<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED FEBRUARY 28, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[BOX CHART]
Offering investors the opportunity for high current income
consistent with low volatility of principal]
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND
". . . there was a flight to quality as investors looked for safe havens
for their money... the fund did well as prices of high quality, short-term
income assets rose. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
PORTFOLIO STATISTICS
8
SHAREHOLDERS' MEETING
9
PORTFOLIO OF INVESTMENTS
10
FINANCIAL STATEMENTS
12
NOTES TO FINANCIAL STATEMENTS
16
FINANCIAL HIGHLIGHTS
At A GLANCE
- -------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND TOTAL RETURNS
- -------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED FEBRUARY 28, 1998
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 1.97%
CLASS B 1.61%
CLASS C 1.63%
LIPPER ADJUSTABLE RATE 2.59%
MORTGAGE FUNDS
CATEGORY AVERAGE*
- -------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not reflect future performance.
Returns, rankings and net asset value fluctuate. Shares are redeemable at
current net asset value, which may be more or less than original cost.
* Lipper Analytical Services, Inc. returns and rankings are based upon
changes in net asset value with all dividends reinvested and do not
include the effect of sales charges and, if they had, results may have
been less favorable.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
NET ASSET VALUE
- -------------------------------------------------------------------------------
AS OF AS OF
2/28/98 8/31/97
- -------------------------------------------------------------------------------
<S> <C> <C>
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND CLASS A $8.25 $8.31
- -------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND CLASS B $8.26 $8.32
- -------------------------------------------------------------------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND CLASS C $8.27 $8.33
- -------------------------------------------------------------------------------
</TABLE>
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND RANKINGS*
- -------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER ADJUSTABLE RATE MORTGAGE FUNDS
CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1-YEAR #30 of #35 of #34 of
35 funds 35 funds 35 funds
- -------------------------------------------------------------------------------
5-YEAR #22 of N/A N/A
25 funds
- -------------------------------------------------------------------------------
10-YEAR #2 of N/A N/A
4 funds
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
DIVIDEND REVIEW
- -------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF FEBRUARY 28, 1998.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS
INCOME: $ .2225 $ .1932 $ .1947
- -------------------------------------------------------------------------------
FEBRUARY
DIVIDEND: $0.0360 $0.0309 $0.0311
- -------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 5.24% 4.49% 4.51%
- -------------------------------------------------------------------------------
SEC YIELD+: 4.72% 4.14% 4.16%
- -------------------------------------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on February 28, 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 February 28, 1998, shown as an annualized
percentage of the maximum offering price on that date. The SEC yield is
computed in accordance with a standardized method prescribed by the
Securities and Exchange Commission.
TERMS TO KNOW
YOUR FUND'S STYLE
[BOX CHART]
- -------------------------------------------------------------------------------
MORNINGSTAR FIXED INCOME STYLE BOX
- -------------------------------------------------------------------------------
Source: Morningstar, Inc., Chicago, IL 312-696-6000. (Morningstar Style Box is
based on a portfolio date as of February 28, 1998.) 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.
FEDERAL FUNDS RATE (FED FUNDS) The interest rate banks charge each other for
overnight loans that are needed to meet reserve requirements. The Fed Funds rate
is often considered the most sensitive indicator of the direction of interest
rates.
FLIGHT-TO-QUALITY BUYING A term describing investors who increase their
allocation to U.S. Treasuries and other high quality securities from riskier
equity and foreign bond 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. HE IS ALSO A MEMBER OF THE INVESTMENT POLICY AND STRATEGY COMMITTEE
FOR KEMPER FUNDS.
SILVIA HOLDS A BACHELOR OF ARTS 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 ADVISOR FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT
ORGANIZATIONS WORLDWIDE, MANAGING MORE THAN $200 BILLION IN ASSETS GLOBALLY FOR
MUTUAL FUND INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE
CLIENTS, INSURANCE COMPANIES AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS. IT IS
ONE OF THE 10 LARGEST MUTUAL FUND COMPLEXES IN THE UNITED STATES.
DEAR SHAREHOLDERS,
Despite ongoing stock market volatility, the economic climate for mutual fund
investors was fairly positive in the first quarter of 1998. The Dow Jones
Industrial Average rose 11.3 percent, making it the best first quarter since
1987. Seemingly in defiance of our diplomatic struggles with Iraq, political
scandal at home and a few major earnings disappointments particularly in the
technology sector, the market managed to hit several new highs in the first
quarter. U.S. corporate profit growth and earnings continued to boost stock
prices, making the market all the more attractive to investors. Steady U.S.
economic growth bolstered by stable interest rates created a positive
environment for both equity and fixed-income investing -- and we expect this
trend to continue.
