<PAGE> 1
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED OCTOBER 31, 1997
Offering investors the opportunity for high current return
"...the market enjoyed an unprecedented period of robust economic growth with
relatively no inflationary pressures. We positioned the fund to take advantage
of this environment by increasing its position in high yield bonds, Treasuries
and, to a lesser degree, emerging market investments..."
[KEMPER FUNDS LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
MANAGEMENT TEAM
6
PERFORMANCE UPDATE
9
PORTFOLIO STATISTICS
10
PORTFOLIO OF
INVESTMENTS
19
REPORT OF
INDEPENDENT AUDITORS
20
FINANCIAL STATEMENTS
22
NOTES TO
FINANCIAL STATEMENTS
26
FINANCIAL HIGHLIGHTS
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME FUND
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31, 1997
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 8.13%
CLASS B 7.13%
CLASS C 7.37%
LIPPER GENERAL
BOND FUNDS
CATEGORY AVERAGE* 9.83%
- --------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not represent future performance.
Returns, rankings, 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
10/31/97 10/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER DIVERSIFIED INCOME
FUND CLASS A $5.96 $5.99
- --------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME
FUND CLASS B $5.96 $5.99
- --------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME
FUND CLASS C $5.99 $6.01
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME FUND
LIPPER 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 #65 OF 79 FUNDS #72 OF 79 FUNDS #71 OF 79 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #1 OF 13 FUNDS N/A N/A
- --------------------------------------------------------------------------------
10-YEAR #1 OF 5 FUNDS N/A N/A
- --------------------------------------------------------------------------------
15-YEAR #2 OF 2 FUNDS N/A N/A
- --------------------------------------------------------------------------------
20-YEAR #1 OF 2 FUNDS N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF OCTOBER 31, 1997.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.4980 $0.4420 $0.4479
- --------------------------------------------------------------------------------
OCTOBER
DIVIDEND: $0.0415 $0.0369 $0.0368
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 8.36% 7.43% 7.37%
- --------------------------------------------------------------------------------
SEC YIELD+: 6.54% 5.86% 5.95%
- --------------------------------------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on October 31, 1997. Distribution
rate simply measures the level of dividends and is not a complete measure of
performance. The SEC yield is net investment income per share earned over the
month ended October 31, 1997, shown as an annualized percentage of the
maximum offering price on that date. The SEC yield is computed in accordance
with the standardized method prescribed by the Securities and Exchange
Commission.
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 its assets in foreign securities
which present special risks including fluctuating exchange rates, government
regulation and differences in liquidity that may affect the volatility of your
investment.
TERMS TO KNOW
YOUR FUND'S STYLE
[MORNINGSTAR STYLE BOX]
MORNINGSTAR FIXED-INCOME STYLE BOX
Source: Morningstar, Inc., Chicago, IL (312) 696-6000. (Morningstar Style Box
is based on a portfolio date as of October 31, 1997.) The Fixed-Income Style
Box placement is based on a fund's average effective maturity or duration and
the average credit rating of the bond portfolio.
Please note that style boxes do not represent an exact assessment of risk and
do not represent future performance. Please consult the prospectus for a
description of investment policies.
<PAGE> 3
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
Stephen B. Timbers is president, chief executive and chief investment officer of
Zurich Kemper Investments, Inc. (ZKI). ZKI and its affiliates manage
approximately $86 billion in assets, including $49 billion in retail mutual
funds. Timbers is a graduate of Yale University and holds an M.B.A. from
Harvard University.
DEAR SHAREHOLDERS,
Once again, investors experienced extreme market volatility in the month of
October. Unlike the October corrections of 1987 and 1989, this year's market
drop occurred at a time when the United States economy is remarkably healthy and
resilient. As we have noted, the U.S. economy has been moving forward for
several years with an alternating fast/slow pace that has proven successful in
removing whatever excesses build from quarter to quarter. As a consequence,
interest rates and the rate of inflation are both low and stable. Moreover, the
federal budget deficit has been reduced to such an extent that discussion has
now turned to what the government should do with a projected surplus in 1998.
Fortunately, no part of our strong economic foundation was shaken by the
market correction. If anything, the correction provided a short-lived and
relatively painless lesson about the vulnerability of a highly valued market.
When markets are high, everything -- economic news, corporate earnings and
liquidity -- must go right. When markets are high -- as our equity market was
for most of this year -- they are vulnerable to relatively minor
disappointments.
As you have read, of course, the direct source of the October correction was
Southeast Asia, where the world's highest growth economies had been stumbling
since the summer. These economies had become overextended, banks ran into
trouble with bad loans and the local governments failed to take prompt action.
The result was a domino effect of competitive devaluations of currencies,
crashing markets and political chaos.
But while Southeast Asia produced the event that led to the mini-panic in the
U.S. equity market -- resulting in a 7 percent loss on October 27 -- the world
quickly looked to the U.S. for solutions. When the U.S. market quickly
rebounded, other markets became less volatile. Considering U.S. economic
fundamentals and the relatively small effect that Southeast Asian problems have
on U.S. companies as a whole, rational investors had to expect our market to
bounce back. In fact, if the U.S. equity market had not been so highly valued,
we would have expected the market's reaction to the Asian problems to be quite
muted. For instance, if the Dow Jones Industrial Average had been closer to 7000
than to 8000, we would have expected that the market would have dropped only
slightly.
