------------------------------------------------------- ---------------------------------------
Net realized and unrealized gain (loss) .09 (.09) (.04) (.04) .09 (.09) (.04) (.04)
- ----------------------------------------------------------------------------------- ---------------------------------------
Total from investment operations .48 .31 .39 .03 .48 .31 .39 .04
- ----------------------------------------------------------------------------------- ---------------------------------------
Less distribution from net investment
income .39 .39 .40 .08 .39 .39 .40 .08
- ----------------------------------------------------------------------------------- ---------------------------------------
Net asset value, end of period $8.32 8.23 8.31 8.32 8.33 8.24 8.32 8.33
- ----------------------------------------------------------------------------------- ---------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.96% 3.79 4.84 .34 5.98 3.82 4.89 .47
- ----------------------------------------------------------------------------------- ---------------------------------------
- ----------------------------------------------------------------------------------- ---------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------- ---------------------------------------
Expenses 1.93% 1.89 1.85 1.96 1.88 1.89 1.79 1.88
- ----------------------------------------------------------------------------------- ---------------------------------------
Net investment income 4.82% 4.75 5.01 3.36 4.87 4.75 5.07 3.52
- ----------------------------------------------------------------------------------- ---------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -----------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $81,967 94,477 129,757 202,815 212,694
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate 249% 272 308 533 138
- -----------------------------------------------------------------------------------------------
</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, and .95% and 4.70% for the year ended August 31,
1993.
Total return does not reflect the effect of any sales charges.
17
<PAGE> 20
NOTES
18
<PAGE> 21
NOTES
19
<PAGE> 22
TRUSTEES&OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS ELIZABETH A. BYRNES
President and Trustee Vice President
DAVID W. BELIN CHARLES R. MANZONI, JR.
Trustee Vice President
LEWIS A. BURNHAM JOHN E. NEAL
Trustee Vice President
DONALD L. DUNAWAY ROBERT C. PECK, JR.
Trustee Vice President
ROBERT B. HOFFMAN RICHARD L. VANDENBERG
Trustee Vice President
DONALD R. JONES PHILIP J. COLLORA
Trustee Vice President and
Secretary
SHIRLEY D. PETERSON
Trustee JEROME L. DUFFY
Treasurer
WILLIAM P. SOMMERS
Trustee ELIZABETH C. WERTH
Assistant Secretary
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT ZURICH KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Ave.
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER ZURICH KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER FUNDS LOGO]
Printed in the U.S.A. on recycled paper
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Funds prospectus.
KARGF - 2 (10/97) 1038280
