-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Byxp120lFyAdKNYmKbJCU1aFceHbxpPHRzXPAmUxFbYuoxCsmQQKq+46AV5rz40E 9wK3CMU1yZ5n+vxxU+YW5Q== 0000950124-96-001904.txt : 19960503 0000950124-96-001904.hdr.sgml : 19960503 ACCESSION NUMBER: 0000950124-96-001904 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960229 FILED AS OF DATE: 19960502 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEMPER ADJUSTABLE RATE U S GOVERNMENT FUND CENTRAL INDEX KEY: 0000814955 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [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: 96555187 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 KEMPER ADJ. RATE U.S. GOVT FUND - SAR 1 KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND SEMIANNUAL REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED FEBRUARY 29, 1996 OFFERING INVESTORS THE OPPORTUNITY FOR HIGH CURRENT INCOME CONSISTENT WITH LOW VOLATILITY OF PRINCIPAL "...To reduce the fund's exposure to prepayments, we added Treasuries [to the portfolio]. " 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 15 Financial Highlights AT A GLANCE - ---------------------------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND TOTAL RETURNS - ---------------------------------- FOR THE SIX-MONTH PERIOD ENDED FEBRUARY 29, 1996 (UNADJUSTED FOR ANY SALES CHARGE) - ---------------------------------------------------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS A 2.81% - ---------------------------------------------------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS B 2.44% - ---------------------------------------------------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS C 2.44% - ---------------------------------------------------------- LIPPER ADJUSTABLE RATE MORTGAGE FUNDS CATEGORY AVERAGE** 1.31% - ----------------------------------------------------------
- ---------------------------------------------------------- NET ASSET VALUE - ---------------------------------------------------------- AS OF AS OF 2/29/96 8/31/95 - ---------------------------------------------------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS A $8.30 $8.30 - ---------------------------------------------------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS B $8.31 $8.31 - ---------------------------------------------------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS C $8.32 $8.32 - ----------------------------------------------------------
- ----------------------------------------------------------------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND RANKINGS** - ----------------------------------------------------------------------- COMPARED TO ALL OTHER FUNDS IN THE LIPPER ADJUSTABLE RATE MORTGAGE FUNDS CATEGORY CLASS A CLASS B CLASS C - ----------------------------------------------------------------------- 1-YEAR #36 OF #48 OF #47 OF 64 FUNDS 64 FUNDS 64 FUNDS - ----------------------------------------------------------------------- 5-YEAR #2 OF 7 N/A N/A - -----------------------------------------------------------------------
**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. Returns and rankings are historical and do not reflect future performance.
- ---------------------------------------------------------------- DIVIDEND REVIEW - ---------------------------------------------------------------- THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND AS OF FEBRUARY 29, 1996. CLASS A CLASS B CLASS C - ---------------------------------------------------------------- SIX-MONTHS INCOME: $0.2318 $0.2006 $0.2015 - ---------------------------------------------------------------- FEBRUARY DIVIDEND: $0.0375 $0.0324 $0.0323 - ---------------------------------------------------------------- ANNUALIZED DISTRIBUTION RATE+: 5.42% 4.68% 4.66% - ---------------------------------------------------------------- SEC YIELD+: 4.68% 4.14% 4.12% - ----------------------------------------------------------------
+Current annualized distribution rate is the latest monthly dividend shown as an annualized percentage of net asset value on February 29, 1996. 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 29, 1996, 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 AVERAGE ANNUAL TOTAL RETURN Average annual total return is a fund's total return expressed as an annualized average, adjusted for the maximum sales charge for Class A shares or the applicable contingent deferred sales charge in effect at the end of the period for Class B and C shares. ADJUSTABLE RATE MORTGAGES (ARMS) ARMs are mortgages whose interest rates adjust periodically based on changes to a corresponding index rate. To protect the borrower from 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 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 the period, assuming the reinvestment of all dividends. It represents the aggregate percentage or dollar value change over the period. 