-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, dwoWaY4g9RFYg6yMum1WQaXgY4sp8gGuGPnw1TdSsrbW4n8ggKcIs+zAjYK5NNYK Hi8+U/9P5rsMCpjIRWA/zQ== 0000950124-95-001341.txt : 19950511 0000950124-95-001341.hdr.sgml : 19950511 ACCESSION NUMBER: 0000950124-95-001341 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950228 FILED AS OF DATE: 19950505 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEMPER ADJUSTABLE RATE U S GOVERNMENT FUND CENTRAL INDEX KEY: 0000814955 STANDARD INDUSTRIAL CLASSIFICATION: 0000 IRS NUMBER: 363528556 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-05195 FILM NUMBER: 95534767 BUSINESS ADDRESS: STREET 1: 120 S LASALLE ST CITY: CHICAGO STATE: IL ZIP: 60603 BUSINESS PHONE: 3127811121 FORMER COMPANY: FORMER CONFORMED NAME: KEMPER GOVERNMENT INCOME TRUST DATE OF NAME CHANGE: 19870811 N-30D 1 ADJ. RATE U.S. GOVT FUND SAR 1 Kemper Adjustable Rate U.S. Government Fund Semiannual Report to Shareholders Period Ended February 28, 1995 Offering investors the opportunity for high current income consistent with low volatility of principal [Kemper Logo] 2 DEAR SHAREHOLDER: We are pleased to provide you with an economic overview and performance for your fund for the six-month period ended February 28, 1995. In addition, following the overview is a question and answer interview with your fund's Portfolio Managers. - - ---------------------------- PERFORMANCE REVIEW
- - ---------------------------------------------------------- Total Return Performance* FOR THE SIX-MONTH PERIOD ENDED FEBRUARY 28, 1995 (UNADJUSTED FOR ANY SALES CHARGE) Kemper Adjustable Rate U.S. Government A 1.91% Kemper Adjustable Rate U.S. Government B 1.56% Kemper Adjustable Rate U.S. Government C 1.47% Lipper Adjustable Mortgage Fund Category Average** -0.91% - - ----------------------------------------------------------
Returns are historical and do not represent future performance. Returns and net asset value fluctuate. Shares are redeemable at current net asset value, which may be more or less than original cost. When comparing Kemper Adjustable Rate U.S. Government Fund A shares to all other Adjustable Mortgage funds in its Lipper** category for the following time periods ended February 28, 1995, this fund ranked: 1-year, 35 of 77 and 5-year, 1 of 5. - - ---------------------- DIVIDEND REVIEW The following table shows dividend and yield information for Kemper Adjustable Rate U.S. Government Fund as of February 28, 1995.
- - ----------------------------------------------------------------- A SHARES B SHARES C SHARES -------- -------- -------- February Dividend: $0.041 $0.0355 $0.0358 Net Asset Value: $ 8.26 $ 8.26 $ 8.26 Annualized Distribution Rate+: 5.96% 5.16% 5.20% SEC Yield+: 5.49% 4.71% 4.75% - - -----------------------------------------------------------------
- - --------------------------------------- GENERAL ECONOMIC OVERVIEW Throughout 1994, rising interest rates dominated most economic discussion and served to dampen the performance of both the income and stock markets. However, rates have now stabilized and the markets rebounded in the first quarter of 1995, suggesting a growing comfort with the health of the economy. Specifically, we believe that the economy is now growing at a moderate pace that can be sustained. Higher interest rates--and we expect rates to continue to creep up as the year progresses--appear to be having the effect of keeping inflation under control. At the same time, rates have not risen so high or so quickly to suggest a disruption of economic growth. As long as long-term fixed-income markets are assured of low inflation, increases in short-term rates should not hurt the performance of the bond market. In fact, with inflation running at 3 percent or below, real (adjusted for inflation) rates of return are attractive. In March, for example, a five-year Treasury note offered a 4.50 percent real rate of return--significantly higher than the post-World War II average real rate of return of 1.40 percent. This relationship is a strong positive for fixed-income investors. MOST MARKETS REBOUNDED IN THE FIRST QUARTER Data show the 1994 and first-quarter 1995 comparative total returns for the domestic and international equity and U.S. and non-U.S. bond markets.
