<PAGE> 1
KEMPER
ADJUSTABLE RATE
U.S. GOVERNMENT FUND
SEMIANNUAL REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED FEBRUARY 28, 1997
Offering investors the opportunity for high current income consistent with low
volatility of principal
" . . . Our increased exposure to these
fully-indexed securities was positive for the fund as
rates began rising in December."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
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 28, 1997 (UNADJUSTED FOR ANY SALES
CHARGE):
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 3.60%
CLASS B 3.22%
CLASS C 3.23%
LIPPER ADJUSTABLE RATE
MORTGAGE RUNDS CATEGORY
AVERAGE 3.64%
- --------------------------------------------------------------------------------
</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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
2/28/97 8/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND CLASS A $8.29 $8.22
- --------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND CLASS B $8.30 $8.23
- --------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND CLASS C $8.31 $8.24
- --------------------------------------------------------------------------------
</TABLE>
* Lipper Analytical Services, Inc. rankings are based upon changes in net asset
value with all dividends reinvested and do not include the effect of sales
charges and, if they had, results may have been less favorable.
- --------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND RANKINGS*
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER ADJUSTABLE RATE MORTGAGE FUNDS
CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #33 OF #42 OF #41 OF
46 FUNDS 46 FUNDS 46 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #8 OF N/A N/A
24 FUNDS
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF FEBRUARY 28, 1997.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME: $0.2227 $0.1924 $0.1938
- --------------------------------------------------------------------------------
FEBRUARY DIVIDEND: $0.0372 $0.0324 $0.0322
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATED+: 5.38% 4.68% 4.65%
- --------------------------------------------------------------------------------
SEC YIELD+: 5.14% 4.60% 4.65%
- --------------------------------------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on February 28, 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 February 28, 1997, shown as an annualized percentage of the
maximum offering price on that date. The SEC yield is computed in accordance
with the 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 Class C shares.
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.
ADJUSTABLE RATE MORTGAGES (ARMS) ARMs are mortgages whose interest rates adjust
periodically based on changes to a corresponding index rate. To protect the
borrower against dramatic rate increases in a short period of time, ARMs are
often originated with interest rate caps. An interest rate cap assures the
borrower that the rate will not adjust beyond a certain point within a specific
period.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) The Government National Mortgage
Association (GNMA) is part of the Department of Housing and Urban Development
and provides financing for residential housing. GNMA issues securities that are
backed by a pool of mortgages. Interest and principal payments are received by
the pool each month from homeowners paying their mortgages. These payments are
passed through to owners of GNMA certificates such as Kemper Adjustable Rate
U.S. Government Fund.
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.
2
<PAGE> 3
ECONOMIC OVERVIEW
LOGO
Stephen B. Timbers is president, chief investment and executive officer of
Zurich Kemper Investments, Inc. (ZKI). ZKI and its affiliates manage
approximately $79 billion in assets, including $42 billion in retail
mutual funds. Timbers is a graduate of Yale University and holds an M.B.A. from
Harvard University.
DEAR SHAREHOLDER:
The Federal Reserve Board's recent decision to raise short-term interest rates
as a pre-emptive strike against inflation has changed the course that the
markets have been on for several months. In fact, we had not seen a change in
the federal funds target rate since January 1996, when the Fed reduced interest
rates. The raising of rates now -- coupled with the general expectation of at
least one and probably two more hikes -- requires a modest adjustment in our
views for 1997.
A review of the standard measures of the economy shows little to be concerned
about. As has been the pattern for more than five years, alternately strong and
weak quarters have produced an overall 2 percent to 3 percent rate of growth in
gross domestic product (GDP). Job creation and the unemployment rate are
consistent with a moderately expanding economy. Corporate profits continue to
grow at an expected 4 to 5 percent rate in 1997. The Consumer Price Index
continues to track at a 2.5 percent to 3.0 percent rate. However, the Fed has
become nervous about the recent modest increases in unit labor costs. To avert
the possibility of more severe later actions to control inflation, the Fed
decided to act now. Ironically, now that rates have been raised, we may never
know whether the economy was in fact in danger of overheating.