3 GENERAL ECONOMIC OVERVIEW [TIMBERS PHOTO] STEPHEN B. TIMBERS IS PRESIDENT, CHIEF EXECUTIVE AND CHIEF INVESTMENT OFFICER OF ZURICH KEMPER INVESTMENTS,(ZKI) INC. ZKI AND ITS AFFILIATES MANAGE APPROXIMATELY $79 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: Last year -- a year in which both the equity and the fixed-income markets produced strong above-average returns -- will be a difficult year to follow. However, based on what we see a few months into the new year, we believe 1996 also will be capable of rewarding investors. Unlike last year, however, we expect there will be more volatility from markets and a wider range of winners and losers in 1996. This is the time for careful decision-making. What has changed? We continue to experience low interest rates, an acceptable rate of economic growth and low inflation. Although certain government reports have been late in coming due to the federal government shutdown, there's little in the economic data that suggests cause for concern. Yet, this year we must begin to consider the possibility of a recession within the next 24 months. We have enjoyed one of the longest economic expansions in the 20th century. By virtue of the length of the expansion alone, it is reasonable to expect a bumpier road ahead with spurts and pockets of strength followed by potholes. Moreover, recessions can be triggered by a surprise not forecastable by current available data. It could take the form of political turmoil in the Middle East, instability in Russia or even a further downturn in Japan's economic health. Any type of surprise has the potential to reverse the growth we have become accustomed to. Having enjoyed an almost uninterrupted climb in 1995, the markets also are vulnerable to correction. A key reason that stock prices have been rising is that there have been large cash flows directed to the market. Whenever positive liquidity is the driving force in the market -- as opposed to investors' reactions to individual companies' fundamentals -- one has to be cautious. Moreover, corporate earnings will not continue to grow at their earlier, breakneck paces. In 1996, we expect profit growth to be in the single-digit. Despite all, at this point early in the year, we think the stock market has the potential to return close to its historical average of about 10 percent.+ Remember, of course, that in the first quarter alone the Standard & Poor's 500 Stock Index gained 5.37 percent. Our forecast assumes added stock market volatility this year. Our equities forecast assumes some help from the bond market. As you know, the Federal Reserve Board began to ease short-term interest rates last year and may ease again if weak economic data appears. The widening relationship between short- and long-term rates at this point in the economic cycle is an intriguing one, and one that would argue against a recession forecast. Short-term interest rates are generally falling. Yet, rates usually rise in an economy headed toward recession. As is typical after a strong year in the domestic markets, many investors will be looking overseas for superior return opportunities in 1996. This move makes good sense to us, as well. Foreign economies' expansions often follow the U.S. In fact, improvement abroad could help sustain this country's expansion as it could boost the demand for exports. The value of the dollar, having had a roller coaster year in 1995, should settle down. Strength in foreign markets could boost those countries' currencies, which would bring an end to the current dollar rally later this year. As we head toward the November presidential elections, we can expect continued discussion from both political parties about balancing the federal budget and related taxation issues. Frankly, we see the candidates as waging a war in sameness -- there will be little difference between the Republican primary platform and what President Bill Clinton has committed to about a balanced budget. Economically as well as socially, the trend in government is toward conservativism. 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 April 1, 1996 +SOURCE: BASED UPON THE AVERAGE OF THE STANDARD & POOR'S 500 (S&P 500) STOCK INDEX SINCE 1928 (TOWERS DATA SYSTEMS). THIS DATA IS HISTORICAL AND DOES NOT REFLECT FUTURE RESULTS. THE S&P 500 IS AN UNMANAGED INDEX GENERALLY REPRESENTATIVE OF THE U.S. STOCK MARKET. 3 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. [BAR GRAPH]
Now (2/29/96) 6 Months Ago 1 year ago 2 years ago 10-year Treasury rate(1) 5.65 6.49 7.47 5.97 Prime rate(2) 8.50 8.75 9.00 6.00 Inflation rate(3) 2.60 2.90 2.87 2.52 The U.S. dollar(4) -0.57 -4.11 -5.54 -0.07 Capital goods orders(5) 11.63 7.10 23.00 15.48 Industrial production(6) 0.07 3.17 5.41 4.21 Employment growth(7) 1.18 2.03 3.15 2.49
1 Falling interest rates in recent years have been a big plus for financial assets. 2 The interest rate that commercial lenders charge their best borrowers. 3 Inflation reduces an investor's real return. In the last five years, inflation has been as high as 6%. The low, moderate inflation of the last few years has meant 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. 4 5 PERFORMANCE UPDATE [BEIMFORD PHOTO] J. PATRICK BEIMFORD JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN 1976 AND IS NOW EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER - FIXED INCOME. HE IS ALSO PORTFOLIO CO-MANAGER OF KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND. BEIMFORD RECEIVED A BACHELOR OF SCIENCE AND INDUSTRIAL MANAGEMENT DEGREE FROM PURDUE UNIVERSITY AND WENT ON TO RECEIVE AN M.B.A. FROM THE UNIVERSITY OF CHICAGO. [BYRNES PHOTO] ELIZABETH BYRNES JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN 1982 AND IS FIRST VICE PRESIDENT OF ZKI AND PORTFOLIO CO-MANAGER OF KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND. BYRNES RECEIVED A B.S. DEGREE FROM MIAMI UNIVERSITY AND IS A CERTIFIED PUBLIC ACCOUNTANT. THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGEMENT TEAM ONLY THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER CONDITIONS. KEMPER ADJUSTABLE RATE GOVERNMENT FUND PORTFOLIO CO-MANAGERS J. PATRICK BEIMFORD AND ELIZABETH BYRNES EXPLAIN THE POLITICAL AND ECONOMIC EVENTS THAT FUELED A STRONG BOND MARKET RALLY AND MORTGAGE PREPAYMENT FEARS DURING THE FIRST PART OF THE FUND'S FISCAL YEAR. THEY DISCUSS HOW THEY ADJUSTED THE FUND'S INVESTMENT IN TREASURIES AND ADJUSTABLE RATE MORTGAGES