<PAGE> 1
KEMPER INTERMEDIATE
GOVERNMENT TRUST
SEMIANNUAL REPORT TO SHAREHOLDERS
FOR THE PERIOD ENDED MAY 31, 1996
"Our outlook on rates began to change in January, so we shortened duration
believing the bond rally would not maintain its momentum."
<PAGE> 2
Table of
Contents
2
Terms to Know
3
General
Economic Overview
5
Performance Update
7
Portfolio Statistics
8
Portfolio of
Investments
9
Financial Statements
11
Notes to
Financial Statements
13
Financial Highlights
At A Glance
- -------------------------------------------------
TOTAL RETURNS
- -------------------------------------------------
FOR THE SIX MONTHS ENDED MAY 31, 1996
<TABLE>
<CAPTION>
BASED ON BASED ON
NET ASSET MARKET
VALUE PRICE
- -------------------------------------------------
<S> <C> <C>
KEMPER INTERMEDIATE
GOVERNMENT TRUST -1.38% 4.21%
- -------------------------------------------------
</TABLE>
- -------------------------------------------------
NET ASSET VALUE AND MARKET PRICE
- -------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
5/31/96 11/30/95
- -------------------------------------------------
<S> <C> <C>
NET ASSET VALUE $7.90 $ 8.31
- -------------------------------------------------
MARKET PRICE $7.13 $ 7.13
- -------------------------------------------------
</TABLE>
- -------------------------------------------------
DISTRIBUTION REVIEW
- -------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DISTRIBUTION INFORMATION FOR THE FUND AS OF
MAY 31, 1996.
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------
SIX MONTH DISTRIBUTION: $0.300
- ------------------------------------------------
MAY DISTRIBUTION: $0.055
- ------------------------------------------------
ANNUALIZED DISTRIBUTION RATE:
(BASED ON NET ASSET VALUE) 8.35%
- ------------------------------------------------
ANNUALIZED DISTRIBUTION RATE:
(BASED ON MARKET VALUE) 9.26%
- ------------------------------------------------
</TABLE>
Statistical Note: Current annualized distribution rate is the latest monthly
distribution shown as an annualized percentage of market price/net asset value
on the date shown. Distribution rate simply measures the level of distributing
and is not a complete measure of performance. Distributions may include return
of capital. Total return measures aggregate change in net asset value/market
price assuming reinvestment of dividends. Returns are historical and do not
represent future performance. Market price, net asset value and returns
fluctuate. Additional information concerning performance is contained in the
Financial Highlights appearing at the end of this report.
TERMS TO KNOW
DURATION Duration is a measure of the interest rate sensitivity of a fixed-
income portfolio incorporating time to maturity and coupon size. The longer the
duration, the greater the interest rate risk.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for a specified period, assuming the
reinvestment of all dividends. It represents the aggregate percentage change in
the value of an investment in the fund over the period. Total return may be
based upon net asset value or market price.
<PAGE> 3
GENERAL ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF EXECUTIVE AND CHIEF INVESTMENT OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $78 BILLION IN ASSETS, INCLUDING $45 BILLION
IN RETAIL MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN
M.B.A. FROM HARVARD UNIVERSITY.
DEAR SHAREHOLDER,
The first six months of 1996 have provided a few surprises. As the year began,
most of us expected sluggish economic and corporate growth -- which the Federal
Reserve Board would address by reducing short-term interest rates. Yet, what we
experienced was stronger-than-anticipated economic growth, better corporate
earnings and rising interest rates. Although such surprises unsettled the bond
market, the stock market has followed a spectacular 1995 with strength so far
this year.
Where is the economy headed now? Its direction is even less predictable as we
draw nearer to the November elections. Half of the country's leading economists
are forecasting 3 percent growth while an equal number are looking for no better
than 1 percent growth. At Kemper Funds, we suspect that the economy is growing
at a subpar rate of 2 percent. Although commodity prices may suggest otherwise,
we think inflation is holding at less than 3 percent. We see no reason to expect
the Fed to reduce rates to stimulate growth but neither is it likely to raise
rates significantly to control growth. In an environment of stable or gently
rising rates, we would expect corporate earnings to grow at a rate of about 7 to
8 percent -- that's somewhat higher than we believed likely at the start of the
year.
