<PAGE> 1
KEMPER DIVERSIFIED INCOME FUND
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED OCTOBER 31, 1996
OFFERING INVESTORS THE OPPORTUNITY FOR HIGH CURRENT RETURN
"...Despite its early losses, the fund rebounded and provided
attractive returns for the year..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
2
At A Glance
2
Terms to Know
3
Economic Overview
5
Management Team
6
Performance Update
10
Portfolio Statistics
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, 1996 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 10.27%
CLASS B 9.23%
CLASS C 9.33%
LIPPER GENERAL BOND FUNDS
CATEGORY AVERAGE* 7.87%
- --------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not reflect future performances.
Returns and net asset value fluctuate. Shares are redeemable at current net
asset value, which may be more or less than original cost.
*Lipper Analytical Services, Inc. returns and rankings are based upon changes in
net asset value with all dividends reinvested and do not include the effect of
sales charges and, if they had, results may have been less favorable.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
10/31/96 10/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER DIVERSIFIED INCOME
FUND CLASS A $5.99 $5.98
- --------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME
FUND CLASS B $5.99 $5.98
- --------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME
FUND CLASS C $6.01 $6.00
- --------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME
FUND RANKINGS*
- -------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER GENERAL BOND FUNDS CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #3 OF 40 #8 OF 40 #7 OF 40
FUNDS FUNDS FUNDS
- --------------------------------------------------------------------------------
5-YEAR #1 OF 11 N/A N/A
FUNDS
- --------------------------------------------------------------------------------
10-YEAR #1 OF 6 N/A N/A
FUNDS
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF OCTOBER 31, 1996.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1 YEAR INCOME: $0.5710 $0.5156 $0.5234
- --------------------------------------------------------------------------------
OCTOBER
DIVIDEND: $0.0415 $0.0369 $0.0375
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 8.31% 7.39% 7.49%
- --------------------------------------------------------------------------------
SEC YIELD+: 6.60% 5.96% 6.02%
- --------------------------------------------------------------------------------
</TABLE>
+Current annualized distribution rate is the latest monthly dividend shown as an
annualized percentage of net asset value on October 31, 1996. Distribution rate
simply measures the level of dividends and is not a complete measure of
performance. The SEC yield is net investment income per share earned over the
month ended October 31, 1996, shown as an annualized percentage of the maximum
offering price on that date. The SEC yield is computed in accordance with a
standardized method prescribed by the Securities and Exchange Commission.
TERMS TO KNOW
DURATION Duration is a measure of the interest rate sensitivity of a
fixed-income portfolio incorporating time to maturity and coupon size. The
longer the duration, the greater the interest rate risk.
HEDGING A strategy used to help protect an investment. Financial managers can
use any number of technical and nontechnical procedures to hedge or reduce the
possibility of a loss on an investment.
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.
YIELD A fund's yield is a measure of the net investment income per share earned
over a specific one-month or 30-day period expressed as a percentage of the
maximum offering price of the fund's shares at the end of the period.
2
<PAGE> 3
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $76 BILLION IN ASSETS, INCLUDING $42 BILLION IN RETAIL
MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM
HARVARD UNIVERSITY.
DEAR SHAREHOLDER:
As we approach the close of 1996, it's remarkable how eventful the year has been
and yet, economically, we are essentially where we were one year ago.
The fundamentals of the economy are remarkably similar today to what they
were in 1995. Long-term interest rates are approximately 6.5% compared to 6.3%
in November 1995. The economy is growing at a rate of approximately 2.2%.
Inflation continues to be well under control, at about 3.0%.
One significant difference between today and one year ago is that prices of
the stocks are on average up 20%. While price movements were more volatile in
1996 than in the past few years, the patient investor was amply rewarded. The
prime element sending the stock market higher was strong positive cash flows.
This liquidity in an environment of modestly increasing corporate profits and
relatively stable interest rates pushed stocks higher for most of the year.
This higher stock market has caused many market observers to worry. While
we cannot ignore what has happened, we find no reason to be bearish over the
long term. The environment is benign to favorable for financial assets. Given
steady interest rates, moderate economic growth and continued moderate corporate
earnings growth, there are few excesses in the system. In fact, real interest
rates are probably too high considering our outlook for inflation, and we may
see them decline over time.
Naturally, we cannot rule out the possibility of a market correction. But,
in our belief, the downside would appear to be limited to 5% to 8%, which is the
size of a typical correction based on historical data. As we have said in
previous outlooks, three elements tend to move the market:
- EARNINGS. We forecast corporate earnings to range between 0% and 5% on
average for the Standard & Poor's 500* in 1997 -- not as high as in
recent years but positive nonetheless.
- INTEREST RATES. Rates should remain stable, and short-term interest rates
may even decline.
- LIQUIDITY. Investors, through mutual funds, 401(k)s and qualified
contribution plans in particular, will continue to create strong demand
for securities.
In order to move the market more than would be expected in a typical
decline, one or more of these elements will have to turn negative in 1997, and,
while future market conditions cannot be predicted with certainty, we fail to
see what would materially change our outlook. Our outlook going forward is that
1997 should be a lot like 1996.
While the economy continued along a relatively consistent path, the United
States took some politically significant steps in 1996. First, of course,
President Bill Clinton and a Republican Congress were re-elected by the voters.
In the first few days after the general election, especially, investors
demonstrated their support for such a balance in our leadership. But of much
greater long-term significance is the expressed commitment by both parties to
balance the federal budget and address certain entitlement programs. The first
year after an election can be a fertile time to accomplish major initiatives,
and we are hopeful that progress can be made.
The future of the Social Security system, which many experts believe will
run out of money about 20 years from now, will be a subject in which you can
expect Zurich Kemper Investments, Inc. to play a leadership role. The possible
solutions for "fixing Social Security" are finite: raise Social Security taxes,
reduce benefits, raise the retirement age, change inflation assumptions or
pursue a higher rate of return on assets contributed by workers. We believe that
a bipartisan solution will be worked out, which will include giving individuals
the option of investing a portion of their Social Security contributions in an
account earmarked for them. This change is needed to return credibility to the
system, which many Americans have lost faith in.
What to do with Social Security is a debate that spans generations and
promises to occupy much attention in the coming years. As we hope to help
advance constructive debate, we'll be advocating partial privatization for this
federal program while maintaining a safety net for many low-wage earners and
providing a seamless transition for seniors near or in retirement.
3
<PAGE> 4
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The 10-year
Treasury rate and the prime rate are prevailing interest rates. The other data
report year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (11/30/96) 6 MONTHS AGO 1 YEAR AGO 2 YEAR AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.2 6.91 5.71 7.81
PRIME RATE(2) 8.25 8.25 8.65 8.5
INFLATION RATE(3) 3.19 2.75 2.6 2.67
THE U.S. DOLLAR(4) 3.46 9.15 -2.58 -4.52
CAPITAL GOODS ORDERS(5)* 7.61 3.93 11.3 12.38
INDUSTRIAL PRODUCTION(5)* 3.6 3.35 1.71 6.58
EMPLOYMENT GROWTH(6) 2.11 2.08 1.92 3.4
</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 family income and retail sales.
