<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED AUGUST 31, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD (SM)
[LOGO]
Offering investors the opportunity for high current
income consistent with low volatility of principal
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
"...Although the market environment hasn't been good
for adjustable rate mortgages, the fund has done what
it's designed to do: provide steady income with little price
fluctuation despite volatile market conditions. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
8
PORTFOLIO STATISTICS
9
PORTFOLIO OF
INVESTMENTS
10
REPORT OF
INDEPENDENT AUDITORS
11
FINANCIAL STATEMENTS
13
NOTES TO
FINANCIAL STATEMENTS
17
FINANCIAL HIGHLIGHTS
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED AUGUST 31, 1998
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 3.68%
CLASS B 3.06%
CLASS C 3.10%
LIPPER ADJUSTABLE RATE MORTGAGE FUNDS CATEGORY AVERAGE* 4.93%
- -------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not guarantee future results.
Investment returns and principal values will fluctuate so that shares when
redeemed may be worth more or less than original cost.
*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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
NET ASSET VALUE
- -------------------------------------------------------------------------------
AS OF AS OF
8/31/98 8/31/97
- -------------------------------------------------------------------------------
<S> <C> <C>
KEMPER ADJUSTABLE RATE U.S.
GOVERNMENT FUND CLASS A $8.19 $8.31
- -------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE U.S.
GOVERNMENT FUND CLASS B $8.21 $8.32
- -------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE U.S.
GOVERNMENT FUND CLASS C $8.22 $8.33
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT
FUND RANKINGS AS OF 8/31/98
- -------------------------------------------------------------------------------
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 #32 of #34 of #33 of
34 funds 34 funds 34 funds
- -------------------------------------------------------------------------------
5-YEAR #23 of N/A N/A
25 funds
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF AUGUST 31, 1998.
<TABLE>
<CAPTION>
CLASS CLASS CLASS
A B C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $.4196 $.3604 $.3638
- -------------------------------------------------------------------------------
AUGUST DIVIDEND: $.0300 $.0254 $.0257
- -------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 4.40% 3.71% 3.75%
- -------------------------------------------------------------------------------
SEC YIELD+: 4.25% 3.75% 3.78%
- -------------------------------------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on August 31, 1998. 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, 1998, 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.
Yields and distribution rates are historical and will fluctuate.
TERMS TO KNOW
YOUR FUND'S STYLE
- -------------------------------------------------------------------------------
MORNINGSTAR FIXED-INCOME STYLE BOX
- -------------------------------------------------------------------------------
[MATURITY QUALITY DIAGRAM]
Source: Data provided by Morningstar, Inc., Chicago, IL 312-696-6000. 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 risk and do
not represent future performance. Please consult the prospectus for a
description of investment policies.
ADJUSTABLE RATE MORTGAGES (ARMS) Mortgages whose interest rates adjust
periodically based on changes to a corresponding index rate. To help protect the
borrower against dramatic rate increases in a short period of time, ARMs are
often originated with interest rate caps. An interest rate cap assures the
borrower that the rate will not adjust beyond a certain point within a specific
period.
DURATION A measure of the interest rate sensitivity of a fixed-income investment
or portfolio. The longer the duration, the greater the interest rate risk.
FLIGHT-TO-QUALITY BUYING When investors move assets from foreign equity and
foreign bond securities to U.S. Treasuries and other high quality securities in
times of global economic uncertainty.
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 represents the aggregate percentage or dollar
value change over the period.
<PAGE> 3
ECONOMIC OVERVIEW
[SILVIA PHOTO]
DR. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS.
SILVIA HOLDS A BACHELOR OF ARTS DEGREE AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND HAS A MASTER'S DEGREE IN ECONOMICS FROM BROWN
UNIVERSITY IN PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS
WITH THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT MANAGER FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $239 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS.
DEAR SHAREHOLDERS,
The third quarter of 1998 ended on a mildly positive note with the Federal
Reserve Board (the Fed) reducing interest rates by 1/4 of a point to 5.25
percent. While some investors were disappointed by the small size of the
adjustment, it nevertheless provided a moment of relief after several stormy
months. Economic and political instability in Russia, terrorist bombings and
U.S. retaliation overseas, lingering effects of the "contagion" in Asia, not to
mention weak corporate profits and political scandal in the United States were
responsible for considerable uncertainty and market volatility. A series of
market dips and drops continued to fuel the debate about whether we would
finally see the end of our long-running bull market -- or even plummet into a
recession.
The Fed's mid-September bank credit survey indicated that domestic banks are
tightening credit standards for both large and small borrowers. This suggests a
reduction in the supply of credit going forward with subsequent negative impacts
on employment growth and capital spending. In this sense, there is the beginning
of a credit crunch starting in U.S. bank credit markets.
But investors should find comfort in the fact that economic fundamentals
continue to favor financial assets in the U.S. -- particularly Treasury bonds.
