<PAGE> 1
Kemper Diversified
Income Fund
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED OCTOBER 31, 1995
Offering investors the opportunity for high current return
"Our optimism about the economy made us 'lonesome company' in the market but
provided opportunities to purchase longer-maturity investments at favorable
prices."
[KEMPER LOGO]
<PAGE> 2
Table of
Contents
3
General
Economic Overview
6
Performance Update
9
Portfolio Statistics
10
Terms to Know
11
Portfolio of
Investments
18
Report of
Independent Auditors
19
Financial Statements
21
Notes to
Financial Statements
26
Financial Highlights
At A Glance
Kemper Diversified Income Fund Total Returns for the year ended
October 31, 1995 (unadjusted for any sales charge):
<TABLE>
<CAPTION>
LIPPER
GENERAL BOND
FUNDS CATEGORY
CLASS A CLASS B CLASS C AVERAGE*
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
14% 12.90% 11.87% 11.95% 13.12%
12
10
8
0
</TABLE>
Net Asset Value
<TABLE>
<CAPTION>
AS OF AS OF
10/31/95 10/31/94
<S> <C> <C>
KEMPER DIVERSIFIED
INCOME FUND CLASS A $5.98 $5.77
- ----------------------------------------------------------
KEMPER DIVERSIFIED
INCOME FUND CLASS B $5.98 $5.77
- ----------------------------------------------------------
KEMPER DIVERSIFIED
INCOME FUND CLASS C $6.00 $5.79
- ----------------------------------------------------------
</TABLE>
KEMPER DIVERSIFIED INCOME FUND RANKINGS
COMPARED TO ALL OTHER FUNDS IN THE LIPPER GENERAL BOND FUNDS CATEGORY*
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------
<S> <C> <C> <C>
CLASS A #28 of 62 funds #1 of 15 #3 of 8
- -----------------------------------------------------------------------
CLASS B #46 of 62 funds N/A N/A
- -----------------------------------------------------------------------
CLASS C #44 of 62 funds N/A N/A
- -----------------------------------------------------------------------
</TABLE>
*Lipper Analytical Services, Inc. returns and rankings are based upon changes
in net asset value with all dividends reinvested and do not include the effect
of sales charges and, if they had, results may have been less favorable.
Returns and rankings are historical and do not reflect future performance.
DIVIDEND AND YIELD REVIEW
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF OCTOBER 31, 1995.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
1 YEAR INCOME: $0.4980 $0.4445 $0.4511
- ------------------------------------------------------------------------------
OCTOBER DIVIDEND: $0.0415 $0.0369 $0.0373
- ------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 8.33% 7.40% 7.46%
- ------------------------------------------------------------------------------
SEC YIELD+: 7.10% 6.50% 6.59%
- ------------------------------------------------------------------------------
</TABLE>
+Current annualized distribution rate is the latest monthly dividend
shown as an annualized percentage of net asset value on October 31, 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 October 31, 1995 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.
About Your Report
SHAREHOLDER REPORTS REVISED
Your fund's annual report is the best source for tracking the progress of your
investment. This report includes several changes that have been made in an
effort to provide additional information to you as well as to explain
significant changes to the fund over the last fiscal year. In addition, the
performance update includes commentary from your fund's portfolio manager or
management team on what might be expected in the coming months.
Specifically, your report now includes:
- - Terms you need to know related to your fund
- - A look at your fund's portfolio composition and how it has changed
- - The years to maturity of the fund's underlying investments.
If you have any comments about the revised format or if you have
suggestions for additional changes, please write to:
Kemper Mutual Funds
Shareholder Communications
120 South LaSalle Street
Chicago, IL 60603
<PAGE> 3
General Economic Overview
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS CHIEF EXECUTIVE AND CHIEF INVESTMENT OFFICER OF KEMPER
FINANCIAL SERVICES, INC. (KFS). KFS AND ITS AFFILIATES MANAGE APPROXIMATELY $63
BILLION IN ASSETS, INCLUDING $44 BILLION IN RETAIL MUTUAL FUNDS. TIMBERS IS A
GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM HARVARD UNIVERSITY.
DEAR SHAREHOLDER,
Investors enjoyed generally positive performance in both the fixed income and
stock markets in the first 10 months of 1995. At this point in the year, the
returns of most leading securities markets worldwide are significantly higher
than they were at the same time in 1994.
We have an excellent environment for financial assets. After several
quarters of robust growth, the United States economy seems to be growing at a
pace that investors find comfortable. Contrary to isolated reports that caused
some observers to become concerned, the economy is in no jeopardy of recession.
Its health was confirmed with the news that the economy grew (as measured by
real gross domestic product [GDP]) at an annual rate of 4.2% in the third
quarter. This follows much lower growth in the first two quarters, as the
economy was adjusting to the Federal Reserve Board's series of interest rate
increases. The slowdown, in fact, was acknowledged by the Fed when it eased
short-term rates by a small but symbolic 25 basis points in July. Now we know
that the economy was rebounding from July through September.
The economy's continued growth without a corresponding increase in
inflation is very encouraging. Although we are well along in the economic cycle
and at a point when prices often start hiking up, inflationary pressures have
actually been reduced somewhat.
Will the Federal Reserve Board adjust interest rates again? As of this
date -- which precedes any resolution on the federal budget issue -- we doubt
that the Fed has motivation to either ease or (which would be even less likely)
raise interest rates. Our forecast calls for lower growth ranging between 2% to
3% for the next few quarters, with the momentum likely to come from exports and
nonresidential construction.
MARKET OUTLOOK
Slow growth and low inflation is the optimal combination for investors in the
fixed income markets, and we expect them to continue to perform well.
We believe that the opportunities for common stock investors will be
increasingly concentrated in higher quality investments. After hitting new
highs and showing considerable strength for most of the year, the stock market
showed some vulnerability when it took a tumble in the summer. The market
recovered after a brief period and has gained ground since. But such a sudden,
severe mini-correction served to remind investors that the current bull market
will inevitably come to an end someday and that some sectors may even be
overextended today.
As we view the remainder of the year, companies cannot necessarily
count on the economy to provide above-average earnings support. Rather, stocks
that have proven themselves with a pattern of consistent earnings are likely to
attract investor support. Specifically, sectors that produce more consistent
earnings, such as health care, consumer nondurables, selected 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.
International investing continues to be quite complex. After sinking
to its post-World War II low in April, the value of the U.S. dollar has gained
strength against most foreign currencies. While a stronger dollar favors the
U.S. economy because it reduces the cost of American imports and attracts
foreign capital, a strong dollar in relation to a local currency has the effect
of devaluing a foreign investment. The value of the dollar and the
attractiveness of U.S. investments to foreign investors will be key factors in
the next few months.
3
<PAGE> 4
General Economic Overview
ECONOMIC GUIDEPOSTS
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund
performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The 10-year
Treasury rate and the prime rate are prevailing interest rates. The other data
report year-to-year percentage changes.
<TABLE>
<CAPTION>
Now (10/31/95) 6 months ago 1 year ago 2 years ago
<S> <C> <C> <C> <C>
10-year Treasury rate(1) 6.04 6.63 7.96 5.72
Prime rate(2) 8.75 9.00 8.15 6.00
Inflation(3) 2.74 3.18 2.60 2.74
Dollar(4) -1.05 -10.02 -5.65 1.23
Capital goods orders(5)* 7.60 17.84 13.93 23.75
Industrial production(6) 2.20 3.31 6.58 2.98
Employment growth(7) 1.79 2.30 3.25 2.47
</TABLE>
1 Falling interest rates in recent years have been a big plus for financial
assets.