The U.S. economy, as measured by the gross domestic product (GDP) growth rate,
grew at a 3.8 percent rate in 1997, representing solid growth for the year
ahead. Momentum for the year is expected to slow to a rate of 2.5 to 3.0
percent, still a very respectable rate.
Although the economy will continue to slow in the months ahead, the outlook is
still positive. Employment growth is expected to remain steady. Both bonds and
equities continue to perform well, thereby boosting consumer confidence and
spending. The housing market has been noteworthy, with new home sales reaching
an all-time high for this point in the economic cycle and housing starts remain
high relative to demographic trends.
Output prices, as measured by the Consumer Price Index (CPI), remained stable
at 1.5 to 2 percent year over year. When the rate of inflation remains stable
and as low as it has, the risk of higher interest rates is reduced and the real
return on financial assets grows. It is unlikely that the Fed will raise
interest rates in the second quarter.
Much of the market activity in the first quarter can be attributed to today's
service-based economy. With the arrival of annual and holiday bonuses at the end
of the fourth quarter -- compensation for a good year's work -- the first
quarter has established itself as a time for American employees to either spend
or stash away these lump sum earnings in Individual Retirement Accounts (IRAs)
and other investments.
One factor that affected the U.S. market in 1997 appears to be having a
diminished influence in 1998. The East Asian market crisis now appears for most
Asian countries to be subsiding. East Asia's economic difficulties did not
affect global production or employment nearly as much as the markets had
anticipated. Consequently, most investors have not felt the serious
repercussions that had been feared. Obviously, investors with heavy
concentrations in the region suffered the largest losses. But the markets were
anticipating a greater global impact -- and this has not yet come to pass.
Further impacts may occur or orders on shipments already made may find no
ultimate buyer. Then again, many East Asian countries appear to have already
recovered from the crisis. Some Asian currencies have stabilized and several
Asian stock markets have rebounded. Korea and Malaysia are two countries where
this has happened. The perception of an Asian "contagion" or flu throughout the
region is fading fast -- and investors in general seem to be staying in the
game.
At the end of February, the U.S. federal budget deficit essentially vanished.
Recent efforts to reduce the deficit, combined with higher federal revenues due
to the robust economy, left us with an expected budget surplus for fiscal 1998.
This stable fiscal environment is characterized by a reduction in Treasury
financing, which tends to have a downward effect on interest rates. Lower
interest rates fuel consumer spending, which clearly benefits the marketplace in
the form of higher corporate revenues and earnings. One result of higher
earnings is higher stock prices, which can ultimately benefit investors.
The last time the U.S. enjoyed a budget surplus was 1969. After nearly 30
years of being in the red, we very well may notice a new shift in psychology
about the Treasury market and the issuance of Treasury securities. In the past,
investors worried about deficits that were out of control and expected higher
interest rates on Treasuries. High interest rates are the bane of fixed-income
investing, so a balanced budget can be expected to have a positive effect.
On the global front, current economic fundamentals continue to favor the U.S.,
with the dollar persisting as a safe haven for investors. International
investors want to
3
<PAGE> 4
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The
10-year Treasury rate and the prime rate are prevailing interest rates. The
other data report year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (3/31/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 5.65 6.03 6.89 6.51
PRIME RATE(2) 8.5 8.5 8.5 8.25
INFLATION RATE(3) 1.38 2.08 2.43 2.9
THE U.S. DOLLAR(4) 4.88 7.62 9.32 8.94
CAPITAL GOODS ORDERS(6)* 8.14 15.24 8.1 3.54
INDUSTRIAL PRODUCTION(5)* 4.95 4.99 5.31 2.41
EMPLOYMENT GROWTH(6) 2.59 2.36 2.27 1.78
</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 February 28, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
participate in U.S. economic growth, which, at 3.8 percent for 1997, was better
than the economic growth in both Europe and Japan. Europe's 1997 growth rate
remained fairly steady at 2 to 3 percent. Japan experienced a growth rate last
year of 1 percent. U.S. real interest rates have also been more attractive than
those of most other countries, enticing foreign investors to buy U.S.
