<PAGE> 1
Kemper Diversified Income Fund
Semiannual Report to Shareholders
For the Period Ended
April 30, 1995
Offering investors the opportunity
for high current return
(LOGO)
<PAGE> 2
KEMPER FIXED INCOME FUNDS
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 1, 1994
Kemper Adjustable Rate U.S. Government Fund
Kemper Diversified Income Fund
Kemper U.S. Government Securities Fund
Kemper High Yield Fund
Kemper Income and Capital Preservation Fund
Kemper Portfolios comprised of the following three series:
Kemper Cash Reserves Fund
Kemper U.S. Mortgage Fund
Kemper Short-Intermediate Government Fund
-------------------------
Kemper Corporation, the parent of Kemper Financial Services, Inc. ("KFS,"
the investment manager for the Funds), has entered into an agreement in
principle with an investor group led by Zurich Insurance Company ("Zurich")
pursuant to which Kemper Corporation would be acquired by the investor group in
a merger transaction. As part of the transaction, Zurich or an affiliate would
purchase KFS.
A definitive agreement is expected in early May 1995, subject to the
completion of the investor group's due diligence. Consummation of the
transaction is subject to a number of contingencies, including approval by the
board and stockholders of Kemper Corporation and the Zurich board and regulatory
approvals. Because the transaction would constitute an assignment of the Funds'
investment management agreements with KFS and, where applicable, Rule 12b-1
agreements under the Investment Company Act of 1940, and therefore a termination
of such agreements, the transaction is subject also to approval of new
agreements by Kemper Fund boards and shareholders. If the contingencies are
timely met, the transaction is expected to close early in the fourth quarter of
1995.
After consummation of the transaction, it is anticipated that the KFS
management team and the Kemper Fund portfolio managers would remain in place and
that the Kemper Funds would be operated in the same manner as they are
currently.
Also, Paul F. Sloan has been named the portfolio manager of Kemper U.S.
Government Securities Fund and Kemper U.S. Mortgage Fund and portfolio
co-manager of Kemper Short-Intermediate Government Fund and Kemper Adjustable
Rate U.S. Government Fund replacing J. Patrick Beimford, Jr. Mr. Beimford
continues as Director of Fixed Income Investments at KFS. Prior to joining KFS,
Mr. Sloan was the director of institutional portfolio management at an
investment management company and prior thereto he was a vice president and
investment officer for a regional bank. He received a B.A. in English Literature
from the University of Detroit, Detroit, Michigan, and an M.B.A. in Finance and
Business Economics from Wayne State University, Detroit, Michigan.
In addition, Kemper Diversified Income Fund is now managed by a team of
portfolio managers who are specialists in the basic sectors in which it invests.
Messrs. Robert S. Cessine, Gordon K. Johns, Michael A. McNamara, Harry E. Resis,
Jr., Paul F. Sloan and Jonathan W. Trutter are the members of the team. Mr.
Cessine is senior vice president and director of investment grade corporate and
sovereign bond research at KFS. Prior to joining KFS in January 1993, he was a
senior corporate bond analyst and chairman of the bond selection committee at an
investment management company. He received a masters degree in Finance from the
University of Wisconsin, Madison, Wisconsin, a masters degree in Agricultural
Economics from the University of Maryland, Baltimore/College Park, Maryland, and
a B.S. in Economics from the University of Wisconsin, Madison, Wisconsin. Mr.
Cessine is a Chartered Financial Analyst. Mr. Johns joined Kemper in 1988 and
currently is executive vice president of KFS and managing director of Kemper
Investment Management Company Limited in London. Previously, he was head of
international fixed income fund management at an investment bank in London. He
received a B.A. in law from Balliol College in Oxford, United Kingdom. Mr.
McNamara joined KFS in February 1972 and is currently a senior vice president of
KFS. He received a B.S. in Business Administration from the University of
Missouri, St. Louis, Missouri, and an M.B.A. in Finance from Loyola University,
Chicago, Illinois. Mr. Resis joined KFS in June 1988 and is currently a senior
vice president of KFS. He received a B.A. in Finance from Michigan State
University, East Lansing, Michigan. Mr. Sloan's background is discussed above.
Mr. Trutter is a first vice president of KFS. Before joining KFS in April 1989,
he was a vice president in commercial banking. Mr. Trutter has an A.B. with dual
majors in East Asian Languages and International Relations from University of
Southern California, Los Angeles and an M.B.A. from Kellogg Graduate School of
Management at Northwestern University, Evanston, Illinois. He is also a
Certified Public Accountant.
Separately, effective February 1, 1995, KFS transferred all its duties and
responsibilities as principal underwriter, distributor and administrator of the
Funds to Kemper Distributors, Inc., a wholly-owned subsidiary of KFS. KFS
continues to provide investment management services. See "Investment Manager and
Underwriter" in the prospectus.
May 8, 1995
KFIF-1A 5/95
<PAGE> 3
DEAR SHAREHOLDER:
We are pleased to provide you with an overview of the performance of your fund
for the six-month period ended April 30, 1995. In addition, following the
economic overview is a question and answer interview with your fund's Portfolio
Managers.
- - --------------------------------------------
PERFORMANCE & DIVIDEND REVIEW
<TABLE>
<CAPTION>
- - ----------------------------------------------------------
Total Return Performance*
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1995
(UNADJUSTED FOR ANY SALES CHARGE)
<S> <C>
Kemper Diversified Income Fund A 5.57%
Kemper Diversified Income Fund B 5.09%
Kemper Diversified Income Fund C 5.12%
Lipper General Bond Funds
Category Average 5.22%
- - ----------------------------------------------------------
</TABLE>
Returns are historical and do not represent future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost. The Fund may invest in lower-rated and
non-rated securities which present greater risk of loss to principal and
interest than higher-rated securities. The Fund may also invest a significant
portion of assets in foreign securities which present special risks including
fluctuating exchange rates, government regulation and differences in liquidity
that may affect your investment.
When comparing Kemper Diversified Income Fund A to other General Bond funds in
its Lipper** category for the following time periods ended April 30, 1995, this
fund ranked:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1-YEAR 5-YEAR 10-YEAR 15-YEAR
5 of 50 1 of 16 5 of 8 3 of 6
</TABLE>
The following table shows dividend and yield information for Kemper Diversified
Income Fund as of April 30, 1995.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- - ---------------------------------------------------------------------
A SHARES B SHARES C SHARES
--------- --------- ---------
April Dividend: $0.0415 $0.0370 $0.0377
Net Asset Value: $5.83 $5.83 $5.85
Annualized Distribution Rate+: 8.54% 7.62% 7.73%
SEC Yield+: 7.36% 6.54% 6.60%
- - ---------------------------------------------------------------------
</TABLE>
- - ---------------------------------------
GENERAL ECONOMIC OVERVIEW
Comfortable with the pace of economic growth and the level of interest rates,
investors enjoyed generally positive performance in both the fixed-income and
stock markets in the first five months of 1995. But as we enter the summer
months, we are seeing a decided weakening in the economy and heightened
uncertainty.
What effect has the recent economic growth had on price inflation? Have higher
interest rates slowed the economy so much that a recession is now a true
threat--and will the Federal Reserve Board now reverse itself and start to ease
rates? Of course, these are the questions that only time will answer. At Kemper,
we believe that economic growth in the second quarter will be flat or possibly
even negative. Such a scenario is more severe than the press-heralded "soft
landing" and could conceivably set the scene for lower interest rates. At this
point--before the release of second quarter data--we believe we have seen only
signs of a slowdown, not a recession. We think that the Fed is not likely to
alter direction quickly.
Against this backdrop, we believe that the opportunities for investors will be
concentrated in high quality investments. Companies can no longer count on the
economy to provide an above average earnings boost. Rather, stocks that have
proven themselves with a pattern of consistent earnings are likely to attract
investor support. Specifically, industries that produce more consistent
earnings, such as consumer nondurables, technology and selected capital goods
can be expected to do well. Picking the right sectors to invest in will be the
key challenge for equity investors during the next few quarters.