2 The interest rate that commercial lenders charge their best borrowers.
3 Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6%. The low, moderate inflation of the last
few years has meant high real returns.
4 Changes in the exchange value of the dollar impact U.S. exporters and
the value of U.S. firms' foreign profits.
5 These influence corporate profits and equity performance.
6 An influence on corporate profits and equity performance.
7 An influence on family income and retail sales.
* Data as of September 30, 1995
SOURCE: ECONOMICS DEPARTMENT, KEMPER FINANCIAL SERVICES, INC.
We are in the midst of a global recovery, and the same fundamentals
that have driven markets higher in the U.S. can be found in many foreign
countries currently. However, leading international economies continue to lag
the U.S. Japan and Germany, whose economies typically follow U.S. growth, are
not as robust as in past cycles. Moreover, conditions in emerging market
countries underline the importance of careful research and experience in
understanding how these markets work.
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 been common for incumbents to attempt to
stimulate growth. Given our Republican Congress and Democratic President,
however, we do not consider this as likely this time.
With the rest of the country, we are closely following political
initiatives to produce a balanced federal budget. This is a political wild
card, but we would expect both the stock and fixed-income matkets to react
with enthusiasm if progress can be made.
With that as an economic backdrop, we encourage you to read the
following detailed report of your fund, including a question-and-answer
interview with your fund's portfolio manager. Thank you for your continued
support. We appreciate the opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
CHIEF INVESTMENT AND EXECUTIVE OFFICER
November 6, 1995
4
<PAGE> 5
Management Team
KEMPER DIVERSIFIED INCOME FUND
PORTFOLIO MANAGEMENT TEAM
[BEIMFORD PHOTO]
J. Patrick Beimford joined Kemper Financial Services, Inc. in 1976 and is now
executive vice president, chief investment officer -- fixed income and
portfolio co-manager of the Kemper Diversified Income Fund. Mr. Beimford
received his bachelor of science and industrial management degree from Purdue
University and went on to receive his M.B.A. from the University of Chicago.
[CESSINE PHOTO]
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. Mr. Cessine received both his B.S. and M.B.A. degrees
from the University of Wisconsin. He also is a Chartered Financial Analyst.
[JOHNS PHOTO]
Gordon Johns joined Kemper in 1988 and is now the managing director of Kemper
Investment Management Company Limited, London, and is portfolio co-manager of
Kemper Diversified Income Fund. Mr. Johns graduated from Balliol College,
Oxford, with a B.A. in law.
[McNAMARA PHOTO]
Mike McNamara has been with Kemper Financial Services, Inc. since 1972 and is
now senior vice president and portfolio co-manager of the Kemper Diversified
Income 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.
[RESIS PHOTO]
Harry Resis joined Kemper Financial Services, Inc. in 1988 and is now a senior
vice president of KFS and portfolio co-manager of Kemper Diversified Income
Fund. Mr. Resis received a B.A. in Finance from Michigan State University.
[TRUTTER PHOTO]
Jonathan Trutter has been with Kemper Financial Services, Inc. (KFS) since
1989. He is now a first vice president of KFS and the portfolio co-manager of
Kemper Diversified Income Fund. He manages the emerging markets portion 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.
5
<PAGE> 6
Performance Update
THE PORTFOLIO MANAGEMENT TEAM OF KEMPER DIVERSIFIED INCOME FUND EXPLAINS ITS
BULLISHNESS ON THE ECONOMY AT THE START OF THE YEAR AND HOW ITS LONGER-MATURITY
INVESTMENT STRATEGY BOLSTERED PERFORMANCE THROUGHOUT THE YEAR.
Q. THE FUND'S FISCAL YEAR -- NOVEMBER 1, 1994, THROUGH OCTOBER 31, 1995 -- WAS
A PERIOD WHERE WE SAW BOTH RISING AND FALLING INTEREST RATES AND A SLOWING OF
ECONOMIC GROWTH. HOW DID THIS ENVIRONMENT IMPACT THE FUND'S PERFORMANCE?
A. At the start of the year, interest rates were rising and investors in the
bond market were anticipating further interest rate hikes and a higher rate of
inflation -- both of which hurt fixed-income investments. Shorter maturity
investments were being favored by the market because they are generally less
sensitive to interest rate changes.
Despite the consensus that interest rates would continue to rise, we made
a 180-degree turn from the market and our previous economic outlook by extending
the maturity of the fund's portfolio and positioning it to take advantage of
what we believed would be a decline in interest rates. We were confident that
an economic slowdown and lower interest rates would be the result of higher
interest rates that prevailed in 1994. Our optimism made us "lonesome company"
in the market but provided opportunities to purchase longer-maturity investments
at favorable prices. And our assumption was correct -- rates began to fall in
December and the fund outperformed the average return of its peers during the
first quarter of 1995.
Our decision to stay fully invested in longer-maturity assets was tested
throughout the year. At several points, conflicting economic data spurred a
sell-off of longer-maturity assets within the market. Yet we stuck to our
longer-term strategy because we were undaunted in our belief that economic
growth would continue to slow and that inflation would not become a problem.
These sell-offs hurt the fund's performance as prices fell, but only
temporarily. Our conviction to "stay long" was rewarded as the slow growth and
declining rate economic cycle continued throughout the fiscal year.
Q. CONSISTENT WITH THE DECISION ANNOUNCED TO SHAREHOLDERS IN JUNE 1994, THE
FUND NOW INVESTS IN HIGH YIELD BONDS, FOREIGN BONDS AND U.S. GOVERNMENT BONDS.
THIS WAS THE FIRST FULL YEAR THAT THE FUND INVESTED IN MULTIPLE SECTORS. HOW
DID SHAREHOLDERS BENEFIT FROM THE NEW EMPHASIS?
A. The diversification among investments enhanced the fund's return and also
exposed shareholders to less risk. Certain sectors outperformed others at
different points during the year. Our flexibility helped us to adjust the
fund's exposure to favor the better performing sectors at different points in
time. For instance, performance of high yield bonds was strong during the first
six months of the year. In April, at its highest point, 32 percent of the fund
was invested in high yield bonds. We began to reduce the fund's high yield
holdings in May when their performance began to moderate and the government
bond market began to rally. By August, high yield bonds represented 24 percent
of the portfolio and U.S. Treasuries and mortgages accounted for 27 percent, up
from 12 percent of the fund's portfolio in April.
Q. AS PART OF THE MOVEMENT TO A MULTISECTOR FUND, PORTFOLIO MANAGEMENT SHIFTED
TO A TEAM APPROACH IN APRIL. HAVE ANY MAJOR ADJUSTMENTS BEEN MADE TO THE FUND'S
INVESTMENT STRATEGY AS A RESULT OF THE NEW TEAM APPROACH?
A. The asset allocation of the fund -- the level of investments in each sector
- -- is determined with the aid of a proprietary computer model and a team of
sector-specific portfolio managers and analytical specialists. The computer
model's analysis considers economic factors such as interest rates, the
strength of the economy and the relative valuations -- and attractiveness -- of
the fund's potential investments. This model helps us determine the appropriate
asset allocation but it's the manage-
6
<PAGE> 7
Performance Update
ment team that enhances the investment selection by using its specialized
sector knowledge and understanding of market expectations. The collaborative
efforts of these resources played a critical role this year in working to
fine-tune the fund's investment strategy.