In a nutshell, the nation's economy remains strong despite its slowdown in the
second half of the year. Short-term interest rates are expected to remain low
for the remainder of the year. There are no major tax or regulatory threats
waiting in the wings. And our economy continues to draw investors from around
the world, although perhaps not as fervently as last year.
The nation's gross domestic product (GDP), which represents the total value of
all goods and services produced within the U.S. economy, is expected to have
grown at an annualized rate of 2 percent in the third quarter of 1998. Faster
growth can be attributed to several one-time factors, including a domestic
correction in inventory levels and the end of the General Motors strike.
Real capital spending and employment growth have remained solid. Consumer
confidence remains fairly high. Home sales remain robust. Economic policy
continues to support the nation's fiscal budget surplus projection of $65
billion.
As far as inflation goes, there are two tales to be told. Prices for consumer
goods, as measured by the consumer price index (CPI), are steady. Compare this
to prices for services, which have risen between 2.5 and 3.5 percent. For
investors, this difference in pricing flexibility translates into a difference
in profit expectations. Profits of domestic service firms should be much
stronger than commodity producers dependent on export markets.
Across the Atlantic, Europe's economy appears to be growing at an even pace as
the region progresses toward the Economic and Monetary Union (EMU) slated for
January 1, 1999. One effect of the union may be a slight rise in short-term
interest rates in Europe -- not because there will be an overt change in policy,
but simply because of the convergence of some very disparate interest rates. The
average rate will likely be higher than the relatively attractive rate the
German Central Bank currently offers, for example.
In Asia, which has been making headlines around the world for more than a year
now, the latest news is from Japan, which recently installed a new prime
minister as well as a new finance minister. Much discussion will be focused on
changes in Japan's economic policy, particularly in terms of taxation and
banking reform -- and patience is in order. Most of the changes in taxation will
impact Japan in the first half of 1999. But as far as banking reform goes, those
of us familiar with bank reform in the U.S. know that this will be a two- to
five-year process. Certainly, investors are looking to Japan to spark recovery
for Asia as a whole, which continues to suffer from the "contagion" of low
currency values, seriously reduced consumer spending and general economic
malaise.
Indeed, while its full effects remain to be seen -- and felt -- by the
majority of American businesses and individuals, the Asian economic crisis has
contributed to the general uncertainty of the emotion-driven U.S. markets.
Whether it's an economic crisis abroad or political scandal at home, current
events move the investors who move the markets.
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>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) NOW (9/30/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 4.81 5.64 6.03 6.53
PRIME RATE(2) 8.49 8.5 8.5 8.25
INFLATION RATE(3) 1.68 2.3 2.22 3
THE U.S. DOLLAR(4) 4.31 3.92 7.62 4.74
CAPITAL GOODS ORDERS(5)* 11.33 10.47 15.67 4.79
INDUSTRIAL PRODUCTION(5)* 3.07 4.49 4.99 3.18
EMPLOYMENT GROWTH(6) 2.41 2.57 2.65 2.22
</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, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
One might conclude that, as a result of 1998's slow corporate profit growth
and turmoil in Russia and Asia, the psychology of the markets is
shifting -- even some of Wall Street's most resolute bulls appear to be
reconsidering their long-held convictions. But with the economy's strong
fundamentals in place, the outlook for a bear market is premature. In any case,
prudent investors are wise to watch for the following economic warning signs:
inflation in the form of rising wages and/or prices; residual fallout from Asia,
which could appear in the form of reduced sales and earnings for American
businesses; and a continued widening of our trade deficit, an imbalance caused
by heightened American demand for foreign goods and services. In the months to
come, investors are likely to maintain their bias in favor of investments that
have historically been considered more conservative: larger capitalization
stocks, U.S. Treasuries and only the highest-grade corporate bonds.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
JOHN E. SILVIA
JOHN E. SILVIA
October 9, 1998
4
<PAGE> 5
PERFORMANCE UPDATE
RICHARD VANDENBERG JOINED SCUDDER KEMPER INVESTMENTS, INC. IN MARCH 1996 AND IS
A MANAGING DIRECTOR. HE IS ALSO LEAD PORTFOLIO MANAGER OF KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND. VANDENBERG HAS 25 YEARS OF FIXED-INCOME PORTFOLIO
MANAGEMENT EXPERIENCE. HE RECEIVED A BACHELOR'S DEGREE AND M.B.A. FROM THE
UNIVERSITY OF WISCONSIN.
JOHN DUGENSKE IS A VICE PRESIDENT OF SCUDDER KEMPER INVESTMENTS AND A PORTFOLIO
MANAGER FOR KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND. HE EARNED HIS
BACHELOR'S AND MASTER'S DEGREES IN MECHANICAL ENGINEERING AND AN M.B.A. FROM THE
UNIVERSITY OF ILLINOIS.