TO ENHANCE TOTAL RETURN, WHILE MANAGING MORTGAGE PREPAYMENT RISK. Q. FALLING INTEREST RATES, SLOW ECONOMIC GROWTH, AND RELATIVELY LOW INFLATION CHARACTERIZED THE FIRST SIX MONTHS OF THE FUND'S FISCAL YEAR -- SEPTEMBER 1, 1995, THROUGH FEBRUARY 29, 1996. WHAT DID THIS MEAN FOR THE FUND'S INVESTMENTS? A. The interest rate environment for the six month period was positive for the fund's investments. The market rallied from September 1995, through the middle of February 1996. Rates fell dramatically, both from optimism that a federal budget agreement would occur and that the Federal Reserve Board would continue to lower short-term rates. In addition, economic indicators suggested that the economy, although growing, was not likely to gain much momentum or move above a non-inflationary growth rate. All of these factors created a favorable climate for the government market, and Treasuries in particular. So favorable, that by the end of February 1996, the yield on one-year and two-year Treasuries declined to 5.22 percent and 5.42 percent, respectively. At the start of the fiscal year, the yields were 5.63 percent for the one-year Treasury and 5.85 percent for the two-year Treasury. Anticipating this rally, we had increased Treasuries to 28 percent of the portfolio in September 1995, from 8 percent in August 1995, and reduced the fund's adjustable rate mortgages (ARMs). Treasuries, at that point, offered more total return potential than ARMs, whose value was threatened by concerns of mortgage prepayments. At least 25 percent of the portfolio remained invested in Treasuries until January, when we believed that the rally might be winding down. As it turned out, the timing of our move out of Treasuries was a little early. It wasn't until February that the rally began losing steam. A stalemate locked budget negotiations and some indicators suggested stronger economic growth was on the horizon. Although the Fed had cut short-term interest rates twice -- in December and January -- other interest rates started to backup (rise). The reason for the backup was that the market had previously priced in a budget resolution and a weaker economy, which pushed market rates even lower. In January and February, some data indicated that the economy was improving. Moreover, the start of the Republican party presidential primaries overshadowed the focus on federal budget negotiations. As a result, the market's previous economic optimism faded, causing a rise in market yields. Prepayment fears subsided as yields began to rise, once again making ARMs a more appealing investment than Treasuries for the fund. 5 6 PERFORMANCE UPDATE Q. HOW DID YOU MANAGE THE FUND'S MORTGAGE PREPAYMENT RISK AS INTEREST RATES FELL DURING THE PERIOD? A. The risk of prepayments is always more prevalent when rates fall because borrowers are likely to refinance into fixed-rate mortgages or teaser rate ARMs. As this happens, ARMs with higher interest rates are paid off early and the proceeds are reinvested at lower market rates. To reduce the fund's exposure to prepayments, we added Treasuries, which provided solid price appreciation and accounted for approximately one quarter of the fund's investments. We also continued to buy teaser rate and Government National Mortgage Association (GNMA) ARMs. This mortgage strategy was one that we had adopted at the start of the bond market rally in Spring 1995. GNMA ARMs are securities with longer durations. Duration is a measurement of a portfolio's sensitivity to interest rates. The longer the fund's duration, the more sensitive it is to interest rate changes. Buying these securities was consistent with our bullish outlook that the economy would continue its slowdown and that interest rates would continue to fall. Teaser rate ARMs also perform well in such an environment because they carry below market or "teaser" rates. The low rates are offered to attract borrowers to an adjustable rather than a fixed-rate mortgage and remain in place until the ARM's first interest rate reset date. At that time, the mortgage adjusts to a higher market rate. When rates fall, teaser rate mortgages offer superior returns because they have longer durations and are less susceptible to prepayments than other types of ARMs that carry higher mortgage rates. Q. WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE PORTFOLIO AS INTEREST RATES BEGAN TO RISE IN FEBRUARY 1996? A. As mentioned earlier, in January 1996, we began selling Treasuries to reduce duration and increase the fund's holdings in ARMs. By selling Treasuries at that point, the fund benefited from a great deal of price appreciation. As rates started to backup in February, fears of mortgage prepayments began to fade, making ARMs more appealing investments. In February, we began purchasing current coupon ARMs. As the name suggests, current coupon ARMs (also called fully-indexed ARMs) pay the current interest rate available in the market at the time of their issue. Current coupon ARMs are attractive investments when interest rates are stable or rising because they have shorter durations than GNMA or teaser rate ARMs. Because of their shorter duration, they reset to market rates more frequently and therefore provide competitive rates of income. Q. THE FUND'S DIVIDEND WAS REDUCED DURING THE PERIOD. WAS THIS A FACTOR OF THE LOWER INTEREST RATE ENVIRONMENT? A. Dividend distributions are dependent on the fund's earnings. As mentioned earlier, Treasuries represented approximately 25 percent of the fund's portfolio for three months of the period. When we sold the fund's higher coupon ARMs to invest in Treasuries, we reduced the fund's income. However, we were