Our forecast calls for a generally comfortable environment for investors. But
both the economy and the general direction of the markets are due for a
reversal. In July, the U.S. economy entered its 64th month of consecutive
growth. This is the longest expansion without a single quarter of negative
output growth since George Washington was president. Today's bull market started
in October 1990, which makes it one of the longest running bull markets in
history. By virtue of its length alone, the stock market is vulnerable to a
correction.
As expected, volatility has returned to the market this year. For example: The
stock market's performance on March 8, the date that a surprisingly strong
employment report was released, betrayed some level of investor skittishness.
But while the Standard & Poor's lost 3.1 percent that day, it quickly regained
the ground and moved higher.
CONSUMERS AND JOB SECURITY
The restructuring of corporate America, which is generally credited for its
improved profitability, has been an important influence on the consumer.
Economic growth is heavily dependent upon consumer spending which, in turn, is
a function of inflation, pay raises and fear of job loss. While the first two
have not been a recent concern, fear of losing one's job has dampened consumer
confidence.
Such anxiety in the workplace was the subject of a recent study by the
Council of Economic Advisors. According to that report, more than two-thirds
of the new jobs created in the United States in 1994 and 1995 paid better than
the average job. The report found that the rate at which jobs were eliminated
has risen slightly despite strong economic growth of recent years -- however, it
reported that the length of time most workers spent unemployed has declined.
The graph below tracks Bureau of Labor Statistics data that show the
recent relationship between number of jobs created versus the number of jobs
lost.
[LINE GRAPH]
<TABLE>
<CAPTION>
Jobs Created Jobs Lost
<S> <C> <C>
12/31/91 (300,000) 40,000
12/31/92 120,000 (30,000)
12/31/93 300,000 70,000
12/31/94 180,000 70,000
12/31/95 (80,000) (40,000)
3/31/96 490,000 (10,000)
</TABLE>
SOURCE: BUREAU OF LABOR STATISTICS
3
<PAGE> 4
GENERAL ECONOMIC OVERVIEW
ECONOMIC GUIDEPOSTS
Economic activity is a key influence on investment performance and
shareholder decision-making. Periods of recession or boom, inflation or
deflation, credit expansion or credit crunch have a significant impact on
mutual fund performance.
The following are some significant economic guideposts and their investment
rationale that may help your investment decision-making. The 10-year Treasury
rate and the prime rate are prevailing interest rates. The other data report
year-to-year percentage changes.
<TABLE>
<CAPTION>
Now (5/31/96) 6 months ago 1 year ago 2 years ago
<S> <C> <C> <C> <C>
10-year Treasury rate(1) 6.74 5.71 6.17 7.10
Prime rate(2) 8.25 8.63 9.00 7.25
Inflation rate(3) 2.96 2.60 3.04 2.56
The U.S. dollar(4) 8.51 -2.58 -9.31 0.51
Capital
goods orders(5) 2.93 11.03 12.98 25.11
Industrial production(6) 3.26 1.08 2.80 6.61
Employment growth(7) 2.00 1.92 2.71 3.12
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years, infla-
tion has been as high as 6%. The low, moderate inflation of the last
few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters
and the value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on corporate profits and equity performance.
(7) An influence on family income and retail sales.
Source: Economics Department, Zurich Kemper Investments, Inc.
Such ebb and flow is to be expected in investing, especially at this point in
the cycle. Attempting to "prepare" for a correction is futile, we believe. Those
whose caution caused them to excuse themselves from the market early this year,
for example, would have forgone its significant gain year to date.
Several opportunities exist today for the careful investor. First, having
settled down some from a raucous 1995, the technology sector continues to enjoy
the product and market demand that make it the dominant sector of the 1990s.
Second, equity investors willing to look overseas may find opportunities in
countries whose economies today are at a point where the U.S. economy was in
1995. Our forecast assumes that strength in foreign markets could boost those
countries' currencies, which would weaken the value of the dollar.