We look for the fixed-income markets to continue their strong performance as
they tend to do well during periods of slow growth and low inflation.
Leading international economies are lagging the U.S. economy. Japan and Germany,
whose economies typically follow U.S. growth, are not as robust as in past
cycles. This phenomenon makes international investing very complex currently.
Moreover, conditions in emerging market countries underline the importance of
careful research and experience in understanding how these markets work.
We are calm about what has been described as a dollar crisis. While it's true
that the dollar has depreciated against the Japanese yen and many European
currencies, we note that the dollar has appreciated in value against the
currency of Canada and Mexico, two of our largest trading partners.
Political leadership also has some bearing on the progress of the economy and
the state of the financial markets. In the months preceding a presidential
election year, it has not been uncommon for incumbents to attempt to stimulate
growth. Given our Republican Congress and Democratic President, however, we do
not consider this a foregone conclusion as we move closer to 1996.
1
<PAGE> 4
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
managers. Thank you for your continued support. We appreciate the opportunity to
serve your investment needs.
Sincerely,
[SIG]
Stephen B. Timbers
Chief Investment and Executive Officer
June 13, 1995
Stephen Timbers is Chief Executive Officer and
is also Chief Investment Officer of Kemper
Financial Services, Inc. (KFS). KFS and its
affiliates manage approximately $60 billion in
[PHOTO] assets, including $42 billion in retail mutual
funds. Timbers is a graduate of Yale
University and holds an M.B.A. from Harvard
University.
* Total return measures net investment income and capital gain or loss from
portfolio investments, assuming reinvestment of all dividends. During the
period noted, securities prices fluctuated. For additional information, see
the Prospectus and Statement of Additional Information and the Financial
Highlights at the end of this report.
**Lipper Analytical Services, Inc. performance and rankings are based upon
changes in net asset value with all dividends reinvested and do not include
the effect of sales charges and, if they had, results may have been less
favorable. Performance and rankings are historical and do not reflect future
performance.
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on April 30, 1995. Distribution
rate simply measures the level of dividends and is not a complete measure of
performance. The SEC yield is net investment income per share earned over the
month ended April 30, 1995 shown as an annualized percentage of the maximum
offering price on that date.
2
<PAGE> 5
KEMPER DIVERSIFIED INCOME FUND
PORTFOLIO MANAGEMENT TEAM
Robert Cessine joined Kemper Financial Services, Inc. (KFS) in
1993 and is now a Senior Vice President of KFS and the Portfolio
Co-Manager of Kemper Diversified Income Fund. He manages
PHOTO the investment grade corporate bond portion of the fund.
Mr. Cessine received both his B.S. and M.B.A. degrees from the
University of Wisconsin. He also is a Chartered Financial
Analyst.
Mike McNamara has been with KFS since 1972 and is now Senior Vice
President and Portfolio Co-Manager of the Kemper Diversified
PHOTO Income Fund. He manages the high yield corporate bond
portion of the fund. Mr. McNamara graduated with a B.S. in
Business Administration from the University of Missouri and went
on to receive his M.B.A. from Loyola University.
Paul Sloan joined KFS in April 1995 and is Senior Vice President
of KFS and Portfolio Co-Manager of Kemper Diversified Income
Fund. He manages the government bond portion of the fund.
PHOTO Mr. Sloan comes to Kemper from Woodbridge Capital Management, the
investment management subsidiary of Comerica, Inc., where he was
the director of institutional portfolio management. Mr. Sloan
graduated from the University of Detroit and earned his master's
of business administration degree from Wayne State University.
Gordon Johns joined Kemper in 1988 and is now an Executive Vice
President of KFS and the Managing Director of Kemper Investment
PHOTO Management Company Limited, London, and is Portfolio
Co-Manager of Kemper Diversified Income Fund. He manages the
foreign bond portion of the fund. Mr. Johns graduated from
Balliol College, Oxford with a B.A. in law.
Harry Resis joined KFS in 1988 and is now Senior Vice President
of KFS and Portfolio Co-Manager of Kemper Diversified
PHOTO Income Fund. He manages the high yield corporate bond portion of
the fund. Mr. Resis received a B.A. in Finance from Michigan
State University.
Jonathan Trutter has been with KFS since 1989. He is now a First
Vice President of KFS and Portfolio Co-Manager of Kemper
Diversified Income Fund. He manages the emerging markets portion
PHOTO of the fund. Mr. Trutter received his bachelor's degree with
dual majors in East Asian Languages and International
Relations from the University of Southern California. He went on
to receive a master's of management degree from Kellogg Graduate
School of Northwestern University.
3
<PAGE> 6
Q&A
AN INTERVIEW
WITH THE PORTFOLIO
MANAGEMENT
TEAM
Q: AT THE END OF LAST OCTOBER, THE BOND MARKET WAS IN THE MIDST OF A
DIFFICULT YEAR. HAS THE SCENARIO CHANGED IN THE PAST SIX MONTHS?
A: Yes, the environment for bonds has definitely improved. In 1994, rising
interest rates hurt bond prices, as rates on outstanding bonds became less
attractive. But since mid-November of last year, interest rates have trended
lower. This has been good for all sectors of the bond market. If you look at
the Salomon Broad Investment Grade Index+ -- a broad measure of bond activity,
you'll see that the bond market fell 2.85% in 1994. For the first four months
of 1995 the index returned 6.49%. So as you can see, the bond market has more
than recovered from last year's losses.
Q: WHAT'S BEHIND THIS DECLINE IN INTEREST RATES?
A: In late November, we began to see signs that the economy had slowed
from last year's heavy pace. As you may know, slower economic growth is usually
positive for bond prices because it implies that inflation, which erodes the
value of fixed payments, is less likely to be a problem. Throughout the first
quarter of 1995, data such as new home sales and retail sales continued to be
weak, pointing toward slower economic growth. With this, yields have declined
and bond prices have rallied.
Q: THE FUND PRIMARILY INVESTS IN HIGH-YIELD CORPORATES, FOREIGN AND U.S.
GOVERNMENT BONDS. HOW DID THESE VARIOUS SECTORS PERFORM FOR THE PAST SIX
MONTHS?
A: Foreign currency bonds, which compose roughly 25% of the fund were the
biggest contributors to the fund's performance. These bonds benefited from a
decline in interest rates throughout most of Europe, and were further boosted
by the dollar's weakness. This is because as the dollar weakens, foreign
currencies appreciate against the dollar and this raises the value of assets
denominated in foreign currencies. Some of the foreign bonds that performed
particularly well for the fund were the government issues of Denmark, Finland
and Ireland.
We held an approximate 27% weighting in high yield corporate bonds for most of
the period, and these bonds were good performers because of favorable market
fundamentals. As bond yields fell for most of the period, the demand for the
higher income offered by high yield corporates grew. This and lower supply,
because of a drop in the new-issuance of corporate bonds, was favorable for
corporate bond prices.
In the fund's government component, we concentrated on mortgage-backed
securities. This proved to be a good strategy since mortgages outperformed
Treasuries of comparable maturities during the period. Mortgages benefited from
greater demand, as investors showed a preference for their income advantage
over Treasuries.
Q: YOU REDUCED YOUR POSITION IN EMERGING MARKETS FROM 18% TO 3% OVER THE
COURSE OF THE PERIOD? WHAT WAS YOUR REASONING?
A: First you should understand that the fund's emerging markets exposure
has been primarily to Latin American countries, and had consisted of U.S.
dollar-denominated Brady bonds, which are named after former Treasury Secretary
Nicholas Brady, and are restructured bank debt of these countries.
In November, we lowered the fund's Argentinean bond holdings based on the
disappointing reception of a new Argentinean bond offering. With the
devaluation of the peso in December and the lack of any favorable economic news
in Mexico, we began to reduce our exposure to Mexican debt. By January we had
eliminated our remaining Mexican holdings and our overall emerging markets
position was 5% by month-end.
Emerging market bonds continued to have a rough ride in the early months of
1995, but in March they began to show signs of recovery. All in all, though,
emerging markets detracted from the fund's performance.
Q: WHAT'S YOUR OUTLOOK FOR THIS SECTOR GOING FORWARD?