1ST QUARTER 1994 1995 ---- ----------- U.S. Stocks (1) 1.31% 9.73% International Stocks (2) 8.06% 1.94% U.S. Government Bonds (3) -2.85% 5.06% Non-U.S. Government Bonds (4) 5.99% 14.44%
(1) Standard & Poor's 500, an unmanaged index of common stocks that is generally considered representative of the U.S. stock market. (2) Morgan Stanley Capital International EAFE Index, an unmanaged index that is generally considered a measure of international equities in 15 major world markets excluding the U.S. and Canada. (3) Salomon Brothers Broad Investment-Grade Bond Index, including Treasury issues with a maturity of one year or longer (unmanaged). (4) Salomon Brothers World Government, Non-U.S. Governments, Index, including the performance of leading government bond markets excluding the U.S. (unmanaged). While there are continuing opportunities for investors, it is important to recognize that the economic expansion is several months into its cycle. Industries such as housing and steel, which led the economy out of the recession, cannot be expected to repeat the strong double-digit growth they enjoyed in 1994. Now that such cyclical industries have experienced most of their outperformance, we believe that investors' sights will shift to the industries that produce more consistent earnings, such as consumer nondurables, technology and selected capital goods. 1 3 Picking the right sectors to invest in will be the key challenge for equity investors during the next few quarters. Leading international economies are lagging the U.S. economy. Japan and Germany, whose economies typically follow U.S. growth, are not as robust as in past cycles. This phenomenon makes international investing very complex currently. Moreover, conditions in emerging market countries underline the importance of careful research and experience in understanding how these markets work. We are calm about what has been described as a dollar crisis. While it's true that the dollar has depreciated against the Japanese yen and many European currencies, we note that the dollar has appreciated in value against the currency of Canada and Mexico, two of our largest trading partners. Political leadership also has some bearing on the progress of the economy and the state of the financial markets. In the months preceding a presidential election year, it has not been uncommon for incumbents to attempt to stimulate growth. Given our Republican Congress and Democratic President, however, we do not consider this a foregone conclusion as we move closer to 1996. With that as an economic backdrop, we encourage you to read the following detailed report of your fund, including a question-and-answer with your fund's portfolio managers. Thank you for your continued support. We appreciate the opportunity to serve your investment needs. Sincerely, /s/ Stephen B. Timbers Stephen B. Timbers Chief Investment and Executive Officer April 10, 1995 Stephen Timbers is Chief Executive Officer and is also Chief Investment Officer of Kemper Financial Services, Inc. (KFS). KFS and its [PHOTO] affiliates manage approximately $60 billion in assets, including $42 billion in retail mutual funds. Timbers is a graduate of Yale University and holds a M.B.A. from Harvard University. * Total return measures net investment income and capital gain or loss from portfolio investments, assuming reinvestment of all dividends. During the periods noted, securities prices fluctuated. For additional information, see the Prospectus and Statement of Additional Information and the Financial Highlights at the end of this report. ** Lipper Analytical Services, Inc. performance 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. Performance and rankings are historical and do not reflect future performance. + Current annualized distribution rate is the latest monthly dividend shown as an annualized percentage of net asset value on February 28, 1995. 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, 1995 shown as an annualized percentage of the maximum offering price on that date. 2 4 Q&A AN INTERVIEW WITH PORTFOLIO MANAGERS PAT BEIMFORD & ELIZABETH BYRNES [PHOTO] J. Patrick Beimford joined Kemper Financial Services, Inc. in 1976 and is now a Vice President and Co-Portfolio Manager of the Kemper Adjustable Rate U.S. Government Fund. Mr. Beimford received a B.S.I.M. degree from Purdue University and went on to receive his M.B.A. from the University of Chicago. [PHOTO] Elizabeth Byrnes joined Kemper Financial Services, Inc. in 1982 and is now a Vice President and Co-Portfolio Manager of Kemper Adjustable Rate U.S. Government Fund. Ms. Byrnes received her B.S. degree from Miami University and is a Certified Public Accountant. Q: THE FEDERAL RESERVE RAISED SHORT-TERM INTEREST RATES AN ADDITIONAL 1.25% DURING THE SIX-MONTH PERIOD COVERED BY THIS REPORT, AS PART OF ITS GOAL OF SLOWING THE ECONOMY AND KEEPING INFLATION LOW. WHAT EFFECT DID