We expect the fixed-income markets to continue to be sensitive to interest
rate and inflation news. However, for as long as economic growth is positive and
earnings are growing, we believe the high-yield market is one market segment
that has significant potential.
Finally, we look for political activity to have less and less bearing on the
markets' performance. Although they may continue to debate tax reform,
federal budget deficit reduction and health care reform, the incumbent
legislators are running out of time to take action before the November
elections. If there is any suspense by November, it is likely to be in whether
the Republicans can retain control of Congress. Their success would make a
balanced budget and tax reform likely agenda topics for 1997.
With that as an economic backdrop, we encourage you to read the following
detailed report of your fund, including an interview with your fund's portfolio
management. Thank you for your continued support. We appreciate the opportunity
to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
ZURICH KEMPER INVESTMENTS, INC.
July 2, 1996
4
<PAGE> 5
PERFORMANCE UPDATE
PORTFOLIO CO-MANAGERS ELIZABETH BYRNES AND MICHELLE KEELEY DISCUSS THE
ADJUSTMENTS THEY MADE TO THE FUND'S PORTFOLIO AS INTEREST RATES SHIFTED
DIRECTION, THEN ROSE THROUGH MOST OF THE PERIOD.
[BYRNES PHOTO]
Elizabeth Byrnes joined Zurich Kemper Investments, Inc. (ZKI) in 1982 and is a
first vice president of ZKI. She has been a vice president and portfolio
co-manager of Kemper Intermediate Government Trust since 1994. Byrnes received a
bachelor of science degree from Miami University and is a certified public
accountant.
[KEELEY PHOTO]
Michelle Keeley joined Zurich Kemper Investments, Inc. in 1990. She is first
vice president of ZKI and has been a vice president and portfolio co-manager of
Kemper Intermediate Government Trust since 1994. Keeley received a bachelor of
arts degree from Michigan State University and a masters of management from
Kellogg Graduate School of Management at Northwestern University.
The views expressed in this report reflect those of the portfolio managers 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.
Q. DURING THE SIX-MONTH PERIOD, INTEREST RATES SHIFTED DIRECTION AND BEGAN
RISING. WHAT CAUSED THIS TURNABOUT IN RATES AND HOW WAS THE MARKET IMPACTED?
A. Rates reversed direction as expectations for the pace of economic growth
changed. At the start of the fiscal year, in December 1995, the market was
rallying. At that point, the market expected that the economy would continue to
grow slowly, inflation would remain low, and that perhaps the Federal Reserve
Board (the Fed) would lower short-term interest rates. The market was also
hopeful that the negotiations underway in Washington D.C. would soon lead to a
balanced budget agreement with a solid plan for reducing the federal budget
deficit. And, in fact, the Fed did move in December 1995, and then in January
1996, to lower interest rates. These moves fueled even higher market prices.
In February 1996, political and economic events caused investors to
re-evaluate whether the economy could continue on its slow growth, low inflation
path. Federal budget negotiations stalled, and an impasse developed. This
effectively eliminated the chances for a balanced budget in the first half of
1996. Additionally, columnist Patrick Buchanan's strong early showing in the
presidential primaries caused concern as the market viewed many of his proposals
as potentially inflationary. Finally, in his testimony before Congress, Fed
Chairman Alan Greenspan intimated that the pace of economic growth was
improving. This caused some investors to conclude that another reduction in
interest rates was not imminent. These events prompted investors to sell, and
interest rates rose.
The most dramatic rise in market rates during the period occurred in early
March, when the U.S. Labor Department reported an unanticipated and dramatic
increase in employment growth. Many bond investors saw this data as evidence
that the economy was gaining more momentum than previously anticipated. The news
caused a sell-off in the market. This is because more rapid economic growth is
associated with higher inflation, which erodes the value of fixed-income
investments. Rates continued to rise through the end of May as demand for
government securities declined.
Q. HOW WAS THE KEMPER INTERMEDIATE GOVERNMENT TRUST'S PERFORMANCE IMPACTED
BY THE CHANGING ECONOMIC ENVIRONMENT?
A. The shift in interest rates hurt the fund's performance. As the fiscal
year began, we, like most of the market, expected rates to continue declining.