But as we have said before, today's markets move very fast. We experienced in
one day the kind of correction that we used to experience over a six-month
period. By Wednesday, November 19, the Dow Jones Industrial Average had climbed
back to where it was before Gray Monday, October 27, 1997. It took only 26 days
to recoup -- contrast that with the 463 days needed to recoup from Black Monday.
The market did not recover from its 22.6 percent October 19, 1987, market
correction until January 24, 1989. At this writing, the U.S. equity market
remains very volatile. We expect that condition to continue, as volatility is a
factor of higher valued markets. Despite what the last few years may have
suggested, markets do not go in just one direction.
Our recent experience supported many of the basic tenets of investing:
- Invest for the long term and don't react to the short-term noise. Investors
who got hurt in the October correction were those who had borrowed the
money they invested and were forced to sell at low prices. Investors who
were able to remain invested and did, lost only some of their
above-average gain for the year.
- Diversification helps reduce overall portfolio risk. Government securities
investors, for example, found the bond market to be a safe haven as the
bond market rallied during the stock market correction.
- Investing abroad is complex and requires expert advice. Currency
valuations, in particular, can have a significant effect on investment
returns.
Our forecast for the next several months calls for moderate economic growth,
stable interest rates and controlled inflation. While we cannot rule out the
possibility of another market event that would add to the excitement of equity
investing, we would expect the U.S. market to again demonstrate its resiliency.
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 (11/30/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 5.88 6.49 6.3 5.71
PRIME RATE(2) 8.5 8.5 8.25 8.65
INFLATION RATE(3)* 2.08 2.3 3.25 2.6
THE U.S. DOLLAR(4) 9.65 5.52 4.36 -2.58
CAPITAL GOODS ORDERS(5)* 9.92 7.16 3.3 8.09
INDUSTRIAL PRODUCTION(5)* 5.51 4.23 4.33 3.4
EMPLOYMENT GROWTH(6) 2.52 2.13 2.15 1.91
</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 percent. The low, moderate inflation of
the last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of October 31, 1997.
Sources: Economics Department, Zurich Kemper Investments, Inc.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT AND CHIEF INVESTMENT OFFICER
ZURICH KEMPER INVESTMENTS INC.
December 4, 1997
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 A 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 ZKI IN 1988 AND IS AN EXECUTIVE VICE PRESIDENT OF ZKI, THE
MANAGING DIRECTOR OF ZURICH INVESTMENT MANAGEMENT LIMITED, LONDON 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 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
NORTHWEST-
ERN UNIVERSITY.
[VANDENBURG PHOTO]
RICHARD VANDENBERG JOINED ZKI IN MARCH 1996, AS SENIOR VICE PRESIDENT OF ZKI AND
PORTFOLIO CO-MANAGER OF KEMPER DIVERSIFIED INCOME FUND. VANDENBERG HAS MORE THAN
23 YEARS OF FIXED-INCOME PORTFOLIO MANAGEMENT EXPERIENCE. HE RECEIVED BOTH A
BACHELOR'S DEGREE AND AN M.B.A. FROM THE UNIVERSITY OF WISCONSIN.
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
BONDS ENJOYED STRONG PERFORMANCE DURING THE YEAR ENDED OCTOBER 31, 1997, DESPITE
SOME TUMULTUOUS EVENTS THAT TOOK PLACE. BELOW, THE PORTFOLIO MANAGERS DISCUSS
HOW THEY SHIFTED ASSETS IN THE PORTFOLIO TO PREPARE FOR RISING AND THEN FALLING
MARKET YIELDS.
Q HOW DID KEMPER DIVERSIFIED INCOME FUND PERFORM DURING THE YEAR?
A The total return for the fund's Class A shares was 8.13 percent
(unadjusted for any sales charge). We were pleased with that performance given
some of the major economic and market events that occurred during the year. As
of October 31, the fund was given a four-star overall rating from Morningstar,
Inc. For the three-, five- and ten-year periods, Kemper Diversified Income Fund
was rated three stars, five stars and four stars, respectively. It was ranked
against 1,338, 732 and 307 taxable bond funds, respectively.*
*MORNINGSTAR PROPRIETARY RATINGS REFLECT RISK-ADJUSTED PERFORMANCE. THE RATINGS
ARE SUBJECT TO CHANGE EVERY MONTH. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE
RESULTS. MORNINGSTAR RATINGS ARE CALCULATED FROM THE FUNDS' THREE-, FIVE-, AND
10-YEAR RETURNS (WITH FEE ADJUSTMENTS) IN EXCESS OF 90-DAY TREASURY BILL
RETURNS, AND A RISK FACTOR THAT REFLECTS FUND PERFORMANCE BELOW 90-DAY TREASURY
BILL RETURNS. THE PERCENTAGE OF FUNDS RECEIVING A PARTICULAR RATING IS AS
FOLLOWS: FIVE STARS 10 PERCENT; FOUR STARS 22.5 PERCENT; THREE STARS 35
PERCENT; TWO STARS 22.5 PERCENT; AND ONE STAR 10 PERCENT.