willing to trade that income potential to avoid the risk of prepayments and the possibility of a lower total return. Q. WHAT'S YOUR OUTLOOK FOR THE ARM MARKET AND KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND IN PARTICULAR? A. We believe that 1996 will be a good year for the market and the fund. Our outlook is for moderate growth with low inflation. We anticipate a more stable interest rate environment this year, which should be positive for the fund, and ARMs in particular. Last year, Treasuries provided a great deal of price appreciation due to the declining interest rate environment. This year we expect total return to come primarily from the income generated by ARMs, the fund's core investments. Q. WHAT COULD THREATEN YOUR OUTLOOK? A. There would need to be a major change in economic fundamentals to change our outlook at this point. If interest rates begin to rise quickly, we'd need to adjust our strategy. We'd shorten the fund's duration and favor investments that reset to market rates more frequently. On the other hand, if rates began to fall again, we'd increase the fund's Treasury holdings again to increase its total return potential. 6 7 PORTFOLIO STATISTICS
- ------------------------------------------------------- PORTFOLIO COMPOSITION - ------------------------------------------------------- ON 2/29/96 ON 8/31/95 - ------------------------------------------------------- GOVERNMENT AGENCIES ARMS 86% 91% - ------------------------------------------------------- FIXED RATE AGENCY SECURITIES 1 1 - ------------------------------------------------------- GOVERNMENT BONDS - ------------------------------------------------------- SHORT-TERM 8 -- - ------------------------------------------------------- INTERMEDIATE-TERM 5 8 - ------------------------------------------------------- 100% 100%
[PIE CHARTS] - - GOVERNMENT AGENCIES ARMS - - FIXED RATE AGENCY SECURITIES GOVERNMENT BONDS - - SHORT-TERM - - INTERMEDIATE-TERM
- ------------------------------------------------------- DURATION - ------------------------------------------------------- ON 2/29/96 ON 8/31/95 - ------------------------------------------------------- DURATION 4.2 YEARS 4.7 YEARS - -------------------------------------------------------
7 8 PORTFOLIO OF INVESTMENTS KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND FEBRUARY 29, 1996 (DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------- COUPON PRINCIPAL U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE - ---------------------------------------------------------------------------------------------------------------------- GOVERNMENT NATIONAL Adjustable rate MORTGAGE ASSOCIATION - 33.9% mortgages 5.50-6.50% 2025 $26,337 $ 26,630 (Cost: $37,131) 5.50-6.00 2026 10,000 10,019 Pass-through certificates 11.00 2018 500 560 --------------------------------------------------------------------------------- 37,209 - ---------------------------------------------------------------------------------------------------------------------- FEDERAL HOME LOAN Adjustable rate MORTGAGE CORPORATION - mortgages 7.969% 2019 8,609 8,913 29.3% 7.875 2020 2,724 2,796 (Cost: $31,960) 7.875-8.50 2022 3,965 4,065 7.823 2023 2,726 2,783 7.21 2024 7,777 7,974 5.731 2026 4,819 4,905 Fixed rate collateralized mortgage obligations 11.25 2010 473 524 11.00 2014 188 206 --------------------------------------------------------------------------------- 32,166 - ---------------------------------------------------------------------------------------------------------------------- FEDERAL NATIONAL Adjustable rate MORTGAGE ASSOCIATION - mortgages 7.374 2019 4,331 4,451 23.7% 7.807-8.005 2021 4,783 4,919 (Cost: $25,929) 5.699-5.90 2025 14,279 14,594 5.127 2026 1,994 2,020 --------------------------------------------------------------------------------- 25,984 - ---------------------------------------------------------------------------------------------------------------------- U.S. TREASURY Notes 7.875 1996 1,500 1,515 SECURITIES - 12.8% 8.75 1997 7,000 7,369 (Cost: $14,255) 5.00-7.875 1999 4,000 4,116 Bonds 12.75 2010 727 1,066 --------------------------------------------------------------------------------- 14,066 - ---------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS--99.7% (Cost: $109,275) 109,425 --------------------------------------------------------------------------------- CASH AND OTHER ASSETS, LESS LIABILITIES--.3% 323 --------------------------------------------------------------------------------- NET ASSETS--100% $109,748 ---------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- NOTES TO PORTFOLIO OF INVESTMENTS - -------------------------------------------------------------------------------- Adjustable rate securities make up 86% of total investments at February 29, 1996. The coupon rates vary with a selected index at specified intervals and the rates shown are the effective rates on February 29, 1996. The dates shown represent the final maturity of the obligations. Based on the cost of investments of $109,275,000 for federal income tax purposes at February 29, 1996 the aggregate gross unrealized appreciation was $454,000, the aggregate gross unrealized depreciation was $304,000 and the net unrealized appreciation of securities was $150,000. See accompanying Notes to Financial Statements. 