Treasuries.
We anticipate the positive economic environment to continue. The budget
surplus should hold for at least the near term. President Clinton's initiatives
for increased spending and more tax credits haven't come to fruition. In fact,
proponents of spending control have continued to squelch spending programs on
Capitol Hill. All the while, fiscal policy has remained steady.
With solid economic growth, lower interest rates, low inflation and a
record-setting stock market, it is no wonder that investor expectations are
high. But, are investors expecting too much?
It is important to recognize that although from a macroeconomic perspective
the economy is strong, there are some microeconomic challenges that could
threaten in the months to come. These include health care reform and shifts in
the political landscape at home and continuing conflicts or new developments
abroad. For example, the European monetary union (EMU) appears to be proceeding
as we would expect. But within six months to a year after the EMU is established
in 1999, tensions may indeed mount as countries try to adapt to the new
structure. Each of these issues could affect our strong, yet reactive
marketplace. Be sure to stay tuned.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ JOHN E. SILVIA
JOHN E. SILVIA
April 10, 1998
4
<PAGE> 5
PERFORMANCE UPDATE
[VANDENBERG PHOTO]
RICHARD VANDENBERG JOINED SCUDDER KEMPER INVESTMENTS, INC. IN MARCH 1996 AND IS
A MANAGING DIRECTOR. HE IS A PORTFOLIO 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.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME,
BASED ON MARKET AND OTHER CONDITIONS.
WITH THE ECONOMIC IMPACT OF THE ASIAN FINANCIAL CRISIS NOT YET CLEAR, BOND
INVESTORS DROVE YIELDS DOWN THEN UP AGAIN DURING KEMPER ADJUSTABLE RATE U.S.
GOVERNMENT FUND'S SEMI-ANNUAL PERIOD FROM SEPTEMBER 1997 THROUGH FEBRUARY 1998.
PORTFOLIO MANAGER RICHARD VANDENBERG DISCUSSES HOW THE FUND RESPONDED TO THE
CHANGING CONDITIONS AND WHAT HE EXPECTS DOWN THE ROAD.
Q HOW DID KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND PERFORM OVER THE PAST
SIX MONTHS?
A Performance was strong from September through October, lost some drive
from November through mid-January and was rather disappointing from mid-January
through much of February. The fund gained 1.97 percent from September 1997
through February 1998, versus an average gain of 2.59 percent for the 35 funds
in the Lipper Analytical Services adjustable rate mortgage category. It wasn't
one of the better returns from this fund.
Q KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND HAS FARED CONSIDERABLY BETTER
IN THE PAST. WHAT WERE SOME OF THE MARKET FORCES BEHIND THIS PERIOD'S
PERFORMANCE?
A In September the Asian crisis was just emerging. The market presumed that
the Federal Reserve Board (the Fed) would have to ease short-term interest rates
to bolster the U.S. economy as the effects of the crisis reached our shores. The
fund performed well as the bond market strengthened under this scenario.
When the stock market lost 7 percent of its total value on October 27, 1997,
there was a flight to quality as investors looked for safe havens for their
money. Again, the fund did well as prices of high quality, short-term income
assets rose.
Going into mid-January, the market still expected the Fed would move to lower
interest rates. During the second week of that month, yields dropped to 35-year
lows on the long end of the bond market and short-term Treasuries were actually
trading at a lower yield than Fed Funds, which typically occurs when the market
expects the Fed to ease imminently.
But when economic indicators began to show that the Asian crisis was having
much less of an effect on the U.S. economy than was previously expected, the
market began to question whether the Fed was going to need to ease. When Fed
Chairman Alan Greenspan spoke during his Humphrey-Hawkins testimony on February
4, 1998, he made it clear that the Fed had no near-term plans to move rates in
any direction. Short rates went back up, and adjustable rate mortgages (ARMs)
actually outperformed Treasuries. This is the point where the fund stumbled a
bit.
Q HOW DID THIS AFFECT THE FUND?
A The fund was a bit short in duration compared to its peer group in
December, which hurt its performance slightly in the beginning of January. But
what probably had a stronger negative impact on performance was the fund's
higher allocation in Treasuries -- about 20 percent. A more typical allocation
for this fund is 10- to 15-percent in Treasuries. We had overweighted
5
<PAGE> 6
PERFORMANCE UPDATE
Treasuries in anticipation of stable or lower interest rates. Instead, as
interest rates rose from mid-January through the end of February, Treasuries
lost value and, therefore, this allocation caused the fund to lose ground
against its peers.