A: We believe that the recent sell-off in the emerging markets sector has
been overdone. The fundamental economic progress made in many emerging markets
countries has been substantial and underscores the ongoing value in this sector
as a whole. We expect to remain active in emerging markets as they will
continue to represent good investment opportunities relative to global fixed
income markets.
4
<PAGE> 7
Q: KEMPER DIVERSIFIED INCOME FUND HAD GOOD PERFORMANCE DURING THE PERIOD.
THE FUND'S CLASS A SHARES RETURNED 5.57%, COMPARED TO AN AVERAGE RETURN
OF 5.22% FOR ITS PEERS IN THE LIPPER GENERAL BOND FUND CATEGORY. WHAT DO
YOU ATTRIBUTE THIS TO?
A: From our earlier discussion, you can see that our sector allocation was
fairly good. We had significant weightings in foreign currency bonds and high
yield corporate bonds, and both were good performers. While emerging markets
had some difficulty, we avoided additional losses by aggressively lowering
exposure to the sector and hedging our position.
Q: YOU STATED EARLIER THAT MARKET CONSENSUS IS THAT THE ECONOMY IS SLOWING
AND THAT INFLATION IS LESS LIKELY TO BE A PROBLEM. DO YOU SHARE THIS
VIEW AND IF SO HOW DO YOU THINK THIS WILL AFFECT BONDS?
A: While a temporary correction in some of the economic data is possible,
we think that the persuasiveness of slower economic data is compelling. We
think it supports the theory that the slowdown in growth is not merely a pause
but a trend reversal from last year's pace.
Slower economic growth, which keeps inflation tame, should be positive for all
bonds, including high yield bonds, since lower inflation helps preserve the
value of fixed-income payments. Our outlook, then, is favorable.
We continue to expect good performance from foreign bonds, particularly if the
dollar stays weak. In the high yield sector, slower economic growth will likely
limit the potential for price-appreciation. However, shareholders can continue
to benefit from the high level of income that high yield bonds offer relative
to other investments.
+ Salomon Brothers Broad Investment Grade (BIG) Bond Index is a market
capitalization-weighted index that covers an all-inclusive universe of
institutionally traded U.S. Treasury, agency, mortgage and corporate
securities. This index includes all fixed-rate bonds with a maturity of
one year or longer and issues with at least $50 million outstanding
($200 million for mortgage coupons). Source is Salomon Brothers Inc.
PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
April 30, 1995 October 31, 1994
-------------- ----------------
<S> <C> <C>
HIGH YIELD CORPORATES 30% 30%
EMERGING MARKETS 3 18
FOREIGN CURRENCY BONDS 25 22
HIGH GRADE CORPORATES 2 2
MORTGAGES 12 8
CASH AND EQUIVALENTS 26 18
OTHER 2 2
</TABLE>
5
<PAGE> 8
KEMPER DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS April 30, 1995
(In thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
---------- ------------
(in Local Currency) (in Dollars)
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION CERTIFICATES-12.3%
- - ------------------------------------------------------------
7.00%, 2022-2025 $ 21,320 $ 20,180
7.50%, 2023-2024 72,981 71,180
- - ------------------------------------------------------------
U.S. TREASURY SECURITIES-33.3%
- - ------------------------------------------------------------
U.S. Treasury Notes
8.50%, 1995 34,000 34,032
10.50%, 1995 14,000 14,182
11.25%, 1995 25,000 25,047
8.875%, 1996 40,000 40,787
9.375%, 1996 109,500 112,665
- - ------------------------------------------------------------
U.S. Treasury Bonds
11.50%, 1995 20,000 20,619
- - ------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS-45.6%
(Cost $336,636) 338,692
- - ------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS
- - ------------------------------------------------------------
Commonwealth of New Zealand
10.00%, 2002 NZL 18,500 13,820
6.50%, 2000 8,000 5,076
- - ------------------------------------------------------------
Federal Republic of Brazil,
4.25%, 2024 USD 31,500 12,521
- - ------------------------------------------------------------
French Treasury
8.50%, 2000 FRF 38,500 8,194
8.50%, 2002 107,000 22,784
6.75%, 2003 34,000 6,510
- - ------------------------------------------------------------
Government of Canada
8.25%, 1997 CAD 11,800 8,747
6.50%, 2004 17,800 11,554
- - ------------------------------------------------------------
Government of the Netherlands,
8.25%, 2002 NLG 23,700 16,524
- - ------------------------------------------------------------
Italian Treasury
12.00%, 2001 ITL 3,000,000 1,761
8.50%, 1999 7,000,000 3,706
- - ------------------------------------------------------------
Kingdom of Denmark
6.00%, 1999 DKK 100,000 17,054
9.00%, 2000 84,000 15,966
8.00%, 2003 30,000 5,343
- - ------------------------------------------------------------
Kingdom of Spain
10.30%, 2002 ESP 70,000 523
8.30%, 1998 440,000 3,239
- - ------------------------------------------------------------
Republic of Argentina,
6.062%, 2001 USD 16,000 11,130
- - ------------------------------------------------------------
Republic of Finland
11.00%, 1997 FIM 21,000 5,273
11.00%, 1999 30,000 7,697
9.50%, 2004 27,000 6,526
- - ------------------------------------------------------------
Republic of Ireland
6.25%, 1999 IEP 5,255 7,829
6.25%, 2004 8,425 11,466
- - ------------------------------------------------------------
Republic of Portugal
11.875%, 2000 PTE 550,000 3,761
10.625%, 2003 350,000 2,249
12.50%, 1998 500,000 3,477
- - ------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS-28.6%
(Cost $202,525) 212,730
- - ------------------------------------------------------------
<CAPTION>
Principal
Amount Value
---------- ------------
<S> <C> <C>
CORPORATE OBLIGATIONS
BROADCASTING, CABLESYSTEMS AND
PUBLISHING-4.9%
- - ------------------------------------------------------------
Act III Broadcasting, Inc.,
9.625%, 2003 $ 120 $ 119
- - ------------------------------------------------------------
Adelphia Communications Corporation,
12.50%, 2002 1,680 1,637
- - ------------------------------------------------------------
Affinity Group, Inc., 11.50%,
2003 1,480 1,442
- - ------------------------------------------------------------
(b)Bell Cablemedia PLC, 11.95%,
2004 2,180 1,379
- - ------------------------------------------------------------
Big Flower Press, Inc., 10.75%,
2003 1,390 1,345
- - ------------------------------------------------------------
CF Cable TV Inc., 11.625%, 2005 850 892
- - ------------------------------------------------------------
Cablevision Industries
Corporation, 10.75%, 2002 1,945 2,071
- - ------------------------------------------------------------
Cablevision Systems Corporation
9.875%, 2013 900 891
9.875%, 2023 150 146
- - ------------------------------------------------------------
Century Communications Corporation
9.50%, 2000 300 298
11.875%, 2003 1,900 2,012
9.50%, 2005 2,330 2,266
- - ------------------------------------------------------------
Comcast Corporation
9.50%, 2008 970 931
10.625%, 2012 310 322
- - ------------------------------------------------------------
Continental Cablevision, Inc.,
9.50%, 2013 3,505 3,479
- - ------------------------------------------------------------
International Cabletel, zero
coupon, 2005 3,690 2,048
- - ------------------------------------------------------------
Katz Corporation, 12.75%, 2002 1,235 1,321
- - ------------------------------------------------------------
(b)Neodata Services, 12.00%,
2003 1,130 879
- - ------------------------------------------------------------
Rogers Cablesystems Limited
9.625%, 2002 870 870
10.00%, 2005 750 761
- - ------------------------------------------------------------
Sinclair Broadcasting Group,
Inc., 10.00%, 2003 960 955
- - ------------------------------------------------------------
Summit Communications Group, Inc.,
10.50%, 2005 1,230 1,291
- - ------------------------------------------------------------
Time Warner Inc., 8.375%, 2033 3,500 3,166
- - ------------------------------------------------------------
Turner Broadcasting, 8.375%,
2013 860 742
- - ------------------------------------------------------------
Univision TV, 11.75%, 2001 670 717
- - ------------------------------------------------------------
Viacom International Inc.,
8.00%, 2006 2,920 2,694
- - ------------------------------------------------------------
Videotron Groupe, 10.625%, 2005 550 572
- - ------------------------------------------------------------
(b)Videotron Holdings PLC,
11.125%, 2004 1,450 903
- - ------------------------------------------------------------
Webcraft Technology, Inc.,
9.375%, 2002 670 593
- - ------------------------------------------------------------
36,742
BUSINESS SERVICES-1.0%
- - ------------------------------------------------------------
Comdata Network, Inc.