SCOTT DOLAN JOINED SCUDDER KEMPER INVESTMENTS IN 1989 AND IS A VICE PRESIDENT.
HE IS ALSO A PORTFOLIO MANAGER FOR KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND.
HE RECEIVED A BACHELOR'S DEGREE IN BUSINESS ADMINISTRATION MAJORING IN FINANCE
FROM NORTHEASTERN UNIVERSITY AND AN MS DEGREE IN FINANCE FROM BOSTON COLLEGE.
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.
THROUGHOUT THE FUND'S FISCAL YEAR, TURBULENT INTERNATIONAL MARKETS PROMPTED
INVESTORS TO FLEE TO THE RELATIVE SAFETY OF U.S. GOVERNMENT BONDS. THE RESULTING
DROP IN INTEREST RATES WAS GOOD FOR THE U.S. GOVERNMENT BOND MARKET, BUT CREATED
A DIFFICULT ENVIRONMENT FOR A FUND FOCUSED ON ADJUSTABLE RATE MORTGAGE BONDS.
BELOW, THE MANAGERS DISCUSS THE REASONS WHY.
Q WHAT WERE THE MOST SIGNIFICANT FACTORS THAT AFFECTED THE INVESTMENT
ENVIRONMENT DURING THE FISCAL YEAR?
A Without a doubt, the most significant impact was felt as a result of
instability in foreign bond markets -- first from developments in Asia, then in
Latin America and Russia.
Before the fiscal year began, news about potential economic and currency
problems in Asian countries had been circulating for a while. Investors began to
realize that the outsized growth experienced by these countries -- particularly
Hong Kong, Thailand, Malaysia and Indonesia -- was supported largely by intense
speculation worldwide. This support reversed itself in the summer of 1997 and
came to a head in October as the Hong Kong stock market imploded and other
countries devalued their currencies.
However, the problems abroad led to strong performance by government bonds
here in the United States. Investors opted for the relatively safe haven of
Treasuries, and demand drove Treasury bond prices sharply higher. At the same
time, investors expected cheaper foreign goods to put a damper on U.S.
inflation, and lower exports to impede U.S. economic growth. You must remember
that, in early 1998, the U.S. economy appeared to be growing quite rapidly. The
troubles in foreign markets changed this perception and suggested an opportunity
for lower interest rates in the future, which is positive for bonds.
In 1998, as the Asian crisis spread to other developing economies, Latin
American countries also started to experience problems, and most recently,
Russia effectively devalued the ruble. This continuing turmoil further increased
demand for U.S. government bonds, and the result was that Treasuries staged a
powerful rally in August as the fiscal year drew to a close.
Q HOW DID THESE EVENTS AFFECT THE FUND?
A Normally, falling interest rates are a good thing for bonds. Lower yields
in the marketplace mean that the higher yields offered by previously issued
bonds become more attractive. Therefore, lower interest rates cause prices on
existing bonds to rise. However, that's not the case with adjustable rate
mortgage bonds (ARMs). Because the yields on these bonds adjust to the
prevailing interest rate, they do not offer an advantage when rates decline.
ARMs currently are in a sort of no-win situation: no supply, no demand. As
rates decline, ARM owners tend to refinance their ARMs into low fixed rate
mortgages. Therefore, the universe of ARMs in which we can invest is shrinking.
This dynamic makes it very difficult to make headway in this environment,
because we get money from the prepayments, but there are very
5
<PAGE> 6
PERFORMANCE UPDATE
few attractively priced ARMs available to buy.
Additionally, there is little demand, because the spread between
short-term rates and long-term rates is historically narrow right now.
Currently, a 3-month Treasury Bill offers nearly the same yield as a 5-year
Treasury Note. With yields on short-term instruments being so attractive, most
investors prefer to invest in them rather than ARMs, so the supply of ARMs has
shriveled.
Overall, our strategy with the ARM portion of the portfolio is to let them
pay down and reinvest the proceeds in high quality instruments such as
short-maturity Treasuries that provide nearly as attractive a yield, but no
prepayment risk. However, because 65 percent of the portfolio must be invested
in ARMs, our options are limited.
Q SO THE ENVIRONMENT FOR ARMS HASN'T BEEN GREAT. HAS THERE BEEN ANY UPSIDE?
A The positive side is that, while markets have been volatile, the fund
posted a positive return. Not every sector of the bond market can say that for
the 1-year period ended August 31, 1998. Corporate bonds, high-yield bonds in
particular, have been battered in the last couple of months as investors have
become concerned about credit quality if the economy does slow considerably. So
although the market environment hasn't been good for ARMs, the fund has done
what it's designed to do: provide steady income with little price fluctuation
despite volatile market conditions.
Q HAVE YOU USED ANY STRATEGIES IN YOUR EFFORT TO INCREASE THE FUND'S TOTAL
RETURN DESPITE THE WEAK ARM MARKET?