Q DURING THE FUND'S FISCAL YEAR THE FEDERAL RESERVE BOARD (THE FED) RAISED
SHORT-TERM INTEREST RATES. AT THE END OF THE YEAR, EVENTS IN SOUTHEAST ASIA
CAUSED A MAJOR SELL-OFF IN GLOBAL MARKETS. HOW DID THESE EVENTS IMPACT THE
PERFORMANCE OF THE FIXED-INCOME MARKETS?
A Despite these events, fixed-income securities performed relatively well
during the year. The Fed did raise interest rates but the impact of the
tightening on the market was brief and relatively minimal. In addition, the
crisis in Southeast Asia hurt corporate and emerging market bonds but caused
U.S. government bonds to rally. Specifically, here's what happened.
At the start of the fiscal year, U.S. fixed-income markets rallied in
response to the outcome of the U.S. presidential and congressional elections,
in which the Republicans maintained control of Congress and President Clinton
was re-elected.
This bullish environment began to change in December, when Federal
Reserve Board Chairman Alan Greenspan implied in passing that financial assets
might be overvalued. This shook the market and caused yields to rise and
securities prices to fall. Early in 1997, strong economic reports surfaced and
Greenspan reiterated his concern about the values of securities and about the
potential for a rise in wage inflation. In what was considered to be a
preemptive move at keeping inflation in check, the Fed tightened short-term
rates by 0.25 percent in late March.
While economic growth remained somewhat strong, even after the Fed
tightening, inflation remained uncharacteristically low. Fixed-income markets
began recouping losses experienced with the Fed's interest rate increase as
inflation fears remained unconfirmed. Market yields fluctuated with the release
of varying economic data but remained relatively range-bound until October.
On October 8, Greenspan once again expressed his concern about whether
the current low level of inflation could continue with such a strong U.S.
economy. The market believed his comments to be a warning that he might tighten
interest rates again soon. That prospect was discounted on October 27, when
there was a global equity market sell-off spawned by economic events in
Southeast Asia. The sell-off was dramatic and initiated steep declines in
emerging market bonds and less significant declines in high yield and
investment grade corporate bonds. Investors flocked to higher quality issues
and as a result the U.S. Treasury market rallied through the end of the fund's
fiscal year.
Q HOW DID YOU MANAGE THE FUND GIVEN THE INTEREST RATE UNCERTAINTY IN THE
FIRST PART OF THE YEAR?
A We managed the fund fairly defensively by shortening its duration.
Duration is a measurement of a fund's sensitivity to interest rates. The shorter
the duration, the less sensitive it is to interest rate changes. This means
that, because of the shorter duration, the fund's performance was less impacted
by the spike in interest rates than it would have been with a longer duration.
We made the adjustment by increasing the level of cash and cash
equivalents in the fund. Typically, we try to keep the fund's cash position
relatively low, because it limits the amount of interest income that the fund
can generate.
However, our larger cash position helped us greatly in March and into
April as rates were rising. In mid-April as inflation remained unthreatening
and yields began to fall, we looked for opportunities to reallocate the cash
back into sectors that appeared attractive -- sectors such as high yield bonds,
emerging market investments and mortgages.
6
<PAGE> 7
PERFORMANCE UPDATE
Q WHAT OTHER TYPES OF ADJUSTMENTS DID YOU MAKE TO THE FUND?
A During the fiscal year, the market enjoyed an unprecedented period of
robust economic growth with relatively no inflationary pressures. We positioned
the fund to take advantage of this environment by increasing its position in
high yield bonds, Treasuries and to a lesser degree, emerging market
investments.
Ever increasing demand for high yield bonds fueled gains in the market as
corporate earnings continued to be strong. Supply kept up with demand and a
great deal of new, lower quality issues were gobbled up by the market. We stayed
away from many of these riskier issues, favoring higher quality (B-rated or
higher) bonds, from fundamentally strong companies. Although these issues didn't
necessarily offer the highest returns in the short run, we felt they would
withstand economic or market uncertainty and provide strong returns in the long
run. Our assumption was proven correct during the October decline when riskier
high yield assets suffered deeper losses than their higher quality high yield
counterparts.
As rates trended lower from April on, we increased the level of
Treasuries in the fund. This made sense because Treasuries tend to perform
strongest when rates decline. On October 31, Treasury notes and bonds
represented 29 percent of the fund -- up from 11 percent in late March after
the Fed's interest rate tightening. This sector also enjoyed a dramatic rally
at the end of the year as investors sold other investments and rushed into
Treasuries.
Emerging market investments gained during much of the period and we
increased our exposure to a high of 8 percent. However, as events in Southeast
Asia and other foreign markets began to escalate, we cut exposure to 5 percent.
All of the fund's emerging markets exposure was denominated in U.S. dollars.