THE FED'S ACTIONS HAVE ON THE BOND MARKET? A: Short-term interest rates rose and long-term interest rates declined in response to the Fed's 0.75% hike in the Federal funds rate in November. The magnitude of the rate hike exceeded market expectations and caused a severe flattening of the yield curve. The flattening of the curve was exacerbated as accounts liquidated short-duration assets before year-end. In January, interest rates declined as market participants predicted the Fed's tough stance on inflation would pay-off. On August 31, 1994, the yield on two-year Treasuries was 6.14%. By the end of 1994, the yield had risen to 7.70%. When we closed the six-month period on February 28, 1995, the yield on two-year Treasuries had declined to 6.75%. Q: THE FUND PRIMARILY INVESTS IN ADJUSTABLE RATE MORTGAGE SECURITIES THAT ARE ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT. HOW DID THESE SECURITIES PERFORM RELATIVE TO THE BOND MARKET? A: Adjustable rate mortgages (ARMs), whose maturities typically range from one- to three-years, outperformed Treasuries of comparable maturities. The ARM market improved when investor demand for ARMS, which was absent for most of 1994, increased dramatically in December and continued in January and February. Greater demand combined with lower supply added to the attractiveness of existing mortgage securities such as ARMS. Q: HOW DID YOU MANAGE THE FUND GIVEN THESE DEVELOPMENTS IN THE BOND MARKET? A: As you know, we continually monitor and evaluate trends in the bond market so that we can pursue opportunities as they arise. This being the case, we adjusted the fund's allocation between ARMs and short-term Treasuries throughout the period. For example, in September, we began to reduce the fund's 92% position in ARMs. This was because we anticipated that investors would take losses on their investments prior to year-end, and that this selling pressure would cause mortgage yields to rise relative to Treasury yields. By November 30, ARMs were down to 77% of assets. This reduction in ARMs also served to shorten the fund's duration. Duration is a measurement of a portfolio's sensitivity to interest rates and is based, in part, on the average maturity of bonds within a portfolio. The shorter a fund's duration the lower its sensitivity to interest rate changes. Because our outlook was for short-term interest rates to continue to rise prior to the Fed's meeting in November, we shortened the fund's duration to under one year. Interest rates did in fact rise and so a shorter duration helped protect the fund's holdings, and therefore its net asset value. In December, our outlook for ARMs improved, and we began to reinvest in this sector. By the end of February, 98% of the portfolio was invested in ARMs. This higher allocation increased duration to slightly over one year, and helped the fund since mortgages outperformed short-term Treasuries in early 1995 and interest rates declined. 3 5 "OVERALL, OUR STRATEGY OF MAINTAINING A SHORTER DURATION AT THE BEGINNING OF THE PERIOD AND EXTENDING DURATION IN THE FINAL MONTHS WAS FAIRLY WELL TIMED, SINCE THE TREASURY YIELD CURVE STEEPENED DURING THE FIRST THREE MONTHS OF THE PERIOD AND LATER FLATTENED." Q: HOW DID THESE STRATEGIES WORK FOR THE FUND? A: For the six-month period, the fund's Class A shares advanced 1.91% while its Lipper peer group average declined 0.91% on average. Overall, our strategy of maintaining a shorter duration at the beginning of the period and extending duration in the final months was fairly well timed, since the Treasury yield curve steepened during the first three months of the period and later flattened. The fund underperformed in December because of a lower weighting in ARMs than its peers. However, it had exceptionally strong performance in January because its duration was slightly longer than its peer group during a time when interest rates declined. Q: DO YOU THINK RATES WILL CONTINUE TO RISE, AND IF SO, HOW IS THE FUND POSITIONED TO BUFFER THE EFFECTS? A: While the Fed's recent statements and actions show it taking a tough stance on inflation, it is also true that the Fed must avoid raising rates so high that the economy goes back into recession. The Fed has shown that it will seek to stabilize rates when it is satisfied that the economy is growing at a steady rate of approximately 2.5% and that inflation is under control. We expect the Fed to tighten at least one more time during the first part of 1995. Yet, we believe that another year of rate hikes as severe as 1994 is unlikely. The newly Republican controlled Congress also has important implications for our interest rate outlook. The Republicans have promised to sponsor a mandate to cut taxes, reduce government spending and the government budget deficit. These changes would put downward pressure on interest rates and be positive for the bond market. We think the fund is positioned well