12.50%, 1999 2,100 2,268
13.25%, 2002 80 88
- - ------------------------------------------------------------
Corporate Express Inc., 9.125%,
2004 940 897
- - ------------------------------------------------------------
</TABLE>
6
<PAGE> 9
(in thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
---------- ------------
<S> <C> <C>
- - ------------------------------------------------------------
Computervision Corporation,
10.875%, 1997 $ 1,450 $ 1,458
convertible, 8.00%, 2009 200 138
- - ------------------------------------------------------------
Merisel, Inc., 12.50%, 2004 1,580 1,406
- - ------------------------------------------------------------
Outdoor Systems, 10.75%, 2003 1,170 1,111
- - ------------------------------------------------------------
7,366
CHEMICALS-1.5%
- - ------------------------------------------------------------
Agriculture Mining and
Chemicals, Inc., 10.75%, 2003 780 811
- - ------------------------------------------------------------
Arcadian Partners, L.P.,
10.75%, 2005 1,380 1,414
- - ------------------------------------------------------------
Atlantis Group, Inc., 11.00%,
2003 1,198 1,204
- - ------------------------------------------------------------
G-I Holdings Inc., zero coupon, 1998 2,310 1,571
- - ------------------------------------------------------------
Huntsman Corporation, 10.625%,
2001 390 411
- - ------------------------------------------------------------
Pioneer Americas Acquisition
Corp., 13.275%, 2005 1,400 1,456
- - ------------------------------------------------------------
Rexene Corporation, 11.75%,
2004 1,620 1,741
- - ------------------------------------------------------------
UCC Investors Holdings, Inc.
10.50%, 2002 1,990 2,040
11.00%, 2003 260 267
- - ------------------------------------------------------------
10,915
COMMUNICATIONS-2.2%
- - ------------------------------------------------------------
(b)Call-Net Enterprises Inc.,
13.25%, 2004 850 475
- - ------------------------------------------------------------
(b)Celcaribe, S.A., 13.50%,
2004 1,050 877
- - ------------------------------------------------------------
(b)Cellular, Inc., 11.75%, 2003 705 504
- - ------------------------------------------------------------
(b)Echostar Communications
Unit, 12.00%, 2004 4,680 2,434
- - ------------------------------------------------------------
Paging Network,
11.75%, 2002 1,365 1,445
(a) 9.25%, 2002 1,000 1,000
8.875%, 2006 1,040 926
- - ------------------------------------------------------------
(b)PanAmSat, L.P., 11.375%,
2003 2,680 1,856
- - ------------------------------------------------------------
Rogers Cantel, 11.125%, 2002 1,521 1,582
- - ------------------------------------------------------------
Rogers Communications Inc.,
10.875%, 2004 420 430
- - ------------------------------------------------------------
Tele-Communications Inc.
9.80%, 2012 2,100 2,177
8.75%, 2023 1,500 1,376
- - ------------------------------------------------------------
USA Mobile Communications, Inc. II,
14.00%, 2004 1,020 1,102
- - ------------------------------------------------------------
16,184
CONSTRUCTION MATERIALS-2.6%
- - ------------------------------------------------------------
American Standard Inc.
10.875%, 1999 310 328
11.375%, 2004 2,580 2,819
(b) 10.50%, 2005 2,160 1,582
- - ------------------------------------------------------------
(b)Building Materials
Corporation of America,
11.75%, 2004 3,630 2,105
- - ------------------------------------------------------------
Nortek, Inc., 9.875%, 2004 1,785 1,678
- - ------------------------------------------------------------
Triangle Pacific Corp., 10.50%,
2003 2,260 2,260
- - ------------------------------------------------------------
<CAPTION>
Principal
Amount Value
---------- ------------
<S> <C> <C>
- - ------------------------------------------------------------
Waxman Industries, Inc.
12.25%, 1998 $ 1,080 $ 1,026
13.75%, 1999 4,227 3,677
(a)(b) 12.75%, 2004, with
warrants expiring 2004 7,552 3,540
- - ------------------------------------------------------------
19,015
CONSUMER PRODUCTS AND SERVICES-2.5%
- - ------------------------------------------------------------
Allied Waste Industry, 12.00%,
2004 740 751
- - ------------------------------------------------------------
Bally's Park Place Funding,
Inc., 9.25%, 2004 2,850 2,572
- - ------------------------------------------------------------
Beatrice Foods, Inc., 12.00%,
2001 2,300 2,116
- - ------------------------------------------------------------
Cinemark USA, Inc., 12.00%,
2002 893 942
- - ------------------------------------------------------------
(b)Dr. Pepper Bottling
Holdings, Inc., 11.625%, 2003 1,290 955
- - ------------------------------------------------------------
Empress River Casino, 10.75%,
2002 1,270 1,264
- - ------------------------------------------------------------
Mid-American Waste Systems
Inc., 12.25%, 2003 1,160 1,184
- - ------------------------------------------------------------
P&C Food Markets, Inc., 11.50%,
2001 880 932
- - ------------------------------------------------------------
Players International, 10.875%,
2005 360 363
- - ------------------------------------------------------------
RJR Nabisco, 8.75%, 2005 3,500 3,428
- - ------------------------------------------------------------
Santa Fe Hotel, Inc., 11.00%,
2000, with warrants expiring
1996 710 705
- - ------------------------------------------------------------
Trump Taj Mahal, PIK, 11.35%,
1999 4,867 3,687
- - ------------------------------------------------------------
18,899
DRUGS AND HEALTH CARE-1.2%
- - ------------------------------------------------------------
Abbey Healthcare Group
Incorporated, 9.50%, 2002 760 777
- - ------------------------------------------------------------
Amerisource Distribution Corp., PIK,
11.25%, 2005 1,356 1,495
- - ------------------------------------------------------------
Charter Medical Corporation,
11.25%, 2004 1,220 1,275
- - ------------------------------------------------------------
Dade International Inc.,
13.00%, 2005 1,030 1,063
- - ------------------------------------------------------------
National Medical Enterprises
9.625%, 2002 540 558
10.125%, 2005 1,450 1,515
- - ------------------------------------------------------------
Ornda Healthcorporation
12.25%, 2002 1,240 1,352
11.375%, 2004 900 968
- - ------------------------------------------------------------
9,003
ENERGY AND RELATED SERVICES-1.3%
- - ------------------------------------------------------------
Commonwealth Edison Co.,
8.125%, 2007 1,750 1,702
- - ------------------------------------------------------------
Dual Drilling Company, 9.875%,
2004 250 214
- - ------------------------------------------------------------
Empire Gas Corporation,
7.00%, 2004,
with warrants expiring 2004 1,600 1,189
- - ------------------------------------------------------------
Global Marine Inc., 12.75%,
1999 320 350
- - ------------------------------------------------------------
Gulf Canada Resources Limited,
9.25%, 2004 770 739
- - ------------------------------------------------------------
HS Resources, 9.875%, 2003 620 598
- - ------------------------------------------------------------
</TABLE>
7
<PAGE> 10
(in thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
---------- ------------
<S> <C> <C>
- - ------------------------------------------------------------
Long Island Lighting Co.,
7.125%, 2005 $ 3,600 $ 2,990
- - ------------------------------------------------------------
TransTexas Gas Corporation,
10.50%, 2000 1,570 1,656
- - ------------------------------------------------------------
WRT Energy Corporation,
13.875%, 2002 570 586
- - ------------------------------------------------------------
10,024
FINANCIAL SERVICES, HOME BUILDERS AND REAL ESTATE-1.1%
- - ------------------------------------------------------------
Continental Homes Holding,
12.00%, 1999 1,420 1,353
- - ------------------------------------------------------------
The Forecast Group L.P.,
11.375%, 2000 800 484
- - ------------------------------------------------------------
(a)Great America Holdings,
11.00%, 1998 800 803
- - ------------------------------------------------------------
Hovnanian Kent, 11.25%, 2002 1,594 1,413
- - ------------------------------------------------------------
J.M. Peters, 12.75%, 2002 550 467
- - ------------------------------------------------------------
NVR, Inc., 11.00%, 2003 1,250 1,150
- - ------------------------------------------------------------
Oriole Homes Corp., 12.50%,
2003 605 520
- - ------------------------------------------------------------
The Presley Companies, 12.50%,
2001 1,550 1,286
- - ------------------------------------------------------------
Toll Corp.