Q WILL YOU REALLOCATE?
A Actually, I expect the fund will perform better, positioned as it is, now
that the market has found a bottom and is rallying. The higher allocation of
Treasuries should serve us well now, so we think we will regain performance.
When the market gets up close to where it was the second week of January, where
we don't think those yields could be sustained, we'll likely roll a good portion
of the fund's Treasuries into adjustable rate mortgages. We're also considering
adding some pass-throughs that are not adjustable rate but are short duration
and should add income to the fund.
Q WHAT DO YOU EXPECT FOR THE FUND'S SECOND HALF OF ITS FISCAL REPORTING
YEAR?
A We're taking a neutral outlook. We're keeping a close eye on the Asian
crisis and the domestic economic data. If the domestic economic data continues
very strong, there is a chance that the Fed may choose to raise rates. If that
happens we're likely to take a more defensive posture and will increase our ARM
holdings.
Q ARE ARM FUNDS A GOOD PLACE TO BE NOW?
A ARM funds are a good defensive vehicle. If economic growth continues at
the strong pace it is today, then the odds probably favor the Fed tightening
rates at some point to cool off growth. Most bond funds lose value when rates
rise. An ARM coupon goes up as the rates rise so the principal remains steady.
6
<PAGE> 7
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 2/28/98 ON 8/31/97
- -------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT AGENCIES ARMS 75% 91%
- -------------------------------------------------------------------------------
SHORT-TERM GOVERNMENT BONDS 24 8
- -------------------------------------------------------------------------------
FIXED RATE AGENCY SECURITIES 1 1
- -------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 2/28/98 ON 8/31/97
DURATION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 2/28/98 ON 8/31/97
- -------------------------------------------------------------------------------
<S> <C> <C>
DURATION 0.9 years 0.9 years
- -------------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
7
<PAGE> 8
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 3, 1997, a special shareholders' meeting was held, and adjourned as
necessary. Kemper Adjustable Rate U.S. Government Fund shareholders were asked
to vote on five separate issues: election of the nine members to the Board of
Trustees, ratification of Ernst & Young LLP as independent auditors, approval of
new investment management agreement, approval of changes in the Fund's
fundamental investment policies to permit a master/feeder fund structure and
approval of a new rule 12b-1 distribution plan with Zurich Kemper Distributors,
Inc. for Class B shares and Class C shares. The following are the results for
each issue:
1) Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
David W. Belin 5,610,204 47,024
Lewis A. Burnham 5,611,588 45,640
Donald L. Dunaway 5,611,588 45,640
Robert B. Hoffman 5,611,588 45,640
Donald R. Jones 5,610,876 46,352
Shirley D. Peterson 5,608,996 48,232
Daniel Pierce 5,606,483 50,745
William P. Sommers 5,611,588 45,640
Edmond D. Villani 5,606,657 50,571
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
5,594,417 14,699 48,113
</TABLE>
3) Approval of new investment management agreement with Scudder Kemper
Investments, Inc.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
4,745,574 30,133 246,039 635,482
</TABLE>
4) Approval of changes in the Fund's fundamental investment policies to permit a
master/feeder fund structure.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
4,575,959 109,270 445,801
</TABLE>
5) To approve a new rule 12b-1 distribution plan with Zurich Kemper
Distributors, Inc.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C> <C>
Class B 572,892 1,249 4,661 27,167
Class C 68,995 0 3,232 0
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
PORTFOLIO OF INVESTMENTS AT FEBRUARY 28, 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
INTEREST PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FEDERAL HOME LOAN Adjustable rate 7.663-7.86 % 2022 $15,757 $16,276
MORTGAGE CORPORATION - mortgages (a) 7.699-7.886 2023 5,617 5,783
37.3% 7.882-7.992 2025 5,116 5,240
(Cost: $27,557)
Fixed rate 11.25 2010 220 242
collateralized 11.00 2014 58 58
mortgage obligations
-------------------------------------------------------------------------
27,599
- ----------------------------------------------------------------------------------------------------------------
GOVERNMENT Adjustable rate 7.375 2022 5,347 5,486
NATIONAL MORTGAGE mortgages (a) 7.00 2027 4,922 4,993
ASSOCIATION - 25.6% 6.00 2028 8,000 8,084
(Cost: $18,920)
Pass-through 11.00 2018 292 324
certificates
-------------------------------------------------------------------------
18,887
- ----------------------------------------------------------------------------------------------------------------
U.S. TREASURY Notes 9.125 1999 5,000 5,205
SECURITIES - 24.2% 8.00 1999 3,000 3,101
(Cost: $18,063) 8.875 2000 6,000 6,405
7.50 2002 3,000 3,208
-------------------------------------------------------------------------
17,919
- ----------------------------------------------------------------------------------------------------------------
FEDERAL Adjustable rate 7.124 2019 3,083 3,163
NATIONAL MORTGAGE mortgages (a) 7.66 2021 1,660 1,717
ASSOCIATION - 14.1% 7.804 2023 2,123 2,194
(Cost: $10,435) 7.651 2025 3,249 3,348
-------------------------------------------------------------------------
10,422
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--101.2%
(Cost: $74,975) 74,827
-------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(1.2)% (882)
-------------------------------------------------------------------------
NET ASSETS--100% $73,945
-------------------------------------------------------------------------
</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 February 28, 1998. The dates shown represent the final
maturity of the obligations.