for the remainder of 1995. Adjustable rate mortgages, the fund's primary investment, tend to perform well in stable to rising rate environments. These securities usually adjust at least once a year. Currently, the average reset of the fund's holdings is 6.5 months. Because these securities reset, they are able to adjust more quickly to prevailing interest rates, and as a result tend to have less price movement than securities with longer maturities. This is why the fund was able to raise its dividend in 6 out of the past 6 months, while its net asset value was relatively unchanged. Q: GIVEN THE FED'S ACTIONS SO FAR, WHAT IS YOUR OUTLOOK FOR INFLATION AND THE BOND MARKET IN 1995? A: We think that 1995 will continue to be another challenging year for the bond market as both the Fed and investors continue to be on guard for an increase in inflation. Nevertheless, our outlook for 1995 is positive. The Fed's tightening throughout 1994 should moderate growth in 1995 to a level well below that of 1994. In the past, the Fed has waited for signs of inflation to emerge before it has moved to raise interest rates. In this case the Fed has raised rates in anticipation of a rise in inflation. Because of this vigilant, preemptive strategy, few people expect that the rise in inflation will be significant. This should benefit bond holders in the long run. 4 6 KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND PORTFOLIO OF INVESTMENTS February 28, 1995 (Dollars in thousands) U.S. GOVERNMENT OBLIGATIONS
Coupon Principal FEDERAL HOME LOAN MORTGAGE CORPORATION--58.9% Rate Maturity Amount Value ------------ -------- --------- -------- (Cost: $91,843) - - --------------------------------------------------------------------------------------------------------------------------------- Adjustable Rate Mortgages 7.485-7.525% 2018 $ 6,741 $ 6,929 - - --------------------------------------------------------------------------------------------------------------------------------- 7.308 2019 9,185 9,440 - - --------------------------------------------------------------------------------------------------------------------------------- 7.626 2020 4,127 4,225 - - --------------------------------------------------------------------------------------------------------------------------------- 7.61 2021 2,985 3,054 - - --------------------------------------------------------------------------------------------------------------------------------- 6.183-7.527 2022 52,186 52,978 - - --------------------------------------------------------------------------------------------------------------------------------- 6.128-7.629 2023 7,458 7,551 - - --------------------------------------------------------------------------------------------------------------------------------- Collateralized Mortgage Obligations Fixed Rate 10.00 1995 2,000 2,021 - - --------------------------------------------------------------------------------------------------------------------------------- 11.25 2010 516 561 - - --------------------------------------------------------------------------------------------------------------------------------- 11.00 2014 341 365 - - --------------------------------------------------------------------------------------------------------------------------------- Floating Rate 6.625 1997 4,375 4,358 - - --------------------------------------------------------------------------------------------------------------------------------- 91,482 FEDERAL NATIONAL MORTGAGE ASSOCIATION--11.6% (Cost: $17,997) - - --------------------------------------------------------------------------------------------------------------------------------- Adjustable Rate Mortgages 6.446-6.909 2021 5,066 5,191 - - --------------------------------------------------------------------------------------------------------------------------------- 7.493 2022 7,637 7,735 - - --------------------------------------------------------------------------------------------------------------------------------- 7.149 2023 5,085 5,182 - - --------------------------------------------------------------------------------------------------------------------------------- 18,108 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--28.3% (Cost: $43,299) - - --------------------------------------------------------------------------------------------------------------------------------- Adjustable Rate Mortgages 7.50 2024 9,974 10,214 - - --------------------------------------------------------------------------------------------------------------------------------- 6.50-8.00 2025 32,390 33,076 - - --------------------------------------------------------------------------------------------------------------------------------- Pass-through Certificates 11.00 2018 579 629 - - --------------------------------------------------------------------------------------------------------------------------------- 43,919 