Although we could not have foreseen the impact that the Southeast Asia
crisis would have on world markets, these portfolio adjustments helped limit
its impact on the fund.
Q IN THE FUND'S SEMIANNUAL SHAREHOLDER REPORT YOU DISCUSSED REDUCING THE
FUND'S EXPOSURE TO FOREIGN CURRENCY BONDS. HOW DID YOU MANAGE THAT ALLOCATION
DURING THE LAST HALF OF THE FISCAL YEAR?
A We continued to reduce the fund's position in foreign currency bonds
because we believed that the U.S. bond market had more potential to outperform
foreign bonds on an absolute level and because of concerns about the European
Monetary Union. Also, yields in many foreign markets were well below yields
achievable through U.S. investments. At the start of the fiscal year foreign
currency bonds represented 25 percent of the fund's investments. By July 30 we
had cut our exposure to just 5 percent -- a level we maintained throughout the
remainder of the year.
Q WHAT'S YOUR OUTLOOK FOR THE FIXED-INCOME MARKETS?
A We are cautiously optimistic about the fixed-income markets. We believe
that the fundamentals of most sectors remain positive. However, we look for the
possibility of more volatility in the global marketplace.
7
<PAGE> 8
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR PERIODS ENDED OCTOBER 31, 1997 (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 3.30% 9.56 11.53% 10.40% (since 6/23/77)
- ------------------------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME FUND CLASS B 4.13 N/A N/A 7.82 (since 5/31/94)
- ------------------------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME FUND CLASS C 7.37 N/A N/A 8.49 (since 5/31/94)
- ------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class A shares from 6/23/77 to 10/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6/23/77 12/31/77 12/31/85 12/31/93 10/31/97
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kemper Diversified Income Fund Class A(1) 10000 9565 24954 56515 74781
Lehman Brothers Government/Corporate Bond Index+ 10000 10077 22776 49725 63612
Consumer Price Index++ 10000 10231 18007 24020 26557
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class B shares from 5/31/94 to 10/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 12/31/96 10/31/97
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kemper Diversified Income Fund Class B(1) 10000 9794 11612 12491 12936
Lehman Brothers Government/Corporate Bond Index+ 10000 10063 11999 12347 13341
Consumer Price Index++ 10000 10149 10407 10753 10929
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in
Class C shares from 5/31/94 to 10/31/97
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5/31/94 12/31/94 12/31/95 12/31/96 10/31/97
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kemper Diversified Income Fund Class C(1) 10000 9816 11648 12559 13214
Lehman Brothers Government/Corporate Bond Index+ 10000 10063 11999 12347 13341
Consumer Price Index++ 10000 10149 10407 10753 10929
</TABLE>
Returns are historical and do not represent future performance. Returns and net
asset values 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 percent,
for Class B shares adjustment for the applicable contingent deferred sales
charge (CDSC) as follows: 1-year, 3 percent; 5-year, 1 percent; since
inception, 0 percent and for Class C shares no adjustment for sales charge.
The maximum CDSC for Class B shares is 4 percent. For Class C shares, there
is a 1 percent CDSC on certain redemptions within the first year of
purchase. 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 the report.
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 the
volatility of your investment.
(1) Performance includes reinvestment of dividends and adjustment for the
maximum sales charge for Class A shares and the CDSC in effect at the end
of the period for Class B shares. In comparing the performance of Kemper
Diversified Income Fund Class A and Class B shares 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 applicable 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.
8
<PAGE> 9
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/97 ON 10/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
HIGH YIELD CORPORATES 42% 35%
- --------------------------------------------------------------------------------
EMERGING MARKETS 5 6
- --------------------------------------------------------------------------------
FOREIGN CURRENCY BONDS 5 25
- --------------------------------------------------------------------------------
HIGH GRADE CORPORATES 7 1
- --------------------------------------------------------------------------------
MORTGAGES 7 13
- --------------------------------------------------------------------------------
TREASURY NOTES & BONDS 29 13
- --------------------------------------------------------------------------------
CASH EQUIVALENTS 5 7
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/97 ON 10/31/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/97 ON 10/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH AND EQUIVALENTS 5% --
- --------------------------------------------------------------------------------
1-10 YEARS 51 73%
- --------------------------------------------------------------------------------