10.50%, 2002 280 281
9.50%, 2003 600 573
- - ------------------------------------------------------------
8,330
MANUFACTURING, METALS AND MINING-5.5%
- - ------------------------------------------------------------
Aftermarket Technology, 12.00%,
2004 910 955
- - ------------------------------------------------------------
Allison Engine, 10.00%, 2003 770 857
- - ------------------------------------------------------------
Amstar Corporation, 11.375%,
1997 2,315 2,327
- - ------------------------------------------------------------
BE Aerospace, 9.75%, 2003 690 683
- - ------------------------------------------------------------
Bluebird Body Company, 11.75%,
2002 1,620 1,660
- - ------------------------------------------------------------
Earle M. Jorgensen Co., 10.75%,
2000 780 756
- - ------------------------------------------------------------
Essex Group Incorporated,
10.00%, 2003 925 902
- - ------------------------------------------------------------
Exide Corporation
10.75%, 2002 1,040 1,089
10.00%, 2005 2,100 2,137
- - ------------------------------------------------------------
Fairchild Corporation
12.00%, 2001 1,975 1,708
13.00%, 2007 733 616
- - ------------------------------------------------------------
Fairchild Industries, 12.25%,
1999 100 99
- - ------------------------------------------------------------
Fairfield Manufacturing
Company, 11.375%, 2001 890 837
- - ------------------------------------------------------------
Foamex L.P.
11.25%, 2002 2,090 2,147
11.875%, 2004 590 578
- - ------------------------------------------------------------
(b)Foamex - JPS Automotive
L.P., 14.00%, 2004, with
warrants expiring 1999 1,200 684
- - ------------------------------------------------------------
Great Dane Holding, 12.75%,
2001 2,225 2,247
- - ------------------------------------------------------------
GS Technologies, 12.00%, 2004 1,220 1,225
- - ------------------------------------------------------------
<CAPTION>
Principal
Amount Value
---------- ------------
<S> <C> <C>
- - ------------------------------------------------------------
Gulf States Steel, convertible,
13.50%, 2003 $ 1,000 $ 1,025
- - ------------------------------------------------------------
Jordan Industries, 10.375%,
2003 660 620
- - ------------------------------------------------------------
JPS Automotive Products
Corporation, 11.125%, 2001 1,050 1,042
- - ------------------------------------------------------------
K & F Industries, Inc., 13.75%,
2001 5,225 5,225
- - ------------------------------------------------------------
(a)Lehman (K&F) Promissory
Note, 6.125%, 1997 500 463
- - ------------------------------------------------------------
Newflo Corporation, 13.25%,
2002 1,070 1,043
- - ------------------------------------------------------------
Pace Industries, Inc., 10.625%,
2002 580 542
- - ------------------------------------------------------------
Penda Industries, Inc., 10.75%,
2004 670 610
- - ------------------------------------------------------------
Polymer Group Inc., 12.25%,
2002 900 891
- - ------------------------------------------------------------
RHI Holdings, 11.875%, 1999 1,165 1,127
- - ------------------------------------------------------------
SPX Corporation, 11.75%, 2002 575 612
- - ------------------------------------------------------------
Sequa Corporation
9.625%, 1999 200 198
8.75%, 2001 820 773
9.375%, 2003 310 289
- - ------------------------------------------------------------
Thermedyne Industries, Inc.,
PIK
10.25%, 2002 1,607 1,567
10.75%, 2003 782 759
- - ------------------------------------------------------------
Unisys Corporation
13.50%, 1997 370 405
10.625%, 1999 2,031 2,133
- - ------------------------------------------------------------
40,831
PAPER AND FOREST PRODUCTS AND CONTAINERS-3.6%
- - ------------------------------------------------------------
Berry Plastics Corporation,
12.25%, 2004, with warrants
expiring 2004 505 507
- - ------------------------------------------------------------
Container Corporation of
America, 11.25%, 2004 1,005 1,065
- - ------------------------------------------------------------
Gaylord Container Corporation,
11.50%, 2001 735 777
(b) 12.75%, 2005 1,950 1,874
warrants expiring 1996 743 6,734
- - ------------------------------------------------------------
Maxxam Group, Inc., 11.25%,
2003 810 778
- - ------------------------------------------------------------
Owens-Illinois, Inc.
11.00%, 2003 2,340 2,533
9.95%, 2004 2,220 2,209
9.75%, 2004 210 207
- - ------------------------------------------------------------
Repap New Brunswick, 10.625%,
2005 1,440 1,462
- - ------------------------------------------------------------
Riverwood International
Corporation, 11.25%, 2002 580 625
- - ------------------------------------------------------------
SD Warren Company, 12.00%, 2004 1,020 1,102
- - ------------------------------------------------------------
Stone - Consolidated
Corporation, 10.25%, 2000 1,100 1,129
- - ------------------------------------------------------------
Stone Container Corporation,
10.75%, 2002 4,095 4,310
- - ------------------------------------------------------------
Sweetheart Cup Company, Inc.,
10.50%, 2003 950 931
- - ------------------------------------------------------------
26,243
</TABLE>
8
<PAGE> 11
(in thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
---------- ------------
<S> <C> <C>
RETAILING-3.7%
- - ------------------------------------------------------------
Color Tile, Inc., 10.75%, 2001 $ 2,310 $ 1,588
- - ------------------------------------------------------------
Dominicks, 10.875%, 2005 780 790
- - ------------------------------------------------------------
(a)Dominick's Bank Loan,
12.25%, 2005 1,300 1,300
- - ------------------------------------------------------------
Federated Department Stores,
Inc., convertible, 9.72%,
2004 500 501
- - ------------------------------------------------------------
Finlay Fine Jewelry
Corporation, 10.625%, 2003 780 745
- - ------------------------------------------------------------
Flagstar Corporation
10.75%, 2001 740 703
10.875%, 2002 780 741
- - ------------------------------------------------------------
Food 4 Less Supermarket,
13.75%, 2001 3,200 3,440
- - ------------------------------------------------------------
(c)Grand Union Company, 12.25%,
2002 3,510 1,158
- - ------------------------------------------------------------
(b)International Semi-Tech
Microelectronics, Inc., 11.50%,
2003 1,710 817
- - ------------------------------------------------------------
Orchard Supply Hardware
Corporation, 9.375%, 2002 900 738
- - ------------------------------------------------------------
Pamida Holdings., 11.75%, 2003 2,390 2,271
- - ------------------------------------------------------------
Pathmark Stores, Inc.