Based on the cost of investments of $74,975,000 for federal income tax purposes
at February 28, 1998, the gross unrealized appreciation was $192,000, the gross
unrealized depreciation was $340,000 and the net unrealized depreciation on
investments was $148,000.
See accompanying Notes to Financial Statements.
9
<PAGE> 10
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------
Investments, at value
(Cost: $74,975) $ 74,827
- -------------------------------------------------------------------------
Cash 6,532
- -------------------------------------------------------------------------
Receivable for:
Fund shares sold 37
- -------------------------------------------------------------------------
Investments sold 1,063
- -------------------------------------------------------------------------
Interest 877
- -------------------------------------------------------------------------
TOTAL ASSETS 83,336
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------
Payable for:
Fund shares redeemed 1,169
- -------------------------------------------------------------------------
Investments purchased 8,113
- -------------------------------------------------------------------------
Management fee 35
- -------------------------------------------------------------------------
Distribution services fee 5
- -------------------------------------------------------------------------
Administrative services fee 15
- -------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 19
- -------------------------------------------------------------------------
Trustees' fees 35
- -------------------------------------------------------------------------
Total liabilities 9,391
- -------------------------------------------------------------------------
NET ASSETS $ 73,945
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------
Paid-in capital $ 84,288
- -------------------------------------------------------------------------
Accumulated net realized loss on investments (10,699)
- -------------------------------------------------------------------------
Net unrealized depreciation on investments (148)
- -------------------------------------------------------------------------
Undistributed net investment income 504
- -------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 73,945
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
THE PRICING OF SHARES
- -------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($65,307 / 7,919 shares outstanding) $8.25
- -------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 3.63% of
net asset value or 3.50% of offering price) $8.55
- -------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($7,214 / 873 shares outstanding) $8.26
- -------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price per share
(subject to contingent deferred sales charge) per share
($1,424 / 172 shares outstanding) $8.27
- -------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
10
<PAGE> 11
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
NET INVESTMENT INCOME
- ----------------------------------------------------------------------
Interest income $2,575
- ----------------------------------------------------------------------
Expenses:
Management fee 219
- ----------------------------------------------------------------------
Distribution services fee 32
- ----------------------------------------------------------------------
Administrative services fee 86
- ----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 128
- ----------------------------------------------------------------------
Professional fees 24
- ----------------------------------------------------------------------
Reports to shareholders 61
- ----------------------------------------------------------------------
Trustees' fees and other 10
- ----------------------------------------------------------------------
Total expenses 560
- ----------------------------------------------------------------------
NET INVESTMENT INCOME 2,015
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ----------------------------------------------------------------------
Net realized gain on sales of investments (including
options purchased) 22
- ----------------------------------------------------------------------
Net realized loss from futures transactions (81)
- ----------------------------------------------------------------------
Net realized loss (59)
- ----------------------------------------------------------------------
Change in net unrealized appreciation on investments (395)
- ----------------------------------------------------------------------
Net loss on investments (454)
- ----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,561
- ----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
FEBRUARY 28, ENDED
1998 AUGUST 31,
(UNAUDITED) 1997
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -------------------------------------------------------------------------------------------------
Net investment income $ 2,015 4,875
- -------------------------------------------------------------------------------------------------
Net realized gain (loss) (59) 522
- -------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation (395) 341
- -------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,561 5,738
