-----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, A6cR0KUv0hXmH3I43BUlXeEF7ReDrJDOsrIsK+KbfAi2IN/fTDuILNTi4P5HvJOu her+lWWYUfz6GwVY2O/LaA== 0000950137-97-003633.txt : 19971110 0000950137-97-003633.hdr.sgml : 19971110 ACCESSION NUMBER: 0000950137-97-003633 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971107 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: SEC FILE NUMBER: 811-05195 FILM NUMBER: 97709925 BUSINESS ADDRESS: STREET 1: 222 S RIVERSIDE PLAZA CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3125371569 MAIL ADDRESS: STREET 1: 222 SOUTH RIVERSIDE PLAZA CITY: CHICAGO STATE: IL ZIP: 60606 FORMER COMPANY: FORMER CONFORMED NAME: KEMPER GOVERNMENT INCOME TRUST DATE OF NAME CHANGE: 19870811 N-30D 1 AR-ADJUSTABLE RATE US GOV'T FUND-8/31/97 1 LONG-TERM INVESTING IN A SHORT-TERM WORLD SM ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED AUGUST 31, 1997 Offering investors teh oppoortunity for high current income consistent with low volatility of principal KEMPER ADJUSTABLE RATED U.S. GOVERNMENT FUND 2 CONTENTS 3 ECONOMIC OVERVIEW 5 PERFORMANCE UPDATE 8 PORTFOLIO STATISTICS 9 PORTFOLIO OF INVESTMENTS 10 REPORT OF INDEPENDENT AUDITORS 11 FINANCIAL STATEMENTS 13 NOTES TO FINANCIAL STATEMENTS 17 FINANCIAL HIGHLIGHTS At A GLANCE - -------------------------------------------------------------------------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND TOTAL RETURNS - -------------------------------------------------------------------------------- FOR THE YEAR ENDED AUGUST 31, 1997 (UNADJUSTED FOR ANY SALES CHARGE) [BAR GRAPH] - -------------------------------------------------------------------------------- Class A 6.75 Class B 5.96 Class C 5.98 Lipper Adjustable Rate Morgage Funds Category Average* 6.59 - --------------------------------------------------------------------------------
Returns and rankings 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. * 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.
- -------------------------------------------------------------------------------- NET ASSET VALUE - -------------------------------------------------------------------------------- AS OF AS OF 8/31/97 8/31/96 - -------------------------------------------------------------------------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS A $8.31 $8.22 - -------------------------------------------------------------------------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS B $8.32 $8.23 - -------------------------------------------------------------------------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS C $8.33 $8.24 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 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 #23 of 46 funds #36 of 46 funds #34 of 46 funds - -------------------------------------------------------------------------------- 5-YEAR #14 of 28 N/A N/A - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- DIVIDEND REVIEW - -------------------------------------------------------------------------------- THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND AS OF AUGUST 31, 1997.
CLASS A CLASS B CLASS C - -------------------------------------------------------------------------------- ONE-YEAR INCOME: $0.4509 $0.3905 $0.3928 - -------------------------------------------------------------------------------- AUGUST DIVIDEND: $0.0385 $0.0334 $0.0335 - -------------------------------------------------------------------------------- ANNUALIZED DISTRIBUTION RATE+: 5.56% 4.82% 4.83% - -------------------------------------------------------------------------------- SEC YIELD+: 5.00% 4.48% 4.52% - --------------------------------------------------------------------------------
+ Current annualized distribution rate is the latest monthly dividend shown as an annualized percentage of net asset value on August 31, 1997. Distribution rate simply measures the level of dividends and is not a complete measure of performance. The SEC yield is net investment income per share earned over the month ended August 31, 1997, shown as an annualized percentage of the maximum offering price on that date. The SEC yield is computed in accordance with a standardized method prescribed by the Securities and Exchange Commission. TERMS TO KNOW YOUR FUND'S STYLE - -------------------------------------------------------------------------------- MORNINGSTAR FIXED INCOME STYLE BOX - -------------------------------------------------------------------------------- [MATURITY/QUALITY DIAGRAM] Source: Morningstar, Inc., Chicago, IL 312-696-6000. (Morningstar Style Box is based on a portfolio date as of August 31, 1997.) The Fixed-Income Style Box placement is based on a fund's average effective maturity or duration and the average credit rating of the bond portfolio. Please note that style boxes do not represent an exact assessment of and do not represent future performance. Please consult the prospectus for a description of investment policies. DURATION Duration is a measure of the interest rate sensitivity of a fixed-income investment or portfolio. 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. Total return assumes the reinvestment of all dividends and it represents the aggregate percentage or dollar value change over the period. YIELD A fund's yield is a measure of the net investment income per share earned over a specific one-month or 30-day period expressed as a percentage of the maximum offering price of the fund's shares at the end of the period. 3 ECONOMIC OVERVIEW [TIMBERS PHOTO] STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF ZURICH KEMPER INVESTMENTS INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE APPROXIMATELY $86 BILLION IN ASSETS, INCLUDING $49 BILLION IN RETAIL MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM HARVARD UNIVERSITY. DEAR SHAREHOLDER, A self-regulating economy, a balanced budget agreement and a positive stock market all have contributed to another excellent year for investors. Given the extended length of today's bull market (which celebrated its 15th anniversary on August 12), it is prudent to wonder whether the end is near. Our position is that while there is a certain precariousness to today's environment, which we will elaborate on below, we see little to suggest that there will be more than occasional market corrections. Bipartisan agreement to balance the federal budget by the year 2002 represents significant progress that should benefit investors over the long term. By reducing the burden of capital gains and eliminating certain tax loopholes, the Taxpayer Relief Act of 1997 and the Balanced Budget Act of 1997 have the potential to meaningfully affect behavior. Now that the ceiling has been raised on capital gains from the sale of a home, empty nesters will be more inclined to move out of homes and into smaller condominiums. Added investment and savings options should help boost the country's sagging savings rate. From a social perspective, government's action to widen the difference between the taxation rate on capital gains and on income