As a result of this interaction, we've defined specific investment
ranges for each sector -- and made subsequent adjustments as needed. For
example, after significant volatility in the emerging markets sector early in
the year, we limited these investments to a maximum of 10 percent of the
portfolio. That's almost half of what we held at the start of the fiscal year
when emerging markets accounted for 18 percent of the fund's assets. With 10
percent invested in emerging markets, the fund can benefit from the sector's
high return potential but we've reduced the fund's exposure to this sector's
volatility.
Q. WHAT SECTORS CONTRIBUTED MOST TO THE FUND'S PERFORMANCE THIS YEAR?
A. Foreign currency bonds, high yield bonds and U.S. government securities
were all superior performers during different points of the year.
The foreign currency bond sector was particularly strong during the first
quarter of 1995 as the U.S. dollar weakened against other major currencies.
Even since the dollar's recent strengthening, these holdings have continued to
provide positive returns.
High yield investments also performed exceptionally well during the first
six months of 1995. At the start of the year, we were invested in cyclical bond
issues. Cyclical industries are those that flourish when the economy expands
because they produce or support the production of discretionary goods, such as
new homes or automobiles. By bucking the market's defensive investment strategy,
we were able to purchase cyclical issues at very attractive prices. When
interest rates began to fall and fears of a recession diminished, these issues
were strong performers.
In May and throughout the rest of the fiscal year, the government
market was the place to be. Falling interest rates and slower economic growth
spurred a government rally in May. We were positioned to exploit this through
our longer maturity strategy and our relatively high position in long-term
government securities (11 percent in Treasuries and 12 percent in mortgages).
Since that time, Treasuries have continued to perform well and at the end of
the fiscal year, government securities -- 22 percent in Treasuries and 11
percent in government-backed mortgages -- accounted for 33 percent of the
portfolio.
Q. WERE THERE ANY DISAPPOINTMENTS DURING THE YEAR?
A. At the start of the fiscal year, we were very excited about the fund's
emerging markets investments because of their high return potential.
Unfortunately, the devaluation of the peso, political turmoil in Argentina and
the overall volatility in these markets hurt returns sporadically throughout
the year. However, losses from this sector were often followed by strong
returns. Volatility will always be a concern, but we remain bullish on the
potential for returns from holdings in emerging markets.
Q. DO YOU ANTICIPATE THAT NEXT YEAR WILL BE AS POSITIVE?
A. The economic outlook is very good. We anticipate continued slow to moderate
economic growth, a benign level of inflation and interest rates that should
continue to fall. Further contributing to this scenario is the likelihood that
a meaningful balanced federal budget agreement will be reached. If that
happens, it is possible that interest rates may move even lower during 1996.
This would be a very positive environment for fixed-income investments.
Q. WHAT ARE SOME OF THE RISKS TO THAT ASSUMPTION?
A. The principal risk would be that economic growth significantly accelerates
but, at this point, that's not what the economic data suggest. Exports and
housing construction markets are somewhat strong but it is unlikely that these
two forces alone could move the economy in a different direction. If the
economy would take off, we'd shorten the average maturity of the fund and
probably increase our level of mortgage investments, which generally perform
better than Treasuries when interest rates rise.
7
<PAGE> 8
Performance Update
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED OCTOBER 31, 1995 (ADJUSTED FOR THE APPLICABLE SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR 5-YEAR 10-YEAR CLASS
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KEMPER DIVERSIFIED
INCOME FUND A 7.86% 18.37% 9.74% 10.52% (SINCE 6/23/77)
- ----------------------------------------------------------------------------------
KEMPER DIVERSIFIED
INCOME FUND B 8.87 N/A N/A 6.44 (SINCE 5/31/94)
- ----------------------------------------------------------------------------------
KEMPER DIVERSIFIED
INCOME FUND C 11.95% N/A N/A 8.70% (SINCE 5/31/94)
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER DIVERSIFIED INCOME FUND CLASS
A FROM 6/23/77 THROUGH 10/31/95
<TABLE>
<CAPTION>
6/23/77 12/31/82 12/31/87 12/31/92 12/31/95
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
KEMPER DIVERSIFIED INCOME FUND CLASS A1 10,000 17,567 23,586 46,770 $62,755
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX+ 10,000 15,116 26,938 44,787 $56,275
CONSUMER PRICE INDEX++ 10,000 16,079 19,012 23,377 $25,321
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER DIVERSIFIED INCOME FUND CLASS
B FROM 5/31/94 THROUGH 10/31/95
<TABLE>
<CAPTION>
5/31/94 12/31/94 10/31/95
------- -------- --------
<S> <C> <C> <C>
KEMPER DIVERSIFIED INCOME FUND CLASS B1 10,000 9,794 $10,927
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX+ 10,000 10,064 $11,680
CONSUMER PRICE INDEX++ 10,000 10,149 $10,420
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER DIVERSIFIED INCOME FUND CLASS
C FROM 5/31/94 THROUGH 10/31/95
<TABLE>
<CAPTION>
5/31/94 12/31/94 10/31/95
------- -------- --------
<S> <C> <C> <C>
KEMPER DIVERSIFIED INCOME FUND CLASS C1 10,000 9,816 $11,257
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX+ 10,000 10,064 $11,680
CONSUMER PRICE INDEX++ 10,000 10,149 $10,420
</TABLE>
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.
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.
* Average annual total return measures net investment income and capital gain
or loss from portfolio investments, assuming reinvestment of all dividends and
for A Shares adjustment for the maximum sales charge of 4.5% and for B Shares
adjustment for the applicable contingent deferred sales charge as follows:
1-year, 3%; 5-year, 1%; since inception, 0%. During the periods noted,
securities prices fluctuated. For additional information, see the Prospectus
and Statement of Additional Information and the Financial Highlights at the end
of this report.
1 Performance includes reinvestment of dividends and adjustment for the maximum
sales charge for A Shares and the contingent deferred sales charge in effect at
the end of the period for B Shares. In comparing the Kemper Diversified Income
Fund performance to the Lehman Brothers Government/Corporate Bond Index, you
should also note that the fund's performance reflects the applicable sales
charge, while no such charges are reflected in the performance of the index.