8 9 FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES FEBRUARY 29, 1996 (IN THOUSANDS) - ------------------------------------------------------------------------------------------------------- ASSETS - ------------------------------------------------------------------------------------------------------- Investments, at value (Cost: $109,275) $109,425 - ------------------------------------------------------------------------------------------------------- Cash 318 - ------------------------------------------------------------------------------------------------------- Receivable for: Fund shares sold 199 - ------------------------------------------------------------------------------------------------------- Investments sold 13,387 - ------------------------------------------------------------------------------------------------------- Interest 1,154 - ------------------------------------------------------------------------------------------------------- TOTAL ASSETS 124,483 - ------------------------------------------------------------------------------------------------------- LIABILITIES AND NET ASSETS - ------------------------------------------------------------------------------------------------------- Payable for: Fund shares redeemed 72 - ------------------------------------------------------------------------------------------------------- Investments purchased 14,508 - ------------------------------------------------------------------------------------------------------- Management fee 52 - ------------------------------------------------------------------------------------------------------- Administrative services fee 20 - ------------------------------------------------------------------------------------------------------- Custodian and transfer agent fees and related expenses 46 - ------------------------------------------------------------------------------------------------------- Other 37 - ------------------------------------------------------------------------------------------------------- Total liabilities 14,735 - ------------------------------------------------------------------------------------------------------- NET ASSETS $109,748 - ------------------------------------------------------------------------------------------------------- ANALYSIS OF NET ASSETS - ------------------------------------------------------------------------------------------------------- Paid-in capital $119,728 - ------------------------------------------------------------------------------------------------------- Accumulated net realized loss on investments (10,860) - ------------------------------------------------------------------------------------------------------- Net unrealized appreciation on investments 150 - ------------------------------------------------------------------------------------------------------- Undistributed net investment income 730 - ------------------------------------------------------------------------------------------------------- NET ASSETS APPLICABLE TO SHARES OUTSTANDING $109,748 - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- THE PRICING OF SHARES - ------------------------------------------------------------------------------------------------------- CLASS A SHARES Net asset value and redemption price per share ($102,439,000 / 12,348,000 shares outstanding) $8.30 - ------------------------------------------------------------------------------------------------------- Maximum offering price per share (net asset value, plus 3.63% of net asset value or 3.50% of offering price) $8.60 - ------------------------------------------------------------------------------------------------------- CLASS B SHARES Net asset value and redemption price (subject to contingent deferred sales charge) per share ($5,677,000 / 683,000 shares outstanding) $8.31 - ------------------------------------------------------------------------------------------------------- CLASS C SHARES Net asset value and redemption price per share ($1,632,000 / 196,200 shares outstanding) $8.32 - -------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements. 9 10 FINANCIAL STATEMENTS STATEMENT OF OPERATIONS Six months ended February 29, 1996 (IN THOUSANDS) - ------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME - ------------------------------------------------------------------------------------------------------- Interest income $4,240 - ------------------------------------------------------------------------------------------------------- Expenses: Management fee 351 - ------------------------------------------------------------------------------------------------------- Distribution services fee 24 - ------------------------------------------------------------------------------------------------------- Administrative services fee 128 - ------------------------------------------------------------------------------------------------------- Custodian and transfer agent fees and related expenses 209 - ------------------------------------------------------------------------------------------------------- Professional fees 25 - ------------------------------------------------------------------------------------------------------- Reports to shareholders 8 - ------------------------------------------------------------------------------------------------------- Trustees' fees and other 9 - ------------------------------------------------------------------------------------------------------- Total expenses 754 - ------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME 3,486 - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS - ------------------------------------------------------------------------------------------------------- Net realized gain on sales of investments (including options purchased) 818 - ------------------------------------------------------------------------------------------------------- Net realized loss from futures transactions (80) - ------------------------------------------------------------------------------------------------------- Net realized gain 738 - ------------------------------------------------------------------------------------------------------- Change in net unrealized appreciation on investments (684) - ------------------------------------------------------------------------------------------------------- Net gain on investments 54 - ------------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,540 - -------------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 29, 1996 AUGUST 31, 1995 - ---------------------------------------------------------------------------------------------------------- OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY - ---------------------------------------------------------------------------------------------------------- Net investment income $ 3,486 9,245 - ---------------------------------------------------------------------------------------------------------- Net realized gain (loss) 738 (3,301) - ---------------------------------------------------------------------------------------------------------- Change in net unrealized appreciation/depreciation (684) 2,153 - ---------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 3,540 8,097 - ---------------------------------------------------------------------------------------------------------- Net equalization charges (178) (591) - ---------------------------------------------------------------------------------------------------------- Distribution from net investment income (3,482) (9,118) - ---------------------------------------------------------------------------------------------------------- Net decrease from capital share transactions (19,889) (71,446) - ---------------------------------------------------------------------------------------------------------- TOTAL DECREASE IN NET ASSETS (20,009) (73,058) - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- NET ASSETS - ---------------------------------------------------------------------------------------------------------- Beginning of period 129,757 202,815 - ---------------------------------------------------------------------------------------------------------- END OF PERIOD (including undistributed net investment income of $730 and $904, respectively) $109,748 129,757 - ----------------------------------------------------------------------------------------------------------
10 11 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1 DESCRIPTION OF THE FUND Kemper Adjustable Rate U.S. Government Fund is an open-end management investment company organized as a business trust under the laws of Massachusetts. The Fund currently 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, for shares sold on or after April 1, 1996, 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 29, 1996) 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. 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 discount amortization on fixed income 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 29, 1996 the Fund had $10,155,000 in purchase commitments outstanding (9.3% of net assets), with a corresponding amount of assets segregated. 11 12 NOTES TO FINANCIAL STATEMENTS 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 (and Class C shares after April 1, 1996) will be reduced by the amount of any applicable contingent deferred sales charge. On each day the New York Stock Exchange is open for trading, the net asset value per share is determined as of the earlier of 3:00 p.m. Chicago time or the close of the Exchange. The net asset value per share is determined separately for each class by dividing the Fund's net assets attributable to that class by the number of shares of the class outstanding. FEDERAL INCOME TAXES. The Fund has complied with the special provisions of the Internal Revenue Code available to investment companies during the six months ended February 29, 1996. The accumulated net realized loss on sales of investments for federal income tax purposes at February 29, 1996, amounting to approximately $10,848,000, is available to offset future taxable gains. If not applied, the loss carryover expires during the period 1997 through 2004. DIVIDENDS TO SHAREHOLDERS. The Fund declares and pays dividends of net investment income monthly and any net realized capital gains annually, which are recorded on the ex-dividend date. Dividends are determined in accordance with income tax principles which may treat certain transactions differently than generally accepted accounting principles. EQUALIZATION ACCOUNTING. A portion of proceeds from sales and cost of redemptions of Fund shares is credited or charged to undistributed net investment income so that income per share available for distribution is not affected by sales or redemptions of shares. - -------------------------------------------------------------------------------- 3 TRANSACTIONS WITH 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 .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 $351,000 for the six months ended February 29, 1996. UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT. The Fund has an underwriting and distribution services agreement with Kemper Distributors, Inc. (KDI). Underwriting commissions paid in connection with the distribution of Class A shares are as follows:
COMMISSIONS ALLOWED BY KDI COMMISSIONS ------------------------------ RETAINED BY KDI TO ALL FIRMS TO AFFILIATES --------------- ------------ ------------- Six months ended February 29, 1996 $ 7,000 54,000 --