reflects a conscious effort to encourage capital investment. The more people and businesses can do for themselves, the less likely they are to rely on the government, which should help restrain federal spending. The maximum tax on long-term capital gains is now 20 percent versus a maximum of approximately 40 percent on ordinary income earned by Americans in the highest income tax brackets. This dramatic difference could have some influence on the management of mutual funds in the future. Although few investment decisions are based on their tax consequences, the legislation supports a "buy and hold" approach to investing, by which a mutual fund generates investment returns through gains on investments held 18 months or longer. Such gains are taxed at the reduced capital gains rate. On the margin, portfolio managers should focus on long-term investing -- the strategy that we have always supported. In addition, mutual funds will gain investment flexibility with the new law's repeal of what has been called the "short/short rule." Previously, investment companies had been subject to a 30 percent limitation on total income arising from the sale of securities held less than three months -- or face severe tax consequences. The lifting of this limitation provides newer funds, in particular, with much needed maneuvering ability. You can expect to hear more from Kemper about the implications of the new legislation, and specifically about the tax reporting changes, over the next several weeks and months. Overall, we believe that this legislation is something the country can be proud of. It represents years of a commitment on the part of the federal government to hold spending in check and refrain from creating new programs. Expanding corporate revenues and profits in an extended period of low inflation also contributed to making this investor-friendly environment possible. As we look toward the end of the year, we see little to trouble us. The economy appears to be in excellent condition. Continuing the alternatingly fast/slow pace that we have experienced for several months, the fast-growing first quarter was followed by a slower second quarter. Such self-regulation has minimized any need for the Federal Reserve Board to raise interest rates again. We don't rule out the possibility of another hike in the fourth quarter, however. Inflation is very low. In spite of unemployment being the lowest we have seen in decades, wage pressures are still manageable. Strong productivity, attributable to technological advances and better management practices, has produced largely non-inflationary economic growth. This environment is one of the best in decades. Our primary concern is the very high valuations of the stock market. All things considered, it is difficult to see where we can go from here. With prices at such heady levels, the market can be expected to react negatively to even minor earnings disappointments, as we saw in August. Kemper's response to this market is to 3 4 ECONOMIC OVERVIEW - -------------------------------------------------------------------------------- ECONOMIC GUIDEPOSTS - -------------------------------------------------------------------------------- Economic Activity is a key influence on investment performance and shareholder decision-making. Periods of recession or boom, inflation or deflation, credit expansion or credit crunch have a significant impact on mutual fund performance. The following are some significant economic guideposts and their investment rationale that may help your investment decision-making. The 10-year Treasury rate and the prime rate are prevailing interest rates. The other data report year-to-year percentage changes. [BAR GRAPH] NOW (09/30/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO 10-year Treasury Rate (1) 6.21 6.89 6.53 6.04 Prime Rate (2) 8.5 8.5 8.25 8.75 Inflation rate (3) 2.22 2.76 3.07 2.54 The U.S. Dollar (4) 8.76 9.32 4.74 -1.05 Capital Goods Orders (5)* 11.11 8.1 3.77 9.42 Industrial Production (5)* 4.75 4.91 2.65 3.43 Employment Growth (6) 2.23 2.27 2.1 2.19
(1) Falling interest rates in recent years have been a big plus for financial assets. (2) The interest rate that commercial lenders charge their best borrowers. (3) Inflation reduces an investor's real return. In the last five years, inflation has been as high as 6 percent. The low, moderate inflation of the last few years has meant high real returns. (4) Changes in the exchange value of the dollar impact U.S. exporters and the value of U.S. firms' foreign profits. (5) These influence corporate profits and equity performance. (6) An influence on family income and retail sales. * Data as of August 31, 1997. SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENT, INC. remain fully invested and to reduce risk by diversifying across a wider group of investment opportunities. Research, the first step in stock selection, is key in this kind of a market. Bond markets are obviously cheered by recent events, and prospects for income investors continue to be positive. Interest rates are stable and credit quality has not been an issue. A dwindling supply of municipal bonds has enabled municipal investments to outperform U.S. Treasuries. In such a fully valued domestic market, it can make sense to look to international markets for their growth potential. The strength of the dollar thus far this year has diminished returns but international opportunities look bright. With this commentary as an economic backdrop, we encourage you to read the following detailed report of your fund, including an interview with your fund's portfolio management. Thank you for your continued support. We appreciate the opportunity to serve your investment needs. Sincerely, /s/ Stephen B. Timbers STEPHEN B. TIMBERS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER Zurich Kemper Investments, Inc. October 8, 1997 4 5 [INSERT TIMBERS LETTER] ECONOMIC OVERVIEW [TIMBERS PHOTO] 3 6 [INSERT TIMBERS LETTER] ECONOMIC OVERVIEW 4 7 PERFORMANCE UPDATE [VANDENBERG PHOTO] RICHARD VANDENBERG JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN MARCH 1996 AS A SENIOR VICE PRESIDENT OF ZKI AND PORTFOLIO CO-MANAGER OF KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND. VANDENBERG HAS MORE THAN 23 YEARS OF FIXED-INCOME PORTFOLIO MANAGEMENT EXPERIENCE. HE RECEIVED BOTH A BACHELORS DEGREE AND M.B.A. FROM THE UNIVERSITY OF WISCONSIN. [BYRNES PHOTO] ELIZABETH BYRNES JOINED ZURICH KEMPER INVESTMENTS, INC. IN 1982 AND IS A FIRST VICE PRESIDENT OF ZKI AND PORTFOLIO CO-MANAGER OF KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND. BYRNES RECEIVED HER B.S. DEGREE FROM MIAMI UNIVERSITY, OXFORD, OHIO, 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 U.S. GOVERNMENT FUND CLASS A SHARES PERFORMED WELL DURING ITS FISCAL YEAR ENDED AUGUST 31, 1997, BEATING ITS PEER GROUP AVERAGE AS MEASURED BY LIPPER ANALYTICAL SERVICES, INC. THE FUND BEAT THE AVERAGE OF ITS PEERS' (LIPPER'S 46 ADJUSTABLE RATE MORTGAGE FUNDS) AVERAGE ANNUAL TOTAL RETURNS FOR THE 1-YEAR, 3-YEAR AND 5-YEAR PERIODS (UNADJUSTED FOR