To take advantage of the potential decline, we positioned the fund with a
longer than average duration. Duration is a measurement of a fund's
sensitivity to interest rates. The longer the duration, the more sensitive it
is to interest rate changes.
5
<PAGE> 6
PERFORMANCE UPDATE
Our outlook on rates began to change in January, so we shortened the fund's
duration believing that the bond rally would not maintain its momentum. We
shortened duration again in February, and then positioned the fund for a more
stable rate environment. Unfortunately the employment release in March caused
the market to trade down sharply, which hurt the fund's performance -- even with
its shortened duration.
Q. WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE FUND'S PORTFOLIO?
A. Basically we added to our mortgage position and reduced our investment in
Treasuries. At the start of the year, December 1, 1995, 65 percent of the
portfolio was invested in U.S. Treasuries, while mortgages represented 35
percent. On May 31, 1996, Treasuries accounted for 39 percent of the fund and
61 percent of the fund was comprised of mortgages. We favored mortgages, not
only because of their higher coupon income potential, but because history
suggests that mortgages tend to outperform Treasuries when interest rates rise.
Q. DID YOU ALTER THE TYPES OF SECURITIES IN WHICH YOU INVESTED?
A. As we mentioned before, we shortened the fund's duration during the
period. We accomplished that, in part, by adding Treasuries with shorter
maturities and reducing our investment in longer-term government securities. At
the start of the period, 53 percent of the fund was invested in
intermediate-term Treasuries and 12 percent was invested in long-term
Treasuries. By May 31, we had moved out of long-term governments completely and
reduced intermediate Treasuries to 22 percent of the portfolio. Short-term
governments represented 17 percent of the portfolio at the close of the period.
Q. WOULD YOU EXPLAIN WHY THE FUND HAS ADOPTED A MANAGED DISTRIBUTION
STRATEGY?
A. The fund traded at a relatively deep discount from net asset value
through much of 1995 and part of 1996. After monitoring this discount, The
Board of Trustees and management of the fund considered various options to help
reduce the discount. And it was determined that a competitive, consistent
stream of distributions could have a positive impact on the fund's discount.
Consequently, in April, the fund began paying a monthly distribution of
$0.055 per share. These monthly distributions are made from the fund's income,
net capital gains and, to the extent necessary, shareholders' capital. It's
anticipated that, in the current interest rate environment, a portion of the
distributions may constitute a return of capital. Shareholders will of course be
notified of any tax consequences of the distributions after the end of each
calendar year.
Q. WHAT CAUSED KEMPER INTERMEDIATE GOVERNMENT TRUST TO TRADE AT A DISCOUNT
TO NET ASSET VALUE?
A. The market price of a closed-end fund or any publicly traded security
varies for a wide range of reasons -- some analytical, some speculative. To some
degree, the fund's discount was exacerbated as its income level was reduced in
1995.
In 1994, when we began managing the fund, our goal was to provide
shareholders with a reasonable level of income, but also with a good total
return -- income AND price appreciation. At that point, the fund was primarily
invested in short-term premium Treasuries. Although these investments provided
a high rate of income, they hurt the fund's total return. We began selling
these investments, which sacrificed current income and was followed by a
decline in the fund's market value. However, the move made sense because as
premium coupon Treasuries mature, their price declines to par value. This
amortization to par erodes the total return potential for the fund.
As interest rates fell through much of 1995, it would have been
increasingly difficult to maintain the fund's level of income through premium
coupon Treasuries. If we had done so, shareholders would have been exposed to
more investment risk than we believed was prudent. We remain committed to
managing for total return. And, with the managed distribution strategy, we hope
to reduce the fund's discount to net asset value, which would be beneficial for
shareholders.
Q. WHAT'S YOUR OUTLOOK FOR THE NEXT FEW MONTHS?
A. We expect that economic growth will moderate. It is conceivable that
interest rates may trend slightly higher from current levels, but not at the
rate we've witnessed through the end of this reporting period. We plan to
remain fully invested, but to keep the duration of the fund positioned
defensively until economic fundamentals suggest otherwise.