* Data as of October 31, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this letter as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
December 10, 1996
*THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
4
<PAGE> 5
MANAGEMENT TEAM
KEMPER DIVERSIFIED INCOME FUND
PORTFOLIO MANAGEMENT TEAM
[BEIMFORD PHOTO]
J. PATRICK BEIMFORD, JR., JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN 1976
AND IS EXECUTIVE VICE PRESIDENT, CHIEF INVESTMENT OFFICER -- FIXED INCOME AND
PORTFOLIO CO-MANAGER OF KEMPER DIVERSIFIED INCOME FUND. BEIMFORD RECEIVED A
BACHELOR OF SCIENCE AND INDUSTRIAL MANAGEMENT DEGREE FROM PURDUE UNIVERSITY AND
EARNED AN M.B.A. FROM THE UNIVERSITY OF CHICAGO.
[CESSINE PHOTO]
ROBERT CESSINE IS A SENIOR VICE PRESIDENT OF ZKI AND PORTFOLIO CO-MANAGER OF
KEMPER DIVERSIFIED INCOME FUND. HE JOINED THE COMPANY IN 1993. CESSINE RECEIVED
BOTH HIS B.S. AND M.S. FROM THE UNIVERSITY OF WISCONSIN.
[JOHNS PHOTO]
GORDON JOHNS JOINED ZURICH INVESTMENT MANAGEMENT LIMITED, LONDON (ZIML) IN 1988
AND IS A MANAGING DIRECTOR OF ZIML AND A PORTFOLIO CO-MANAGER OF KEMPER
DIVERSIFIED INCOME FUND. JOHNS GRADUATED FROM BALLIOL COLLEGE, OXFORD, WITH A
B.A. IN LAW.
[MCNAMARA PHOTO]
MIKE MCNAMARA HAS BEEN WITH ZKI SINCE 1972 AND IS SENIOR VICE PRESIDENT OF ZKI
AND PORTFOLIO CO-MANAGER OF KEMPER DIVERSIFIED INCOME FUND. MCNAMARA GRADUATED
WITH A B.S. IN BUSINESS ADMINISTRATION FROM THE UNIVERSITY OF MISSOURI AND
EARNED AN M.B.A. FROM LOYOLA UNIVERSITY.
[RESIS PHOTO]
HARRY RESIS IS A SENIOR VICE PRESIDENT WITH ZKI. HE JOINED THE COMPANY IN 1988
AND IS A PORTFOLIO CO-MANAGER OF KEMPER DIVERSIFIED INCOME FUND. RESIS RECEIVED
A B.A. IN FINANCE FROM MICHIGAN STATE UNIVERSITY.
[TRUTTER PHOTO]
JONATHAN TRUTTER HAS BEEN WITH ZKI SINCE 1989. HE IS A FIRST VICE PRESIDENT OF
ZKI AND A PORTFOLIO CO-MANAGER OF KEMPER DIVERSIFIED INCOME FUND. TRUTTER
RECEIVED A BACHELOR'S DEGREE WITH DUAL MAJORS IN EAST ASIAN LANGUAGES AND
INTERNATIONAL RELATIONS FROM THE UNIVERSITY OF SOUTHERN CALIFORNIA. HE EARNED A
MASTER'S OF MANAGEMENT DEGREE FROM KELLOGG GRADUATE SCHOOL OF BUSINESS AT
NORTHWESTERN UNIVERSITY.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
5
<PAGE> 6
PERFORMANCE UPDATE
DURING THE FISCAL YEAR, THE PORTFOLIO MANAGEMENT TEAM MADE SIGNIFICANT CHANGES
TO THE PORTFOLIO'S DIVERSIFICATION AS WELL AS ITS FOREIGN CURRENCY BOND
INVESTMENT STRATEGY. BELOW THE TEAM EXPLAINS HOW THESE ADJUSTMENTS ENABLED THE
FUND TO REBOUND FROM LOSSES EARLY IN THE YEAR, WHILE REDUCING THE FUND'S LEVEL
OF RISK IN SOME CASES.
Q. DURING THE FISCAL YEAR -- NOVEMBER 1, 1995, THROUGH OCTOBER 31, 1996 --
INTEREST RATES FELL DRAMATICALLY, ROSE FOR NEARLY HALF OF THE YEAR, STABILIZED,
THEN BEGAN TO DECLINE AGAIN. WHAT WAS BEHIND THIS VOLATILITY?
A. Rates reversed direction as expectations about the pace of economic
growth shifted. At the start of the fiscal year, in November 1995, bond
investors were optimistic about the market. It was expected that the economy
would continue to grow slowly, inflation would remain low, and that the Federal
Reserve Board (the Fed) would lower short-term interest rates. The market was
also hopeful that the negotiations underway in Washington, D.C. would soon lead
to a balanced budget agreement with a solid plan for reducing the federal budget
deficit. All of these events were positive for fixed-income investments because
they supported a slow-growth, benign inflation environment.
Economic growth continued to falter through 1995 and the market
rallied as investors speculated that more interest rate reductions would be
forthcoming. The Federal Reserve Board moved in December 1995, and in January
1996, to lower interest rates. These cuts fueled higher market prices.
In February 1996, political and economic events caused investors to
re-evaluate whether the economy could continue on its slow growth, low inflation
path. Federal budget negotiations stalled, and an impasse developed which
effectively eliminated the chances for a balanced budget during the year.
Additionally, in his testimony before Congress, Fed Chairman Alan Greenspan
intimated that the pace of economic growth was improving. This caused some
investors to conclude that another reduction in interest rates was not imminent.
These events prompted investors to sell, and interest rates rose.
The most dramatic rise in market rates occurred in early March, when the
U.S. Department of Labor announced an unanticipated and significant increase in
employment growth. Many bond investors saw this data as evidence that the
economy was gaining more momentum than previously anticipated. The news caused a
sell-off in the market because more rapid economic growth is associated with
higher inflation, which erodes the value of fixed-income investments. Rates
continued to rise throughout the spring and then stabilized at higher levels
until September, when indicators began to show signs of slowing economic growth.
With inflation still under control, these signs of economic weakening convinced
the market that the Fed would not need to tighten interest rates in order to
keep inflation at bay. As a result of the market's optimism, yields began to
fall.
Q. HOW WAS KEMPER DIVERSIFIED INCOME FUND'S PERFORMANCE IMPACTED BY THE
INTEREST RATE VOLATILITY?
A. We entered 1996 with a relatively long duration of 6.9 years. This
duration served the fund well during the first two months of the period as rates
fell precipitously. Remember, duration is a measurement of a fund's sensitivity
to interest rates. The longer the duration, the more sensitive it is to interest
rate changes.
Mid-way through January, we shortened duration as we did not believe that
the decline in interest rates could continue. We positioned the fund for a more
stable interest rate environment and by the end of February, duration was at 6.2
years. Unfortunately, the strong employment release in early March caused the
market to trade down sharply and the fund's still longer than average duration
hurt returns. By the end of March, we had pulled the fund's duration in to 4.1
years from 6.9 years at the start of January. As rates began to stabilize at
their higher levels, we extended the fund's duration to a more market neutral
position and at the end of the period, duration was at 5.0 years.