+ The Lehman Brothers Government/Corporate Bond Index is an unmanaged index
comprised of intermediate and long-term government and investment grade
corpo-
8
<PAGE> 9
Portfolio Statistics
PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
On 10/31/95 On 10/31/94
<S> <C> <C>
HIGH YIELD CORPORATES 29% 30%
EMERGING MARKETS 5 18
FOREIGN CURRENCY BONDS 21 22
HIGH GRADE CORPORATES 4 2
MORTGAGES 11 8
TREASURY NOTES & BONDS 22 --
CASH AND EQUIVALENTS 7 18
OTHER 1 2
100% 100%
</TABLE>
[PIE CHART]
- - HIGH YIELD CORPORATES
- - EMERGING MARKETS
- - FOREIGN CURRENCY BONDS
- - HIGH GRADE CORPORATES
- - MORTGAGES
- - CASH AND EQUIVALENTS
- - OTHER
YEARS OF MATURITY
<TABLE>
<CAPTION>
On 10/31/95 On 10/31/94
<S> <C> <C>
CASH AND EQUIVALENTS 7% 18%
0-1 YEARS -- 2
1-10 YEARS 60 47
10-20 YEARS 16 25
20+ YEARS 17 8
100% 100%
</TABLE>
[PIE CHART]
- - CASH AND EQUIVALENTS
- - 0-1 YEARS
- - 1-10 YEARS
- - 10-20 YEARS
- - 20+ YEARS
AVERAGE MATURITY
<TABLE>
<CAPTION>
On 10/31/95 On 10/31/94
<S> <C> <C>
AVERAGE MATURITY 11.4 years 7.9 years
</TABLE>
9
<PAGE> 10
Shareholders' Meeting
SPECIAL SHAREHOLDERS' MEETING
On September 19, 1995, a special shareholders' meeting was held. Fund
shareholders were asked to vote on four separate issues: election of nine
Trustees to the Board of Trustees, ratification of Ernst & Young LLP as
independent auditors, approval of a new investment management agreement with
Kemper Financial Services, Inc. or its successor on the same terms as the
current agreement and for Class B and Class C shareholders only, approval of a
new 12b-1 distribution plan with Kemper Distributors, Inc. or its successor on
the same terms as the current plan. We are pleased to report that all nominees
were elected and all other items were approved. Following are the results for
each issue:
- - Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
David W. Belin 78,737,633 2,914,999
Lewis A. Burnham 78,713,137 2,939,495
Donald L. Dunaway 78,729,468 2,923,164
Robert B. Hoffman 78,762,129 2,890,503
Donald R. Jones 78,729,468 2,923,164
David B. Mathis 78,729,468 2,923,164
Shirley D. Peterson 78,729,468 2,923,164
William P. Sommers 78,778,459 2,874,173
Stephen B. Timbers 78,786,625 2,866,007
</TABLE>
- - Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
76,609,123 1,373,317 3,670,192
</TABLE>
- - Approval of new investment management agreement
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
74,505,397 2,490,062 4,657,173
</TABLE>
- - Approval of new 12b-1 distribution plan
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
Class B
Shares 25,081,663 863,992 1,982,845
Class C
Shares 200,130 1,106 4,334
</TABLE>
Terms To Know
BOND RALLY A sharp, short-lived rise in bond values after a period of either
little movement or falling values.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period, assuming the
reinvestment of all dividends. It represents the aggregate percentage or dollar
value change over the period.
10
<PAGE> 11
Portfolio of Investments
KEMPER DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
PRINCIPAL
GOVERNMENT OBLIGATIONS AMOUNT VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT
OBLIGATIONS U.S. Treasury Notes
7.25%, 1996 $14,800 $15,043
9.375%, 1996 45,500 46,261
8.875%, 1999 11,000 12,019
6.125%, 2000 12,000 12,142
6.75%, 2000 41,500 42,991
7.75%, 2001 16,000 17,375
6.50%, 2005 14,000 14,483
U.S. Treasury Bonds
11.50%, 1995 20,000 20,041
7.25%, 2016 33,100 36,208
8.75%, 2017 1,500 1,886
7.625%, 2025 26,500 30,728
Federal National Mortgage
Association Certificates
6.50%, 2025 20,000 19,400
Government National Mortgage
Association Certificates
6.50%, 2025 34,000 33,044
7.00%, 2022-2026 14,609 14,480
7.50%, 2023-2024 16,869 17,091
=========================================================
TOTAL U.S. GOVERNMENT OBLIGATIONS--44.2%
(Cost $331,278) 333,192
=========================================================
FOREIGN GOVERNMENT
OBLIGATIONS
(PRINCIPAL AMOUNT IN LOCAL CURRENCY,
UNLESS OTHERWISE INDICATED)
Republic of Argentina,
(principal amount in U.S. dollars)
5.00%, 2023 13,750 6,579
Commonwealth of Australia
7.00%, 1998 6,000 4,467
8.75%, 2001 6,400 4,967
7.50%, 2005 7,000 4,911
Federal Republic of Brazil
(principal amount
in U.S. dollars)
8.00%, 2014 20,853 10,635
4.25%, 2024 24,400 11,803
Republic of Finland
11.00%, 1997 27,000 6,858
11.00%, 1999 18,000 4,778
9.50%, 2004 26,000 6,708
French Treasury
8.50%, 2000 28,900 6,349
8.50%, 2002 50,000 11,073
6.75%, 2003 13,000 2,601
Government of Ireland
6.25%, 1999 5,770 9,038
6.25%, 2004 7,095 10,210
Japan Development Bank,
6.50%, 2001 600,000 7,220
Government of the Netherlands
7.75%, 2000 17,000 11,668
8.25%, 2002 18,000 12,742
8.25%, 2007 14,500 10,305
Commonwealth of New Zealand
8.00%, 1998 10,000 6,726
6.50%, 2000 5,000 3,216
10.00%, 2002 14,000 10,539
</TABLE>
11
<PAGE> 12
Portfolio of Investments
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Republic of Portugal
12.50%, 1998 460,000 $ 3,250
11.875%, 2000 540,000 3,809
10.625%, 2003 340,000 2,301
United Mexican States,
(principal amount in
U.S. dollars) 6.25%,
2019, with value
recovery rights
expiring 2003 15,400 9,047
=========================================================
TOTAL FOREIGN GOVERNMENT
OBLIGATIONS--24.1%
(Cost $169,754) 181,800
=========================================================
- --------------------------------------------------------------------------
Corporate obligations
- --------------------------------------------------------------------------
AEROSPACE - 1.2%
Fairchild Corporation,
12.00%, 2001 $ 1,975 $ 1,837
Fairchild Industries,
12.25%, 1999 100 103
K & F Industries, Inc.,
13.75%, 2001 5,225 5,434
===== =====
RHI Holdings, 11.875%, 1999 1,415 1,380
=========================================================
8,754
BROADCASTING, CABLESYSTEMS AND
PUBLISHING - 7.1%
Act III Broadcasting, Inc.,
9.625%, 2003 120 121
Adelphia Communications
Corporation,
12.50%, 2002 1,130 1,102
Affinity Group, Inc.,
11.50%, 2003 1,480 1,495
Alliance Entertainment,
11.25%, 2005 840 838
(b) Australis Media Corporation,
14.00%, 2003 900 650
(b) Bell Cablemedia PLC
11.95%, 2004 1,810 1,238
11.875%, 2005 800 482
Big Flower Press, Inc.,
10.75%, 2003 1,820 1,920
CF Cable TV Inc., 11.625%, 2005 1,250 1,347
Cablevision Systems Company
9.875%, 2013 1,180 1,227
9.875%, 2023 110 114
Century Communications
Corporation
9.50%, 2000 300 304
11.875%, 2003 1,320 1,402
9.50%, 2005 1,270 1,283
Comcast Corporation
9.125%, 2006 2,620 2,676
9.50%, 2008 810 834
10.625%, 2012 310 340
Continental Cablevision,
Inc., 9.50%, 2013 3,505 3,671
(b) Echostar Communications,
12.875%, with
warrants, 2004 4,680 3,019
Granite Broadcasting,
10.375%, 2005 1,180 1,215
(b) International Cabletel
Incorporated,
12.75%, 2005 2,840 1,739
Katz Corporation, 12.75%, 2002 1,235 1,365
(b) Neodata Services, 12.00%, 2003 1,500 1,354
News America Holdings, Inc.,
9.25%, 2013 4,000 4,551
(b) People's Choice TV Unit,
13.125%, 2004 180 100
Rogers Cablesystems Limited
9.625%, 2002 810 828
10.00%, 2005 750 784
Sinclair Broadcasting Group,
Inc., 10.00%, 2003 1,510 1,559
Tele-Communications Inc.,
9.80%, 2012 2,100 2,402
(b) Telewest PLC, 11.00%, 2007 3,300 1,939
Time Warner Inc., 8.375%, 2033 4,000 4,052
Univision TV, 11.75%, 2001 670 727
</TABLE>
12
<PAGE> 13
(DOLLARS IN THOUSANDS)
CORPORATE OBLIGATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
PRINCIPAL
CORPORATE OBLIGATIONS AMOUNT VALUE
- -------------------------------------------------------------------------
<S> <C>
Viacom International Inc.,
8.00%, 2006 $ 3,500 $ 3,474
Videotron Groupe, 10.625%, 2005 550 582
(b) Videotron Holdings PLC
11.125%, 2004 1,720 1,161
11.00%,2005 1,000 590
Webcraft Technology, Inc.,
9.375%, 2002 670 630
Young Broadcasting Inc.,
11.75%, 2004 180 202
=========================================================
53,317
BUSINESS
SERVICES - .7%
Comdata Network, Inc.