Investors' immediate reaction to the higher rates was negative, as evidenced
by the stock market's first sizable correction in years. Yet, as uncomfortable
as it is to participate in a market decline, a correction is a natural event in
a market cycle. A market correction is generally defined as a loss in value of 8
to 10 percent. Historically, corrections take place over a period of four to six
months, the current one has already fallen the average amount in a very short
amount of time. It is likely that the stock market will require many weeks of
retrenchment before a new sustainable upward movement begins.
A correction should be distinguished from a bear market, which involves a
decline of at least 20 percent and typically occurs over six to eight months. We
see no reason to believe that we are entering a classic bear market. The economy
is stable and the interest rate increases are likely to be gradual and modest.
Inflation is the greatest threat to the securities markets, and if higher rates
are what is required to control inflation, investors will be better off over the
longer term.
Just as we see a limited downside to today's rising interest rate environment,
so is there a limited upside in the near future. The effect of higher rates will
have to work itself through the economy. Higher rates have significant
implications for corporate profitability, debt issuance, credit extension and
international trade. Post-correction cash flows into the financial markets will
be a subject of great scrutiny. One of the factors driving the stock market to
its all-time high early in 1997 was the unprecedented high level of investment
through mutual funds, 401(k)s and qualified contribution plans. It is realistic
to expect that, on the margin, some of that cash will find a home in short-term,
liquid investments while the stock market sorts itself out.
One of the most interesting aspects of today's environment is the role of the
technology stocks. They seem to be demonstrating the same market leadership
characteristics that we have seen before. In the early 1970s, consumer
nondurable stocks led the market up and down. More recently, in the 1980s, oil
stocks led, followed by financial services stocks. Today, we look at technology
stocks as a strong indicator of market direction. When they finally find a
bottom and then turn upward, we would expect the general market to follow.
Higher interest rates are, of course, anathema to the fixed-income market. The
market has fallen, discounting a more restricting monetary policy. However, in
the era of instant adjustment, most of the damage is likely done. We expect now
that the bond market is likely to trade in a very narrow range -- with long-term
interest rates no lower than 6.75 percent and no higher than 7.25 percent. One
positive effect of the stock market correction was the widening of spreads
available on high yield bonds. As a consequence, high yield bonds today are more
reasonably priced.
[Timbers Photo]
3
<PAGE> 4
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and sharholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch has 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 (3/31/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.69 6.53 6.51 7.06
PRIME RATE(2) 8.50 8.25 8.25 9.00
INFLATION RATE(3)* 2.72 2.62 2.86 2.57
THE U.S. DOLLAR(4) 8.58 4.74 8.94 -11.46
CAPITAL GOODS ORDERS(5)* 5.25 1.96 3.98 15.52
INDUSTRIAL PRODUCTION(5)* 3.79 3.13 1.36 3.38
EMPLOYMENT GROWTH(6) 2.27 2.18 1.76 3.12
</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 hight 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 February 28, 1997.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
A natural response to a troubled U.S. equity market is to look abroad. In
fact, the valuations of many international markets are more attractive than the
U.S. There too, though, weak German and Japanese economies make it difficult to
identify exciting near-term opportunities.
Our recommendation to shareholders is to stay the course and to fight the
temptation to try to time when and where you should be invested. Financial
assets react much quicker today to events. Volatility has returned to the market
and with it heightened uncertainty. Now is the time to rely on your financial
representative for the expertise and the long-term investing discipline that he
or she can provide.
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
Zurich Kemper Investments, Inc.
April 10, 1997
4
<PAGE> 5
PERFORMANCE UPDATE
[VANDENBERG PHOTO]
RICHARD VANDENBERG JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN MARCH 1996,
AS 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 BACHELOR'S 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 BACHELOR'S DEGREE FROM MIAMI UNIVERSITY OF
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.
IN THE LAST SIX MONTHS, THE GOVERNMENT BOND MARKET SAW A DECLINE IN MARKET
YIELDS ONLY TO BE FOLLOWED BY SIGNS OF A SOMEWHAT STRONGER ECONOMY, WHICH
FUELED HIGHER YIELDS. BELOW, PORTFOLIO MANAGERS BETH BYRNES AND RICHARD
VANDENBERG EXPLAIN HOW THEY FINE-TUNED THE FUND'S PORTFOLIO TO OPTIMIZE ITS
PERFORMANCE IN BOTH ENVIRONMENTS.