10-20 YEARS 28 19
- --------------------------------------------------------------------------------
20+ YEARS 16 8
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 10/31/97 ON 10/31/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 10/31/97 ON 10/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 10.9 years 8.2 years
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--36.2% PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Note, 6.125%, 2007 $ 25,275 $ 25,816
U.S. Treasury Bonds
10.75%, 2005 17,270 22,435
9.125%, 2009 29,300 34,203
13.875%, 2011 4,350 6,616
12.00%, 2013 9,200 13,474
13.25%, 2014 18,000 28,583
10.625%, 2015 28,210 41,716
6.50%, 2026 2,145 2,236
6.625%, 2027 28,325 30,033
6.375%, 2027 20,000 20,613
U.S. Treasury Strip, zero coupon, 2019 80,000 21,110
Federal Home Loan Mortgage Corp.,
6.50%, 2023 26,681 26,389
Government National Mortgage Association,
6.50%, 2023-2027 39,132 38,728
-------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost: $306,658) 311,952
-------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS--9.8%
- -------------------------------------------------------------------------------------------------------------------------
(Principal amount in local currency, (a)Republic of Argentina
unless otherwise indicated) (principal amount in U.S. dollars)
6.687%, 2005 1,334 1,131
5.50%, 2023 5,750 3,910
Commonwealth of Australia,
9.50%, 2003 1,136 950
Republic of Austria,
5.875%, 2000 10,340 878
Kingdom of Belgium,
9.00%, 2003 71,715 2,371
(a)Federal Republic of Brazil,
(principal amount in U.S. dollars)
6.687%, 2006 100 78
Government of Canada,
7.50%, 2003 4,071 3,229
Kingdom of Denmark,
7.00%, 2004 9,127 1,551
Republic of Finland,
10.00%, 2001 2,000 452
French Treasury
5.50%, 2001 21,324 3,790
8.50%, 2008 14,192 3,034
German Bundesrepublic,
8.25%, 2001 13,436 8,733
Government of Ireland,
9.25%, 2003 202 356
Italian Treasury,
10.50%, 2000 9,400,000 6,223
Government of the Netherlands,
7.00%, 2003 5,464 3,056
Commonwealth of New Zealand,
8.00%, 2001 268 173
Republic of the Philippines,
(principal amount in U.S. dollars)
6.25%, 2017 2,240 1,854
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Republic of Poland,
(principal amount in U.S. dollars)
4.00%, 2014 $ 6,000 $ 4,905
Republic of Portugal,
11.875%, 2005 53,260 410
Russia Ministry of Finance,
(principal amount in U.S. dollars)
9.25%, 2001 2,000 1,893
Kingdom of Spain,
8.00%, 2004 362,520 2,806
Kingdom of Sweden,
10.25%, 2003 9,300 1,484
United Kingdom
7.00%, 2002 1,348 2,293
7.25%, 2007 2,067 3,645
United Mexican States
(principal amount in U.S. dollars)
8.00%, 2002 2,310 2,171
11.375%, 2016 4,000 4,160
6.835%, 2019 2,000 1,780
6.25%, 2019 6,000 4,680
11.50%, 2026 1,450 1,508
Republic of Venezuela,
(principal amount in U.S. dollars)
6.75%, 2007 12,250 10,596
----------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost: $88,075) 84,100
----------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--48.2%
- -------------------------------------------------------------------------------------------------------------------------
AEROSPACE--.9% Airlines Pass Through Trust, 10.875%, 2019 1,200 1,344
Fairchild Corp., 12.00%, 2001 1,545 1,553
Howmet, Inc., 10.00%, 2003 1,560 1,700
RHI Holdings, 11.875%, 1999 1,037 1,042
Tracor, 8.50%, 2007 1,000 1,003
Valujet, Inc., 10.25%, 2001 1,100 1,020
----------------------------------------------------------------------------
7,662
- -------------------------------------------------------------------------------------------------------------------------
BROADCASTING, Affinity Group, Inc., 11.50%, 2003 1,480 1,569
CABLESYSTEMS (b)Bell Cablemedia, PLC, 11.875%, 2005 100 87
AND PUBLISHING--5.7% Busse Broadcasting, 11.625%, 2000 430 460
Cablevision Systems Corp.
8.125%, 2009 2,990 3,005
10.50%, 2016 1,200 1,353
Capstar Broadcasting
9.25%, 2007 510 515
(b) 12.75%, 2009 2,910 2,037
Century Communications Corp., 8.75%, 2007 580 577
(b)Charter Communications, 14.00%, 2007 1,530 1,148
Comcast Cablevision
8.875%, 2017 1,225 1,399
8.50%, 2027 625 709
(b)Comcast UK Cable Partners, Ltd., 11.20%,
2007 4,200 3,297
(b)Diamond Cable Communications, PLC
13.25%, 2004 920 803
11.75%, 2005 1,840 1,375
10.75%, 2007 2,830 1,832
EZ Communications, 9.75%, 2005 590 648
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foxkids Worldwide
(b) 10.25%, 2007 $ 2,000 $ 1,145
9.25%, 2007 1,350 1,298
Frontiervision
11.00%, 2006 1,060 1,147
(b) 11.875%, 2007 1,000 685
Granite Broadcasting Corp., 10.375%, 2005 1,590 1,648
Intermedia Capital Partners, 11.25%, 2006 1,360 1,476
(b)International Cabletel, Inc., 12.75%,
2005 2,840 2,300
Multicanal Participacoes, 12.625%, 2004 1,240 1,271
NTL, 10.00%, 2007 380 391
News America Holdings, Inc.
9.25%, 2013 600 695
8.25%, 2018 1,375 1,457
Newsquest Capital, PLC, 11.00%, 2006 190 211
Salem Communication Corp., 9.50%, 2007 980 980
Sinclair Broadcasting Group, Inc., 10.00%,
2003 1,660 1,722
STC Broadcasting, 11.00%, 2007 590 631
Sullivan Broadcasting, 10.25%, 2005 1,160 1,230
Tele-Communications, Inc., 9.80%, 2012 950 1,148
(b)TeleWest Communications, PLC, 11.00%,
2007 3,065 2,291
Time Warner Entertainment, 8.375%, 2023 1,050 1,147
Time Warner, Inc.