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 at various rates for sales of Class B and Class C shares. In addition, KDI receives any contingent deferred sales 12 13 NOTES TO FINANCIAL STATEMENTS charges (CDSC) from redemptions of Class B shares. Distribution fees and commissions paid in connection with the sale of Class B and Class C shares and the CDSC received in connection with the redemption of Class B shares are as follows:
COMMISSIONS AND DISTRIBUTION FEES DISTRIBUTION FEES PAID BY KDI AND CDSC ------------------------------ RECEIVED BY KDI TO ALL FIRMS TO AFFILIATES ----------------- ------------ ------------- Six months ended February 29, 1996 $29,000 26,000 3,000
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:
ASF PAID BY KDI ASF PAID BY ------------------------------ THE FUND TO KDI TO ALL FIRMS TO AFFILIATES --------------- ------------ ------------- Six months ended February 29, 1996 $ 128,000 128,000 3,000
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. For the six months ended February 29, 1996, the transfer agent remitted shareholder service fees to KSvC of $161,000. OFFICERS AND TRUSTEES. Certain officers or trustees of the Fund are also officers or directors of ZKI. For the six months ended February 29, 1996, the Fund made no payments to its officers and incurred trustees' fees of $8,000 to independent trustees. - -------------------------------------------------------------------------------- 4 INVESTMENT TRANSACTIONS For the six months ended February 29, 1996, investment transactions (excluding short-term instruments) are as follows (in thousands): Purchases $196,635 Proceeds from sales 220,486 13 14 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 5 CAPITAL SHARE TRANSACTIONS The following table summarizes the activity in capital shares of the Fund (in thousands):
SIX MONTHS ENDED YEAR ENDED AUGUST 31, FEBRUARY 29, 1996 1995 --------------------- ---------------------- SHARES AMOUNT SHARES AMOUNT ----------------------------------------------------------------------------- SHARES SOLD ----------------------------------------------------------------------------- Class A 2,757 $22,722 4,898 $ 39,971 ----------------------------------------------------------------------------- Class B 170 1,420 605 4,993 ----------------------------------------------------------------------------- Class C 81 674 169 1,399 ----------------------------------------------------------------------------- SHARES ISSUED IN REINVESTMENT OF DIVIDENDS ----------------------------------------------------------------------------- Class A 290 2,411 737 6,072 ----------------------------------------------------------------------------- Class B 13 110 24 195 ----------------------------------------------------------------------------- Class C 3 31 6 49 ----------------------------------------------------------------------------- SHARES REDEEMED ----------------------------------------------------------------------------- Class A (5,610) (46,389) (14,546) (119,011) ----------------------------------------------------------------------------- Class B (82) (685) (478) (3,932) ----------------------------------------------------------------------------- Class C (22) (183) (142) (1,182) ----------------------------------------------------------------------------- CONVERSION OF SHARES ----------------------------------------------------------------------------- Class A -- -- 31 262 ----------------------------------------------------------------------------- Class B -- -- (31) (262) ----------------------------------------------------------------------------- NET DECREASE FROM CAPITAL SHARE TRANSACTIONS $(19,889) $ (71,446) -----------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 6 FINANCIAL FUTURES CONTRACTS The Fund has entered into exchange traded financial futures contracts to take advantage of anticipated market conditions and bears the risk that arises from owning these contracts. At the time the Fund enters into a futures contract, it is required to segregate liquid assets 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 February 29, 1996, the market value of assets segregated by the Fund was $5,496,000 for the following financial futures contracts owned by the Fund.
FACE AMOUNT EXPIRATION TYPE (IN THOUSANDS) POSITION MONTH ----------------------------------------------------------------------- U.S. Treasury Securities $5,420 Long June '96
14 15 FINANCIAL HIGHLIGHTS
CLASS A --------------------------------------------------------------------- SIX MONTHS JULY 1, ENDED 1991 TO FEBRUARY 29, 1996 YEAR ENDED AUGUST 31, AUGUST 31, 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE - -------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period $8.30 8.33 8.68 8.63 8.37 8.21 - -------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income .23 .48 .34 .47 .63 .13 - -------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) -- (.04) (.29) .02 .22 .17 - -------------------------------------------------------------------------------------------------------------- Total from investment operations .23 .44 .05 .49 .85 .30 - -------------------------------------------------------------------------------------------------------------- Less distribution from net investment income .23 .47 .40 .44 .59 .14 - -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $8.30 8.30 8.33 8.68 8.63 8.37 - -------------------------------------------------------------------------------------------------------------- TOTAL RETURN (NOT ANNUALIZED) 2.81% 5.52 .59 5.87 10.56 3.62 - -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS (ANNUALIZED) - -------------------------------------------------------------------------------------------------------------- Expenses 1.15% 1.10 .93 .21 .28 1.09 - -------------------------------------------------------------------------------------------------------------- Net investment income 5.50 5.76 3.96 5.44 7.02 9.45 - --------------------------------------------------------------------------------------------------------------