11.625%, 2002 1,560 1,599
9.625%, 2003 1,010 970
- - ------------------------------------------------------------
Penn Traffic Company
8.625%, 2003 790 732
9.625%, 2005 1,080 1,013
- - ------------------------------------------------------------
Ralph's Grocery Company, 9.00%,
2003 1,630 1,597
- - ------------------------------------------------------------
Service Merchandise Company,
Inc., 9.00%, 2004 953 762
- - ------------------------------------------------------------
Southland Corporation, 5.00%,
2003 4,484 3,273
- - ------------------------------------------------------------
Specialty Retailers, Inc.,
11.00%, 2003 990 931
- - ------------------------------------------------------------
Thrifty Payless
11.75%, 2003 980 1,044
12.25%, 2004 610 628
- - ------------------------------------------------------------
27,341
TRANSPORTATION-.9%
- - ------------------------------------------------------------
Burlington Motor Holdings,
Inc., 11.50%, 2003 1,490 1,319
- - ------------------------------------------------------------
Delta Airlines, 9.375%, 2007 1,646 1,696
- - ------------------------------------------------------------
OMI Corp., 10.25%, 2003 1,690 1,502
- - ------------------------------------------------------------
(b)Transtar Holdings, L.P.,
13.375%, 2003 670 389
- - ------------------------------------------------------------
<CAPTION>
Number of
Shares,
Contracts
or
Principal
Amount Value
---------- ------------
<S> <C> <C>
- - ------------------------------------------------------------
United Airlines
10.67%, 2004 $ 875 $ 955
11.21%, 2014 875 985
- - ------------------------------------------------------------
6,846
TOTAL CORPORATE OBLIGATIONS-32.0%
(Cost: $239,351) 237,739
- - ------------------------------------------------------------
COMMON AND PREFERRED STOCKS
- - ------------------------------------------------------------
(c)Computervision Corporation 377,410shs. 2,076
- - ------------------------------------------------------------
J. M. Peters 4,345 4
- - ------------------------------------------------------------
(c)Interco Incorporation,
warrants expiring 1999 49,654 25
- - ------------------------------------------------------------
K-III Communications, Inc., PIK 4,888 457
- - ------------------------------------------------------------
Panamsat Corporation, PIK 550 557
- - ------------------------------------------------------------
(a)(c)Peebles, Inc. 146,877 3,305
- - ------------------------------------------------------------
(c)Specialty Equipment
Companies, Inc. 120,500 1,491
- - ------------------------------------------------------------
(c)Thrifty Payless Inc. 25,650 102
- - ------------------------------------------------------------
UGI Inc. 1,083 1
- - ------------------------------------------------------------
Walter Industries, Inc. 55,160 683
- - ------------------------------------------------------------
TOTAL COMMON AND
PREFERRED STOCK-1.2%
(Cost: $8,196) 8,701
- - ------------------------------------------------------------
LONG CALL AND PUT OPTIONS
- - ------------------------------------------------------------
Treasury Bond Futures Call
Option,
June 1995; 104 - 105 Strike 865cts. 874
- - ------------------------------------------------------------
Republic of Argentina Spread Put Option,
June 1995; 525 Strike 3,500 175
- - ------------------------------------------------------------
TOTAL LONG OPTIONS-.1%
(Cost: $1,010) 1,049
- - ------------------------------------------------------------
MONEY MARKET INSTRUMENTS
Yield-6.04-6.10%
Due-May 1995
- - ------------------------------------------------------------
Dayton-Hudson Corporation $10,000 9,956
- - ------------------------------------------------------------
Enserch Corporation 5,400 5,398
- - ------------------------------------------------------------
TOTAL MONEY MARKET
INSTRUMENTS-2.0%
(Cost: $15,354) 15,354
- - ------------------------------------------------------------
TOTAL INVESTMENTS-109.5%
(Cost: $803,072) 814,265
- - ------------------------------------------------------------
LIABILITIES, LESS
OTHER ASSETS-(9.5%) (70,851)
- - ------------------------------------------------------------
NET ASSETS-100% $743,414
- - ------------------------------------------------------------
</TABLE>
See accompanying Notes to Portfolio of Investments.
9
<PAGE> 12
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The following securities may require registration under the
Securities Act of 1933 or an exemption therefrom in order to effect sale in
the ordinary course of business; they were valued at cost on the dates of
acquisition. These securities are valued at fair value as determined in
good faith by the Board of Trustees of the Fund. There were no market
quotations available for unrestricted securities of the same class on the
dates of acquisition or on April 30, 1995. At April 30, 1995, the value of
the Fund's restricted securities was $6,899,000, which represented .93% of
net assets.
<TABLE>
<CAPTION>
Principal Amount
Date of or Number Unit
Security Description Acquisition of Shares Cost
<S> <C> <C> <C>
- - ---------------------------------------------------------------------------------------------------------------------
Dominick's Bank Loan, 12.25%, 2005 March, 1995 $1,300,000 $100.00
- - ---------------------------------------------------------------------------------------------------------------------
July 1990 and
Great American Holdings, 11.00%, 1998 March 1992 800,000 80.84
- - ---------------------------------------------------------------------------------------------------------------------
Lehman (K&F) Promissory Note, 6.125%, 1997 July 1994 500,000 90.75
- - ---------------------------------------------------------------------------------------------------------------------
Paging Network, 9.25%, 2002 March, 1995 1,000,000 99.63
- - ---------------------------------------------------------------------------------------------------------------------
July 1989,
February 1992
Peebles, Inc., common stock and August 1994 146,877shs. 27.37
- - ---------------------------------------------------------------------------------------------------------------------
Waxman Industries, Inc., warrants June, 1994 222,607 2.00
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) Deferred interest obligation; currently zero coupon under the terms of the
initial offering.
(c) Non-income producing security. In the case of a bond, generally denotes
that the issuer has defaulted on the payment of interest or has filed for
bankruptcy.
"PIK" denotes that interest or dividends are paid in kind.
Based on the cost of investments of $803,072,000, for federal income
tax purposes at April 30, 1995, the aggregate gross unrealized appreciation
was $26,172,000, the aggregate gross unrealized depreciation was
$14,979,000 and the net unrealized appreciation of investments was
$11,193,000.
10
<PAGE> 13
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1995
(in thousands)
<TABLE>
<S> <C>
ASSETS
- - ------------------------------------------------------
Investments, at value
(Cost: $803,072) $814,265
- - ------------------------------------------------------
Receivable for:
Fund shares sold 502
- - ------------------------------------------------------
Investments sold 78,971
- - ------------------------------------------------------
Interest 17,718
- - ------------------------------------------------------
Total assets 911,456
- - ------------------------------------------------------
LIABILITIES AND NET ASSETS
- - ------------------------------------------------------
Cash overdraft 5,928
- - ------------------------------------------------------
Payable for:
Fund shares redeemed 606
- - ------------------------------------------------------
Investments purchased 160,602
- - ------------------------------------------------------
Management fee 348
- - ------------------------------------------------------
Distribution services fee 162
- - ------------------------------------------------------
Administrative services fee 137
- - ------------------------------------------------------
Custodian and transfer agent fees
and related expenses 192
- - ------------------------------------------------------
Other 67
- - ------------------------------------------------------
Total liabilities 168,042
- - ------------------------------------------------------
Net assets $743,414
- - ------------------------------------------------------
ANALYSIS OF NET ASSETS
- - ------------------------------------------------------
Excess of amounts received from
issuance of shares over amounts paid
on redemptions of shares on
account of capital $909,033
- - ------------------------------------------------------
Accumulated net realized loss on sales of
investments and foreign currency
transactions (187,710)
- - ------------------------------------------------------
Unrealized appreciation of investments and
foreign currency transactions 11,193
- - ------------------------------------------------------
Undistributed net investment income 10,898
- - ------------------------------------------------------
Net assets applicable to shares
outstanding $743,414
- - ------------------------------------------------------
THE PRICING OF SHARES
- - ------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per
share
($482,913 / 82,794 shares outstanding) $5.83
- - ------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net
asset value or 4.50% of offering price) $6.10
- - ------------------------------------------------------
CLASS B SHARES
Net asset value and redemption
price (subject to contingent deferred
sales
charge) per share
($258,600 / 44,335 shares outstanding) $5.83
- - ------------------------------------------------------
CLASS C SHARES
Net asset value and redemption
price per share
($1,901 / 325 shares outstanding) $5.85
- - ------------------------------------------------------
See accompanying Notes to Financial Statements.