12.50%, 1999 2,100 2,347
13.25%, 2002 80 94
Corporate Express Inc.,
9.125%, 2004 940 935
Monarch Marking, 12.50%, 2003 880 917
Outdoor Systems, 10.75%, 2003 1,170 1,120
=========================================================
5,413
CHEMICALS - 1.5%
Agriculture Mining and
Chemicals, Inc.,
10.75%, 2003 710 760
Arcadian Partners, L.P.,
10.75%, 2005 1,380 1,490
Atlantis Group, Inc.,
11.00%, 2003 1,198 1,096
G-I Holdings Inc., zero
coupon, 1998 2,300 1,713
Huntsman Corporation,
10.625%, 2001 500 544
Pioneer Americas Acquisition
Corp., 13.375%, 2005 1,020 1,051
Rexene Corporation, 11.75%,
2004 1,700 1,811
UCC Investors Holdings,
Inc., 10.50%, 2002 2,500 2,569
=========================================================
11,034
COMMUNICATIONS - 2.2%
CAI Wireless Systems,
12.25%, 2002 1,000 1,060
(b) Call-Net Enterprises Inc.,
13.25%, 2004 850 608
(a)(b) Celcaribe, S.A., 13.50%, 2004 1,050 935
(b) Cellular, Inc., 11.75%, 2003 705 550
Commnet Cellular, 11.25%, 2005 370 387
(b) Intelcom Group, Inc.,
13.50%, 2005 1,220 689
Intermedia Communications
of Florida, Inc.,
13.50%, with
warrants, 2005 1,060 1,145
IXC Communication Services,
12.50%, 2005 1,640 1,665
Paging Network
11.75%, 2002 1,655 1,830
10.125%, 2007 1,290 1,377
(b) PanAmSat, L.P., 11.375%, 2003 2,680 2,117
Rogers Cantel, 11.125%, 2002 3,241 3,419
USA Mobile Communications,
Inc. II, 14.00%, 2004 1,020 1,178
=========================================================
16,960
CONSTRUCTION
MATERIALS - 2.2%
American Standard Inc.
10.875%, 1999 870 948
11.375%, 2004 2,580 2,851
9.25%, 2016 200 207
</TABLE>
13
<PAGE> 14
Portfolio of Investments
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
PRINCIPAL
CORPORATE OBLIGATIONS AMOUNT VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
(b) Building Materials Corporation
of America,
11.75%, 2004 $2,700 $1,768
Nortek, Inc., 9.875%, 2004 1,400 1,306
Triangle Pacific Corp.,
10.50%, 2003 1,800 1,877
Waxman Industries, Inc.
12.25%, 1998 1,160 1,125
13.75%, 1999 4,227 3,466
(b) 12.75%, 2004 7,552 3,021
(a) 223,000 warrants
expiring 2004 28
==========================================================================
16,597
CONSUMER PRODUCTS
AND SERVICES - 3.4%
Beatrice Foods, Inc.,
12.00%, 2001 2,300 644
Black and Decker Corp.,
7.50%, 2003 4,000 4,137
Cinemark USA, Inc.,
12.00%, 2002 893 964
(b) Dr. Pepper Bottling Holdings,
Inc., 11.625%, 2003 1,290 1,019
Grand Union Company,
12.00%, 2004 950 912
Herff Jones, Inc., 11.00%, 2005 500 517
Mid-American Waste Systems Inc.,
12.25%, 2003 120 120
P&C Food Markets, Inc.,
11.50%, 2001 880 863
Pathmark Stores, Inc.,
11.625%, 2002 2,640 2,746
Premier Parks Inc., 12.00%, 2003 520 537
Ralph's Grocery Company
10.45%, 2004 870 873
13.75%, 2005 3,200 3,380
RJR Nabisco, 8.75%, 2005 3,500 3,475
(b) Six Flags Theme Park,
12.25%, 2005 3,070 2,402
Van De Kamps, Inc., 12.00%, 2005 600 614
West Point Stevens Inc.,
9.375%, 2005 2,780 2,773
==========================================================================
25,976
DRUGS AND HEALTH
CARE - 1.4%
Amerisource Distribution Corp.,
11.25%, 2005 788 859
Charter Medical Corporation,
11.25%, 2004 1,220 1,319
Dade International Inc.,
13.00%, 2005 880 968
Graphic Controls, 12.00%, 2005 570 583
Ornda Healthcorporation
12.25%, 2002 1,240 1,364
11.375%, 2004 900 1,003
Tenet Healthcare
9.625%, 2002 540 582
8.625%, 2003 2,500 2,563
10.125%, 2005 1,450 1,566
==========================================================================
10,807
ENERGY AND RELATED
SERVICES - 1.9%
Chesapeake Energy Corporation,
10.50%, 2002 960 967
Commonwealth Edison Co.,
8.125%, 2007 1,750 1,799
Empire Gas Corporation, 7.00%,
with warrants, 2004 1,000 826
Gerrity Oil & Gas, 11.75%, 2004 660 615
Gulf Canada Resources Limited,
9.25%, 2004 770 776
Gulf States Steel, 13.50%,
with warrants, 2003 1,270 1,191
</TABLE>
14
<PAGE> 15
Portfolio of Investments
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
PRINCIPAL
CORPORATE OBLIGATIONS AMOUNT VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
HS Resources, 9.875%, 2003 $ 620 $ 608
Parker and Parsley, 8.25%, 2007 4,000 4,166
Sante Fe Energy Resources, Inc.,
11.00%, 2004 300 326
TransTexas Gas Corporation,
11.50%, 2002 2,590 2,707
==========================================================================
13,981
FINANCIAL SERVICES,
HOME BUILDERS AND
REAL ESTATE - 2.3%
Continental Homes Holding,
12.00%, 1999 780 825
The Forecast Group L.P.,
11.375%, 2000 800 480
Hovnanian Kent, 11.25%, 2002 1,594 1,498
J.M. Peters, 12.75%,
with warrants, 2002 550 501
KFW International Finance,
6.00%, 1999
(principal amount
in Japanese Yen) 450,000 5,169
IBRD, 4.75%, 2004
(principal amount
in Japanese Yen) 700,000 7,864
The Presley Companies,
12.50%, 2001 1,680 1,361
==========================================================================
17,698
HOTEL AND GAMING - 1.3%
Bally's Park Place Funding,
Inc., 9.25%, 2004 2,660 2,627
Empress River Casino,
10.75%, 2002 1,070 1,075
Players International Inc.,
10.875%, 2005 360 342
Rio Hotel and Casino, Inc.,
10.625%, 2005 500 489
(b) Santa Fe Hotel, Inc.,
11.00%, 2000 842 598
Trump Taj Mahal, PIK,
11.35%, 1999 4,963 4,460
==========================================================================
9,591
MANUFACTURING,
METALS AND
MINING - 2.8%
Aftermarket Technology,
12.00%, 2004 1,180 1,247
Bluebird Body Company,
11.75%, 2002 1,560 1,599
Crain Industries, Inc.,
13.50%, 2005 700 723
Day International Group Inc.,
11.125%, 2005 1,020 1,040
Fairfield Manufacturing Company,
11.375%, 2001 890 841
Foamex L.P.