ANY SALES CHARGE). DURING THE REPORTING YEAR, THE ECONOMY CONTINUED TO EXPERIENCE LOW INFLATION DESPITE MODERATE ECONOMIC GROWTH. PORTFOLIO CO-MANAGERS ELIZABETH BYRNES AND RICHARD VANDENBERG EXPLAIN HOW THEY POSITIONED THE FUND TO EXCEL IN THIS ECONOMIC ENVIRONMENT. Q THE FEDERAL RESERVE BOARD (THE FED) INCREASED SHORT-TERM INTEREST RATES BY 0.25 PERCENT IN MARCH. WHAT CAUSED THE FED TO ACT? A Let's look at the fixed-income environment from the start of Kemper Adjustable Rate U.S. Government Fund's fiscal year to the Fed's action in March. The fund began its fiscal year, September 1996, amidst moderate economic growth, benign inflation and stable interest rates. The fixed-income market overall was benefiting from this environment. Relatively weak Gross Domestic Product (GDP) figures were released that supported this economic state. The market maintained a positive tone through the end of November. The outcome of the November elections kept Republicans in control of Congress and the investment markets rallied upon hearing the news. Between August 31, 1996, and November 30, 1996, the one-year Treasury's yield declined 53 basis points to 5.37 percent. Things started to change in December when Federal Reserve Board Chairman Alan Greenspan commented that the market was acting with "irrational exuberance," meaning he thought that the prices of securities might be overvalued. In January, stronger economic growth surfaced, including higher-than-expected fourth quarter GDP growth and better-than-expected holiday retail sales. Investors remained cautious as it appeared likely the Fed would move to raise interest rates to slow the economy and keep inflation under control. Remember, strong economic growth indicates the potential for higher inflation. Inflation is negative for bond investors as it erodes the "real" value of fixed-income investments. The markets' fears were realized when the Fed increased short-term interest rates in March by 0.25 percent. This was considered a preemptive move aimed at slowing growth in the economy to maintain a low rate of inflation. All markets suffered with this move and yields rose and prices of bonds fell. By the end of March, the yield on the one-year Treasury had risen to 6 percent. In April, economic growth once again appeared to slow. As no signs of inflation surfaced, the markets began to recover and yields tended to fall or remain stable through August 31, the fund's fiscal year end. 5 8 PERFORMANCE UPDATE Q WHAT DID YOU DO TO KEEP THE FUND'S PERFORMANCE SOUND AMIDST THIS ACTIVITY IN THE MARKET AND ECONOMY? A In October 1996, in the early part of the fund's fiscal year when there was little concern about the Fed tightening interest rates, we extended the duration of the fund. Previously we had held a defensive position because growth was strong. We moved to a more neutral position as growth moderated and as the Fed passed on tightening rates in September. Remember, the longer a fund's duration, the more sensitive it is to interest rate changes. As rates decline, a longer duration supports more price appreciation of an asset than a shorter duration given the same circumstances. We were not convinced, however, that rates would continue to decline, so we were modest in our extension. As rates fell, we bought teaser adjustable rate mortgages (ARMs) and reduced short-duration Treasuries in the portfolio. Teaser rate ARMs perform well as interest rates decline because they carry below market rates to attract borrowers to an adjustable-rate rather than a fixed-rate mortgage. In January, we sold our teaser rate ARMs at a profit. We had moved in and out of teasers to take advantage of the sharp decline in rates that occurred at the start of the period. We did not expect interest rate declines of that magnitude to continue, so we began adding Government National Mortgage Association (GNMA) mortgages. GNMAs are securities with longer durations but that tend to be less volatile than teaser-rate mortgages. The fund benefited from its defensive position going into March when the Fed raised the federal funds rate. The fund not only outperformed its peer group average in March, it also gained 0.21 percent. Moving forward to April 1997, it became apparent that the economy was again slowing down so we extended the duration of the fund and carried that position through the beginning of August. Our timing of duration adjustments had been good through the year, and in general, ARMs have performed well. Q HOW DID THE FUND FARE IN COMPARISON WITH OTHER MARKETS? A This fund did very well and outperformed the Salomon Brothers 6-Month T-Bill Index*. Kemper Adjustable Rate U.S. Government Fund returned 6.75 percent (Class A shares unadjusted for sales charge) for the one-year period, compared with the Index, which returned 5.43 percent. Q WILL YOU DO ANYTHING DIFFERENT IF THE FED RAISES RATES AGAIN? A If the Fed tightens rates again, we would reduce our exposure to GNMAs. However, we will not wait for the Fed to make a move before we act. If we see economic data that tells us the economy is ripe for an interest rate increase, we'll act then to help protect the fund. Q WHAT IS YOUR OUTLOOK FOR THE GOVERNMENT BOND MARKET? A We're keeping the fund close to a neutral duration. Growth picked up at the end of the fiscal year, close to 4 percent GDP growth over the past several quarters and it looks like growth for the calendar year will come in between 3 and 4 percent. We want to be cautious in case this relatively strong GDP growth prompts the Fed to raise rates again before the end of 1997. The inflation outlook remains very positive for the fixed-income market, and the Fed is unlikely to raise rates as long as inflation is benign. The fund is fully invested, meaning the fund is not keeping any cash reserves. At the same time, we're avoiding excessive risk by being invested in lower-risk bonds. We're favoring fully indexed seasoned ARMs. GNMA ARMs in a flattening interest rate environment should perform well and they are relatively inexpensive. * Salomon Brothers 6-month T-Bill Index is an unmanaged index based on the average monthly yield of a 6-month Treasury Bill. Rates of Treasury obligations are fixed at issuance, and payment of principal and interest is backed by the U.S. Treasury. Market value will generally fluctuate inversely with interest rates prior to maturity and will equal par at maturity. Due to their short maturities, Treasury Bills experience very low market volatility. 6 9 PERFORMANCE UPDATE - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS* - -------------------------------------------------------------------------------- FOR PERIODS ENDED AUGUST 31, 1997 (ADJUSTED FOR THE APPLICABLE SALES CHARGE)