Q. WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE PORTFOLIO TO REDUCE
DURATION?
A. We shortened duration primarily by reducing our exposure to the
government market
6
<PAGE> 7
PERFORMANCE UPDATE
and by favoring high yield and foreign currency bond investments.
We reduced our holdings in Treasuries throughout most of the year. As
interest rates fell early in the fiscal year, Treasuries offered a good deal of
price appreciation potential. And about 22 percent of the fund was invested in
Treasuries in late 1995, which enabled us to capture significant price gains as
interest rates dropped in December. However, as rates rose, Treasuries became
less appealing because they no longer provided potential for appreciation. In
January, we began selling Treasuries, which reduced the fund's duration. By June
30, Treasuries had been reduced to about 7 percent of the portfolio. The
proceeds from the sales of Treasuries and mortgage-backed securities were used,
in part, to increase exposure to high yield and foreign currency bonds, which
outperformed nearly all other fixed-income asset classes. At the close of the
year, when rates began to decline, we began to slightly increase Treasury
holdings.
Q. HIGH YIELD BOND PERFORMANCE HAS RECEIVED A LOT OF ATTENTION IN THE PRESS
RECENTLY. WHAT HAS BEEN BEHIND THE SECTOR'S NOTABLE PERFORMANCE?
A. The growing U.S. economy continued to drive strong high yield bond
returns during the fiscal year. While most fixed-income investments suffered due
to the economy's pickup, high yield bonds flourished in the higher market rate
environment that ensued. That's because stronger economic growth fueled
corporate earnings, which enabled most companies to meet the interest payments
on their outstanding bond issues. The strong stock market was also positive for
high yield bonds. It facilitated an increased number of initial public offerings
by high yield issuers, which enabled many issuers to pay down their debt. In
addition, defaults within the high yield market were virtually nonexistent
during the period.
Q. WHAT ABOUT FOREIGN CURRENCY BONDS?
A. We were bullish on foreign currency bonds for two reasons. First, foreign
markets tend to follow a similar economic cycle to the U.S. However, economic
cycles abroad have historically tended to lag the U.S. As such, we felt it was
likely that foreign markets would begin to experience the slow economic growth
and declining interest rate environment that characterized the U.S. in 1995. As
witnessed by U.S. fixed-income returns in 1995, that type of economy is
generally positive for bond investments. The second reason was that in December
1995, the fund began the use of limited hedging for the foreign currency
allocation. By hedging the foreign currencies back to the dollar, we were able
to reduce some of the currency risk involved with foreign non-dollar
investments. By April, approximately 70 percent of the foreign currency
allocation was hedged back to the dollar, which largely insulated the fund from
the appreciation of the dollar that occurred against most major European
currencies.
Q. HOW DO YOU MANAGE THE FOREIGN CURRENCY BOND SELECTION PROCESS?
A. During the year we made a significant adjustment in our foreign currency
investment strategy. Historically, we've managed the foreign currency allocation
by investing in a handful of markets with the potential to outperform. While
this approach was generally beneficial, we came to feel that we would have the
opportunity for comparable returns through broader diversification, while
reducing the level of risk of our forecasts.
By October 31, 1996, we owned foreign currency bonds from 17 countries as
compared to our previous average of four or five countries. While future
performances cannot be predicted, this increased level of diversification has
enabled us to achieve our objective of reduced volatility with competitive
returns.
We were not invested in Japan because the low yield of these bonds
(approximately 2-3 percent) made them unappealing.
Q. WHAT CAN YOU TELL US ABOUT THE OTHER SECTORS IN WHICH THE FUND INVESTS?
A. Two other sectors in which the fund invests are emerging markets and high
grade corporate bonds. Emerging markets performed particularly well during the
period as the fundamental outlook for these markets continued to improve.
Although performance of this sector was strong in 1996, we kept exposure between
5 and 8 percent of the portfolio because of the historical volatility of this
sector. The fund's high grade
7
<PAGE> 8
PERFORMANCE UPDATE
corporate sector has been underweighted due to the historically tight spreads
that exist currently.
Q. WERE THERE ANY DISAPPOINTMENTS DURING THE YEAR?
A. Well, the unexpected shift in interest rates during the first part of the
year was really our primary disappointment. As mentioned before, the duration of
the fund was long as rates backed up and the fund's performance suffered.
Despite its early losses, the fund rebounded and provided attractive
returns for the year. Class A shares gained 10.27%, Class B shares gained 9.23%
and Class C shares gained 9.33%. Returns for all share classes were higher than
the 7.67% average return of the General Bond Fund category as tracked by Lipper
Analytical Services, Inc.
Q. WHAT'S YOUR OUTLOOK FOR THE BOND MARKET?
A. Our outlook for the market is optimistic. We expect that long-term rates
will remain within a range of between 6 to 7 percent. At the close of the fund's
fiscal year the yield on the long bond was approximately 6.5 percent. For rates
to move to the low end of that range, some credible progress would need to be
made by the President and Congress in agreeing to reduce the federal budget
deficit. Any progress on the budget would of course be very beneficial for the
bond market. If rates move higher, it would probably be the result of
inflationary concerns, which would of course upset the market. The current
environment is definitely a positive one for the overall bond market and Kemper
Diversified Income Fund.
8
<PAGE> 9
PERFORMANCE UPDATE
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- -------------------------------------------------------------------------------
FOR PERIODS ENDED OCTOBER 31, 1996 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR 5-YEAR 10-YEAR CLASS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME FUND CLASS A 5.32% 10.84 9.78% 10.50% (SINCE 6/23/77)
- -----------------------------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME FUND CLASS B 6.23 N/A N/A 7.69 (SINCE 5/31/94)
- -----------------------------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME FUND CLASS C 9.33 N/A N/A 8.96 (SINCE 5/31/94)
- -----------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- -------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper Diversified Income Fund Class A FROM 6/23/77 THROUGH 10/31/96
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6/23/77 12/31/80 12/31/84 12/31/90 10/31/96
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -Kemper Diversified Income Fund Class A(1) 10000 14800 24954 26165 69165
- -Lehman Brothers Government/Corporate Bond Index+ 10000 10751 22776 35848 58461
- -Consumer Price Index++ 10000 142217 18007 22043 25997
</TABLE>
[LINE GRAPH]
- -------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper Diversified Income Fund Class B FROM 5/31/94 THROUGH 10/31/96
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 10/31/96
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -Kemper Diversified Income Fund Class B(1) 10000 9794 11612 11963
- -Lehman Brothers Government/Corporate Bond Index+ 10000 10063 11999 12261
- -Consumer Price Index++ 10000 10149 10407 10732
</TABLE>
[LINE GRAPH]
- ------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Kemper Diversified Income Fund Class C FROM 5/31/94 THROUGH 10/31/96
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 10/31/96
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -Kemper Diversified Income Fund Class C(1) 10000 9816 11648 12307
- -Lehman Brothers Government/Corporate Bond Index+ 10000 10063 11999 12261
- -Consumer Price Index++ 10000 10149 10407 10732
</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.