6
<PAGE> 7
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 5/31/96 ON 11/30/95
- --------------------------------------------------------------------------
<S> <C> <C>
INTERMEDIATE-TERM GOVERNMENTS 22% 53%
- --------------------------------------------------------------------------
MORTGAGES 61 35
- --------------------------------------------------------------------------
LONG-TERM GOVERNMENTS -- 12
- --------------------------------------------------------------------------
SHORT-TERM GOVERNMENTS 17 --
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
On 5/31/96 On 11/30/96
Intermediate-term governments
Mortgages
Long-term governments
Short-term governments
AVERAGE MATURITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
ON 5/31/96 ON 11/30/95
- ------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 6.9 YEARS 8.3 YEARS
- ------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
PORTOFOLIO OF INVESTMENTS
KEMPER INTERMEDIATE GOVERNMENT TRUST
PORTFOLIO OF INVESTMENTS AT MAY 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT COUPON PRINCIPAL
OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY Notes 8.875% 1997 $10,000 $ 10,383
SECURITIES--80.2% 8.125-9.25 1998 39,000 41,009
(Cost: $222,064) 8.00-8.875 1999 26,000 27,282
8.75 2000 23,240 25,052
Bonds 9.125 2009 20,727 23,392
10.00-12.75 2010 36,962 49,551
13.875-14.00 2011 22,200 33,455
13.25 2014 3,500 5,301
---------------------------------------------------------------------------
215,425
- --------------------------------------------------------------------------------------------------------
GOVERNMENT Pass-through 7.00 2022-2026 12,445 11,838
NATIONAL MORTGAGE certificates 7.50 2022-2026 43,378 42,345
ASSOCIATION--34.1% 8.00 2026 36,000 36,000
(Cost: $91,659) 9.00 2016-2025 1,322 1,380
---------------------------------------------------------------------------
91,563
- --------------------------------------------------------------------------------------------------------
FEDERAL Collateralized 5.55 2007 2,729 2,719
NATIONAL MORTGAGE mortgage 6.25 2022 10,000 9,267
ASSOCIATION--21.8% obligations 6.50 2009 9,500 8,551
(Cost: $58,199) 7.00 2026 40,000 38,138
---------------------------------------------------------------------------
58,675
- --------------------------------------------------------------------------------------------------------
FEDERAL HOME
LOAN MORTGAGE
CORPORATION--5.1%
(Cost: $13,326)
Collateralized 5.00 2021 5,000 4,383
mortgage 6.25 2021 10,000 9,363
obligations
---------------------------------------------------------------------------
13,746
---------------------------------------------------------------------------
TOTAL INVESTMENTS--141.2%
(Cost: $385,248) 379,409
---------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(41.2)% (110,677)
---------------------------------------------------------------------------
NET ASSETS--100% $ 268,732
---------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
Based on the cost of investments of $385,248,000 for federal income tax purposes
at May 31, 1996, the gross unrealized appreciation was $2,192,000, the gross
unrealized depreciation was $8,031,000 and the net unrealized depreciation of
investments was $5,839,000.
See accompanying Notes to Financial Statements.