A Since 65 percent of the fund must be invested in floating rate securities,
we've concentrated on what we can do with the other 35 percent. Primarily, this
involved adjusting the duration of the fund. Duration, as you may know, is an
indication of a portfolio's sensitivity to changes in interest rates. If a fund
manager expects the market to rally and interest rates to go down, he or she
wants to lengthen duration to help the fund participate as much as possible. If
a fund manager expects interest rates to trend up, then he or she wants to
shorten duration to help lessen the negative effects.
As events in foreign markets in late 1997 suggested a rush to U.S. bonds
and a corresponding decline in rates, we increased the fund's duration in
January. We also increased the fund's allocation to Treasuries. We believe the
portfolio is well-positioned for the current environment, and we expect it will
make up ground going forward.
Q WHAT'S YOUR OUTLOOK FOR THE MARKET FROM HERE?
A There probably won't be a lot going on in the ARM market in the
foreseeable future. Interest rates are already at historic lows and are likely
to remain stable or trend slightly lower, since inflation is subdued, and the
economy is showing signs of weakening. The ARM market becomes more active when
interest rates are rising, and we certainly don't expect that to happen.
However, ARMs should still provide investors with a way to invest in a fairly
stable security with a decent yield. As for the fund, we will continue to use
our analytical skills to look for ways to increase the fund's potential return
in the non-ARM portion of its portfolio.
6
<PAGE> 7
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED AUGUST 31, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR LIFE OF CLASS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND A 0.07% 3.47% 6.01% (since 9/1/87)
- ---------------------------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND B 0.10 N/A 3.82 (since 5/31/94)
- ---------------------------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND C 3.10 N/A 4.28 (since 5/31/94)
- ---------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Kemper Adjustable Rate U.S. Government Fund Class A
- --------------------------------------------------------------------------------
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000
investments
in Class A Shares from 9/1/87 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Adjustable Salomon
Rate U.S. Brothers 6- Consumer
Measurement Period Gov't Class Month T- Price
(Fiscal Year Covered) A(1) Bill Index** Index++
- -------------------------------------------------------------
<S> <C> <C> <C>
9/1/87 10000 10000 10000
9507 10286 10052
9818 10427 10087
10030 10583 10184
10060 10777 10315
10190 10982 10472
10291 11211 10533
10407 11482 10691
11028 11707 10848
11060 11944 10927
11489 12180 11023
11169 12428 11250
11564 12875 11355
11611 12918 11600
12315 13138 11696
12602 13339 11801
12758 13535 11888
13494 13715 11993
12/31/91 13973 13888 12054
13940 14008 12177
14368 14141 12255
14781 14261 12351
14819 14378 12404
15098 14480 12552
15312 14853 12622
15485 14770 12684
15547 14898 12745
15561 15035 12867
15499 15210 12937
15515 15413 13059
15478 15635 13086
15943 15889 13234
16284 16068 13330
16483 16292 13392
12/31/95 16795 16503 13418
16861 16721 13610
17041 16942 13698
17312 17170 13794
17589 17393 13864
17828 17629 13986
18162 17881 14012
18436 18099 14091
18641 18337 14100
18773 18579 14178
18936 18742 14248
8/31/98 19005 18742 14266
</TABLE>
- --------------------------------------------------------------------------------
Kemper Adjustable Rate U.S. Government Fund Class A
- --------------------------------------------------------------------------------
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000
investments
in Class A Shares from 1/1/92 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Adjustable Lehman
Rate U.S. Brothers Consumer
Measurement Period Government Adjustable Price
(Fiscal Year Covered) Class A(1) Rate Index+ Index++
- -------------------------------------------------------------
<S> <C> <C> <C>
1/1/92 10000 10000 10000
10210 10476 10247
10236 10502 10290
10429 10752 10413
10577 10956 10471
10696 11073 10522
10739 11130 10573
10749 11081 10674
10706 11037 10732
10717 11113 10834
12/31/94 10692 11131 10856
11013 11596 10979
11248 11958 11059
11386 12160 11109
11601 12433 11131
11647 12570 11291
11771 12712 11363
11958 12950 11443
12/31/96 12150 13266 11501
12315 13443 11603
12546 13722 11624
12735 13990 11690
12877 14182 11697
12968 14404 11762
13080 14608 11820
8/31/98 13128 14742 11835
</TABLE>
- --------------------------------------------------------------------------------
Kemper Adjustable Rate U.S. Government Fund Class B
- --------------------------------------------------------------------------------
[LINE GRAPH]
- --------------------------------------------------------------------------------
Growth of an assumed $10,000
investments
in Class B Shares from 5/31/94 to 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper
Adjustable
Rate U.S. Lehman
Government Brothers Consumer
Measurement Period Fund Class Adjustable Price
(Fiscal Year Covered) B(1) Rate Index+ Index++
- -------------------------------------------------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
10017.8 10091 10129
9958.2 10107 10149
10222.1 10529 10264
10417.7 10858 10339
10550.6 11041 10386
10743.8 11289 10407
10753.3 11414 10556
10821.1 11543 10624
10960.1 11759 10698
12/31/96 11154.7 12046 10753
11287 12207 10847
11536.5 12460 10868
11661.7 12703 10929
12/31/97 11738.1 12878 10936
11799.6 13080 10997
11894.5 13265 11051
8/31/98 11727.4 13386 11064
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURNS AND
PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES WHEN REDEEMED MAY BE WORTH MORE
OR LESS THAN ORIGINAL COST.