1-YEAR 5-YEAR LIFE OF CLASS - ------------------------------------------------------------------------------------------------------------ KEMPER ADJUSTABLE RATE U.S. GOVERNMENT A 2.99% 3.90% 6.25% (since 9/1/87) - ------------------------------------------------------------------------------------------------------------ KEMPER ADJUSTABLE RATE U.S. GOVERNMENT B 2.96% N/A 4.02 (since 5/31/94) - ------------------------------------------------------------------------------------------------------------ KEMPER ADJUSTABLE RATE U.S. GOVERNMENT C 5.98% N/A 4.65 (since 5/31/94) - ------------------------------------------------------------------------------------------------------------
[LINE GRAPH] - -------------------------------------------------------------------------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS A - -------------------------------------------------------------------------------- Growth of an assumed $10,000 investment in Class A shares from 9/1/87 to 8/31/97 - --------------------------------------------------------------------------------
9/1/87 12/31/90 12/31/93 8/31/97 - ------------------------------------------------------------------------------------------------------------ Kemper Adjustable Rate U.S. Government Fund Class A(1) 10000 12315 15547 18330 Salomon Brothers 6-month T-bill* 10000 10000 15641 18831 Consumer Price Index++ 10000 11696 12745 14030 - ------------------------------------------------------------------------------------------------------------
[LINE GRAPH] - -------------------------------------------------------------------------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS A - -------------------------------------------------------------------------------- Growth of an assumed $10,000 investment in Class A shares from 1/1/92 to 8/3/97 - --------------------------------------------------------------------------------
1/1/92 12/31/93 12/31/95 8/31/97 - ------------------------------------------------------------------------------------------------------------ Kemper U.S. Government Securities Fund Class B(1) 10000 10739 11601 12662 Salomon Brothers 30 Year GNMA Index+ 10000 11130 12433 13876 Consumer Price Indexx++ 10000 10573 11131 11639 - ------------------------------------------------------------------------------------------------------------
[LINE GRAPH] - -------------------------------------------------------------------------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS B - -------------------------------------------------------------------------------- Growth of an assumed $10,000 investment in Class B shares from 5/31/94 to 8/31/97 - --------------------------------------------------------------------------------
5/31/94 12/31/95 12/31/96 8/31/97 - ------------------------------------------------------------------------------------------------------------ Kemper U.S. Government Securrities Fund Class C(1) 10000 10744 11155 11370 Salomon Brothers 30 Year GNMA Index+ 10000 11289 12046 12600 Consumer Price Index++ 10000 10407 10753 10881 - ------------------------------------------------------------------------------------------------------------
Past performance is not predictive of 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. * Average annual total return measures net investment income and capital gain or loss from portfolio investments, assuming reinvestment of dividends and for Class A shares adjustment for the maximum sales charge of 3.5 percent, for Class B shares adjustment for the applicable contingent deferred sales charge (CDSC) as follows: 1-year, 3 percent; 5-year, 1 percent; since inception, 0 percent and for Class C shares no adjustment for sales charge. The maximum Class B share CDSC is 4 percent. For Class C shares there is a 1 percent CDSC on certain redemptions within the first year of purchase. Please note the Kemper Adjustable Rate U.S. Government Fund was previously the Kemper Enhanced Government Income Fund. The fund's investment objective and policies were changed on January 1, 1992. Prior to the changes, the fund's objective was to seek high current return by investing primarily in U.S. Government securities. Since the change, the fund's objective has been to seek high current income consistent with low volatility of principal. The fund seeks its new objective by investing primarily in adjustable rate U.S. Government securities. The first chart represents the life of fund performance (since September 1, 1987) and the following charts represent the fund's performance under its new objective (since January 1, 1992). (1) Performance includes reinvestment of dividends and adjustment for the applicable sales charge in effect at the end of the period. In comparing the Kemper Adjustable Rate U.S. Government Fund performance to the Lehman Brothers Adjustable Rate Index, you should also note that the fund's performance reflects the maximum sales charge, while no such charges are reflected in the performance of the index. ** Salomon Brothers 6-month T-Bill Index is an unmanaged index based on the average monthly yield of a 6-month Treasury Bill. Rates of Treasury obligations are fixed at issuance, and payment of principal and interest is backed by the U.S. Treasury. Market value will generally fluctuate inversely with interest rates prior to maturity and will equal par at maturity. Due to their short maturities, Treasury Bills experience very low market volatility. + The Lehman Brothers Adjustable Rate Index is a broad market capitalization index of the agency Adjustable Rate Mortgage market. All securities in the index have rates that periodically adjust based on a spread over a published index, and all are government agency guaranteed. Source is Lehman Brothers. ++ The Consumer Price Index is a statistical measure of change, over time, in the prices of goods and services in major expenditure groups for all urban consumers. 7 10 PERFORMANCE UPDATE [LINE GRAPH] - -------------------------------------------------------------------------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CLASS C - -------------------------------------------------------------------------------- Growth of an assumed $10,000 investment in Class C shares from 5/31/94 to 8/31/97 - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------ 5/31/94 12/31/95 12/31/96 8/31/97 - ------------------------------------------------------------------------------------------------------------------ Kemper Adjustable Rate U.S. Government Fund Class C(1) 10000 10750 11180 11595 Lehman Brothers Adjustable Rate Index+ 10000 11289 12046 12600 Consumer Price Index++ 10000 10407 12600 10881
PORTFOLIO STATISTICS PORTFOLIO COMPOSITION* [PIE GRAPH] [PIE CHART] ON 8/31/97 ON 8/31/96
- ------------------------------------------------------------------------------------------------------------------ ON 8/31/97 ON 8/31/96 - ------------------------------------------------------------------------------------------------------------------ GOVERNMENT AGENCIES ARMS 91% 82% - ------------------------------------------------------------------------------------------------------------------ FIXED RATE AGENCY SECURITIES 1 1 - ------------------------------------------------------------------------------------------------------------------ GOVERNMENT BONDS: - ------------------------------------------------------------------------------------------------------------------ SHORT-TERM 8 11 - ------------------------------------------------------------------------------------------------------------------ INTERMEDIATE-TERM -- 6 - ------------------------------------------------------------------------------------------------------------------ 100% 100%