- -------------------------------------------------------------------------------------------------
Net equalization charges (81) (127)
- -------------------------------------------------------------------------------------------------
Distribution from net investment income (2,087) (4,810)
- -------------------------------------------------------------------------------------------------
Net decrease from capital share transactions (7,415) (13,311)
- -------------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (8,022) (12,510)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------------
Beginning of period 81,967 94,477
- -------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed
net investment income of
$504 and $657, respectively) $73,945 81,967
- -------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Adjustable Rate U.S. Government Fund (the
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,
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 INVESTMENT VALUATION. Investments are stated at
value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Exchange traded financial futures
and options are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Over-the-counter
traded fixed income options are valued based upon
prices provided by market makers. Other securities
and assets are valued at fair value as determined
in good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes discount amortization on
all fixed income securities and premium
amortization on mortgage-backed securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
The Fund may purchase securities with delivery or
payment to occur at a later date. At the time the
Fund enters into a commitment to purchase a
security, the transaction is recorded and the value
of the security is reflected in the net asset
value. The value of the security may vary with
market fluctuations. No interest accrues to the
Fund until payment takes place. At the time the
Fund enters into this type of transaction it is
required to segregate cash or other liquid assets
equal to the value of the securities purchased. At
February 28, 1998, the Fund had $8,113,000 in
purchase commitments outstanding (11% 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
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
by dividing the Fund's net assets attributable to
that class by the number of shares of the class
outstanding.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies for the six
months ended February 28, 1998. The accumulated net
realized loss on sales of investments for federal
income tax purposes at February 28, 1998, amounting
to approximately $10,681,000, is available to
offset future taxable gains. If not applied, the
loss carryover expires during the period 1998
through 2006.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income monthly and
any net realized capital gains annually, which are
recorded on the ex-dividend date. Dividends are
determined in accordance with income tax principles
which may treat certain transactions differently
than generally accepted accounting principles.
EQUALIZATION ACCOUNTING. A portion of proceeds from
sales and cost of redemptions of Fund shares is
credited or charged to undistributed net investment
income so that income per share available for
distribution is not affected by sales or
redemptions of shares.
- --------------------------------------------------------------------------------
3 TRANSACTIONS
WITH AFFILIATES INVESTMENT MANAGER COMBINATION. Effective December
31, 1997, Zurich Insurance Company, the parent of
Zurich Kemper Investments, Inc. (ZKI), acquired a
majority interest in Scudder, Stevens & Clark, Inc.
(Scudder), another major investment manager. As a
result of this transaction, the operations of ZKI
were combined with Scudder to form a new global
investment organization named Scudder Kemper
Investments, Inc. (Scudder Kemper). The transaction
resulted in the termination of the Fund's
investment management agreement with ZKI, however,
a new investment management agreement between the
Fund and Scudder Kemper was approved by the Fund's
Board of Trustees and by the Fund's Shareholders.
The new management agreement, which was effective
December 31, 1997, is the same in all material
respects as the previous management agreement,
except that Scudder Kemper is the new investment
adviser to the Fund. In addition, the names of the
Fund's principal underwriter and shareholder
service agent were changed to Kemper Distributors,
Inc. (KDI) and Kemper Service Company (KSvC),
respectively.
MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper, 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 $219,000 for the six months ended
February 28, 1998.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with 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>
Six months ended February 28, 1998 $6,000 51,000
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
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>
Six months ended February 28, 1998 $42,000 50,000
</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>
Six months ended February 28, 1998 $86,000 87,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
KSvC is the shareholder service agent of the Fund.