Q HOW DID THE FUND PERFORM FOR THE SIX-MONTH PERIOD, SEPTEMBER 1996 THROUGH
FEBRUARY 1997?
A For the semi-annual period, the fund kept pace with its peer group average,
gaining 3.60 percent versus the 3.64 percent average return of the 46 funds in
Lipper Analytical Services' adjustable rate mortgage category. This return is
also ahead of where the fund was during the same period a year ago.
Q WHAT HAS BEEN THE GENERAL THEME IN THE GOVERNMENT BOND MARKET OVER THE LAST
SIX MONTHS?
A The government bond market is moved primarily by interest rates and the
market's anticipation about their direction. Market interest rates were trending
higher in early September, the start of the fund's fiscal year, in response to
mixed signals about the ongoing pace of the economy. However, in mid-September
the market began to rally (bond yields declined) when low Consumer Price Index
(CPI) figures were reported. These figures indicated tame inflation, which
investors believed would ward off an interest rate increase by the Federal
Reserve Board (the Fed). The market was correct in its assumption and no action
was taken by the Fed regarding interest rates in September.
The government market enjoyed about three months of strong performance as
economic data, such as Gross Domestic Product, hourly earnings and housing
starts continued to suggest that growth in the economy was moderate and
inflation benign. Additionally, the outcome of the November U.S. Presidential
and Congressional elections renewed optimism that a balanced budget agreement
might be possible in 1997.
In December, however, a confluence of events caused investors to re-evaluate
the true strength of the economy. Economic data such as non-farm payrolls and
hourly earnings moved higher, signaling a pick-up in economic growth and the
potential for higher inflation. The market was also derailed by comments made by
Fed Chairman Alan Greenspan suggesting that the valuations of financial assets
had become over-valued. He made the comment in December initially, then
reiterated his concern in February during his testimony to Congress. Market
rates rose in response to these events, and as a result, returns in the
fixed-income market were relatively flat from December through February.
5
<PAGE> 6
PERFORMANCE UPDATE
Q HOW WAS THE FUND POSITIONED TO TAKE ADVANTAGE OF THE RALLYING MARKET EARLY
IN THE PERIOD?
A As concern faded that the Fed would tighten interest rates, we extended the
duration of the fund's securities. We moved the fund's duration to a neutral
position, similar to that of our peers, from our previous more defensive stance.
Remember, the longer a fund's duration, the more sensitive it is to interest
rate changes. As rates decline, a longer duration supports more price
appreciation of an asset than a shorter duration would, given the same
circumstances.
We never extended the fund's duration aggressively, however, because we
were not convinced that rates would continue declining.
As rates fell, we bought teaser adjustable rate mortgages (ARMs) and
reduced short-term, short-duration Treasuries in the portfolio. Teaser rate
ARMs perform well as interest rates decline because they carry below market or
"teaser" rates. The low rates are offered to attract borrowers to an
adjustable-rate rather than a fixed-rate mortgage. These rates 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
mortgage prepayments than other types of ARMs that carry higher interest rates.
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. Since we didn't expect interest rate
declines of that magnitude to continue, we began adding Government National
Mortgage Association (GNMA) mortgages. GNMA's are securities with longer
durations, but less volatility than teaser-rate mortgages.
We also began adding fully-indexed ARMs, also called current coupon
ARMs. Fully-indexed ARMs are attractive investments when interest rates are
stable or have a bias to increase. This is because they pay the current
interest rate available in the market at the time of their issue and have
shorter durations. Our increased exposure to these fully-indexed securities was
positive for the fund as rates began rising in December.
Q WHEN RATES REVERSED DIRECTION, WHAT OTHER TYPES OF ADJUSTMENTS DID YOU MAKE
TO THE PORTFOLIO?
A As we had expected, economic growth picked up in late December and interest
rates rose. By that time, we had already positioned the fund for a somewhat
higher interest rate environment. As rates continued to rise, we added more
fully-indexed ARMs and short-term, short-duration U.S. Treasuries, both of which
tend to outperform when interest rates rise.
Q WHAT'S YOUR OUTLOOK FOR THE GOVERNMENT BOND MARKET?