DURATION
- ------------------------------------------------------------------------------------------------------------------ ON 8/31/97 ON 8/31/96 - ------------------------------------------------------------------------------------------------------------------ DURATION 3.6 years 3.1 years - ------------------------------------------------------------------------------------------------------------------
* Portfolio composition and holdings are subject to change. 8 11 PORTFOLIO OF INVESTMENTS KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND PORTFOLIO OF INVESTMENTS AT AUGUST 31, 1997 (DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------ INTEREST PRINCIPAL U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------ U.S. TREASURY Notes 9.25% 1998 $ 3,500 $ 3,610 SECURITIES - 23.2% 9.125 1999 4,000 4,203 (Cost: $19,125) 6.75 1999 3,000 3,039 6.25 1999 4,000 4,019 7.75 2000 4,000 4,150 ------------------------------------------------------------------------ 19,021 - ------------------------------------------------------------------------------------------------------------------ FEDERAL HOME LOAN Adjustable rate 7.745-8.103 2022 18,601 19,308 MORTGAGE CORPORATION - mortgages (a) 7.826-7.882 2023 6,531 6,747 45.3% 7.944 2025 6,455 6,688 (Cost: $36,862) 7.572 2026 3,911 4,050 Fixed rate collateralized 11.25 2010 263 286 mortgage obligations 11.00 2014 72 72 ------------------------------------------------------------------------ 37,151 - ------------------------------------------------------------------------------------------------------------------ GOVERNMENT Adjustable rate 7.375 2022 6,044 6,213 NATIONAL MORTGAGE mortgages (a) 6.00-7.00 2027 18,000 18,228 ASSOCIATION - 30.3% (Cost: $24,814) Pass-through 11.00 2018 344 381 certificates ------------------------------------------------------------------------ 24,822 - ------------------------------------------------------------------------------------------------------------------ FEDERAL Adjustable rate 7.376 2019 3,403 3,495 NATIONAL MORTGAGE mortgages (a) 7.923 2021 1,708 1,776 ASSOCIATION - 15.9% 7.939 2023 2,643 2,746 (Cost: $12,948) 7.716 2025 4,790 4,985 ------------------------------------------------------------------------ 13,002 - ------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS--114.7% (Cost: $93,749) 93,996 ------------------------------------------------------------------------ LIABILITIES, LESS CASH AND OTHER ASSETS--(14.7)% (12,029) ------------------------------------------------------------------------ NET ASSETS--100% $ 81,967 ------------------------------------------------------------------------
- -------------------------------------------------------------------------------- NOTES TO PORTFOLIO OF INVESTMENTS - -------------------------------------------------------------------------------- (a) Adjustable rate securities. The interest rates on these securities vary with a selected index at specified intervals and the rates shown above are the effective rates on August 31, 1997. The dates shown represent the final maturity of the obligations. Based on the cost of investments of $93,749,000 for federal income tax purposes at August 31, 1997, the gross unrealized appreciation was $415,000, the gross unrealized depreciation was $168,000 and the net unrealized appreciation on investments was $247,000. See accompanying Notes to Financial Statements. 9 12 REPORT OF INDEPENDENT AUDITORS THE BOARD OF TRUSTEES AND SHAREHOLDERS KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Kemper Adjustable Rate U.S. Government Fund as of August 31, 1997, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the fiscal periods since 1993. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as of August 31, 1997, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Kemper Adjustable Rate U.S. Government Fund at August 31, 1997, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the fiscal periods since 1993, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois October 16, 1997 10 13 FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 1997 (IN THOUSANDS)
- ------------------------------------------------------------------------ ASSETS - ------------------------------------------------------------------------ Investments, at value (Cost: $93,749) $ 93,996 - ------------------------------------------------------------------------ Cash 863 - ------------------------------------------------------------------------ Receivable for: Fund shares sold 139 - ------------------------------------------------------------------------ Investments sold 4,874 - ------------------------------------------------------------------------ Interest 922 - ------------------------------------------------------------------------ TOTAL ASSETS 100,794 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ LIABILITIES AND NET ASSETS - ------------------------------------------------------------------------ Payable for: Dividends 118 - ------------------------------------------------------------------------ Fund shares redeemed 272 - ------------------------------------------------------------------------ Investments purchased 18,311 - ------------------------------------------------------------------------ Management fee 38 - ------------------------------------------------------------------------ Distribution services fee 5 - ------------------------------------------------------------------------ Administrative services fee 15 - ------------------------------------------------------------------------ Custodian and transfer agent fees and related expenses 36 - ------------------------------------------------------------------------ Trustees' fees 32 - ------------------------------------------------------------------------ Total liabilities 18,827 - ------------------------------------------------------------------------ NET ASSETS $ 81,967 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ ANALYSIS OF NET ASSETS - ------------------------------------------------------------------------ Paid-in capital $ 91,703 - ------------------------------------------------------------------------ Accumulated net realized loss on investments (10,640) - ------------------------------------------------------------------------ Net unrealized appreciation on investments 247 - ------------------------------------------------------------------------ Undistributed net investment income 657 - ------------------------------------------------------------------------ NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 81,967 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ THE PRICING OF SHARES - ------------------------------------------------------------------------ CLASS A SHARES Net asset value and redemption price per share ($73,504 / 8,849 shares outstanding) $8.31 - ------------------------------------------------------------------------ Maximum offering price per share (net asset value, plus 3.63% of net asset value or 3.50% of offering price) $8.61 - ------------------------------------------------------------------------ CLASS B SHARES Net asset value and redemption price (subject to contingent deferred sales charge) per share ($7,404 / 890 shares outstanding) $8.32 - ------------------------------------------------------------------------ CLASS C SHARES Net asset value and redemption price (subject to contingent deferred sales charge) per share ($1,059 / 127 shares outstanding) $8.33 - ------------------------------------------------------------------------