CLASS B CLASS C ----------------------------------------- ------------------------------------------ SIX MONTHS MAY 31, SIX MONTHS MAY 31, ENDED YEAR ENDED 1994 TO ENDED YEAR ENDED 1994 TO FEBRUARY 29, AUGUST 31, AUGUST 31, FEBRUARY 29, AUGUST 31, AUGUST 31, 1996 1995 1994 1996 1995 1994 - ----------------------------------------------------------------------------------- ------------------------------------------ PER SHARE OPERATING PERFORMANCE - ----------------------------------------------------------------------------------- ------------------------------------------ Net asset value, beginning of period $ 8.31 8.32 8.37 8.32 8.33 8.37 - ----------------------------------------------------------------------------------- ------------------------------------------ Income from investment operations: Net investment income .20 .43 .07 .20 .43 .08 - ----------------------------------------------------------------------------------- ------------------------------------------ Net realized and unrealized loss -- (.04) (.04) -- (.04) (.04) - ----------------------------------------------------------------------------------- ------------------------------------------ Total from investment operations .20 .39 .03 .20 .39 .04 - ----------------------------------------------------------------------------------- ------------------------------------------ Less distribution from net investment income .20 .40 .08 .20 .40 .08 - ----------------------------------------------------------------------------------- ------------------------------------------ Net asset value, end of period $ 8.31 8.31 8.32 8.32 8.32 8.33 - ----------------------------------------------------------------------------------- ------------------------------------------ TOTAL RETURN (NOT ANNUALIZED) 2.44% 4.84 .34 2.44 4.89 .47 - ---------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS (ANNUALIZED) - ---------------------------------------------------------------------------------------------------------------------------------- Expenses 1.84% 1.85 1.96 1.85 1.79 1.88 - ----------------------------------------------------------------------------------- ------------------------------------------ NET INVESTMENT INCOME 4.81 5.01 3.36 4.80 5.07 3.52 - ----------------------------------------------------------------------------------- ------------------------------------------ - ---------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA FOR ALL CLASSES - ---------------------------------------------------------------------------------------------------------------------------------- SIX MONTHS JULY 1, ENDED 1991 TO FEBRUARY 29, YEAR ENDED AUGUST 31, AUGUST 31, 1996 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------------------------- Net assets at end of period (in thousands) $109,748 129,757 202,815 212,694 174,967 76,749 - ---------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 254% 308 533 138 309 228 - ----------------------------------------------------------------------------------------------------------------------------------
NOTES: ZKI agreed to waive its management fee and absorb certain operating expenses during a portion of the fiscal year ended August 31, 1992. Thereafter, these expenses were gradually reinstated from December 31, 1992 through January 31, 1994. Without this agreement, the ratios of expenses and net investment income to average net assets for Class A shares would have been .99% and 3.90% for the year ended August 31, 1994, .95% and 4.70% for the year ended August 31, 1993, and .90% and 6.40% for the year ended August 31, 1992. Total return does not reflect the effect of any sales charges. 15 16 TRUSTEES AND OFFICERS TRUSTEES OFFICERS STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR. JEROME L. DUFFY President and Trustee Vice President Treasurer DAVID W. BELIN ELIZABETH A. BYRNES ELIZABETH C. WERTH Trustee Vice President Assistant Secretary LEWIS A. BURNHAM JOHN E. NEAL Trustee Vice President DONALD L. DUNAWAY JOHN E. PETERS Trustee Vice President ROBERT B. HOFFMAN RICHARD L. VANDENBERG Trustee Vice President DONALD R. JONES PHILIP J. COLLORA Trustee Vice President Secretary DOMINIQUE P. MORAX Trustee CHARLES F. CUSTER Vice President and SHIRLEY D. PETERSON Assistant Secretary Trustee WILLIAM P. SOMMERS Trustee - -------------------------------------------------------------------------------- LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMHOLZ 222 North LaSalle Street Chicago, IL 60601 - -------------------------------------------------------------------------------- SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY P.O. Box 419557 Kansas City, MO 64141 1-800-621-1048 - -------------------------------------------------------------------------------- CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY 127 West 10th Street Kansas City, MO 64105 - -------------------------------------------------------------------------------- INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC. PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC. 120 South LaSalle Street Chicago, IL 60603 http://www.kemper.com (RECYCLE LOGO) Printed on recycled paper. This report is not to be distributed unless preceded or accompanied by a Kemper Fixed Income Fund prospectus. KARGF - 3 (4/96) KEMPER LOGO 1013510 Printed in the U.S.A. -----END PRIVACY-ENHANCED MESSAGE-----