* Average annual total return measures net investment income and capital gain
or loss from portfolio investments, assuming reinvestment of dividends and for
Class A shares adjustment for the maximum sales charge of 4.5%, for Class B
shares adjustment for the applicable contingent deferred sales charge (CDSC) as
follows: 1-year, 3%; 5-year, 1%; since inception, 0% and for C shares no
adjustment for sales charge. The maximum B share CDSC is 4%. For C shares
purchased on or after April 1, 1996, there is a 1% CDSC on certain redemptions
within the first year of purchase.
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.
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 performance of the fund to
that of the Lehman Brothers Government/Corporate Bond Index and the Consumer
Price Index, you should also note that the fund's performance reflects the
maximum sales charge, while no such charges are reflected in the performance of
the indices.
+ The Lehman Brothers Government/Corporate Bond Index is an unmanaged index
comprised of intermediate and long-term government and investment grade
corporate debt securities. Source is Towers Data Systems.
++ The Consumer Price Index is a statistical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. Source is Towers Data Systems.
9
<PAGE> 10
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/96 ON 10/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
HIGH YIELD CORPORATES 35% 29%
- --------------------------------------------------------------------------------
EMERGING MARKETS 6 5
- --------------------------------------------------------------------------------
FOREIGN CURRENCY BONDS 25 21
- --------------------------------------------------------------------------------
HIGH GRADE CORPORATES 1 4
- --------------------------------------------------------------------------------
MORTGAGES 13 11
- --------------------------------------------------------------------------------
TREASURY NOTES & BONDS 13 22
- --------------------------------------------------------------------------------
CASH EQUIVALENTS 7 7
- --------------------------------------------------------------------------------
OTHER -- 1
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/96 ON 10/31/95
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/96 ON 10/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH AND EQUIVALENTS 0% 7%
- --------------------------------------------------------------------------------
1-10 YEARS 73 60
- --------------------------------------------------------------------------------
10-20 YEARS 19 16
- --------------------------------------------------------------------------------
20+ YEARS 8 17
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/96 ON 10/31/95
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/96 ON 10/31/95
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 8.2 YEARS 11.7 YEARS
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition and holdings are subject to change.
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
KEMPER DIVERSIFIED INCOME FUND
Portfolio of Investments at October 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT--44.0% U.S. Treasury Notes
8.875%, 1997 $ 36,300 $ 37,497
8.125%, 1998 37,000 38,127
9.25%, 1998 60,000 63,544
U.S. Treasury Bonds
10.75%, 2005 40,000 51,694
9.125%, 2009 26,600 30,839
13.875%, 2011 4,350 6,623
12.00%, 2013 9,200 13,251
Federal National Mortgage Association
7.50%, 2026 15,000 15,028
8.50%, 2026 19,000 19,653
Government National Mortgage Association
7.50%, 2024-2026 31,359 31,485
8.00%, 2026 34,000 34,765
-------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $340,037) 342,506
-------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN (a)Republic of Argentina
GOVERNMENTS--31.4% (PRINCIPAL AMOUNT IN U.S. DOLLARS)
(PRINCIPAL AMOUNT IN LOCAL 6.3125%, 2005 8,232 6,753
CURRENCY, UNLESS OTHERWISE 5.25%, 2023 12,450 7,381
INDICATED) 6.5625%, 2023 4,600 3,318
Commonwealth of Australia
12.00%, 2001 2,240 2,146
10.00%, 2006 2,660 2,476
Republic of Austria,
5.875%, 2000 35,800 3,507
Kingdom of Belgium,
9.00%, 2003 271,216 10,311
Federal Republic of Brazil
(PRINCIPAL AMOUNT IN U.S. DOLLARS)
(a) 6.50%, 2006 4,100 3,473
(a) 6.50%, 2024 11,400 8,358
8.00%, 2014, PIK 5,094 3,504
Government of Canada,
7.50%, 2003 17,075 13,760
Kingdom of Denmark,
8.00%, 2001 37,270 7,022
Republic of Finland,
10.00%, 2001 7,000 1,859
French Treasury
8.50%, 2000 12,000 2,646
8.50%, 2002 68,808 15,706
6.75%, 2003 43,000 9,027
German Bundesrepublic,
8.25%, 2001 55,557 41,720
Government of Ireland,
9.25%, 2003 802 1,499
Italian Treasury,
10.50%, 2000 37,865,000 27,455
Government of the Netherlands,
7.00%, 2003 19,375 12,406
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commonwealth of New Zealand,
10.00%, 2002 $ 858 $ 679
Kingdom of Norway,
9.50%, 2002 5,850 1,061
(a)Republic of Poland,
(PRINCIPAL AMOUNT IN U.S. DOLLARS)
3.75%, 2014 3,900 3,221
Republic of Portugal,
8.75%, 2001 151,120 1,055
Kingdom of Spain,
11.30%, 2002 1,158,500 10,665
Kingdom of Sweden
13.00%, 2001 9,100 1,741
10.25%, 2003 33,100 5,901
United Kingdom
8.50%, 2005 12,170 20,983
8.50%, 2007 1,638 2,809
United Mexican States
(PRINCIPAL AMOUNT IN U.S. DOLLARS)
11.375%, 2016 2,730 2,722
(a) 6.3975%, 2019 6,325 5,210
Banco Nacional De Comercio Exterior,
(PRINCIPAL AMOUNT IN U.S. DOLLARS)
7.25%, 2004 2,364 1,986
Republic of Venezuela,
(PRINCIPAL AMOUNT IN U.S. DOLLARS)
6.625%, 2007 2,500 2,051
-------------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $234,317) 244,411
-------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--34.9%
- ----------------------------------------------------------------------------------------------------------------
AEROSPACE--1.3% Airlines Pass Thru Class D, 10.875%, 2019 1,200 1,305
Fairchild Corporation, 12.00%, 2001 1,975 1,980
Howmet Inc., 10.00%, 2003 1,560 1,673
K & F Industries, Inc.