9.50%, 2000 1,450 1,436
11.25%, 2002 800 816
(b) Foamex - JPS Automotive L.P.,
14.00%, 2004, with
warrants expiring 1999 1,200 672
Great Dane Holding Company,
12.75%, 2001 1,985 1,836
GS Technologies
12.00%, 2004 1,810 1,810
12.25%, 2005 690 699
Jordan Industries, 10.375%, 2003 1,440 1,282
Newflo Corporation, 13.25%, 2002 1,070 1,097
NS Group, Inc., 13.50%, 2003 885 739
Pace Industries, Inc.,
10.625%, 2002 580 536
Penda Industries, Inc.,
10.75%, 2004 670 559
Polymer Group Inc., 12.25%, 2002 1,220 1,263
Terra Industries Inc.,
10.50%, 2005 600 647
Thermadyne Industries, Inc.
10.25%, 2002 1,607 1,607
10.75%, 2003 682 682
==========================================================================
21,131
15
</TABLE>
<PAGE> 16
Portfolio of Investments
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
PRINCIPAL
CORPORATE OBLIGATIONS AMOUNT VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
PAPER AND FOREST
PRODUCTS AND
CONTAINERS - 2.3%
Berry Plastics Corporation,
12.25%, with
warrants, 2004 $ 505 $ 536
Container Corporation of America,
11.25%, 2004 1,595 1,679
Crown Paper, 11.00%, 2005 1,000 950
Gaylord Container Corporation
11.50%, 2001 1,620 1,673
418,000 warrants
expiring 1996 3,004
Maxxam Group, Inc.
(b) 12.50%, 2003 150 105
11.25%, 2003 1,190 1,184
Owens-Illinois, Inc.
11.00%, 2003 1,160 1,288
9.95%, 2004 2,220 2,320
9.75%, 2004 1,490 1,546
Repap New Brunswick,
10.625%, 2005 1,300 1,326
SD Warren Company, 12.00%, 2004 670 740
Sweetheart Cup Company, Inc.,
10.50%, 2003 950 941
==========================================================================
17,292
Retailing - 1.9%
Color Tile, Inc., 10.75%, 2001 1,440 562
Federated Department Stores, Inc.,
10.00%, 2001 4,000 4,280
Finlay Fine Jewelry Corporation,
10.625%, 2003 780 768
(b) International Semi-Tech
Microelectronics, Inc.,
11.50%, 2003 1,710 876
Pamida Holdings., 11.75%, 2003 2,390 1,966
Southland Corporation,
5.00%, 2003 4,534 3,735
Specialty Retailers, Inc.,
11.00%, 2003 530 498
Thrifty Payless Inc.,
11.75%, 2003 1,760 1,892
==========================================================================
14,577
TECHNOLOGY - 1.2%
Communication and Power Industry,
Inc., 12.00%, 2005 550 564
Computervision Corporation
10.875%, 1997 1,250 1,308
11.375%, 1999 3,430 3,559
Merisel, Inc., 12.50%, 2004 1,580 1,185
Unisys Corporation
13.50%, 1997 670 678
10.625%, 1999 2,031 1,848
==========================================================================
9,142
TRANSPORTATION - 1.5%
Burlington Motor Holdings, Inc.,
11.50%, 2003 1,490 399
Delta Airlines, 9.75%, 2021 4,000 4,573
OMI Corp., 10.25%, 2003 1,690 1,487
(b) Transtar Holdings, L.P.,
13.375%, 2003 670 446
United Airlines
11.21%, 2004 2,000 2,409
9.56%, 2018 2,000 2,130
==========================================================================
11,444
==========================================================================
TOTAL CORPORATE OBLIGATIONS--34.9%
(Cost: $265,262) $263,714
==========================================================================
</TABLE>
16
<PAGE> 17
Portfolio of Investments
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
NUMBER OF SHARES
OR PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND
PREFERRED STOCKS
BCP/Essex Holding, PIK 19,712 shs. $ 527
(c) Gaylord Container Corporation 228,376 1,741
(c) Grand Union Company 62,037 667
(c) Speciality Equipment
Companies, Inc. 82,900 881
(c) Thrifty Payless Inc. 25,650 102
Walter Industries, Inc. 55,177 753
==========================================================================
TOTAL COMMON AND PREFERRED STOCK--.6%
(Cost: $5,690) 4,671
==========================================================================
MONEY MARKET
INSTRUMENTS
Yield - 5.81-5.95%
Due-November 1995
Baxter International Inc. $ 9,000 9,000
Conagra, Inc. 1,000 998
Enserch Corporation 11,780 11,780
Finova Capital Corporation 1,500 1,500
Quaker Oats Company 6,700 6,694
==========================================================================
TOTAL MONEY MARKET INSTRUMENTS--4.0%
(Cost: $29,972) 29,972
==========================================================================
TOTAL INVESTMENTS--107.8%
(Cost: $801,956) 813,349
==========================================================================
LIABILITIES, LESS CASH AND OTHER ASSETS--(7.8%) (59,127)
==========================================================================
Net assets--100% $754,222
==========================================================================
</TABLE>
- --------------------------------------------------------------------------
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. At October 31, 1995, the value of the Fund's
restricted securities was $963,000, which represented .13% of net assets.
<TABLE>
<CAPTION> PRINCIPAL
AMOUNT
DATE OF OR NUMBER UNIT
SECURITY DESCRIPTION ACQUISITION OF SHARES COST
- -------------------- ----------- --------- ----
<S> <C> <C> <C>
Celcaribe, 13.50%, 2004 May, 1995 $1,050,000 $0.80
- -------------------------------------------------------------------------
Waxman Industries, Inc.,
warrants June, 1994 222,607 shs. 2.00
- -------------------------------------------------------------------------
</TABLE>
(b) Deferred interest obligation; currently zero coupon under the terms of the
initial offering.
(c) Non-income producing security.
"PIK" denotes that interest or dividends are paid in kind.
Based on the cost of investments of $801,956,000, for federal income tax
purposes at October 31, 1995, the aggregate gross unrealized appreciation was
$26,712,000, the aggregate gross unrealized depreciation was $15,319,000 and
the net unrealized appreciation of investments was $11,393,000.