*AVERAGE ANNUAL TOTAL RETURN AND TOTAL RETURN MEASURE NET INVESTMENT INCOME AND
CAPITAL GAIN OR LOSS FROM PORTFOLIO INVESTMENT OVER THE PERIODS SPECIFIED,
ASSUMING REINVESTMENT OF DIVIDENDS AND, WHERE INDICATED, ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE. THE MAXIMUM SALES CHARGE FOR CLASS A SHARES IS 3.5%. FOR
CLASS B SHARES, THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE IS 4%. CLASS C
SHARES HAVE NO SALES ADJUSTMENT, BUT REDEMPTIONS WITHIN ONE YEAR OF PURCHASE MAY
BE SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE OF 1%. SHARE CLASSES INVEST IN
THE SAME UNDERLYING PORTFOLIO. AVERAGE ANNUAL TOTAL RETURN REFLECTS ANNUALIZED
CHANGE WHILE TOTAL RETURN REFLECTS AGGREGATE CHANGE. DURING THE PERIODS NOTED
SECURITIES PRICES WILL FLUCTUATE.
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. IT IS GENERALLY CONSIDERED TO BE A MEASURE OF INFLATION. SOURCE IS
TOWERS DATA SYSTEMS.
7
<PAGE> 8
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
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 8/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kemper Adjustable Rate
Measurement Period U.S. Government Fund Lehman Brothers Consumer Price
(Fiscal Year Covered) Class C(1) Adjustable Rate Index+ Index++
<S> <C> <C> <C>
5/31/94 10000 10000 10000
10019 10022 10034
10007 10091 10129
9973 10107 10149
10252 10529 10264
10449 10858 10339
10569 11041 10386
10750 11289 10407
10773 11414 10556
10869 11543 10624
11023 11759 10698
12/31/96 11180 12046 10753
11311 12207 10847
11502 12460 10868
11670 12703 10929
12/31/97 11779 12878 10936
11828 13080 10997
11924 13265 11051
8/31/98 11954 13386 11064
</TABLE>
(Note: please see page seven for footnote information)
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT AGENCIES ARMs 70% 91%
- --------------------------------------------------------------------------------
FIXED RATE AGENCY SECURITIES 11 1
- --------------------------------------------------------------------------------
GOVERNMENT BONDS:
- --------------------------------------------------------------------------------
SHORT-TERM 1 8
- --------------------------------------------------------------------------------
INTERMEDIATE-TERM 5 --
- --------------------------------------------------------------------------------
CASH EQUIVALENTS 10 --
- --------------------------------------------------------------------------------
CORPORATES 3 --
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 8/31/98 ON 8/31/97
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 8/31/98 ON 8/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 2.9 years 3.6 years
- --------------------------------------------------------------------------------
</TABLE>
*Portfolio composition and holdings are subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
Portfolio of Investments at August 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GOVERNMENT NATIONAL Adjustable rate mortgages(a) 6.875 % 2021 $ 1,831 $ 1,870
MORTGAGE ASSOCIATION 6.875-7.375 2022 5,669 5,779
- 39.3% 6.875 2023 1,202 1,226
(Cost: $27,291) 7.00 2027 4,289 4,364
6.00 2028 7,659 7,736
Pass-through certificates 6.50 2013 2,750 2,796
11.00 2018 270 300
9.00 2022 2,938 3,142
--------------------------------------------------------------------------------------
27,213
- ---------------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Adjustable rate mortgages(a) 7.492-7.856 2022 11,909 12,149
MORTGAGE CORPORATION 7.545-7.564 2023 4,441 4,517
- 29.2% 7.731 2025 3,494 3,583
(Cost: $20,417) Fixed rate collateralized
mortgage obligation 11.00 2014 7 7
--------------------------------------------------------------------------------------
20,256
- ---------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Adjustable rate mortgages(a) 7.124 2019 2,555 2,609
MORTGAGE ASSOCIATION 7.53 2021 1,167 1,188
- 11.8% 7.64 2023 1,423 1,449
(Cost: $8,259) 7.585 2025 1,556 1,574
Fixed rate collateralized
mortgage obligation 9.25 2018 1,257 1,338
--------------------------------------------------------------------------------------
8,158
- ---------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY Notes 8.875 2000 500 531
SECURITIES - 5.4% 7.50 2002 3,000 3,247
--------------------------------------------------------------------------------------
3,778
(Cost: $3,779) --------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--85.7%
(Cost: $59,746) 59,405
--------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
CORPORATE Deutsche Floorplan
OBLIGATIONS - 4.0% Receivables Master Trust 5.856 2001 1,400 1,401
(Cost: $2,805) MBNA Master Credit Card Trust 5.826 2003 1,400 1,403
--------------------------------------------------------------------------------------
2,804
- ---------------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--5.43%
INSTRUMENTS - 7.1% Due--September 1998
(Cost: $4,900) Federal National Mortgage Association 4,900 4,900
--------------------------------------------------------------------------------------
TOTAL INVESTMENTS--96.8%
(Cost: $67,451) 67,109
--------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--3.2% 2,198
--------------------------------------------------------------------------------------
NET ASSETS--100% $69,307
--------------------------------------------------------------------------------------
</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, 1998. The dates shown represent the final maturity
of the obligations.