11.875%, 2003 50 54
10.375%, 2004 850 875
RHI Holdings, 11.875%, 1999 1,415 1,419
UNC, Inc., 11.00%, 2006 2,950 3,090
-------------------------------------------------------------------------------
10,396
- ----------------------------------------------------------------------------------------------------------------
BROADCASTING, CABLESYSTEMS Adelphia Communications Corporation, 12.50%,
AND PUBLISHING--5.8% 2002 800 792
Affinity Group, Inc., 11.50%, 2003 1,480 1,548
American Radio System, 9.00%, 2006 2,350 2,232
(b)Bell Cablemedia PLC
11.95%, 2004 2,120 1,749
11.875%, 2005 100 73
Big Flower Press, Inc., 10.75%, 2003 1,215 1,258
Cablevision Systems Corporation
9.25%, 2005 1,500 1,414
9.875%, 2013 920 853
10.50%, 2016 930 902
9.875%, 2023 370 337
Century Communications Corporation, 11.875%,
2003 1,430 1,527
(b)Charter Communications, 14.00%, 2007 1,530 868
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(b)Comcast UK Cable Partners Limited, 11.20%,
2007 $ 4,200 $ 2,746
Comcast Corporation, 9.125%, 2006 970 960
(b)Echostar Communications, 12.875%, 2004 2,490 1,973
Frontiervision, 11.00%, 2006 1,220 1,211
Granite Broadcasting Corp., 10.375%, 2005 1,590 1,602
Intermedia Capital Partners, 11.25%, 2006 1,200 1,203
(b)International Cabletel Incorporated
12.75%, 2005 2,690 1,843
11.50%, 2006 530 322
K-III Communications, 8.50%, 2006 1,600 1,502
Multicanal Participacoes, 12.625%, 2004 920 978
Neodata Services, 12.00%, 2003 1,500 1,522
Netsat Servicos, 12.75%, 2004 700 733
(b)People's Choice TV Unit, 13.125%, 2004 150 79
Rogers Communications, 10.875%, 2004 3,000 3,090
Sinclair Broadcasting Group, Inc., 10.00%,
2003 1,660 1,621
Sullivan Broadcasting, 10.25%, 2005 1,160 1,160
TeleWest Communications PLC,
9.625%, 2006 1,350 1,347
(b) 11.00%, 2007 4,185 2,678
(b)UIH Australia Pacific, Inc., 14.00%, 2006 5,370 2,806
Univision TV, 11.75%, 2001 670 705
(b)Videotron Holdings PLC
11.125%, 2004 1,100 894
11.00%, 2005 840 613
Young Broadcasting Inc., 11.75%, 2004 180 192
-------------------------------------------------------------------------------
45,333
- ----------------------------------------------------------------------------------------------------------------
CHEMICALS AND Agriculture, Mining and Chemicals, Inc.,
AGRICULTURE--1.7% 10.75%, 2003 710 756
Arcadian Partners, L.P., 10.75%, 2005 1,330 1,468
Atlantis Group, Inc., 11.00%, 2003 1,328 1,331
Hines Horticulture, 11.75%, 2005 2,690 2,824
NL Industries, 11.75%, 2003 700 722
Pioneer Americas Acquisition Corporation,
13.375%, 2005 1,020 1,132
Polymer Group Inc., 12.25%, 2002 813 883
Rexene Corporation, 11.75%, 2004 1,900 2,100
Terra Industries Inc., 10.50%, 2005 650 701
UCC Investors Holdings, Inc., 10.50%, 2002 1,460 1,548
-------------------------------------------------------------------------------
13,465
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS--3.4% CAI Wireless Systems, 12.25%, 2002 $ 1,000 $ 965
(b)Call-Net Enterprises Inc., 13.25%, 2004 850 673
(b)Cellular, Inc., 11.75%, 2003 705 613
CommNet Cellular, 11.25%, 2005 370 386
(b)CS Wireless, 11.375%, 2006 2,080 967
(b)ICG Holdings, 13.50%, 2005 1,785 1,178
Impsat Corp., 12.125%, 2003 930 953
Intermedia Communications of Florida Inc.,
13.50%, 2005, with warrants expiring 2000 1,515 1,784
(b)Millicom International Cellular S.A.,
13.50%, 2006 920 524
Nextlink Communications, 12.50%, 2006 635 652
Paging Network, Inc.
11.75%, 2002 1,145 1,239
10.125%, 2007 2,300 2,317
(b)PanAmSat, L.P., 11.375%, 2003 1,880 1,725
Rogers Cantel
11.125%, 2002 3,241 3,423
9.375%, 2008 560 564
9.75%, 2016 560 556
(b)Shared Technology, 12.25%, 2006 800 632
USA Mobile Communications, Inc. II, 14.00%,
2004 1,770 1,982
Vanguard Cellular Systems, 9.375%, 2006 2,870 2,856
Western Wireless, 10.50%, 2006 1,880 1,894
-------------------------------------------------------------------------------
25,883
- ----------------------------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS--1.1% American Standard Inc., 11.375%, 2004 3,050 3,286
(b)Building Materials Corporation of America,
11.75%, 2004 2,700 2,241
Nortek, Inc., 9.875%, 2004 1,400 1,368
Triangle Pacific Corporation, 10.50%, 2003 1,800 1,899
-------------------------------------------------------------------------------
8,794
- ----------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS AMF Group
AND SERVICES--2.8% 10.875%, 2006 3,010 3,117
(b) 12.25%, 2006 580 357
Avondale Mills, 10.25%, 2006 1,480 1,521
Cinemark USA, Inc., 9.625%, 2008 1,200 1,176
Dimon, Inc., 8.875%, 2006 2,750 2,826
(b)Dr. Pepper Bottling Holdings, Inc.,
11.625%, 2003 1,290 1,184
Herff Jones, Inc., 11.00%, 2005 600 639
Premier Parks Inc., 12.00%, 2003 1,220 1,321
(b)Six Flags Theme Park, 12.25%, 2005 3,680 3,330
Van De Kamps, Inc., 12.00%, 2005 600 653
West Point Stevens Inc., 9.375%, 2005 5,310 5,363
-------------------------------------------------------------------------------
21,487
- ----------------------------------------------------------------------------------------------------------------
DRUGS AND Dade International Inc., 11.125%, 2006 1,000 1,067
HEALTH CARE--1.3% Genesis Health Venture, 9.25%, 2006 720 718
Magellan Health Services, 11.25%, 2004 1,220 1,345
Ornda Healthcorporation
12.25%, 2002 1,240 1,328
11.375%, 2004 830 944
Tenet Healthcare
8.625%, 2003 2,000 2,110
10.125%, 2005 1,990 2,184
Unison Healthcare, 12.25%, 2006 600 605
-------------------------------------------------------------------------------
10,301
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ENERGY AND Benton Oil & Gas Co., 11.625%, 2003 $ 970 $ 1,062
RELATED SERVICES--2.7% Chesapeake Energy Corporation, 10.50%, 2002 960 1,031
Clark USA Inc., 10.875%, 2005 770 791
Coda Energy, 10.50%, 2006 1,000 1,046
Empire Gas Corporation, 7.00%, with warrants,
2004 1,000 863
Ferrellgas Partners, L.P., 9.375%, 2006 1,040 1,040
Flores & Rucks, 9.75%, 2006 340 349
Forcenergy, 9.50%, 2006 570 570
Gulf Canada Resources Limited
9.25%, 2004 610 633
9.625%, 2005 720 760
8.35%, 2006 4,000 4,159
Oryx Energy Co., 8.375%, 2004 4,000 4,160
Santa Fe Energy Resources, Inc., 11.00%, 2004 310 341
United Meridian Corp., 10.375%, 2005 2,700 2,916
Vintage Petroleum, 9.00%, 2005 1,430 1,444
-------------------------------------------------------------------------------
21,165
- ----------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES, Aames Financial, 9.125%, 2003 90 91
HOME BUILDERS AND Chelsea GCA Realty, 7.75%, 2001 2,340 2,382
REAL ESTATE--1.0% Continental Homes Holding, 10.00%, 2006 400 404
Forecast Group, 11.375%, 2000 825 726
Hovnanian Kent, 11.25%, 2002 1,384 1,386
Intertek Finance, 10.25%, 2006 650 657
J.M. Peters Company, 12.75%, 2002 550 517
Ryland Group, 10.50%, 2006 1,730 1,765
-------------------------------------------------------------------------------
7,928
- ----------------------------------------------------------------------------------------------------------------
LODGING AND GAMING--2.5% Bally's Park Place Funding, Inc., 9.25%, 2004 5,160 5,650
Eldorado Resorts, 10.50%, 2006 530 556
Empress River Casino, 10.75%, 2002 1,410 1,500
Harvey's Casino Resorts, 10.625%, 2006 2,450 2,560
MGM Grand Hotel Finance Corporation, 12.00%,
2002 3,000 3,263
Players International, 10.875%, 2005 1,600 1,584
Station Casinos Inc., 10.125%, 2006 2,160 2,106
Trump Atlantic City, 11.25%, 2006 2,470 2,340
-------------------------------------------------------------------------------
19,559
- ----------------------------------------------------------------------------------------------------------------
MANUFACTURING, METALS Aftermarket Technology, 12.00%, 2004 1,180 1,298
AND MINING--4.6% Alvey Systems, 11.375%, 2003 3,755 3,933
Bluebird Body Company, 11.75%, 2002 1,660 1,718
Collins & Aikman Corporation, 11.50%, 2006 2,090 2,187
Crain Industries, Inc., 13.50%, 2005 700 780
Day International Group, Inc., 11.125%, 2005 3,060 3,198
Delco Remy International, 10.625%, 2006 580 597
Essex Group Incorporated, 10.00%, 2003 980 1,009
Euramax International PLC, 11.25%, 2006 960 979
Fairfield Manufacturing Company, 11.375%, 2001 620 642
(b)Foamex - JPS Automotive L.P., 14.00%, with
warrants, 2004 1,200 978
Foamex L.P.