</TABLE>
STATEMENT OF OPERATIONS
Six months ended April 30, 1995
(in thousands)
<TABLE>
<S> <C>
INTEREST INCOME $ 44,381
- - ------------------------------------------------------
EXPENSES
- - ------------------------------------------------------
Management fee 2,030
- - ------------------------------------------------------
Administrative services fee 765
- - ------------------------------------------------------
Distribution fee 955
- - ------------------------------------------------------
Custodian and transfer agent
fees and related expenses 1,156
- - ------------------------------------------------------
Professional fees 28
- - ------------------------------------------------------
Reports to shareholders 68
- - ------------------------------------------------------
Trustees' fees and other 25
- - ------------------------------------------------------
Total expenses 5,027
- - ------------------------------------------------------
Net investment income 39,354
- - ------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
- - ------------------------------------------------------
Net realized loss on sales of investments
and foreign currency transactions
(including options purchased) (24,023)
- - ------------------------------------------------------
Net realized gain from futures
transactions 2,890
- - ------------------------------------------------------
Net realized loss from options written (121)
- - ------------------------------------------------------
Net realized loss on investments (21,254)
- - ------------------------------------------------------
Net change in balance of unrealized
depreciation
of investments and foreign currency
transactions 20,645
- - ------------------------------------------------------
Net loss on investments (609)
- - ------------------------------------------------------
Net increase in net assets resulting from
operations $ 38,745
- - ------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(in thousands)
<TABLE>
<CAPTION>
Six months
ended Year ended
April 30, October 31,
1995 1994
---------- -----------
<S> <C> <C>
OPERATIONS
- - ----------------------------------------------------------
Net investment income $ 39,354 44,924
- - ----------------------------------------------------------
Net realized loss on
investments (21,254) (44,410)
- - ----------------------------------------------------------
Net change in unrealized
depreciation of
investments 20,645 4,872
- - ----------------------------------------------------------
Net increase in net assets
resulting from operations 38,745 5,386
- - ----------------------------------------------------------
Dividends to shareholders
from net investment income (30,656) (43,835)
- - ----------------------------------------------------------
Net (decrease) increase from
capital share transactions (2,689) 447,951
- - ----------------------------------------------------------
Total increase in net assets 5,400 409,502
- - ----------------------------------------------------------
NET ASSETS
- - ----------------------------------------------------------
Beginning of period 738,014 328,512
- - ----------------------------------------------------------
End of period (including
undistributed net investment
income of $10,898 in 1995
and $2,200 in 1994) $743,414 738,014
- - ----------------------------------------------------------
</TABLE>
11
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE FUND
Kemper Diversified Income Fund currently offers three classes of shares. Class A
shares are sold to investors subject to an initial sales charge. Class B shares
are sold without an initial sales charge but are subject to higher ongoing
expenses than Class A shares and a contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically convert to Class A shares six
years after issuance. Class C shares are sold without an initial or a contingent
deferred sales charge but are subject to higher ongoing expenses than Class A
shares and do not convert into another class. The Fund may offer, to a limited
group of investors, Class I shares (none sold through April 30, 1995) which are
not subject to initial or contingent deferred sales charges and have lower
ongoing expenses than other classes. 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. Portfolio securities
that are traded on a domestic securities exchange are valued at the last sale
price on the exchange where primarily traded or, if there is no recent sale, at
the last current bid quotation. Portfolio securities that are primarily traded
on foreign securities exchanges are generally valued at the preceding closing
values of such securities on their respective exchanges where primarily traded.
Securities not so traded are valued at the last current bid quotation if market
quotations are available. Exchange traded 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 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. Forward foreign currency contracts are valued at the
forward rates prevailing on the day of valuation. Other securities and assets
are valued at fair value as determined in good faith by the Board of Trustees.
CURRENCY TRANSLATION
The books and records of the Fund are maintained in U.S. dollars. All
assets and liabilities initially expressed in foreign currency values are
converted into U.S. dollar values at the mean between the bid and offered
quotations of such currencies against U.S. dollars as last quoted by a
recognized dealer. If such quotations are not readily available, the rate of
exchange is determined in good faith by the Board of Trustees. Income and
expenses and purchases and sales of investments are translated into U.S.
dollars at the rate of exchange prevailing on the respective dates of such
transactions. The Fund includes that portion of the results of operations
resulting from changes in foreign exchange rates with net realized and
unrealized gain or loss from investments and foreign currency transactions, as
appropriate.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME
Investment transactions are accounted for on the trade date (date the order to
buy or sell is executed). Dividend income is recorded on the ex-dividend date
and interest income is recorded on the accrual basis. Interest income includes
premium and discount amortization on money market instruments; it also includes
original issue and market discount amortization on long-term fixed income
securities. Realized gains and losses from investment transactions are reported
on an identified cost basis. Realized and unrealized gains and losses on
financial futures, options and forward foreign currency contracts are included
in net realized and unrealized gain (loss) on investments, as appropriate.
FUND SHARE VALUATION
Fund shares are sold and redeemed on a continuous basis at net asset value (plus
an initial sales charge on most sales of Class A shares). Proceeds payable on
redemption of Class B shares will be reduced by the amount of any applicable
contingent deferred sales charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is determined as of the earlier
of 3:00 p.m. Chicago time or the close of the Exchange. The net asset value per
share is determined separately for each class by dividing the Fund's net assets
attributable to that class by the number of shares of the class outstanding.
FEDERAL INCOME TAXES AND DIVIDENDS TO SHAREHOLDERS
The Fund has complied with the special provisions of the Internal Revenue Code
available to investment companies for the six months ended April 30, 1995. The
accumulated net realized loss on sales of investments for federal income tax
purposes at April 30, 1995, amounting to approximately $273,858,000, is
available to offset future taxable gains. If not applied, the loss carryover
expires during the period 1996 through 2003.
On May 17, 1995, the following per share dividends were declared, payable May
31, 1995 to shareholders of record on May 18, 1995.
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C>
- - --------------------------------------------------------------------
Income $ .0415 .0369 .0371
- - --------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
The Fund declares and pays dividends on a monthly basis. Net realized capital
gains, if any, reduced by capital loss carryovers, will be distributed at least
annually. Dividends payable to its shareholders are recorded by the Fund on the
ex-dividend date.
Differences in dividends per share are due to different class expenses.
Dividends payable to its shareholders are recorded by the Fund on the
ex-dividend date.
Distributions are determined in accordance with income tax principles which may
treat certain transactions differently from generally accepted accounting
principles.
OTHER CONSIDERATIONS
The Fund invests a substantial portion of its assets in high yield bonds. These
bonds ordinarily are in the lower rating categories of recognized rating
agencies or are non-rated, and thus involve more risk than higher rated bonds.
Kemper Financial Services, Inc. (KFS), the Fund's investment manager, may serve
as a member of various bondholders' committees. These committees represent the
interests of bondholders in restructuring negotiations and court proceedings. As
a result of participation on such committees, KFS may receive material,
non-public information with respect to bonds the Fund owns. Accordingly, the
Fund may be temporarily precluded from effecting transactions in such bonds due
to various restraints imposed by federal and state securities laws involving the
possession of material, non-public information.
3. TRANSACTIONS WITH AFFILIATES
MANAGEMENT AGREEMENT
The Fund has a management agreement with KFS, and pays a management fee at an
annual rate of .58% of the first $250 million of average daily net assets
declining gradually to .42% of average daily net assets in excess of $12.5
billion. The Fund incurred a management fee of $2,030,000 for the six months
ended April 30, 1995.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT
The Fund has an underwriting and distribution services agreement with Kemper
Distributors, Inc. (KDI). Before February 1, 1995, KFS was the Fund's principal
underwriter and distributor. As principal underwriter for the Fund, KDI (as
successor to KFS) retained commissions of $35,000 for the six months ended
April 30, 1995 for sales of Class A shares, after allowing $206,000 as
commissions to firms, of which $29,000 was paid to firms affiliated with KDI.
For distribution services, the Fund pays KDI a fee of .75% of average daily net
assets of the Class B and Class C shares. Pursuant to the agreement, KDI enters
into related selling group agreements with various firms that provide
distribution services to investors. KDI compensates these firms at various
rates for sales of Class B and Class C shares. During the six months ended
April 30, 1995, the Fund incurred a distribution services fee for Class B and
Class C shares of $955,000 and KDI paid $520,000 for commissions and
distribution fees to firms, including $74,000 to firms affiliated with KDI. In
addition, KDI received $357,000 of contingent deferred sales charges.