Based on the cost of investments of $67,451,000 for federal income tax purposes
at August 31, 1998, the gross unrealized appreciation was $19,000, the gross
unrealized depreciation was $361,000 and the net unrealized depreciation on
investments was $342,000.
See accompanying Notes to Financial Statements.
9
<PAGE> 10
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Adjustable Rate U.S.
Government Fund as of August 31, 1998, 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 1994. 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, 1998, by correspondence with the custodian. 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, 1998, 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 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 16, 1998
10
<PAGE> 11
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $67,451) $ 67,109
- ------------------------------------------------------------------------
Cash 412
- ------------------------------------------------------------------------
Receivable for:
Fund shares sold 450
- ------------------------------------------------------------------------
Investments sold 1,151
- ------------------------------------------------------------------------
Interest 552
- ------------------------------------------------------------------------
TOTAL ASSETS 69,674
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Payable for:
Dividends 67
- ------------------------------------------------------------------------
Fund shares redeemed 176
- ------------------------------------------------------------------------
Management fee 32
- ------------------------------------------------------------------------
Distribution services fee 5
- ------------------------------------------------------------------------
Administrative services fee 12
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 42
- ------------------------------------------------------------------------
Trustees' fees 33
- ------------------------------------------------------------------------
Total liabilities 367
- ------------------------------------------------------------------------
NET ASSETS $ 69,307
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $ 79,561
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (9,912)
- ------------------------------------------------------------------------
Net unrealized depreciation on investments (342)
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 69,307
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($60,856 / 7,431 shares outstanding) $8.19
- ------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 3.63% of
net asset value or 3.50% of offering price) $8.49
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($7,108 / 865 shares outstanding) $8.21
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price per share
(subject to contingent deferred sales charge) per share
($1,343 / 163 shares outstanding) $8.22
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
11
<PAGE> 12
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended August 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
NET INVESTMENT INCOME
- ----------------------------------------------------------------------
Interest income $4,646
- ----------------------------------------------------------------------
Expenses:
Management fee 415
- ----------------------------------------------------------------------
Distribution services fee 63
- ----------------------------------------------------------------------
Administrative services fee 161
- ----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 298
- ----------------------------------------------------------------------
Professional fees 43
- ----------------------------------------------------------------------
Reports to shareholders 84
- ----------------------------------------------------------------------
Trustees' fees and other 18
- ----------------------------------------------------------------------
Total expenses 1,082
- ----------------------------------------------------------------------
NET INVESTMENT INCOME 3,564
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
- ----------------------------------------------------------------------
Net realized loss on sales of investments (including
options purchased) (137)
- ----------------------------------------------------------------------
Net realized loss from futures transactions (81)
- ----------------------------------------------------------------------
Net realized loss (218)
- ----------------------------------------------------------------------
Change in net unrealized depreciation on investments (589)
- ----------------------------------------------------------------------
Net loss on investments (807)
- ----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,757
- ----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
- --------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 3,564 4,875
- --------------------------------------------------------------------------------------------
Net realized gain (loss) (218) 522
- --------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation (589) 341
- --------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,757 5,738
- --------------------------------------------------------------------------------------------
Net equalization charges -- (127)
- --------------------------------------------------------------------------------------------
Distribution from net investment income (3,759) (4,810)
- --------------------------------------------------------------------------------------------
Net decrease from capital share transactions (11,658) (13,311)
- --------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (12,660) (12,510)
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------
Beginning of year 81,967 94,477
- --------------------------------------------------------------------------------------------
END OF YEAR (including undistributed
net investment income of
$657 for 1997) $69,307 81,967
- --------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
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, 1998) 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 SECURITY VALUATION. Portfolio debt securities with
remaining maturities greater than sixty days are
valued by pricing agents approved by the officers
of the Fund, which quotations reflect
broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents
are unable to provide such quotations, the most
recent bid quotation supplied by a bona fide market
maker shall be used. An exchange-traded options
contract on securities, futures and other financial
instruments is valued at its most recent sale price
on such exchange. Lacking any sales, the options
contract is valued at the Calculated Mean. Lacking
any Calculated Mean, the options contract is valued
at the most recent bid quotation in the case of a
purchased options contract, or the most recent
asked quotation in the case of a written options
contract. An options contract on securities and
other financial instruments traded over-the-counter
is valued at the most recent bid quotation in the
case of a purchased options contract and at the
most recent asked quotation in the case of a
written options contract. Futures contracts are
valued at the most recent settlement price. All
other securities are valued at their fair value as
determined in good faith by the Valuation Committee
of 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.