A We've seen a slight pick-up in economic growth recently. At this point,
however, the level of growth is not alarming. We expect that the economy will
continue to grow at a moderate pace and that inflation, although it may move
higher, should not be problematic.
In February, market yields moved lower by about 25 basis points (one
quarter of a percent) as the market prepared for a preemptive increase in
short-term interest rates by the Fed at its Open Market Committee Meeting in
March. This discounting in the market occurred after Fed Chairman Alan
Greenspan, in his February Humphrey Hawkins testimony to Congress, suggested
that investors were acting with "irrational exuberance" and that financial
asset valuations may be inflated.
We anticipate that the Fed may raise short-term rates by 25-50 basis
points over the course of the next several months, if economic growth continues
to expand beyond a 3 percent annual rate. If that happened, we'd shorten the
duration of the fund accordingly.
6
<PAGE> 7
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT AGENCIES ARMS 85% 82%
- --------------------------------------------------------------------------------
FIXED RATE AGENCY SECURITIES 1 1
- --------------------------------------------------------------------------------
GOVERNMENT BONDS:
SHORT-TERM 13 11
- --------------------------------------------------------------------------------
INTERMEDIATE-TERM 1 6
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/97 ON 8/31/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 2/28/97 ON 8/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
3.9 YEARS 3.8 YEARS
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
7
<PAGE> 8
SPORTFOLIO OF INVESTMENTS
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
Portfolio of Investments at February 28, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COUPON PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY Notes 9.00-9.25% 1998 $17,000 $ 17,717
SECURITIES - 25.8% 8.875 1999 3,000 3,152
(Cost: $24,437) 8.75 2000 3,000 3,225
--------------------------------------------------------------------------------------
24,094
- ------------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Adjustable rate 7.132-8.105 2022 17,362 17,945
MORTGAGE CORPORATION - mortgages (a) 7.307-7.613 2023 10,838 11,184
56.2% 7.671-7.726 2025 17,405 17,993
(Cost: $52,063) 6.24-6.977 2026 4,777 4,894
Fixed rate
collateralized 11.25 2010 310 342
mortgage obligations 11.00 2014 73 73
--------------------------------------------------------------------------------------
52,431
- ------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL Adjustable rate 7.125 2022 6,640 6,798
MORTGAGE ASSOCIATION - mortgages (a) 6.00-7.00 2027 12,500 12,628
21.3% Pass-through 11.00 2018 361 402
(Cost: $19,892) certificates
--------------------------------------------------------------------------------------
19,828
- ------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Adjustable rate 7.124 2019 3,729 3,835
MORTGAGE ASSOCIATION - mortgages (a) 7.656-7.899 2021 3,695 3,827
8.2%
(Cost: $7,618)
--------------------------------------------------------------------------------------
7,662
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--111.5%
(Cost: $104,010) 104,015
--------------------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(11.5)% (10,737)
--------------------------------------------------------------------------------------
NET ASSETS--100% $ 93,278
--------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Adjustable rate securities. The coupon rates on these securities vary with a
selected index at specified intervals and the rates shown above are the
effective rates on February 28, 1997. The dates shown represent the final
maturity of the obligations.
Based on the cost of investments of $104,010,000 for federal income tax purposes
at February 28, 1997, the gross unrealized appreciation was $432,000, the gross
unrealized depreciation was $427,000 and the net unrealized appreciation on
securities was $5,000.
See accompanying Notes to Financial Statements.