ADMINISTRATIVE SERVICES AGREEMENT
The Fund has an administrative services agreement with KDI. Before February 1,
1995, KFS was the Fund's administrator. For providing information and
administrative services to 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. 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. For the six months ended April 30, 1995, the Fund incurred an
administrative services fee of $765,000 and KDI (as successor to KFS) paid
$764,000 to firms, including $109,000 that was paid to firms affiliated with
KDI.
CUSTODIAN AND TRANSFER AGENT AGREEMENT
The Fund has a custodian agreement and a transfer agent agreement with Investors
Fiduciary Trust Company (IFTC), which was 50% owned by KFS until January 31,
1995, when KFS completed the sale of IFTC to a third party. For the six months
ended April 30, 1995, the Fund incurred custodian and transfer agent fees of
$847,000 (excluding related expenses). Pursuant to a services agreement with
IFTC, Kemper Service Company (KSvC), an affiliate of KFS, is the shareholder
service agent of the Fund. For the six months ended April 30, 1995, IFTC
remitted shareholder service fees of $839,000 to KSvC.
OFFICERS AND TRUSTEES
Certain officers or trustees of the Fund are also officers or directors of KFS.
During the six months ended April 30, 1995, the Fund made no payments to its
officers and incurred trustees' fees of $10,000 to independent trustees.
13
<PAGE> 16
4. INVESTMENT TRANSACTIONS
For the six months ended April 30, 1995, investment transactions (excluding
short term instruments) are as follows (in thousands):
<TABLE>
<S> <C>
Purchases $836,232
- - ------------------------------------------------------------
Proceeds from sales $780,458
- - ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONTRACTS PREMIUMS
--------- --------
<S> <C> <C>
Options written:
Options outstanding at
beginning of period -- --
- - ----------------------------------------------------------
Option contracts written 520 $244,000
- - ----------------------------------------------------------
Options terminated by repurchases 520 244,000
- - ----------------------------------------------------------
Options outstanding at end of
period -- --
- - ----------------------------------------------------------
</TABLE>
5. CAPITAL SHARE TRANSACTIONS
The following table summarizes the activity in capital shares of the Fund (in
thousands):
<TABLE>
<CAPTION>
Six months ended Year ended
April 30, 1995 October 31, 1994
------------------- -------------------
Shares Amount Shares Amount
------- -------- ------- --------
<S> <C> <C> <C> <C>
Shares sold:
Class A 7,980 $ 44,818 17,927 $109,172
- - --------------------
Class B 6,263 35,343 6,340 37,396
- - --------------------
Class C 255 1,443 207 1,213
- - --------------------
Shares issued
in reinvestment
of dividends:
Class A 2,227 12,589 3,499 21,004
- - --------------------
Class B 1,106 6,251 945 5,527
- - --------------------
Class C 8 46 2 9
- - --------------------
Shares redeemed:
Class A (11,982) (67,802) (16,549) (119,150)
- - --------------------
Class B (6,167) (34,888) (8,506) (49,888)
- - --------------------
Class C (86) (489) (62) (361)
- - --------------------
Conversion of
shares:
Class A 2,400 13,608 3,247 19,062
- - --------------------
Class B (2,400) (13,608) (3,246) (19,062)
- - --------------------
Shares issued in
acquisition (a):
Class A -- -- 24,583 146,076
- - --------------------
Class B -- -- 49,999 296,953
- - --------------------
Net increase
(decrease) from
capital share
transactions $ (2,689) $447,951
- - --------------------
</TABLE>
(a) On May 27, 1994, the Fund acquired assets of Kemper Investment
Portfolios-Diversified Income Portfolio in a tax-free exchange.
14
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------
Six months
ended
April 30, Year ended October 31
1995 1994 1993 1992 1991
---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 5.77 6.23 5.65 5.47 4.14
- - -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .32 .52 .59 .63 .60
- - -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign
currency (.01) (.45) .58 .14 1.36
- - -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .31 .07 1.17 .77 1.96
- - -----------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .25 .53 .59 .59 .63
- - -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 5.83 5.77 6.23 5.65 5.47
- - -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%): 5.57 1.02 21.60 14.59 50.58
- - -----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (%):
Expenses 1.06 1.12 1.10 1.19 1.21
- - -----------------------------------------------------------------------------------------------------------------------------
Net investment income 10.22 8.81 9.74 11.02 13.41
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Class B Class C
------------------------- -------------------------
Six months May 31, Six months May 31,
ended 1994 to ended 1994 to
April 30, October 31, April 30, October 31,
1995 1994 1995 1994
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $5.77 5.94 $5.79 5.95
- - --------------------------------------------------------------------
Income from investment operations:
Net investment income .29 .19 .30 .20
- - --------------------------------------------------------------------
Net realized and unrealized loss on investments and foreign
currency (.01) (.17) (.01) (.17)
- - --------------------------------------------------------------------
Total from investment operations .28 .02 .29 .03
- - --------------------------------------------------------------------
Less distribution from net investment income .22 .19 .23 .19
- - --------------------------------------------------------------------
Net asset value, end of period $5.83 5.77 $5.85 5.79
- - --------------------------------------------------------------------
TOTAL RETURN (%): 5.09 .35 5.12 .55
- - --------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (%):
Expenses 1.99 1.97 1.80 1.96
- - --------------------------------------------------------------------
Net investment income 9.29 8.01 9.48 8.02
- - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Six months
ended
April 30, Year ended October 31
1995 1994 1993 1992 1991
---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA FOR ALL CLASSES:
Net assets at end of period (in thousands) $743,414 738,014 328,512 244,620 227,625
- - ---------------------------------------------------------------------
Portfolio turnover rate (%) 226 179 80 57 20
- - ---------------------------------------------------------------------
</TABLE>
NOTE: Ratios have been determined on an annualized basis. Total return is not
annualized and does not reflect the effect of any sales charges.
15
<PAGE> 18
(LOGO)
KEMPER FINANCIAL SERVICES, INC.
120 SOUTH LASALLE STREET
CHICAGO, IL 60603
KEMPER DIVERSIFIED INCOME FUND
Trustees Officers
STEPHEN B. TIMBERS JOHN E. PETERS
President and Trustee Vice President
DAVID W. BELIN J. PATRICK BEIMFORD, JR.
Trustee Vice President
LEWIS A. BURNHAM ROBERT S. CESSINE
Trustee Vice President
DONALD L. DUNAWAY GORDON K. JOHNS
Trustee Vice President
ROBERT B. HOFFMAN MICHAEL A. MCNAMARA
Trustee Vice President
DONALD R. JONES HARRY E. RESIS, JR.
Trustee Vice President
DAVID B. MATHIS PAUL F. SLOAN
Trustee Vice President
SHIRLEY D. PETERSON JONATHON W. TRUTTER
Trustee Vice President
WILLIAM P. SOMMERS PHILIP J. COLLORA
Trustee Vice President and
Secretary
CHARLES F. CUSTER
Vice President and
Assistant Secretary
JEROME L. DUFFY
Treasurer
ELIZABETH C. WERTH
Assistant Secretary
- - -----------------------------------------------------------
Legal Counsel Custodian and Transfer Agent
VEDDER, PRICE, KAUFMAN INVESTORS FIDUCIARY TRUST
& KAMMHOLZ COMPANY
222 North LaSalle Street 127 West 10th Street
Chicago, IL 60601 Kansas City, MO 64105
Shareholder Service Agent
KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
800-621-1048
Investment Manager
KEMPER FINANCIAL SERVICES, INC.
Principal Underwriter
KEMPER DISTRIBUTORS, INC.
120 South LaSalle Street
Chicago, IL 60603
(LOGO)
PRINTED ON RECYCLED PAPER.
This report is not to be distributed unless preceded 239730
KDIF-3 (6/95) Printed in the U.S.A.
or accompanied by a Kemper Fixed Income Funds prospectus.