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 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.
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
FEDERAL INCOME TAXES. The Fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies, and to distribute
all of its taxable income to its shareholders.
Accordingly, the Fund paid no federal income taxes
and no federal income tax provision was required.
At August 31, 1998, the Fund had a net tax basis
loss carryforward of approximately $9,652,000,
which may be applied against any realized net
taxable gains of each succeeding year until fully
utilized or it will expire during the period 1999
through 2006. In addition, from November 1, 1997
through August 31, 1998 the Fund incurred
approximately $125,000 of net realized capital
losses. As permitted by tax regulations, the Fund
intends to elect to defer these losses and treat
them as arising in the fiscal year ended August 31,
1999.
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. Prior to September 1,
1997, the Fund used equalization accounting to keep
a continuing shareholder's per share interest in
undistributed net investment income unaffected by
shareholder activity. This was accomplished by
allocating a portion of the proceeds from sales and
the cost of redemptions of fund shares to
undistributed net investment income. As of
September 1, 1997, the Fund discontinued using
equalization. This change has no effect on the
Fund's net assets, net asset value per share or
distributions to shareholders. Discontinuing the
use of equalization accounting will result in
simpler financial statements. The cumulative effect
of the discontinuance of equalization accounting
was to decrease undistributed net investment income
and increase paid-in-capital previously reported
through August 31, 1997 by $749,000.
- --------------------------------------------------------------------------------
3 TRANSACTIONS MANAGEMENT AGREEMENT. The Fund has a management
WITH AFFILIATES agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper), and pays a monthly investment
management fee of 1/12 of the 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 $415,000 for the year
ended August 31, 1998.
ZURICH/B.A.T MERGER. On September 7, 1998, Zurich
Insurance Company (Zurich), majority owner of
Scudder Kemper, entered into an agreement with
B.A.T Industries p.l.c. (B.A.T) pursuant to which
the financial services businesses of B.A.T were
combined with Zurich's businesses to form a new
global insurance and financial services company
known as Zurich Financial Services. Upon
consummation of the transaction, the Fund's
investment management agreement with Scudder Kemper
was deemed to have been assigned and, therefore,
terminated. The Board of Trustees of the Fund has
approved a new investment management agreement with
Scudder Kemper, which is substantially identical to
the former investment management agreement, except
for the dates of execution and termination. The
Board of Trustees of the Fund will seek
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
shareholder approval of the new investment
management agreement through a proxy solicitation
that is currently scheduled to conclude in
mid-December.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS
RETAINED COMMISSIONS ALLOWED
BY KDI BY KDI TO FIRMS
----------- --------------------
<S> <C> <C>
Year ended August 31, 1998 $8,000 91,000
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares pursuant to separate 12b-1 plans for the
Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees, CDSC and commissions
related to Class B and Class C shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS AND
DISTRIBUTION FEES DISTRIBUTION FEES
AND CDSC PAID BY KDI
RECEIVED BY KDI TO FIRMS
----------------- ---------------------
<S> <C> <C>
Year ended August 31, 1998 $94,000 92,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of Fund accounts the firms
service. Administrative services fees (ASF) paid
are as follows:
<TABLE>
<CAPTION>
ASF PAID BY ASF PAID BY KDI
THE FUND TO KDI TO FIRMS
----------------- -----------------
<S> <C> <C>
Year ended August 31, 1998 $161,000 165,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of $234,000
for the year ended August 31, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the year ended August 31, 1998,
the Fund made no direct payments to its officers
and incurred trustees' fees of $14,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT For the year ended August 31, 1998, investment
TRANSACTIONS transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $114,638
Proceeds from sales 145,699
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
--------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 1,939 $ 15,939 1,089 $ 8,931
---------------------------------------------------------------------------
Class B 540 4,466 626 5,196
---------------------------------------------------------------------------
Class C 172 1,427 82 680
---------------------------------------------------------------------------
--------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 296 2,440 369 3,054
---------------------------------------------------------------------------
Class B 32 261 33 271
---------------------------------------------------------------------------
Class C 7 56 7 55
---------------------------------------------------------------------------
--------------------------------------------------------------------------
SHARES REDEEMED
Class A (3,734) (30,799) (3,198) (26,282)
---------------------------------------------------------------------------
Class B (516) (4,267) (523) (4,338)
---------------------------------------------------------------------------