9.50%, 2000 1,450 1,472
11.25%, 2002 800 836
Great Dane Holding Company, 12.75%, 2001 885 872
GS Technologies
12.00%, 2004 570 591
12.25%, 2005 940 986
Hayes Wheels Intl., 11.00%, 2006 1,785 1,856
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IMO Industries, 11.75%, 2006 $ 1,775 $ 1,828
Jordan Industries, 10.375%, 2003 1,440 1,404
JPS Automotive Products Corporation, 11.125%,
2001 530 542
Knoll Inc., 10.875%, 2006 2,320 2,488
Newflo Corporation, 13.25%, 2002 1,070 1,185
Penda Industries Inc., 10.75%, 2004 920 902
Spinnaker Industries, 10.75%, 2006 570 573
Thermadyne Industries, Inc.
10.25%, 2002 1,637 1,694
10.75%, 2003 682 702
Weirton Steel Corp., 11.375%, 2004 760 754
-------------------------------------------------------------------------------
36,004
- ----------------------------------------------------------------------------------------------------------------
PAPER AND FOREST Berry Plastics Corporation, 12.25%, 2004 505 548
PRODUCTS AND BPC Holding Corp., 12.50%, 2006 810 850
CONTAINERS--3.1% Container Corporation of America, 11.25%, 2004 545 580
Crown Paper, 11.00%, 2005 1,460 1,372
Four M Corporation, 12.00%, 2006 550 572
Gaylord Container Corporation, 12.75%, 2005 1,320 1,449
Maxxam Group, Inc.
11.25%, 2003 2,080 2,122
(b) 12.25%, 2003 150 126
National Fiberstock, 11.625%, 2002 800 836
Owens-Illinois, Inc.
11.00%, 2003 1,890 2,077
9.75%, 2004 1,740 1,805
9.95%, 2004 2,070 2,168
Printpack Inc., 10.625%, 2006 1,270 1,314
Repap New Brunswick Inc., 10.625%, 2005 730 741
Riverwood International
10.25%, 2006 870 841
10.875%, 2008 2,390 2,190
Specialty Paperboard, 9.375%, 2006 770 775
Stone Container Corporation
11.50%, 2006 2,310 2,397
11.875%, 2016 940 982
U.S. Can Corp., 10.125%, 2006 560 577
-------------------------------------------------------------------------------
24,322
- ----------------------------------------------------------------------------------------------------------------
RETAILING--1.9% Brunos, 10.50%, 2005 1,995 2,040
Dominick's Finer Foods, 10.875%, 2005 760 835
Federated Department Stores, Inc., 10.00%,
2001 4,000 4,378
Finlay Fine Jewelry Corporation, 10.625%, 2003 4,070 4,192
Guitar Center Management, 11.00%, 2006 460 483
Michaels Stores, 10.875%, 2006 480 418
Pathmark Stores, Inc., 11.625%, 2002 2,190 2,258
-------------------------------------------------------------------------------
14,604
</TABLE>
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT OR NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MISCELLANEOUS--1.7% Coinmach Corporation, 11.75%, 2005 $ 2,120 $ 2,290
Communication and Power Industry, Inc.,
12.00%, 2005 550 599
Computervision Corporation, 11.375%, 1999 3,430 3,597
Corporate Express Inc., 9.125%, 2004 940 945
Delta Air Lines, 9.875%, 2008 1,384 1,572
Monarch Marking Systems, 12.50%, 2003 880 972
(b)Transtar Holdings, L.P., 13.375%, 2003 670 509
United Airlines, 9.56%, 2018 2,000 2,259
-------------------------------------------------------------------------------
12,743
-------------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(Cost: $265,212) $271,984
-------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
COMMON STOCKS--.6% (c)Capital Pacific Holdings 4,345shs. 4
(c)Echostar Communications 15,360 453
(c)Gaylord Container Corporation 417,954 3,135
(c)Grand Union Company 48,037 324
(c)Intelcom Group, Inc., warrants 4,026 50
(c)Thrifty Payless Inc. 7,695 165
(c)Waxman Industries, Inc., warrants 222,607 445
-------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost: $4,021) 4,576
-------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
MONEY MARKET Yields--5.18%-5.28%
INSTRUMENTS--1.2% Due--November and December 1996
(Cost: $9,683) $9,700 9,683
-------------------------------------------------------------------------------
TOTAL INVESTMENTS--112.1%
(Cost: $853,270) 873,160
-------------------------------------------------------------------------------
LIABILITIES LESS OTHER ASSETS--(12.1%) (94,408)
-------------------------------------------------------------------------------
NET ASSETS--100% $778,752
-------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) Variable rate security. Rate shown is effective rate on October 31, 1996 and
date shown represents the final maturity of the obligation.
(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 $853,270,000 for federal income tax purposes
at October 31, 1996, the gross unrealized appreciation was $24,495,000, the
gross unrealized depreciation was $4,605,000 and the net unrealized appreciation
of investments was $19,890,000.
See accompanying Notes to Financial Statements.