8
<PAGE> 9
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $104,010) $104,015
- ------------------------------------------------------------------------
Cash 46
- ------------------------------------------------------------------------
Receivable for:
Fund shares sold 33
- ------------------------------------------------------------------------
Investments sold 1,263
- ------------------------------------------------------------------------
Interest 1,024
- ------------------------------------------------------------------------
TOTAL ASSETS 106,381
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Payable for:
Fund shares redeemed 226
- ------------------------------------------------------------------------
Investments purchased 12,738
- ------------------------------------------------------------------------
Management fee 43
- ------------------------------------------------------------------------
Distribution services fee 5
- ------------------------------------------------------------------------
Administrative services fee 16
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 36
- ------------------------------------------------------------------------
Trustees' fees and other 39
- ------------------------------------------------------------------------
Total liabilities 13,103
- ------------------------------------------------------------------------
NET ASSETS $ 93,278
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $103,562
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (11,012)
- ------------------------------------------------------------------------
Net unrealized appreciation on investments 5
- ------------------------------------------------------------------------
Undistributed net investment income 723
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 93,278
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share ($85,204 /
10,280 shares outstanding) $8.29
- ------------------------------------------------------------------------
Maximum offering price per share (net asset value, plus
3.63% of net asset value or 3.50% of offering price) $8.59
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($6,728 / 810
shares outstanding) $8.30
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($1,346 / 162
shares outstanding) $8.31
- ------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
NET INVESTMENT INCOME
- ----------------------------------------------------------------------
Interest income $3,118
- ----------------------------------------------------------------------
Expenses:
Management fee 257
- ----------------------------------------------------------------------
Distribution services fee 30
- ----------------------------------------------------------------------
Administrative services fee 95
- ----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 169
- ----------------------------------------------------------------------
Professional fees 32
- ----------------------------------------------------------------------
Reports to shareholders 10
- ----------------------------------------------------------------------
Trustees' fees and other 11
- ----------------------------------------------------------------------
Total expenses 604
- ----------------------------------------------------------------------
NET INVESTMENT INCOME 2,514
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- ----------------------------------------------------------------------
Net realized gain on sales of investments (including
options purchased) 572
- ----------------------------------------------------------------------
Net realized gain from futures transactions 40
- ----------------------------------------------------------------------
Net realized gain 612
- ----------------------------------------------------------------------
Change in net unrealized depreciation on investments 99
- ----------------------------------------------------------------------
Net gain on investments 711
- ----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,225
- ----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
FEBRUARY 28, AUGUST 31,
1997 1996
- ---------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 2,514 6,197
- ---------------------------------------------------------------------------------------------
Net realized gain (loss) 612 (20)
- ---------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation 99 (928)
- ---------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,225 5,249
- ---------------------------------------------------------------------------------------------
Net equalization charges (15) (272)
- ---------------------------------------------------------------------------------------------
Distribution from net investment income (2,494) (6,117)
- ---------------------------------------------------------------------------------------------
Net decrease from capital share transactions (1,915) (34,140)
- ---------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (1,199) (35,280)
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------
Beginning of period 94,477 129,757
- ---------------------------------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment income
of $723 and $718 respectively) $93,278 94,477
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
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 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 February 28, 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 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
February 28, 1997 the Fund had $12,738,000 in
11
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
purchase commitments outstanding (14% of net
assets), with a corresponding amount of assets
segregated.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class by dividing the Fund's net assets
attributable to that class by the number of shares
of the class outstanding.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies for the six
months ended February 28, 1997. The accumulated net
realized loss on sales of investments for federal
income tax purposes at February 28, 1999, amounting
to approximately $10,994,000, 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 MANAGEMENT AGREEMENT. The Fund has a management
AFFILIATES 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 $257,000 for the six
months ended February 28, 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>
Six months ended February 28, 1997 $4,000 26,000
</TABLE>
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
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>
Six months ended
February 28, 1997 $43,000 33,000
</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 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>
Six months ended
February 28, 1997 $95,000 95,000
</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 $129,000 for the six months ended February 28,