Under the agreement, KSvC received shareholder
services fees of $121,000 for the six months ended
February 28, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the six months ended February
28, 1998, the Fund made no direct payments to its
officers and incurred trustees' fees of $8,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended February 28, 1998,
investment transactions (excluding short-term
instruments) are as follows (in thousands):
Purchases $ 96,385
Proceeds from sales 115,181
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
1998 1997
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 1,021 $ 8,397 1,089 $ 8,931
-----------------------------------------------------------------------------
Class B 206 1,712 626 5,196
-----------------------------------------------------------------------------
Class C 89 736 82 680
-----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 161 1,331 369 3,054
-----------------------------------------------------------------------------
Class B 17 147 33 271
-----------------------------------------------------------------------------
Class C 3 27 7 55
-----------------------------------------------------------------------------
SHARES REDEEMED
Class A (2,161) (17,792) (3,198) (26,282)
-----------------------------------------------------------------------------
Class B (191) (1,585) (523) (4,338)
-----------------------------------------------------------------------------
Class C (47) (388) (106) (878)
-----------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 49 412 11 93
-----------------------------------------------------------------------------
Class B (49) (412) (11) (93)
-----------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE TRANSACTIONS $(7,415) $(13,311)
-----------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------
CLASS A
-----------------------------------------------
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
1998 -------------------------
(UNAUDITED) 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.31 8.22 8.30 8.33 8.68
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .22 .45 .46 .48 .34
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.06) .09 (.09) (.04) (.29)
- --------------------------------------------------------------------------------------------
Total from investment operations .16 .54 .37 .44 .05
- --------------------------------------------------------------------------------------------
Less distribution from net investment
income .22 .45 .45 .47 .40
- --------------------------------------------------------------------------------------------
Net asset value, end of period $8.25 8.31 8.22 8.30 8.33
- --------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.97% 6.75 4.55 5.52 .59
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------
Expenses 1.28% 1.25 1.15 1.10 .93
- --------------------------------------------------------------------------------------------
Net investment income 5.16% 5.50 5.49 5.76 3.96
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------
CLASS B
-------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST MAY 31
FEBRUARY 28, 31, TO
1998 ------------------ AUGUST 31,
(UNAUDITED) 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 .19 .39 .40 .43 .07
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.06) .09 (.09) (.04) (.04)
- --------------------------------------------------------------------------------------------------
Total from investment operations .13 .48 .31 .39 .03
- --------------------------------------------------------------------------------------------------
Less distribution from net investment
income .19 .39 .39 .40 .08
- --------------------------------------------------------------------------------------------------
Net asset value, end of period $8.26 8.32 8.23 8.31 8.32
- --------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.61% 5.96 3.79 4.84 .34
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 2.01% 1.93 1.89 1.85 1.96
- --------------------------------------------------------------------------------------------------
Net investment income 4.43% 4.82 4.75 5.01 3.36
- --------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------------
CLASS C
--------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST MAY 31
FEBRUARY 28, 31, TO
1998 ------------------ AUGUST 31,
(UNAUDITED) 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 .19 .39 .40 .43 .08
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.06) .09 (.09) (.04) (.04)
- ---------------------------------------------------------------------------------------------
Total from investment operations .13 .48 .31 .39 .04
- ---------------------------------------------------------------------------------------------
Less distribution from net investment
income .19 .39 .39 .40 .08
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $8.27 8.33 8.24 8.32 8.33
- ---------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.63% 5.98 3.82 4.89 .47
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------
Expenses 1.98% 1.88 1.89 1.79 1.88
- ---------------------------------------------------------------------------------------------
Net investment income 4.46% 4.87 4.75 5.07 3.52
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
1998 ---------------------------------------
(UNAUDITED) 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $73,945 81,967 94,477 129,757 202,815
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 226% 249 272 308 533
- ----------------------------------------------------------------------------------------------------
</TABLE>
NOTES: Scudder Kemper 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.
Total return does not reflect the effect of any sales charges.
17
<PAGE> 18
NOTES
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY JOHN R. HEBBLE
Chairman and Trustee President Assistant Treasurer
DAVID W. BELIN PHILLIP J. COLLORA MAUREEN E. KANE
Trustee Vice President, Secretary Assistant Secretary
and Treasurer CAROLINE PEARSON
LEWIS A. BURNHAM
Trustee JERALD K. HARTMAN Assistant Secretary
DONALD L. DUNAWAY Vice President ELIZABETH C. WERTH
Trustee THOMAS W. LITTAUER Assistant Secretary
ROBERT B. HOFFMAN
Trustee ANN M. MCCREARY
Vice President
DONALD R. JONES
Trustee ROBERT C. PECK, JR.
Vice President
SHIRLEY D. PETERSON
Trustee KATHRYN L. QUIRK
Vice President
WILLIAM P. SOMMERS
Trustee RICHARD L. VANDENBERG
Vice President
EDMOND D. VILLANI
Trustee LINDA J. WONDRACK
Vice President
- --------------------------------------------------------------------------------
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
Kansas City, MO 64105
- --------------------------------------------------------------------------------
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 - 3 (4/98) 1045790