7.25%, 2017 800 787
9.15%, 2023 1,425 1,682
(b)UIH Australia Pacific, Inc., 14.00%, 2006 330 229
U.S. West Cap Funding
7.90%, 2027 1,500 1,581
7.95%, 2097 1,250 1,337
----------------------------------------------------------------------------
49,303
- -------------------------------------------------------------------------------------------------------------------------
CHEMICALS AND Agriculture, Mining and Chemicals, Inc.,
AGRICULTURE--1.7% 10.75%, 2003 710 763
Atlantis Group, Inc., 11.00%, 2003 1,328 1,335
Hines Horticulture, 11.75%, 2005 2,690 2,959
Huntsman Corp., 9.50%, 2007 1,740 1,836
Huntsman Polymer Corp., 11.75%, 2004 1,900 2,147
(b)NL Industries, Inc., 13.00%, 2005 280 277
PCI Chemicals, 9.25%, 2007 620 608
Terra Industries, Inc., 10.50%, 2005 650 705
Texas Petrochemicals, 11.125%, 2006 2,000 2,200
UCC Investors Holdings, Inc., 10.50%, 2002 1,460 1,650
----------------------------------------------------------------------------
14,480
- -------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--6.4% (b)Call-Net Enterprise, Inc.
13.25%, 2004 370 334
9.27%, 2007 1,080 702
(b)Cellular, Inc., 11.75%, 2003 705 694
Comcast Cellular, 9.50%, 2007 1,860 1,925
CommNet Cellular, 11.25%, 2005 370 423
Communication and Power Industry, Inc.,
12.00%, 2005 550 611
Dobson Communications, 11.75%, 2007 2,000 2,050
Econophone, 13.50%, 2007 1,425 1,617
GCI General Communication, 9.75%, 2007 1,700 1,734
Highwaymaster, 13.75%, 2005 910 896
(b)ICG Holdings, 13.50%, 2005 2,435 1,924
Interamerica, 14.00%, 2007 320 320
Intermedia Communications of Florida, Inc.,
with warrants expiring 2000
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(b) 11.25%, 2006 $ 1,350 $ 1,087
(b) 11.25%, 2007 2,080 1,362
8.875%, 2007 770 753
(b)Knology Corp., 11.875%, 2007 600 318
McLeod USA
(b) 10.50%, 2007 4,060 2,801
9.25%, 2007 960 979
Metronet Communication
12.00%, 2007 560 627
(b) 10.75%, 2007 500 298
MGC Communications, 13.00%, 2004 1,300 1,287
(b)Millicom International Cellular, S.A.,
13.50%, 2006 1,890 1,422
Netia Holdings
(b) 11.25%, 2007 425 242
10.25%, 2007 300 288
(b)Nextel Communication, 9.75%, 2007 4,100 2,245
Nextlink Communications, 12.50%, 2006 1,285 1,462
(b)PanAmSat, L.P., 11.375%, 2003 1,880 1,859
Primus Telecom Group, 11.75%, with warrants,
2004 1,000 1,070
(b)PTC International Finance, 10.00%, 2007 6,670 4,269
RCN Corp., 10.00%, 2007 330 326
Rogers Cantel
8.80%, 2007 1,900 1,891
9.375%, 2008 1,570 1,652
9.75%, 2016 415 446
(b)Telegroup, 10.50%, 2004 420 313
Telex Communications, 10.50%, 2007 960 950
USA Mobile Communications, Inc. II
14.00%, 2004 1,280 1,434
9.50%, 2004 840 823
Vanguard Cellular Systems, 9.375%, 2006 1,600 1,648
Viasystems, 9.75%, 2007 2,000 2,045
Western Wireless
10.50%, 2006 and 2007 3,340 3,594
Winstar Equipment, 12.50%, 2004 2,400 2,502
Worldcom, Inc.,
7.75%, 2007 and 2027 2,025 2,151
----------------------------------------------------------------------------
55,374
- -------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION (b)Building Materials Corporation of America,
MATERIALS--1.1% 11.75%, 2004 2,700 2,511
Falcon Building
9.50%, 2007 320 328
(b) 10.50%, 2007 3,030 1,954
New Millen Home Building, 12.00%, 2004 250 249
Nortek, Inc., 9.125%, 2007 3,080 3,088
Waxman Industries, Inc.