Class C (143) (1,181) (106) (878)
---------------------------------------------------------------------------
--------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 81 669 11 93
---------------------------------------------------------------------------
Class B (81) (669) (11) (93)
---------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE TRANSACTIONS $(11,658) $(13,311)
---------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------
CLASS A
---------------------------------------
YEAR ENDED AUGUST 31,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------
Net asset value, beginning of year $8.31 8.22 8.30 8.33 8.68
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .41 .45 .46 .48 .34
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.11) .09 (.09) (.04) (.29)
- ----------------------------------------------------------------------------------------
Total from investment operations .30 .54 .37 .44 .05
- ----------------------------------------------------------------------------------------
Less distribution from net investment income .42 .45 .45 .47 .40
- ----------------------------------------------------------------------------------------
Net asset value, end of year $8.19 8.31 8.22 8.30 8.33
- ----------------------------------------------------------------------------------------
TOTAL RETURN 3.68% 6.75 4.55 5.52 .59
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------
Expenses 1.36% 1.25 1.15 1.10 .93
- ----------------------------------------------------------------------------------------
Net investment income 4.79% 5.50 5.49 5.76 3.96
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------
CLASS B
---------------------------------------
YEAR ENDED MAY 31 TO
AUGUST 31, AUGUST 31,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------
Net asset value, beginning of period $8.32 8.23 8.31 8.32 8.37
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .36 .39 .40 .43 .07
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.11) .09 (.09) (.04) (.04)
- ----------------------------------------------------------------------------------------
Total from investment operations .25 .48 .31 .39 .03
- ----------------------------------------------------------------------------------------
Less distribution from net investment income .36 .39 .39 .40 .08
- ----------------------------------------------------------------------------------------
Net asset value, end of period $8.21 8.32 8.23 8.31 8.32
- ----------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.06% 5.96 3.79 4.84 .34
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------
Expenses 1.99% 1.93 1.89 1.85 1.96
- ----------------------------------------------------------------------------------------
Net investment income 4.16% 4.82 4.75 5.01 3.36
- ----------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------
CLASS C
-------------------------------------------
MAY 31 TO
YEAR ENDED AUGUST 31, AUGUST 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.33 8.24 8.32 8.33 8.37
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .36 .39 .40 .43 .08
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.11) .09 (.09) (.04) (.04)
- --------------------------------------------------------------------------------------------
Total from investment operations .25 .48 .31 .39 .04
- --------------------------------------------------------------------------------------------
Less distribution from net investment income .36 .39 .39 .40 .08
- --------------------------------------------------------------------------------------------
Net asset value, end of period $8.22 8.33 8.24 8.32 8.33
- --------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.10% 5.98 3.82 4.89 .47
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------
Expenses 1.95% 1.88 1.89 1.79 1.88
- --------------------------------------------------------------------------------------------
Net investment income 4.20% 4.87 4.75 5.07 3.52
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $69,307 81,967 94,477 129,757 202,815
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate 149% 249 272 308 533
- ----------------------------------------------------------------------------------------------------
</TABLE>
NOTES: Scudder Kemper had agreed to absorb certain operating expenses during a
portion of the year ended August 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%, respectively, for the year ended August 31,
1994.
Total return does not reflect the effect of any sales charges.
TAX INFORMATION
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Kemper Fund account, please call 1-800-621-1048.
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
TRUSTEES OFFICERS
<S> <C> <C>
DANIEL PIERCE MARK S. CASADY RICHARD L. VANDENBERG
Chairman and Trustee President Vice President
DAVID W. BELIN PHILLIP J. COLLORA LINDA J. WONDRACK
Trustee Vice President and Vice President
Secretary
LEWIS A. BURNHAM MAUREEN E. KANE
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
DONALD L. DUNAWAY CAROLINE PEARSON
Trustee JERARD K. HARTMAN Assistant Secretary
Vice President
ROBERT B. HOFFMAN ELIZABETH C. WERTH
Trustee THOMAS W. LITTAUER Assistant Secretary
Vice President
DONALD R. JONES BRENDA LYONS
Trustee ANN M. MCCREARY Assistant Treasurer
Vice President
SHIRLEY D. PETERSON
Trustee ROBERT C. PECK, JR.
Vice President
WILLIAM P. SOMMERS
Trustee KATHRYN L. QUIRK
Vice President
EDMOND D. VILLANI
Trustee
</TABLE>
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania Avenue
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT ERNST & YOUNG LLP
AUDITORS 233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Funds prospectus.
KARGF - 2 (10/98) 1057590