U.S. TREASURY NOTES--10.4% (Cost: $16,483) - - --------------------------------------------------------------------------------------------------------------------------------- 11.25 1995 10,000 10,106 - - --------------------------------------------------------------------------------------------------------------------------------- 9.25 1996 6,000 6,141 - - --------------------------------------------------------------------------------------------------------------------------------- 16,247 RESOLUTION TRUST CORPORATION--1.4% (Cost: $2,251) - - --------------------------------------------------------------------------------------------------------------------------------- Adjustable Rate Mortgages 7.213 2021 2,244 2,210 - - --------------------------------------------------------------------------------------------------------------------------------- MONEY MARKET INSTRUMENT--4.5% Enserch Corporation Yield-6.148% Due-March 1995 (Cost: $6,969) 7,000 6,969 - - --------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS--115.1% (Cost: $178,842) 178,935 - - --------------------------------------------------------------------------------------------------------------------------------- LIABILITIES LESS OTHER ASSETS--(15.1)% (23,542) - - --------------------------------------------------------------------------------------------------------------------------------- NET ASSETS--100% $155,393 - - ---------------------------------------------------------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS Based on the cost of investments of $178,842,000 for federal income tax purposes at February 28, 1995 the aggregate gross unrealized appreciation was $1,124,000, the aggregate gross unrealized depreciation was $1,031,000 and the net unrealized appreciation of securities was $93,000. See accompanying Notes to Financial Statements. 5 7 STATEMENT OF ASSETS AND LIABILITIES February 28, 1995 (in thousands) ASSETS - - ------------------------------------------------------- Investments, at value (Cost: $178,842) $178,935 - - ------------------------------------------------------- Receivable for: Fund shares sold 12 - - ------------------------------------------------------- Investments sold 13,388 - - ------------------------------------------------------- Interest 1,929 - - ------------------------------------------------------- Total assets 194,264 - - ------------------------------------------------------- LIABILITIES AND NET ASSETS - - ------------------------------------------------------- Cash overdraft 5,536 - - ------------------------------------------------------- Payable for: Fund shares redeemed 271 - - ------------------------------------------------------- Investments purchased 32,846 - - ------------------------------------------------------- Management fee 75 - - ------------------------------------------------------- Administrative services fee 24 - - ------------------------------------------------------- Custodian and transfer agent fees and related expenses 80 - - ------------------------------------------------------- Other 39 - - ------------------------------------------------------- Total liabilities 38,871 - - ------------------------------------------------------- Net assets $155,393 - - ------------------------------------------------------- ANALYSIS OF NET ASSETS - - ------------------------------------------------------- Excess of amounts received from issuance of shares over amounts paid on redemptions of shares on account of capital $165,957 - - ------------------------------------------------------- Accumulated net realized loss on sales of investments (11,890) - - ------------------------------------------------------- Unrealized appreciation of investments 93 - - ------------------------------------------------------- Undistributed net investment income 1,233 - - ------------------------------------------------------- Net assets applicable to shares outstanding $155,393 - - ------------------------------------------------------- THE PRICING OF SHARES - - ------------------------------------------------------- CLASS A SHARES Net asset value and redemption price per share ($149,309,748 / 18,085,593 shares outstanding) $8.26 - - ------------------------------------------------------- Maximum offering price per share (net asset value, plus 3.63% of net asset value or 3.50% of offering price) $8.56 - - ------------------------------------------------------- CLASS B SHARES Net asset value, offering price and redemption price (subject to contingent deferred sales charge) per share ($4,878,606 / 590,978 shares outstanding) $8.26 - - ------------------------------------------------------- CLASS C SHARES Net asset value, offering price and redemption price per share ($1,204,536 / 145,754 shares outstanding) $8.26 - - ------------------------------------------------------- See accompanying Notes to Financial Statements.