(b) 12.75%, 2004 370 328
(c) 222,607 warrants expiring 2004 646
----------------------------------------------------------------------------
9,104
- -------------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS AFC Enterprises, 10.25%, 2007 3,120 3,268
AND SERVICES--4.9% Ameriserve Food, 8.875%, 2006 1,300 1,300
AMF Group
(b) 12.25%, 2006 580 439
10.875%, 2006 3,010 3,266
Avondale Mills, 10.25%, 2006 60 65
Bally Total Fitness, 9.875%, 2007 510 506
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cinemark USA, Inc., 9.625%, 2008 $ 3,030 $ 3,121
Coinmach Corp., 11.75%, 2005 3,120 3,432
Commemorative Brands, 11.00%, 2007 290 296
Dimon, Inc., 8.875%, 2006 2,000 2,145
Doskocil Manufacturing Co., 10.125%, 2007 1,030 1,066
(b)Dr. Pepper Bottling Holdings, Inc.,
11.625%, 2003 1,290 1,338
Dyersburg Corp., 9.75%, 2007 2,465 2,539
Hedstrom Corp., 10.00%, 2007 2,800 2,828
Herff Jones, Inc., 11.00%, 2005 1,050 1,134
Hollywood Entertainment, 10.625%, 2004 1,170 1,188
Hollywood Theaters, 10.625%, 2007 420 443
Kinder-Care Learning Centers, 9.50%, 2009 2,990 2,938
NBTY, 8.625%, 2007 680 665
Premier Parks, Inc., 12.00%, 2003 660 732
Regal Cinemas, 8.50%, 2007 400 398
Royal Caribbean, 8.25%, 2005 1,500 1,615
(b)Six Flags Theme Park, 12.25%, 2005 4,330 4,568
Van De Kamps, Inc., 12.00%, 2005 900 1,001
Windy Hill Pet Food, 9.75%, 2007 2,000 2,030
----------------------------------------------------------------------------
42,321
- -------------------------------------------------------------------------------------------------------------------------
DRUGS AND Dade International, Inc., 11.125%, 2006 1,000 1,120
HEALTH CARE--1.7% DVI, Inc., 9.875%, 2004 360 371
Genesis Eldercare, 9.00%, 2007 1,665 1,640
Graham-Field Health, 9.75%, 2007 580 600
Integrated Health Services
9.50%, 2007 3,220 3,260
9.25%, 2008 1,500 1,496
MedPartners, Inc., 7.375%, 2006 920 892
Packard Bioscience, 9.375%, 2007 1,000 1,005
Tenet Healthcare, 8.625%, 2003 2,000 2,106
Vencor, 8.625%, 2007 2,320 2,262
----------------------------------------------------------------------------
14,752
- -------------------------------------------------------------------------------------------------------------------------
ENERGY AND RELATED AES, 8.50%, 2007 780 766
SERVICES--3.7% Bellweather Exploration, 10.875%, 2007 2,000 2,145
Benton Oil & Gas Co.
11.625%, 2003 2,000 2,200
9.375%, 2007 770 768
Coda Energy, 10.50%, 2006 1,600 1,688
Commonwealth Edison, 7.375%, 2004 1,150 1,176
Dailey Petro Service, 9.75%, 2007 1,000 1,040
Espirito Santo, 10.00%, 2007 1,910 1,767
Forcenergy, 9.50%, 2006 2,800 2,961
Forman Petro, 13.50%, 2004 500 508
Gulf Canada Resources, Ltd., 8.35%, 2006 1,200 1,305
National Energy, 10.75%, 2006 1,000 1,043
Ocean Energy, 9.75%, 2006 615 649
Pacalta Resources, 10.75%, 2004 2,830 2,802
Plains Resources, 10.25%, 2006 2,000 2,130
Rutherford Moran, 10.75%, 2004 740 729
Southwest Royal, 10.50%, 2004 650 644
Stone Energy Corp., 8.75%, 2007 780 772
Transamerica Energy Corp., 11.50%, 2002 2,000 2,045
United Meridian Corp., 10.375%, 2005 1,570 1,707
Wiser Oil Co., 9.50%, 2007 2,960 2,930
----------------------------------------------------------------------------
31,775
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL SERVICES, BCH Cayman Islands, 7.70%, 2006 $ 2,000 $ 2,094
HOMEBUILDERS AND CIT Cap Trust I, 7.70%, 2027 2,000 2,040
REAL ESTATE--5.0% Corporation Andina De Formento, 7.79%, 2017 2,000 2,036
Del Webb Corp., 9.75%, 2008 3,630 3,666
Den Danske Bank, 7.40%, 2010 2,000 2,056
Emergent Group, 10.75%, 2004 650 637
Felcor Suites
7.375%, 2004 1,600 1,594
7.625%, 2007 575 572
Forecast Group, L.P., 11.375%, 2000 825 786
Fortress Group, 13.75%, 2003 2,560 2,842
Hovnanian Enterprises, 11.25%, 2002 1,984 2,063
Intertek Finance, 10.25%, 2006 650 683
Kaufman & Broad Homes, 7.75%, 2004 1,000 983
Lehman Brothers Holdings
7.25%, 2003 650 669
7.375%, 2007 2,000 2,066
MBNA Capital, 8.278%, 2026 2,000 2,033
Mellon Capital, 7.72%, 2026 2,000 2,040