1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
For the six months ended February 28, 1997, the
Fund made no direct payments to its officers and
incurred trustees' fees of $8,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT For the six months ended February 28, 1997,
TRANSACTIONS investment transactions (excluding short-term
instruments) are as follows (in thousands):
Purchases $100,281
Proceeds from sales 96,837
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE The following table summarizes the activity in
TRANSACTIONS capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, AUGUST 31,
1997 1996
--------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------
SHARES SOLD
Class A 1,005 $ 8,250 3,196 $ 26,308
------------------------------------------------------------------------------
Class B 210 1,744 352 2,925
------------------------------------------------------------------------------
Class C 68 564 126 1,046
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 192 1,587 500 4,138
------------------------------------------------------------------------------
Class B 15 127 27 224
------------------------------------------------------------------------------
Class C 4 30 6 51
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SHARES REDEEMED
Class A (1,496) (12,287) (8,043) (66,310)
------------------------------------------------------------------------------
Class B (179) (1,484) (182) (1,513)
------------------------------------------------------------------------------
Class C (54) (446) (122) (1,009)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 1 10 14 113
------------------------------------------------------------------------------
Class B (1) (10) (14) (113)
------------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE TRANSACTIONS $(1,915) $ (34,140)
------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES The Fund has entered into exchange traded financial
CONTRACTS 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 February 28,
1997, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $177,000. The Fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures positions
open at February 28, 1997:
<TABLE>
<CAPTION>
FACE EXPIRATION GAIN (LOSS) AT
TYPE AMOUNT MONTH 2/28/97
---------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Note $1,799,000 Mar '97 $(4,000)
---------------------------------------------------------------------
Eurodollar $7,067,000 Jun '97 2,000
---------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------
CLASS A
-------------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, -------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.22 8.30 8.33 8.68 8.63
- ------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .22 .46 .48 .34 .47
- ------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .07 (.09) (.04) (.29) .02
- ------------------------------------------------------------------------------------------------
Total from investment operations .29 .37 .44 .05 .49
- ------------------------------------------------------------------------------------------------
Less distribution from net investment income .22 .45 .47 .40 .44
- ------------------------------------------------------------------------------------------------
Net asset value, end of period $8.29 8.22 8.30 8.33 8.68
- ------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.60% 4.55 5.52 .59 5.87
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------
Expenses 1.19% 1.15 1.10 .93 .21
- ------------------------------------------------------------------------------------------------
Net investment income 5.46% 5.49 5.76 3.96 5.44
- ------------------------------------------------------------------------------------------------
</TABLE>
[CAPTION]
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------------------------- ---------------------------------------------
SIX MONTHS YEAR MAY 31 SIX MONTHS YEAR MAY 31
ENDED ENDED TO ENDED ENDED TO
FEBRUARY 28, AUGUST 31, AUGUST 31, FEBRUARY 28, 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 .20 .40 .43 .07 .20 .40 .43 .08
- ----------------------------------------------------------------------------------- ------------------------------------------
Net realized and unrealized gain
(loss) .06 (.09) (.04) (.04) .06 (.09) (.04) (.04)
- ----------------------------------------------------------------------------------- ------------------------------------------
Total from investment operations .26 .31 .39 .03 .26 .31 .39 .04
- ----------------------------------------------------------------------------------- ------------------------------------------
Less distribution from net investment
income .19 .39 .40 .08 .19 .39 .40 .08
- ----------------------------------------------------------------------------------- ------------------------------------------
Net asset value, end of period $8.30 8.23 8.31 8.32 8.31 8.24 8.32 8.33
- ----------------------------------------------------------------------------------- ------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.22% 3.79 4.84 .34 3.23 3.82 4.89 .47
- ----------------------------------------------------------------------------------- ------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------- ------------------------------------------
Expenses 1.89% 1.89 1.85 1.96 1.84 1.89 1.79 1.88
- ----------------------------------------------------------------------------------- ------------------------------------------
Net investment income 4.76% 4.75 5.01 3.36 4.81 4.75 5.07 3.52
- ----------------------------------------------------------------------------------- ------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, ------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $93,278 94,477 129,757 202,815 212,694
- -------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 189% 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.
15
<PAGE> 16
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR.
President and Trustee Vice President
DAVID W. BELIN ELIZABETH A. BYRNES
Trustee Vice President
LEWIS A. BURNHAM CHARLES R. MANZONI, JR.
Trustee Vice President
DONALD L. DUNAWAY JOHN E. NEAL
Trustee Vice President
ROBERT B. HOFFMAN RICHARD L. VANDENBERG
Trustee Vice President
DONALD R. JONES PHILIP J. COLLORA
Trustee Vice President
and Secretary
DOMINIQUE P. MORAX
Trustee JEROME L. DUFFY
Treasurer
SHIRLEY D. PETERSON
Trustee ELIZABETH C. WERTH
Assistant Secretary
WILLIAM P. SOMMERS
Trustee
- --------------------------------------------------------------------------------
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 INVESTORS FIDUCIARY TRUST COMPANY
AGENT 127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER ZURICH KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[RECYCLED LOGO]
Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Funds prospectus.
KARGF - 3 (4/97) 1030740
Printed in the U.S.A. [KEMPER FUNDS LOGO]