STATEMENT OF OPERATIONS Six months ended February 28, 1995 (in thousands) INTEREST INCOME $ 5,933 - - ------------------------------------------------------- EXPENSES - - ------------------------------------------------------- Management fee 485 - - ------------------------------------------------------- Administrative services fee 164 - - ------------------------------------------------------- Distribution services fee 21 - - ------------------------------------------------------- Custodian and transfer agent fees and related expenses 224 - - ------------------------------------------------------- Professional fees 16 - - ------------------------------------------------------- Reports to shareholders 30 - - ------------------------------------------------------- Trustees' fees and other 4 - - ------------------------------------------------------- 944 - - ------------------------------------------------------- Net investment income 4,989 - - ------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS - - ------------------------------------------------------- Net realized loss on sales of investments (3,236) - - ------------------------------------------------------- Net realized loss from futures transactions (362) - - ------------------------------------------------------- Net realized loss (3,598) - - ------------------------------------------------------- Net change in balance of unrealized depreciation of investments 1,412 - - ------------------------------------------------------- Net loss on investments (2,186) - - ------------------------------------------------------- Net increase in net assets resulting from operations $ 2,803 - - -------------------------------------------------------
6 8 STATEMENT OF CHANGES IN NET ASSETS (in thousands)
Six months ended Year ended February 28, August 31, 1995 1994 ------------ ---------- OPERATIONS - - --------------------------------------------------------- Net investment income $ 4,989 8,947 - - --------------------------------------------------------- Net realized loss on investments (3,598) (4,926) - - --------------------------------------------------------- Net change in unrealized depreciation 1,412 (2,831) - - --------------------------------------------------------- Net increase in net assets resulting from operations 2,803 1,190 - - --------------------------------------------------------- Net equalization (charges) credits (369) 36 - - --------------------------------------------------------- Distribution from net investment income (4,750) (10,570) - - --------------------------------------------------------- Net decrease from capital share transactions (45,106) (535) - - --------------------------------------------------------- Total decrease in net assets (47,422) (9,879) - - --------------------------------------------------------- NET ASSETS - - --------------------------------------------------------- Beginning of period 202,815 212,694 - - --------------------------------------------------------- End of period $155,393 202,815 - - --------------------------------------------------------- Undistributed net investment income at end of period $ 1,233 1,363 - - ---------------------------------------------------------
See accompanying Notes to Financial Statements. NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF THE FUND The Fund currently offers three 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 or a contingent deferred sales charge but are subject to higher ongoing expenses than Class A shares and do not convert into another class. The Fund may offer Class I shares and no such shares are outstanding as of February 28, 1995. Each share represents an identical interest in the investments of the Fund and has the same rights. 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 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 premium and discount amortization of money market instruments and mortgage-backed securities; it also includes original issue and market discount amortization on long-term fixed income securities. Realized gains and losses from investment transactions are reported on an identified cost basis. Realized and unrealized gains and losses on financial futures and options are included in net realized and unrealized gain (loss) on investments, as appropriate. 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 designate cash or other liquid assets equal to the value of the securities purchased. At February 28, 1995 the Fund had $27,782,000 in purchase commitments 7 9 outstanding (18% of net assets) with a corresponding amount of assets designated. 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 shares will be reduced by the amount of any applicable contingent deferred sales charge. On each day the New York Stock Exchange is open for trading, the net asset value per share is determined as of the earlier of 3:00 p.m. Chicago time or the close of the Exchange. The net asset value per share is determined separately for each class by dividing the Fund's net assets attributable to that class by the number of shares of the class outstanding. FEDERAL INCOME TAXES AND DIVIDENDS TO SHAREHOLDERS The Fund has complied with the special provisions of the Internal Revenue Code available to investment companies and therefore no federal income tax provision is required. The accumulated net realized loss on sales of investments for federal income tax purposes at February 28, 1995, amounting to approximately $11,883,000, is available to offset future taxable gains. If not applied, the loss carryover expires during the period 1997 through 2003. Differences in dividends per share are due to different class expenses. Dividends payable to its shareholders are recorded by the Fund on the ex-dividend date. On March 15, 1995, the following per share dividends were declared, payable March 31, 1995 to shareholders of record on March 16, 1995.