17
<PAGE> 18
Report of Independent Auditors
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER DIVERSIFIED INCOME FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Diversified Income Fund as of
October 31, 1995, and the related statements of operations for the year then
ended and 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 1991.
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
October 31, 1995, 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 Diversified Income Fund at October 31, 1995, 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 selected financial
highlights for each of the fiscal periods since 1991, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 28, 1995
18
<PAGE> 19
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------
ASSETS
- -----------------------------------------------------------
<S> <C>
Investments, at value
(Cost: $801,956) $ 813,349
Cash 4,933
Receivable for:
Fund shares sold 982
Investments sold 12,458
Interest 16,095
TOTAL ASSETS 847,817
===========================================================
- -----------------------------------------------------------
LIABILITIES AND NET ASSETS
- -----------------------------------------------------------
Payable for:
Fund shares redeemed 838
Investments purchased 91,648
Management fee 354
Distribution services fee 160
Administrative services fee 135
Custodian and transfer agent fees
and related expenses 405
Other 55
Total liabilities 93,595
NET ASSETS $ 754,222
===========================================================
- -----------------------------------------------------------
ANALYSIS OF NET ASSETS
- -----------------------------------------------------------
Paid-in capital $ 983,127
Accumulated net realized loss on
sales of investments and foreign
currency transactions (256,135)
Net unrealized appreciation on
investments and assets and
liabilities in foreign currencies 11,173
Undistributed net investment income 16,057
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 754,222
===========================================================
- -----------------------------------------------------------
THE PRICING OF SHARES
- -----------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($498,325 % 83,341 shares outstanding) $5.98
- -----------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $6.26
- -----------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge)
per share ($252,885 % 42,296 shares outstanding) $5.98
- -----------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price per share
($3,012 % 502 shares outstanding) $6.00
===========================================================
</TABLE>
See accompanying Notes to Financial Statements.
19
<PAGE> 20
Financial Statements
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1995
(IN THOUSANDS)
<TABLE>
- ------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------
<S> <C>
Interest income $ 77,959
Expenses:
Management fee 4,152
Distribution fee 1,939
Administrative services fee 1,577
Custodian and transfer agent fees and
related expenses 2,588
Professional fees 50
Reports to shareholders 150
Trustees' fees and other 72
Total expenses 10,528
NET INVESTMENT INCOME 67,431
==================================================================
- ------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------
Net realized loss on sales of investments
and foreigncurrency transactions
(including options purchased) (7,673)
Net realized gain from futures transactions 7,410
Net realized loss from options written (121)
Net realized loss (384)
Change in net unrealized depreciation
on investments and assets and liabilities
in foreign currencies 20,625
Net gain on investments 20,241
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 87,672
==================================================================
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
YEAR ENDED OCTOBER 31,
1995 1994
- ------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ------------------------------------------------------------------
Net investment income $ 67,431 44,924
Net realized loss (384) (44,410)
Change in net unrealized depreciation 20,625 4,872
Net increase in net assets
resulting from operations 87,672 5,386
Dividends to shareholders from net
investment income (60,998) (43,835)
Net increase (decrease) from capital share
transactions (10,466) 447,951
Total increase in net assets 16,208 409,502
- ------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------
Beginning of year 738,014 328,512
END OF YEAR (INCLUDING UNDISTRIBUTED NET
INVESTMENT INCOME OF $16,057 AND
$2,200, RESPECTIVELY) $754,222 738,014
==================================================================
</TABLE>
20
<PAGE> 21
Notes to Financial Statements
1 DESCRIPTION OF THE FUND Kemper Diversified Income 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 or a contingent deferred sales charge but
are subject to higher ongoing expenses than Class
A shares and do not convert into another class.
Class I shares (none sold through October 31,
1995) 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. 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 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.
21
<PAGE> 22
Notes to Financial Statements
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.
The Fund may purchase securities with delivery
or payments to occur at a later date. At the time the
Fund enters into a commitment to purchase a security,
the transaction is recorded and the value of the
security is reflected in the net asset value. The value
of the security may vary with market fluctuations. No
interest accrues to the Fund until payment takes place.
At the time the Fund enters into this type of
transaction it is required to designate cash or other
liquid assets equal to the value of the securities
purchased. At October 31, 1995 the Fund had $60,156,000
in purchase commitments outstanding (8% of net assets),
with a corresponding amount of assets designated.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value (plus
an initial sales charge on most sales of Class A
shares). Proceeds payable on redemption of Class B
shares will be reduced by the amount of any applicable
contingent deferred sales charge. On each day the New
York Stock Exchange is open for trading, the net asset
value per share is determined as of the earlier of 3:00
p.m. Chicago time or the close of the Exchange. The
net asset value per share is determined separately for
each class by dividing the Fund's net assets
attributable to that class by the number of shares of
the class outstanding.
FEDERAL INCOME TAXES AND DIVIDENDS TO SHAREHOLDERS.
The Fund has complied with the special provisions
of the Internal Revenue Code available to investment
companies for the year ended October 31, 1995. The
accumulated net realized loss on sales of investments
for federal income tax purposes at October 31, 1995,
amounting to approximately $255,985,000, is available
to offset future taxable gains. If not applied, the
loss carryover expires during the period
1996 through 2003.
Differences in dividends per share are due to
different class expenses. Dividends payable to its
shareholders are recorded by the Fund on the
ex-dividend date.
Dividends are determined in accordance with
income tax principles which may treat certain
transactions differently than generally accepted
accounting principles.
22
<PAGE> 23
Notes to Financial Statements
3 TRANSACTIONS MANAGEMENT AGREEMENT. The Fund has a management
WITH AFFILIATES 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 $4,152,000 for
the year ended October 31, 1995.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution services
agreement with Kemper Distributors, Inc. (KDI).
Underwriting commissions paid in connection with the
distribution of Class A shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS ALLOWED
COMMISSIONS BY KDI TO RETAIL FIRMS COMMISSIONS PAID
RETAINED BY KDI (INCLUDING AFFILIATES) TO AFFILIATES OF KDI
--------------- -------------------- --------------------
<S> <C> <C> <C>
Year ended
October 31, 1995 $75,000 462,000 68,000
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of average
daily net assets of Class B and Class C shares. Pursuant
to the agreement, KDI enters into related selling group
agreements with various firms at various rates for sales
of Class B and Class C shares. In addition, KDI receives
any contingent deferred sales charges (CDSC) from
redemptions of Class B shares. Distribution fees and
commissions paid in connection with the sale of Class B
and Class C shares and CDSC received in connection with
the redemption of Class B shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS AND
DISTRIBUTION FEES DISTRIBUTION FEES PAID
AND CDSC BY KDI TO FIRMS AMOUNTS PAID
RECEIVED BY KDI (INCLUDING AFFILIATES) TO AFFILIATES OF KDI
--------------- -------------------- --------------------
<S> <C> <C> <C>
Year ended
October 31, 1995 $2,627,000 1,169,000 134,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has
an administrative services agreement with KDI. For
providing information and administrative services to
shareholders, the Fund pays KDI a fee at an annual rate
of up to .25% of average daily net assets. KDI in turn
has various 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:
<TABLE>
<CAPTION>
ASF PAID
ASF PAID BY BY KDI TO FIRMS ASF PAID
THE FUND TO KDI (INCLUDING AFFILIATES) TO AFFILIATES OF KDI
--------------- -------------------- --------------------
<S> <C> <C> <C>
Year ended
October 31, 1995 $1,577,000 1,582,000 203,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder service
agent of the Fund. For the year ended October 31, 1995,
the transfer agent remitted shareholder service fees of
$1,650,000 to KSvC.