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, 1996, 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 1992. 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, 1996, 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, 1996, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the fiscal periods since 1992, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 17, 1996
18
<PAGE> 19
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------
Investments, at value
(Cost: $853,270) $ 873,160
- -------------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 7,360
- -------------------------------------------------------------------------------------------------------
Investments sold 416
- -------------------------------------------------------------------------------------------------------
Interest 19,976
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS 900,912
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------------------------------------
Cash overdraft 133
- -------------------------------------------------------------------------------------------------------
Payable for:
Fund shares redeemed 981
- -------------------------------------------------------------------------------------------------------
Investments purchased 119,974
- -------------------------------------------------------------------------------------------------------
Management fee 363
- -------------------------------------------------------------------------------------------------------
Distribution services fee 169
- -------------------------------------------------------------------------------------------------------
Administrative services fee 151
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 339
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 50
- -------------------------------------------------------------------------------------------------------
Total liabilities 122,160
- -------------------------------------------------------------------------------------------------------
NET ASSETS $ 778,752
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------------------------------------
Paid-in capital $ 915,712
- -------------------------------------------------------------------------------------------------------
Accumulated net realized loss on sales of investments and foreign currency transactions (161,894)
- -------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments and assets and liabilities in foreign currencies 18,588
- -------------------------------------------------------------------------------------------------------
Undistributed net investment income 6,346
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 778,752
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- -------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($509,690,200 / 85,081,900 shares outstanding) $5.99
- -------------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net asset value or 4.50% of offering price) $6.27
- -------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to contingent deferred sales charge) per
share ($262,264,300 / 43,777,800 shares outstanding) $5.99
- -------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to contingent deferred sales charge) per
share ($6,787,200 / 1,128,700 shares outstanding) $6.01
- -------------------------------------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($10,000 / 1,700 shares outstanding) $6.00
- -------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended October 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------
Interest income $ 66,719
- -------------------------------------------------------------------------------------------------------
Expenses:
Management fee 4,239
- -------------------------------------------------------------------------------------------------------
Distribution fee 1,942
- -------------------------------------------------------------------------------------------------------
Administrative services fee 1,655
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 2,145
- -------------------------------------------------------------------------------------------------------
Professional fees 61
- -------------------------------------------------------------------------------------------------------
Reports to shareholders 166
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 35
- -------------------------------------------------------------------------------------------------------
Total expenses 10,243
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 56,476
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Net realized gain on sales of investments and foreign currency transactions 7,381
- -------------------------------------------------------------------------------------------------------
Net realized gain from futures transactions 809
- -------------------------------------------------------------------------------------------------------
Net realized gain 8,190
- -------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments and assets and liabilities in foreign
currencies 7,415
- -------------------------------------------------------------------------------------------------------
Net gain on investments 15,605
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 72,081
- -------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 56,476 67,431
- ---------------------------------------------------------------------------------------------------------
Net realized gain (loss) 8,190 (384)
- ---------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation 7,415 20,625
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 72,081 87,672
- ---------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (70,190) (60,998)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions 22,639 (10,466)
- ---------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 24,530 16,208
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------
Beginning of period 754,222 738,014
- ---------------------------------------------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment income of
$6,346 and $16,057, respectively) $778,752 754,222
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
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 sales charge but
are subject to higher ongoing expenses than Class A
shares and, for shares sold on or after April 1,
1996 a contingent deferred sales charge payable
upon certain redemptions within one year of
purchase. Class C shares do not convert into
another class. Class I shares are offered to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
Differences in class expenses will result in the
payment of different per share income dividends by
class. All shares of the Fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT ACCOUNTING
POLICIES INVESTMENT VALUATION. Investments are stated at
value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. 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
rates of exchange prevailing on the respective
dates of such transactions. The Fund includes that
portion of
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
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
discount amortization on all fixed income
securities and premium amortization on
mortgage-backed securities. Realized gains and
losses from investment transactions are reported on
an identified cost basis.
The Fund may purchase securities with delivery or
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 segregate cash or other liquid assets
equal to the value of the securities purchased. At
October 31, 1996 the Fund had $94,092,000 in
purchase commitments outstanding (12% of net
assets), with a corresponding amount of assets
segregated.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class by dividing the Fund's net assets
attributable to that class by the number of shares
of the class outstanding.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies and therefore no
federal income tax provision is required. The
accumulated net realized loss on sales of
investments for federal income tax purposes at
October 31, 1996, amounting to approximately
$157,533,000, is available to offset future taxable
gains. If not applied, the loss carryover expires
during the period 1997 through 2003.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income monthly and
any net realized capital gains annually, which are
recorded on the ex-dividend date. Dividends are
determined in accordance with income tax principles
which may treat certain transactions differently
from generally accepted accounting principles.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI), and pays a management fee at an annual rate
of .58% of the first $250 million of average daily
net assets declining to .42% of average daily net
assets in excess of $12.5 billion.
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
The Fund incurred a management fee of $4,239,000
for the year ended October 31, 1996.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS ALLOWED
BY KDI
COMMISSIONS ----------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Year ended October 31, 1996 $ 129,000 737,000 69,000
</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 and Class C 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 such shares are
as follows:
<TABLE>
<CAPTION>
COMMISSIONS AND
DISTRIBUTION FEES
DISTRIBUTION FEES PAID BY KDI
AND CDSC ----------------------------
RECEIVED BY KDI TO ALL FIRMS TO AFFILIATES
----------------- ------------ -------------
<S> <C> <C> <C>
Year ended October 31, 1996 $ 2,388,000 1,791,000 54,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of Fund accounts the firms
service. Administrative services fees (ASF) paid
are as follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY ----------------------------
THE FUND TO KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Year ended October 31, 1996 $ 1,655,000 1,692,000 55,000
</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. Under the agreement,
KSvC received shareholder services fees of
$1,519,000 for the year ended October 31, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the year ended October 31, 1996, the Fund
made no payments to its officers and incurred
trustees' fees of $34,000 to independent trustees.
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4 INVESTMENT TRANSACTIONS For the year ended October 31, 1996, investment
transactions (excluding short-term instruments) are
as follows (dollars in thousands):
Purchases $2,589,864
Proceeds from sales 2,523,791
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION> YEAR ENDED OCTOBER 31,
1996 1995
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------
SHARES SOLD
-------------------------------------------------------------------------------
Class A 13,566 $ 80,537 15,745 $ 91,132
-------------------------------------------------------------------------------
Class B 11,847 70,188 12,618 73,317
-------------------------------------------------------------------------------
Class C 1,092 6,475 458 2,660
-------------------------------------------------------------------------------
Class I 5 29 -- --
-------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-------------------------------------------------------------------------------
Class A 4,911 29,059 4,342 25,151
-------------------------------------------------------------------------------
Class B 2,405 14,237 2,146 12,431
-------------------------------------------------------------------------------
Class C 49 294 21 124
-------------------------------------------------------------------------------
SHARES REDEEMED
-------------------------------------------------------------------------------
Class A (19,272) (114,353) (23,466) (136,212)
-------------------------------------------------------------------------------
Class B (10,233) (60,748) (13,450) (78,345)
-------------------------------------------------------------------------------
Class C (514) (3,060) (125) (724)
-------------------------------------------------------------------------------
Class I (3) (19) -- --
-------------------------------------------------------------------------------
CONVERSION OF SHARES
-------------------------------------------------------------------------------
Class A 2,536 15,078 4,551 26,461
-------------------------------------------------------------------------------
Class B (2,537) (15,078) (4,551) (26,461)
-------------------------------------------------------------------------------
NET INCREASE (DECREASE)
FROM CAPITAL SHARE
TRANSACTIONS $ 22,639 $ (10,466)
-------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES The Fund has entered into exchange traded financial
CONTRACTS futures contracts in order to help protect it from
anticipated market conditions and, as such, bears
the risk that arises from entering into these
contracts.