11 14 FINANCIAL STATEMENTS STATEMENT OF OPERATIONS YEAR ENDED AUGUST 31, 1997 (IN THOUSANDS) - ------------------------------------------------------------------------------------------- NET INVESTMENT INCOME - ------------------------------------------------------------------------------------------- Interest income $6,048 - ------------------------------------------------------------------------------------------- Expenses: Management fee 493 - ------------------------------------------------------------------------------------------- Distribution services fee 60 - ------------------------------------------------------------------------------------------- Administrative services fee 189 - ------------------------------------------------------------------------------------------- Custodian and transfer agent fees and related expenses 336 - ------------------------------------------------------------------------------------------- Professional fees 50 - ------------------------------------------------------------------------------------------- Reports to shareholders 26 - ------------------------------------------------------------------------------------------- Trustees' fees and other 19 - ------------------------------------------------------------------------------------------- Total expenses 1,173 - ------------------------------------------------------------------------------------------- NET INVESTMENT INCOME 4,875 - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS - ------------------------------------------------------------------------------------------- Net realized gain on sales of investments (including options purchased) 403 - ------------------------------------------------------------------------------------------- Net realized gain from futures transactions 119 - ------------------------------------------------------------------------------------------- Net realized gain 522 - ------------------------------------------------------------------------------------------- Change in net unrealized depreciation on investments 341 - ------------------------------------------------------------------------------------------- Net gain on investments 863 - ------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,738 - -------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (IN THOUSANDS)
YEAR ENDED AUGUST 31, 1997 1996 - ------------------------------------------------------------------------------------------- OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY - ------------------------------------------------------------------------------------------- Net investment income $ 4,875 6,197 - ------------------------------------------------------------------------------------------- Net realized gain (loss) 522 (20) - ------------------------------------------------------------------------------------------- Change in net unrealized appreciation/depreciation 341 (928) - ------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 5,738 5,249 - ------------------------------------------------------------------------------------------- Net equalization charges (127) (272) - ------------------------------------------------------------------------------------------- Distribution from net investment income (4,810) (6,117) - ------------------------------------------------------------------------------------------- Net decrease from capital share transactions (13,311) (34,140) - ------------------------------------------------------------------------------------------- TOTAL DECREASE IN NET ASSETS (12,510) (35,280) - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- NET ASSETS - ------------------------------------------------------------------------------------------- Beginning of year 94,477 129,757 - ------------------------------------------------------------------------------------------- END OF YEAR (including undistributed net investment income of $657 and $718, respectively) $ 81,967 94,477 - -------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements. 12 15 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 offers four classes of shares. Class A shares are sold to investors subject to an initial sales charge. Class B shares are sold without an initial sales charge but are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions. Class B shares automatically convert to Class A shares six years after issuance. Class C shares are sold without an initial sales charge but are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions within one year of purchase. Class C Shares do not convert into another class. Class I shares (none sold through August 31, 1997) are offered to a limited group of investors, are not subject to initial or contingent deferred sales charges and have lower ongoing expenses than other classes. Differences in class expenses will result in the payment of different per share income dividends by class. All shares of the Fund have equal rights with respect to voting, dividends and assets, subject to class specific preferences. - -------------------------------------------------------------------------------- 2 SIGNIFICANT ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at value. Fixed income securities are valued by using market quotations, or independent pricing services that use prices provided by market makers or estimates of market values obtained from yield data relating to instruments or securities with similar characteristics. Exchange traded financial futures and options are valued at the settlement price established each day by the board of trade or exchange on which they are traded. Over-the-counter traded fixed income options are valued based upon prices provided by market makers. Other securities and assets are valued at fair value as determined in good faith by the Board of Trustees. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME. Investment transactions are accounted for on the trade date (date the order to buy or sell is executed). Interest income is recorded on the accrual basis and includes discount amortization on all fixed income securities and premium amortization on mortgage-backed securities. Realized gains and losses from investment transactions are reported on an identified cost basis. The Fund may purchase securities with delivery or payment to occur at a later date. At the time the Fund enters into a commitment to purchase a security, the transaction is recorded and the value of the security is reflected in the net asset value. The value of the security may vary with market fluctuations. No interest accrues to the Fund until payment takes place. At the time the Fund enters into this type of transaction it is required to segregate cash or other liquid assets equal to the value of the securities purchased. At August 31, 1997, the Fund had $13,443,000 in purchase commitments outstanding (16% of net assets) with a corresponding amount of assets segregated. FUND SHARE VALUATION. Fund shares are sold and redeemed on a continuous basis at net asset value (plus an initial sales charge on most sales of Class A shares). Proceeds payable on redemption of Class B and Class C shares will be reduced by the amount of any applicable contingent deferred sales charge. On each day the New York Stock Exchange is open for trading, the net asset value per share is determined as of the earlier of 3:00 p.m. Chicago time or the close of the Exchange. The net asset value per share is determined separately for each class 13 16 NOTES TO FINANCIAL STATEMENTS by dividing the Fund's net assets attributable to that class by the number of shares of the class outstanding. FEDERAL INCOME TAXES. The Fund has complied with the special provisions of the Internal Revenue Code available to investment companies and therefore no federal income tax provision is required. The accumulated net realized loss on sales of investments for federal income tax purposes at August 31, 1997, amounting to approximately $10,622,000, is available to offset future taxable gains. If not applied, the loss carryover expires during the period 1998 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), 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 $493,000 for the year ended August 31, 1997. UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT. The Fund has an underwriting and distribution services agreement with Zurich Kemper Distributors, Inc. (ZKDI). Underwriting commissions paid in connection with the distribution of Class A shares are as follows:
COMMISSIONS RETAINED COMMISSIONS ALLOWED BY ZKDI BY ZKDI TO FIRMS ----------- -------------------- Year ended August 31, 1997 $8,000 58,000
For services under the distribution services agreement, the Fund pays ZKDI a fee of .75% of average daily net assets of the Class B and Class C shares. Pursuant to the agreement, ZKDI enters into related selling group agreements with various firms at various rates for sales of Class B and Class C shares. In addition, ZKDI receives any contingent deferred sales charges (CDSC) from redemptions of Class B and Class C 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 such shares are as follows:
DISTRIBUTION FEES COMMISSIONS AND AND CDSC DISTRIBUTION FEES RECEIVED BY PAID BY ZKDI ZKDI TO FIRMS ----------------- --------------------- Year ended August 31, 1997 $91,000 120,000
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an administrative services agreement with ZKDI. For providing information and administrative services to Class A, Class B and Class C shareholders, the Fund pays ZKDI a fee at an annual rate of up to .25% of average daily net assets of each class. ZKDI in 14 17 NOTES TO FINANCIAL STATEMENTS 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 ASF PAID BY ZKDI THE FUND TO ZKDI TO FIRMS ----------------- ----------------- Year ended August 31, 1997 $189,000 188,000
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a services agreement with the Fund's transfer agent, Zurich Kemper Service Company (ZKSvC) is the shareholder service agent of the Fund. Under the agreement, ZKSvC received shareholder services fees of $249,000 for the year ended August 31, 1997. OFFICERS AND TRUSTEES. Certain officers or trustees of the Fund are also officers or directors of ZKI. For the year ended August 31, 1997, the Fund made no direct payments to its officers and incurred trustees' fees of $15,000 to independent trustees. - -------------------------------------------------------------------------------- 4 INVESTMENT TRANSACTIONS For the year ended August 31, 1997, investment transactions (excluding short-term instruments) are as follows (in thousands): Purchases $241,278 Proceeds from sales 247,926 - -------------------------------------------------------------------------------- 5 CAPITAL SHARE TRANSACTIONS The following table summarizes the activity in capital shares of the Fund (in thousands):
YEAR ENDED AUGUST 31, 1997 1996 --------------------- --------------------- SHARES AMOUNT SHARES AMOUNT ----------------------------------------------------------------------------- SHARES SOLD Class A 1,089 $ 8,931 3,196 $ 26,308 ----------------------------------------------------------------------------- Class B 626 5,196 352 2,925 ----------------------------------------------------------------------------- Class C 82 680 126 1,046 ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- SHARES ISSUED IN REINVESTMENT OF DIVIDENDS ----------------------------------------------------------------------------- Class A 369 3,054 500 4,138 ----------------------------------------------------------------------------- Class B 33 271 27 224 ----------------------------------------------------------------------------- Class C 7 55 6 51 ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- SHARES REDEEMED ----------------------------------------------------------------------------- Class A (3,198) (26,282) (8,043) (66,310) ----------------------------------------------------------------------------- Class B (523) (4,338) (182) (1,513) ----------------------------------------------------------------------------- Class C (106) (878) (122) (1,009) ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- CONVERSION OF SHARES ----------------------------------------------------------------------------- Class A 11 93 14 113 ----------------------------------------------------------------------------- Class B (11) (93) (14) (113) ----------------------------------------------------------------------------- NET DECREASE FROM CAPITAL SHARE TRANSACTIONS $(13,311) $(34,140) -----------------------------------------------------------------------------
15 18 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 6 FINANCIAL FUTURES CONTRACTS The Fund has entered into exchange traded financial futures contracts in order to protect itself from anticipated market conditions and, as such, bears the risk that arises from entering into these contracts. At the time the Fund enters into a futures contract, it is required to make a margin deposit with its custodian. Subsequently, gain or loss is recognized and payments are made on a daily basis between the Fund and its broker as the market value of the futures contract fluctuates. At August 31, 1997, the market value of assets pledged by the Fund to cover margin requirements for open futures positions was $89,000. The Fund also had liquid securities in its portfolio in excess of the face amount of the following short futures position open at August 31, 1997:
FACE EXPIRATION GAIN AT TYPE AMOUNT MONTH 8/31/97 ------------------------------------------------------------------------- U.S. Treasury Note $5,080,000 Sep '97 $9,000
16 19 FINANCIAL HIGHLIGHTS
---------------------------------------- Class A YEAR ENDED AUGUST 31, ---------------------------------------- 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE - ------------------------------------------------------------------------------------------------ Net asset value, beginning of year $8.22 8.30 8.33 8.68 8.63 - ------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income .45 .46 .48 .34 .47 - ------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) .09 (.09) (.04) (.29) .02 - ------------------------------------------------------------------------------------------------ Total from investment operations .54 .37 .44 .05 .49 - ------------------------------------------------------------------------------------------------ Less distribution from net investment income .45 .45 .47 .40 .44 - ------------------------------------------------------------------------------------------------ Net asset value, end of year $8.31 8.22 8.30 8.33 8.68 - ------------------------------------------------------------------------------------------------ TOTAL RETURN 6.75% 4.55 5.52 .59 5.87 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS - ------------------------------------------------------------------------------------------------ Expenses 1.25% 1.15 1.10 .93 .21 - ------------------------------------------------------------------------------------------------ Net investment income 5.50% 5.49 5.76 3.96 5.44 - ------------------------------------------------------------------------------------------------
---------------------------------------- --------------------------------------- Class B Class C ---------------------------------------- --------------------------------------- MAY 31 MAY 31 YEAR ENDED AUGUST 31, TO YEAR ENDED AUGUST 31, TO --------------------------- AUGUST 31, -------------------------- AUGUST 31, 1997 1996 1995 1994 1997 1996 1995 1994 - ----------------------------------------------------------------------------------- --------------------------------------- PER SHARE OPERATING PERFORMANCE - ----------------------------------------------------------------------------------- --------------------------------------- Net asset value, beginning of period $8.23 8.31 8.32 8.37 8.24 8.32 8.33 8.37 - ----------------------------------------------------------------------------------- --------------------------------------- Income from investment operations: Net investment income .39 .40 .43 .07 .39 .40 .43 .08 - ----------------------------------------------------------------------------------- --------------------------------------- Net realized and unrealized gain (loss) .09 (.09) (.04) (.04) .09 (.09) (.04) (.04) - ----------------------------------------------------------------------------------- --------------------------------------- Total from investment operations .48 .31 .39 .03 .48 .31 .39 .04 - ----------------------------------------------------------------------------------- --------------------------------------- Less distribution from net investment income .39 .39 .40 .08 .39 .39 .40 .08 - ----------------------------------------------------------------------------------- --------------------------------------- Net asset value, end of period $8.32 8.23 8.31 8.32 8.33 8.24 8.32 8.33 - ----------------------------------------------------------------------------------- --------------------------------------- TOTAL RETURN (NOT ANNUALIZED) 5.96% 3.79 4.84 .34 5.98 3.82 4.89 .47 - ----------------------------------------------------------------------------------- --------------------------------------- - ----------------------------------------------------------------------------------- --------------------------------------- RATIOS TO AVERAGE NET ASSETS (ANNUALIZED) - ----------------------------------------------------------------------------------- --------------------------------------- Expenses 1.93% 1.89 1.85 1.96 1.88 1.89 1.79 1.88 - ----------------------------------------------------------------------------------- --------------------------------------- Net investment income 4.82% 4.75 5.01 3.36 4.87 4.75 5.07 3.52 - ----------------------------------------------------------------------------------- ---------------------------------------
- ----------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA FOR ALL CLASSES - ----------------------------------------------------------------------------------------------- YEAR ENDED AUGUST 31, 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------- Net assets at end of year (in thousands) $81,967 94,477 129,757 202,815 212,694 - ----------------------------------------------------------------------------------------------- Portfolio turnover rate 249% 272 308 533 138 - -----------------------------------------------------------------------------------------------
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, and .95% and 4.70% for the year ended August 31, 1993. Total return does not reflect the effect of any sales charges. 17 20 NOTES 18 21 NOTES 19 22 TRUSTEES&OFFICERS TRUSTEES OFFICERS STEPHEN B. TIMBERS ELIZABETH A. BYRNES President and Trustee Vice President DAVID W. BELIN CHARLES R. MANZONI, JR. Trustee Vice President LEWIS A. BURNHAM JOHN E. NEAL Trustee Vice President DONALD L. DUNAWAY ROBERT C. PECK, JR. Trustee Vice President ROBERT B. HOFFMAN RICHARD L. VANDENBERG Trustee Vice President DONALD R. JONES PHILIP J. COLLORA Trustee Vice President and Secretary SHIRLEY D. PETERSON Trustee JEROME L. DUFFY Treasurer WILLIAM P. SOMMERS Trustee ELIZABETH C. WERTH Assistant Secretary - -------------------------------------------------------------------------------- LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ 222 North LaSalle Street Chicago, IL 60601 - -------------------------------------------------------------------------------- SHAREHOLDER SERVICE AGENT ZURICH KEMPER SERVICE COMPANY P.O. Box 419557 Kansas City, MO 64141 - -------------------------------------------------------------------------------- CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY 801 Pennsylvania Ave. Kansas City, MO 64105 - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS ERNST & YOUNG LLP 233 South Wacker Drive Chicago, IL 60606 - -------------------------------------------------------------------------------- INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC. PRINCIPAL UNDERWRITER ZURICH KEMPER DISTRIBUTORS, INC. 222 South Riverside Plaza Chicago, IL 60606 www.kemper.com [KEMPER FUNDS LOGO] Printed in the U.S.A. on recycled paper This report is not to be distributed unless preceded or accompanied by a Kemper Fixed Income Funds prospectus. KARGF - 2 (10/97) 1038280 -----END PRIVACY-ENHANCED MESSAGE-----