23
<PAGE> 24
Notes to Financial Statements
OFFICERS AND TRUSTEES. Certain officers or
trustees of the Fund are also officers or directors of
KFS. During the year ended October 31, 1995, the Fund
made no payments to its officers and incurred trustees'
fees of $26,000 to independent trustees.
4 INVESTMENT For the year ended October 31, 1995, investment
TRANSACTIONS transactions (excluding short-term instruments) are as
follows (dollars in thousands):
<TABLE>
<S> <C>
Purchases $2,070,892
Proceeds from sales 2,046,951
<CAPTION>
<S> <C> <C>
Options written: Contracts Premiums
----------------------------------------------------------------------
Options outstanding at beginning of period -- --
Option contracts written 520 $244
Options terminated by repurchases 520 244
Options outstanding at end of period -- --
</TABLE>
5 CAPITAL SHARE The following table summarizes the activity in
TRANSACTIONS capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1995 1994
------------------ ------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
SHARES SOLD
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 15,745 $ 91,132 17,927 $ 109,172
Class B 12,618 73,317 6,340 37,396
Class C 458 2,660 207 1,213
-------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-------------------------------------------------------------
Class A 4,342 25,151 3,499 21,004
Class B 2,146 12,431 945 5,527
Class C 21 124 2 9
-------------------------------------------------------------
SHARES REDEEMED
-------------------------------------------------------------
Class A (23,466) (136,212) (16,549) (119,150)
Class B (13,450) (78,345) (8,506) (49,888)
Class C (125) (724) (62) (361)
-------------------------------------------------------------
CONVERSION OF SHARES
-------------------------------------------------------------
Class A 4,551 26,461 3,247 19,062
Class B (4,551) (26,461) (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 $(10,466) $ 447,951
============================================================
</TABLE>
(a) On May 27, 1994, the Fund acquired the
assets of Kemper Investment Portfolios-Diversified
Income Portfolio in a tax-free exchange.
24
<PAGE> 25
Notes to Financial Statements
6 FINANCIAL FUTURES CONTRACTS
In order to take advantage of anticipated market conditions, the Fund has
entered into exchange traded financial futures contracts as described below.
The Fund bears the market risk that arises from changes in the value of these
financial instruments.
At the time the Fund enters into a futures contract, it is required to make a
margin deposit with its custodian. Subsequently, gain or loss is recognized
and payments are made on a daily basis between the Fund and the broker as the
market price of the futures contract fluctuates. At October 31, 1995, the
market value of investments pledged by the Fund to cover margin requirements
for open futures positions was $1,171,000. At October 31, 1995, the Fund had
outstanding financial futures contracts as follows (in thousands):
<TABLE>
<CAPTION>
FACE EXPIRATION GAIN AT
TYPE AMOUNT POSITION MONTH 10/31/95
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S Treasury
Securities $67,000 Long December $997
</TABLE>
7 FORWARD FOREIGN CURRENCY CONTRACTS
In order to protect itself against a decline in the value of particular foreign
currencies against the U.S. Dollar, the Fund has entered into forward contracts
to deliver foreign currency in exchange for U.S. Dollars as described below.
The Fund bears the market risk that arises from changes in foreign exchange
rates, and accordingly, the unrealized gain (loss) on these contracts is
reflected in the accompanying financial statements. The Fund also bears the
credit risk if the counterparty fails to perform under the contract. At October
31, 1995, the Fund had outstanding forward currency contracts as follows (in
thousands):
<TABLE>
<CAPTION>
FOREIGN CURRENCY CONTRACT AMOUNT SETTLEMENT UNREALIZED LOSS
TO BE DELIVERED IN U.S. DOLLARS DATE 10/31/95
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
102,000 French Franc $20,581 October 1996 $220
</TABLE>
25
<PAGE> 26
Financial Highlights
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 5.77 6.23 5.65 5.47 4.14
Income from investment operations:
Net investment income .55 .52 .59 .63 .60
Net realized and unrealized gain (loss) on
investments and foreign currency .16 (.45) .58 .14 1.36
Total from investment operations .71 .07 1.17 .77 1.96
Less distribution from net
investment income .50 .53 .59 .59 .63
Net asset value, end of year $ 5.98 5.77 6.23 5.65 5.47
==================================================================================================
TOTAL RETURN 12.90% 1.02 21.60 14.59 50.58
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------
Expenses 1.09% 1.12 1.10 1.19 1.21
Net investment income 9.43 8.81 9.74 11.02 13.41
</TABLE>
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------
YEAR ENDED MAY 31, 1994 TO
OCTOBER 31, 1995 OCTOBER 31, 1994
- --------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $ 5.77 5.94
Income from investment operations:
Net investment income .49 .19
Net realized and unrealized gain (loss) on investments
and foreign currency .16 (.17)
Total from investment operations .65 .02
Less distribution from net investment income .44 .19
Net asset value, end of period $ 5.98 5.77
==================================================================================================
TOTAL RETURN (not annualized) 11.87% .35
- --------------------------------------------------------------------------------------------------
ANNUALIZED RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------
Expenses 2.04% 1.97
Net investment income 8.48 8.01
</TABLE>
26
<PAGE> 27
Financial Highlights
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------------------------
YEAR ENDED MAY 31, 1994 TO
OCTOBER 31, 1995 OCTOBER 31, 1994
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $ 5.79 5.95
Income from investment operations:
Net investment income .50 .20
Net realized and unrealized gain (loss) on investments
and foreign currency .16 (.17)
Total from investment operations .66 .03
Less distribution from net investment income .45 .19
Net asset value, end of period $ 6.00 5.79
==============================================================================================
TOTAL RETURN (not annualized) 11.95% .55
- -----------------------------------------------------------------------------------------------
ANNUALIZED RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------
Expenses 1.84% 1.96
Net investment income 8.68 8.02
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $754,222 738,014 328,512 244,620 227,625
Portfolio turnover rate 286% 179 80 57 20
</TABLE>
Note: Total return does not reflect the effect of any sales charges.
27
<PAGE> 28
Trustees and Officers
TRUSTEES OFFICERS
STEPHEN B. TIMBERS JOHN E. PETERS JEROME L. DUFFY
President and Trustee Vice President Treasurer
DAVID W. BELIN J. PATRICK BEIMFORD, JR. ELIZABETH C. WERTH
Trustee Vice President Assistant Secretary
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 JONATHAN W. TRUTTER
Trustee Vice President
SHIRLEY D. PETERSON PHILIP J. COLLORA
Trustee Vice President
and Secretary
WILLIAM P. SOMMERS
Trustee CHARLES F. CUSTER
Vice President and
Assistant Secretary
<TABLE>
- --------------------------------------------------------------------
<S> <C>
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
1-800-621-1048
- --------------------------------------------------------------------
INVESTMENT MANAGER KEMPER FINANCIAL SERVICES, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
120 South LaSalle Street
Chicago, IL 60603
- --------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
</TABLE>
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unless preceded or accompanied by a
Kemper Fixed Income Funds prospectus. 1006820
KSIGF - 2 (12/95) Printed in the U.S.A.