8
<PAGE> 9
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1996
(in thousands)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------
Investments, at value
(Cost: $385,248) $379,409
- -------------------------------------------------------------------------------------------------------
Cash 438
- -------------------------------------------------------------------------------------------------------
Receivable for:
Investments sold 478
- -------------------------------------------------------------------------------------------------------
Interest receivable 3,499
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS 383,824
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------------------------------------
Payable for:
Investments purchased 114,855
- -------------------------------------------------------------------------------------------------------
Management fee 180
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 40
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 17
- -------------------------------------------------------------------------------------------------------
Total liabilities 115,092
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO 33,996 SHARES OUTSTANDING,
$.01 PAR VALUE, EQUIVALENT TO $7.90 PER SHARE $268,732
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------------------------------------
Paid-in capital $315,523
- -------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (40,974)
- -------------------------------------------------------------------------------------------------------
Net unrealized depreciation on investments (5,839)
- -------------------------------------------------------------------------------------------------------
Undistributed net investment income 22
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $268,732
- -------------------------------------------------------------------------------------------------------
NET ASSETS VALUE PER SHARE ($268,732 divided by 33,996 shares outstanding) $ 7.90
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
9
<PAGE> 10
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended May 31, 1996
(in thousands)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- --------------------------------------------------------------------------------------------------------
Interest income $ 11,324
- --------------------------------------------------------------------------------------------------------
Expenses:
Management fee 1,112
- --------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 34
- --------------------------------------------------------------------------------------------------------
Professional fees 36
- --------------------------------------------------------------------------------------------------------
Reports to shareholders 14
- --------------------------------------------------------------------------------------------------------
Trustees' fees and other 45
- --------------------------------------------------------------------------------------------------------
Total expenses 1,241
- --------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 10,083
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- --------------------------------------------------------------------------------------------------------
Net realized loss on sales of investments (including options purchased) (1,898)
- --------------------------------------------------------------------------------------------------------
Net realized gain from futures transactions 2,713
- --------------------------------------------------------------------------------------------------------
Net realized gain 815
- --------------------------------------------------------------------------------------------------------
Change in net unrealized depreciation on investments (14,446)
- --------------------------------------------------------------------------------------------------------
Net loss on investments (13,631)
- --------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (3,548)
- --------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MAY 31, 1996 NOVEMBER 30, 1995
<S> <C> <C>
OPERATIONS AND DIVIDENDS
Net investment income $ 10,083 19,843
- --------------------------------------------------------------------------------------------------------
Net realized gain 815 4,417
- --------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation (14,446) 14,452
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (3,548) 38,712
- --------------------------------------------------------------------------------------------------------
Distribution from net investment income (10,199) (20,296)
- --------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (13,747) 18,416
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------------------
Beginning of period 282,479 264,063
- --------------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment income
of $22 and $138, respectively) $268,732 282,479
- --------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 SIGNIFICANT ACCOUNTING
POLICIES DESCRIPTION OF FUND. The Fund is registered under
the Investment Company Act of 1940 as a
diversified, closed-end management investment
company.
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. Portfolio securities that are
traded on a domestic securities exchange are valued
at the last sale price on the exchange where
primarily traded or, if there is no recent sale, at
the last current bid quotation. Portfolio
securities that are primarily traded on foreign
securities exchanges are generally valued at the
preceding closing values of such securities on
their respective exchanges where primarily traded.
Securities not so traded are valued at the last
current bid quotation if market quotations are
available. Exchange traded fixed income options are
valued at the last sale price unless there is no
sale price, in which event prices provided by
market makers are used. Over-the-counter traded
fixed income options are valued based upon prices
provided by market makers. Financial futures and
options thereon are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Other securities
and assets are valued at fair value as determined
in good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes discount amortization on
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
May 31, 1996 the Fund had $105,984,000 in purchase
commitments outstanding (39% of net assets) with a
corresponding amount of assets segregated.
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 May 31, 1996. The accumulated net
realized loss on sales of investments for federal
income tax purposes at May 31, 1996, amounting to
approximately $40,960,000, is available to offset
future taxable gains. If not applied, the loss
carryover expires during the period 1998 through
2002.
11
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends to its shareholders on a monthly
basis. The dividends are recorded by the Fund on
the ex-dividend date. In April 1996, the Fund
adopted a managed distribution policy. In the
current interest rate environment the Fund intends
to pay a monthly distribution of $.055 per share.
The distribution will be made from net investment
income, net realized gains and, to the extent
necessary, shareholders' capital.
- --------------------------------------------------------------------------------
2 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI) (formerly known as Kemper Financial Services,
Inc.), and pays a management fee at an annual rate
of .80% of average weekly net assets. The Fund
incurred a management fee of $1,112,000 for the six
months ended May 31, 1996.
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 $21,000,
for the six months ended May 31, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the six months ended May 31, 1996, the Fund
made no payments to its officers and incurred
trustees' fees of $12,000 to independent trustees.
- --------------------------------------------------------------------------------
3 INVESTMENT
TRANSACTIONS For the six months ended May 31, 1996, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $1,214,411
Proceeds from sales 1,145,522
- --------------------------------------------------------------------------------
4 FINANCIAL FUTURES
CONTRACTS The Fund has entered into exchange traded financial
futures contracts in order to help protect it from
anticipated market conditions and, as such, bears
the risk that arises from owning these contracts.