Class A Class B Class C - - ---------------------------------------------------------------- Income $.042 $.0355 $.0364 - - ----------------------------------------------------------------
Distributions are determined in accordance with income tax principles which may treat certain transactions differently from generally accepted accounting principles. EQUALIZATION ACCOUNTING A portion of proceeds from sales and cost of redemptions of Fund shares is credited or charged to undistributed net investment income so that income per share available for distribution is not affected by sales or redemptions of shares. 3. TRANSACTIONS WITH AFFILIATES MANAGEMENT AGREEMENT The Fund has a management agreement with Kemper Financial Services, Inc. (KFS) and pays a management fee at an annual rate of .55% of the first $250 million of average daily net assets declining gradually to .40% of average daily net assets in excess of $12.5 billion. For the six months ended February 28, 1995 the Fund paid a management fee of $485,000. UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT The Fund has an underwriting and distribution services agreement with Kemper Distributors, Inc. (KDI). Before February 1, 1995, KFS was the Fund's principal underwriter and distributor. As principal underwriter for the Fund, KDI (as successor to KFS) retained commissions of $18,000 for the six months ended February 28, 1995 for sales of Class A shares, after allowing $87,000 as commissions to retail firms, of which $28,000 was paid to firms affiliated with KDI. 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 firms that provide distribution services to investors. KDI compensates these firms at various rates for sales of Class B and Class C shares. During the six months ended February 28, 1995, the Fund incurred a distribution services fee for Class B and Class C shares of $21,000, and KDI paid $88,000 for commissions and distribution fees to firms, including $39,000 to firms affiliated with KDI. In addition, KDI received $17,000 of contingent deferred sales charges. ADMINISTRATIVE SERVICES AGREEMENT The Fund has an administrative services agreement with KDI. Before February 1, 1995, KFS was the Fund's administrator. For providing information and administrative services to shareholders, the Fund pays KDI a fee at an annual rate of up to .25% of average daily net assets. KDI in turn has various arrangements with financial services firms that provide these services and pays these firms based on assets of Fund accounts the firms service. For the six months ended February 28, 1995, the Fund incurred an administrative services fee of $164,000 and KDI (as successor to KFS) paid $174,000 to firms, including $42,000 that was paid to firms affiliated with KDI. CUSTODIAN AND TRANSFER AGENT AGREEMENTS The Fund has a custodian agreement and a transfer agent agreement with Investors Fiduciary Trust Company (IFTC), which was 50% owned by KFS until January 31, 1995, when KFS completed the sale of IFTC to a third party. For the six months ended February 28, 1995, the Fund incurred custodian and transfer agent fees of $200,000 (excluding related expenses). Pursuant to a services' agreement with IFTC, Kemper Service Company (KSvC), an affiliate of KFS, is the shareholder service agent of the Fund. For the six months ended February 28, 1995, IFTC remitted shareholder service fees of $208,000 to KSvC. OFFICERS AND TRUSTEES Certain officers or trustees of the Fund are also officers or directors of KFS. For the six months ended February 28, 1995, the Fund made no payments to its officers and incurred trustees' fees of $4,000 to independent trustees. 8 10 4. INVESTMENT TRANSACTIONS For the six months ended February 28, 1995, investment transactions (excluding short term instruments) are as follows (in thousands): Purchases $327,157 - - ------------------------------------------------------------ Proceeds from sales 356,285 - - ------------------------------------------------------------
5. CAPITAL SHARE TRANSACTIONS The following table summarizes the activity in capital shares of the Fund (in thousands):
Six months ended February 28, Year ended 1995 August 31, 1994 ----------------- ------------------- Shares Amount Shares Amount ------ -------- ------- --------- Shares sold: Class A 3,056 $ 23,961 13,585 $ 114,850 - - ------------------------------------------------------------------ Class B 436 3,584 492 4,113 - - ------------------------------------------------------------------ Class C 91 747 116 973 - - ------------------------------------------------------------------ Shares issued in reinvestment of dividends: Class A 393 3,224 892 7,682 - - ------------------------------------------------------------------ Class B 10 84 1 14 - - ------------------------------------------------------------------ Class C 3 25 -- -- - - ------------------------------------------------------------------ Shares redeemed: Class A (9,155) (73,721) (15,198) (127,781) - - ------------------------------------------------------------------ Class B (317) (2,604) (31) (261) - - ------------------------------------------------------------------ Class C (49) (406) (15) (125) - - ------------------------------------------------------------------ Net decrease from capital share transactions $(45,106) $ (535) - - ------------------------------------------------------------------
9 11 FINANCIAL HIGHLIGHTS