At the time the Fund enters into a futures
contract, it is required to make a margin deposit
with its custodian. Subsequently, gain or loss is
recognized and payments are made on a daily basis
between the Fund and its broker as the market value
of the futures contract fluctuates. At October 31,
1996, the market value of assets pledged by the
fund to cover margin requirements for open futures
positions was $458,000. The Fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures position open
at October 31, 1996 (in thousands):
<TABLE>
<CAPTION>
FACE EXPIRATION LOSS AT
TYPE AMOUNT MONTH 10/31/96
------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Securities $10,716 December '96 $(28)
</TABLE>
- --------------------------------------------------------------------------------
7 FORWARD FOREIGN
CURRENCY CONTRACTS In order to help protect it from 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 net 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, 1996,
the Fund had the following forward foreign currency
contracts outstanding with settlement dates in
November, 1996 (in thousands):
<TABLE>
<CAPTION>
FOREIGN CURRENCY CONTRACT AMOUNT UNREALIZED GAIN (LOSS)
TO BE DELIVERED IN U.S. DOLLARS AT 10/31/96
------------------------------------------------------------------------------
<S> <C> <C> <C>
4,056 Australian Dollars $ 3,212 $ (12)
------------------------------------------------------------------------------
26,676 Austrian Shillings 2,502 16
------------------------------------------------------------------------------
235,954 Belgium Francs 7,567 (44)
------------------------------------------------------------------------------
10,460 British Pounds 17,025 (509)
------------------------------------------------------------------------------
12,711 Canadian Dollars 9,489 (65)
------------------------------------------------------------------------------
29,908 Danish Kroner 5,132 (22)
------------------------------------------------------------------------------
15,449 Dutch Guilders 9,086 (99)
------------------------------------------------------------------------------
5,950 Finnish Markka 1,310 (7)
------------------------------------------------------------------------------
100,662 French Francs 19,650 (167)
------------------------------------------------------------------------------
44,605 German Marks 29,411 (197)
------------------------------------------------------------------------------
666 Irish Punts 1,084 (16)
------------------------------------------------------------------------------
28,721,652 Italian Lira 18,899 (93)
------------------------------------------------------------------------------
683 New Zealand Dollars 482 (1)
------------------------------------------------------------------------------
4,758 Norwegian Kroner 744 2
------------------------------------------------------------------------------
115,333 Portuguese Escudos 753 (12)
------------------------------------------------------------------------------
938,488 Spanish Pesetas 7,344 (65)
------------------------------------------------------------------------------
34,496 Swedish Kroner 5,245 (11)
------------------------------------------------------------------------------
NET UNREALIZED LOSS $ (1,302)
------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------
CLASS A
-------------------------------------------------
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------
Net asset value, beginning of year $5.98 5.77 6.23 5.65 5.47
- -----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .55 .52 .59 .63
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency .12 .16 (.45) .58 .14
- -----------------------------------------------------------------------------------------------
Total from investment operations .58 .71 .07 1.17 .77
- -----------------------------------------------------------------------------------------------
Less distribution from net investment
income .57 .50 .53 .59 .59
- -----------------------------------------------------------------------------------------------
Net asset value, end of year $5.99 5.98 5.77 6.23 5.65
- -----------------------------------------------------------------------------------------------
TOTAL RETURN 10.27% 12.90 1.02 21.60 14.59
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------
Expenses 1.03% 1.09 1.12 1.10 1.19
- -----------------------------------------------------------------------------------------------
Net investment income 7.72 9.43 8.81 9.74 11.02
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------
CLASS B
-------------------------------
YEAR ENDED MAY 31 TO
OCTOBER 31, OCTOBER 31,
1996 1995 1994
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------
Net asset value, beginning of period $5.98 5.77 5.94
- -----------------------------------------------------------------------------
Income from investment operations:
Net investment income .41 .49 .19
- -----------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency .12 .16 (.17)
- -----------------------------------------------------------------------------
Total from investment operations .53 .65 .02
- -----------------------------------------------------------------------------
Less distribution from net investment
income .52 .44 .19
- -----------------------------------------------------------------------------
Net asset value, end of period $5.99 5.98 5.77
- -----------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 9.23% 11.87 .35
- -----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------
Expenses 1.96% 2.04 1.97
- -----------------------------------------------------------------------------
Net investment income 6.79 8.48 8.01
- -----------------------------------------------------------------------------
</TABLE>
26
<PAGE> 27
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C CLASS I
----------------------------------------------
NOVEMBER 22,
YEAR ENDED MAY 31 TO 1995 TO
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995 1994 1996
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------- ---------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------- ---------
Net asset value, beginning of period $6.00 5.79 5.95 5.98
- ----------------------------------------------------------------------------------- ---------
Income from investment operations:
Net investment income .41 .50 .20 .45
Net realized and unrealized gain (loss) on
investments and foreign currency .12 .16 (.17) .12
- ----------------------------------------------------------------------------------- ---------
Total from investment operations .53 .66 .03 .57
- ----------------------------------------------------------------------------------- ---------
Less distribution from net investment income .52 .45 .19 .55
- ----------------------------------------------------------------------------------- ---------
Net asset value, end of period $6.01 6.00 5.79 6.00
- ----------------------------------------------------------------------------------- ---------
TOTAL RETURN (NOT ANNUALIZED) 9.33% 11.95 .55 10.01
- ----------------------------------------------------------------------------------- ---------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------- ---------
Expenses 1.86% 1.86 1.96 1.27
- ----------------------------------------------------------------------------------- ---------
Net investment income 6.89 8.68 8.02 7.48
- ----------------------------------------------------------------------------------- ---------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $778,752 754,222 738,014 328,512 244,620
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 310% 286 179 80 57
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
27
<PAGE> 28
TRUSTEES&OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR.
President and Trustee Vice President
DAVID W. BELIN ROBERT S. CESSINE
Trustee Vice President
LEWIS A. BURNHAM CHARLES R. MANZONI, JR.
Trustee Vice President
DONALD L. DUNAWAY MICHAEL A. MCNAMARA
Trustee Vice President
ROBERT B. HOFFMAN JOHN E. NEAL
Trustee Vice President
DONALD R. JONES HARRY E. RESIS, JR.
Trustee Vice President
DOMINIQUE P. MORAX JONATHAN W. TRUTTER
Trustee Vice President
SHIRLEY D. PETERSON RICHARD L. VANDENBERG
Trustee Vice President
WILLIAM P. SOMMERS PHILIP J. COLLORA
Trustee Vice President
and Secretary
JEROME L. DUFFY
Treasurer
ELIZABETH C. WERTH
Assistant Secretary
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 Riverside Plaza Chicago, IL 60606
http://www.kemper.com
[RECYCLE LOGO]
Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Funds prospectus.
KDIF - 2 (12/96) 1026010
Printed in the U.S.A. [KEMPER FUNDS LOGO]