At the time the Fund enters into a futures
contract, it is required to make a margin deposit
with its custodian. Subsequently, gain or loss is
recognized and payments are made on a daily basis
between the Fund and the broker as the market value
of the futures contract changes. At May 31, 1996,
the market value of assets segregated at the
custodian to cover margin requirements was
$3,153,000. The Fund also had liquid securities in
its portfolio sufficient to cover the following
short futures positions open at May 31, 1996:
<TABLE>
<CAPTION>
EXPIRATION GAIN AT
TYPE FACE AMOUNT MONTH 5/31/96
------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Securities $25,815,000 June '96 $ 99,000
------------------------------------------------------------------------
U.S. Treasury Securities 69,045,000 September '96 425,000
------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, -------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.31 7.77 8.69 8.81 8.97
- --------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .30 .58 .63 .71 .87
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.41) .56 (.87) (.12) (.28)
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations (.11) 1.14 (.24) .59 .59
- --------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .30 .60 .68 .71 .75
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.90 8.31 7.77 8.69 8.81
- --------------------------------------------------------------------------------------------------------------------
Market value, end of period $7.13 7.13 7.13 8.50 8.88
- --------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------------
Based on net asset value (1.38)% 15.20 (2.85) 6.90 6.76
- --------------------------------------------------------------------------------------------------------------------
Based on market value 4.21 8.61 (8.24) 3.92 7.00
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------------
Expenses .94% .95 .94 .92 .93
- --------------------------------------------------------------------------------------------------------------------
Net investment income 7.22 7.28 7.68 8.02 9.78
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $268,732 282,479 264,063 295,471 298,945
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 689% 552 497 326 494
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return based on net asset value reflects changes in the Fund's net
asset value during the period. Total return based on market value reflects
changes in market value. Each figure includes reinvestment of dividends. These
figures will differ depending upon the level of any discount from or premium to
net asset value at which the Fund's shares trade during the period.
13
<PAGE> 14
SHAREHOLDERS' MEETING
ANNUAL SHAREHOLDERS' MEETING
On May 29, 1996, an annual shareholders' meeting was held. Kemper Intermediate
Government Trust shareholders were asked to vote on three separate issues:
re-election of the eight members to the Board of Trustees, ratification of Ernst
& Young LLP as independent auditors and approval of converting the fund from a
closed-end investment company to an open-end investment company. Following are
the results for each issue:
1) Re-election of Trustees:
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
James E. Akins 27,291,465 691,171
Arthur R. Gottschalk 27,355,825 626,811
Frederick T. Kelsey 27,369,816 612,820
Dominique P. Morax 27,325,044 657,592
Fred B. Renwick 27,313,851 668,785
Stephen B. Timbers 27,400,597 582,039
John B. Tingleff 27,400,597 582,039
John G. Weithers 27,400,597 582,039
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
27,549,805 178,370 254,461
</TABLE>
3) Converting the fund from a closed-end investment company to an open-end
investment company:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
3,739,661 11,156,753 1,263,194
</TABLE>
14
<PAGE> 15
NOTES
15
<PAGE> 16
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS JOHN E. NEAL
President and Trustee Vice President
JAMES E. AKINS JOHN E. PETERS
Trustee Vice President
ARTHUR R. GOTTSCHALK J. PATRICK BEIMFORD, JR.
Trustee Vice President
FREDERICK T. KELSEY ELIZABETH A. BYRNES
Trustee Vice President
DOMINIQUE P. MORAX MICHELLE M. KEELEY
Trustee Vice President
FRED B. RENWICK RICHARD L. VANDENBERG
Trustee Vice President
JOHN B. TINGLEFF PHILIP J. COLLORA
Trustee Vice President
and Secretary
JOHN G. WEITHERS
Trustee CHARLES F. CUSTER
Vice President and
Assistant Secretary
JEROME L. DUFFY
Treasurer
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419066
Kansas City, MO 64141-6066
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
120 South LaSalle Street Chicago, IL 60603
http://www.kemper.com
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