Class A ---------------------------------------------------------------------------- Six months July 1, ended Year ended August 31, 1991 to Year ended February 28, --------------------------- August 31, June 30, 1995 1994 1993 1992 1991 1991 ------------ ----- ---- ---- ---------- ---------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $8.33 8.68 8.63 8.37 8.21 8.21 - - --------------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income .23 .34 .47 .63 .13 .79 - - --------------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (.08) (.29) .02 .22 .17 .02 - - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations .15 .05 .49 .85 .30 .81 - - --------------------------------------------------------------------------------------------------------------------------------- Less distribution from net investment income .22 .40 .44 .59 .14 .81 - - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $8.26 8.33 8.68 8.63 8.37 8.21 - - --------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (%): 1.91 .59 5.87 10.56 3.62 10.33 - - --------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS (%): Expenses 1.05 .93 .21 .28 1.09 1.07 - - --------------------------------------------------------------------------------------------------------------------------------- Net investment income (loss) 5.68 3.96 5.44 7.02 9.45 9.62 - - ---------------------------------------------------------------------------------------------------------------------------------
Class B Class C ----------------------------- ----------------------------- Six months May 31, Six months May 31, ended 1994 to ended 1994 to February 28, August 31, February 28, August 31, 1995 1994 1995 1994 ------------ ---------- ------------ ---------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $8.32 8.37 $ 8.33 8.37 - - --------------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income .20 .07 .20 .08 - - --------------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized loss on investments (.08) (.04) (.08) (.04) - - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations .12 .03 .12 .04 - - --------------------------------------------------------------------------------------------------------------------------------- Less distribution from net investment income .18 .08 .19 .08 - - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $8.26 8.32 $ 8.26 8.33 - - --------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN (%): 1.56 .34 1.47 .47 - - --------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS (%): Expenses 1.82 1.96 1.83 1.88 - - --------------------------------------------------------------------------------------------------------------------------------- Net investment income 4.95 3.36 4.94 3.52 - - ---------------------------------------------------------------------------------------------------------------------------------
Six months July 1, ended Year ended August 31, 1991 to Year ended February 28, ------------------------------------ August 31, June 30, SUPPLEMENTAL DATA FOR ALL CLASSES: 1995 1994 1993 1992 1991 1991 ------------ -------- ------- ------- ---------- ---------- Net assets at end of period (in thousands) $155,393 202,815 212,694 174,967 76,749 75,012 - - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (%) 368 533 138 309 228 259 - - ---------------------------------------------------------------------------------------------------------------------------------
NOTES: KFS agreed to waive its management fee and absorb certain operating expenses of the Fund through December 31, 1992. Thereafter, these expenses were gradually reinstated through January 31, 1994. Without this agreement, the ratio of expenses to average net assets and the ratio of net investment income to average net assets for Class A shares would have been .99% and 3.90%, respectively, for the year ended August 31, 1994, .95% and 4.71%, respectively, for the year ended August 31, 1993, and .90% and 6.40%, respectively, for the year ended August 31, 1992. Ratios have been determined on an annualized basis. Total return is not annualized and does not reflect the effect of any sales charges. 10 12 [KEMPER LOGO] KEMPER FINANCIAL SERVICES, INC. 120 South LaSalle Street Chicago, IL 60603 KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND Trustees Officers STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR. President and Trustee Vice President DAVID W. BELIN ELIZABETH A. BYRNES Trustee Vice President LEWIS A. BURNHAM JOHN E. PETERS Trustee Vice President DONALD L. DUNAWAY PHILIP J. COLLORA Trustee Vice President and Secretary ROBERT B. HOFFMAN CHARLES F. CUSTER Trustee Vice President and Assistant Secretary DONALD R. JONES JEROME L. DUFFY Trustee Treasurer DAVID B. MATHIS ELIZABETH C. WERTH Trustee Assistant Secretary WILLIAM P. SOMMERS Trustee - - ----------------------------------------------------------- Legal Counsel Custodian and Transfer Agent VEDDER, PRICE, KAUFMAN INVESTORS FIDUCIARY & KAMMHOLZ TRUST COMPANY 222 North LaSalle Street 127 West 10th Street Chicago, IL 60601 Kansas City, MO 64105 Shareholder Service Agent KEMPER SERVICE COMPANY P.O. Box 419557 Kansas City, MO 64141 800-621-1048 Investment Manager KEMPER FINANCIAL SERVICES, INC. Principal Underwriter KEMPER DISTRIBUTORS, INC. 120 South LaSalle Street Chicago, IL 60603 [RECYCLED PAPER LOGO] Printed on Recycled Paper This report is not to be distributed unless 237860 KARGF-3 (4/95) preceded or accompanied Printed in by a Kemper Fixed Income Funds prospectus the U.S.A. -----END PRIVACY-ENHANCED MESSAGE-----