Peoples Bank Bridgeport, 7.20%, 2006 2,000 2,026
Presley Companies, 12.50%, 2001 90 86
Scotland International, 8.80%, 2004 700 777
Simon DeBartolo, 7.125%, 2007 1,600 1,626
Societe Generale, 7.85%, 2049 1,000 1,041
Southern Pacific Funding, 11.50%, 2004 930 930
Svenska Handlsbanken, 7.125%, 2049 2,000 2,010
Trinet Corp Realty Trust, 7.70%, 2017 2,000 2,057
UDC Homes, 12.50%, 2000 600 600
Williams Scotsman, 9.875%, 2007 2,790 2,874
----------------------------------------------------------------------------
42,887
- -------------------------------------------------------------------------------------------------------------------------
HOTELS AND Eldorado Resorts, 10.50%, 2006 1,120 1,221
GAMING--1.9% Empress River Casino, 10.75%, 2002 810 871
Harvey's Casino Resorts, 10.625%, 2006 2,380 2,570
Hilton Hotels
7.375%, 2002 1,000 1,026
7.95%, 2007 1,300 1,385
HMH Properties
9.50%, 2005 430 447
8.875%, 2007 2,070 2,117
Marriott International, 6.75%, 2009 2,000 1,987
Players International, 10.875%, 2005 1,475 1,578
Trump Atlantic City, 11.25%, 2006 3,100 3,054
----------------------------------------------------------------------------
16,256
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANUFACTURING, METALS Aftermarket Technology, 12.00%, 2004 $ 885 $ 983
AND MINING--5.6% Alvey Systems, 11.375%, 2003 1,325 1,381
Bar Technologies, 13.50%, 2001 2,030 2,208
Collins & Aikman Corp., 11.50%, 2006 2,090 2,356
Crain Industries, Inc., 13.50%, 2005 890 1,006
Day International Group, Inc.,11.125%, 2005 3,060 3,305
Euramax International, PLC, 11.25%, 2006 1,695 1,835
EV International, 11.00%, 2007 2,000 2,000
Foamex L.P., 9.875%, 2007 2,510 2,566
GS Technologies
12.00%, 2004 330 362
12.25%, 2005 650 730
Hayes Wheels International, 9.125%, 2007 4,200 4,305
IMO Industries, 11.75%, 2006 2,035 2,239
Johnstown America, 11.75%, 2005 820 886
JPS Automotive Products Corp., 11.125%, 2001 1,530 1,698
Knoll, Inc., 10.875%, 2006 1,638 1,802
MMI Products, 11.250%, 2007 2,150 2,301
Motors and Gears, Inc., 10.75%, 2006 1,620 1,701
Neenah Corp., 11.125%, 2007 2,860 3,103
Newflo Corp., 13.25%, 2002 1,070 1,128
Oxford Auto, 10.125%, 2007 2,000 2,060
Thermadyne Industries, Inc.
10.25%, 2002 1,497 1,557
10.75%, 2003 262 282
Venture Holdings, 9.50%, 2005 1,480 1,462
WCI Steel, Inc., 10.00%, 2004 1,600 1,668
Weirton Steel Corp., 11.375%, 2004 760 817
Wells Aluminum Corp., 10.125%, 2005 2,800 2,898
----------------------------------------------------------------------------
48,639
- -------------------------------------------------------------------------------------------------------------------------
PAPER, FOREST Berry Plastics Corp., 12.25%, 2004 505 556
PRODUCTS, AND BPC Holding Corp., 12.50%, 2006 810 891
CONTAINERS--3.0% BWAY Corp., 10.25%, 2007 310 333
Fonda Group, 9.50%, 2007 3,610 3,430
Gaylord Container Corp.
12.75%, 2005 2,220 2,409
9.75%, 2007 520 528
Maxxam Group, Inc.
(b) 12.25%, 2003 150 148
11.25%, 2003 2,080 2,194
National Fiberstock Corp., 11.625%, 2002 800 840
Pindo Finance, 10.75%, 2007 700 630
Printpack, Inc.
9.875%, 2004 170 179
10.625%, 2006 1,600 1,672
Riverwood International
10.25%, 2006 690 702
10.625%, 2007 525 545
10.875%, 2008 4,365 4,278
Spinnaker Industries, 10.75%, 2006 1,560 1,607
Stone Container Corp.
9.875%, 2001 2,370 2,414
12.25%, 2002 190 197
11.50%, 2006 800 848
TJIWI Kimia Finance, 10.00%, 2004 1,000 910
U.S. Can Corp., 10.125%, 2006 480 505
----------------------------------------------------------------------------
25,816
</TABLE>
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RETAILING--3.5% Ameriking, 10.75%, 2006 $ 1,999 $ 2,119
Cole National Group
9.875%, 2006 500 531
8.625%, 2007 2,000 1,980
Federated Department Stores, Inc., 10.00%,
2001 2,000 2,211
Finlay Fine Jewelry Corp., 10.625%, 2003 3,905 4,100
Flagstar Corp.
10.750%, 2001 2,075 2,106
10.875%, 2002 590 603
Guitar Center Management, 11.00%, 2006 307 341
J. Crew
10.375%, 2007 1,040 1,030
(b) 13.12%, 2008 440 242
Krystal Co., 10.25%, 2007 530 529
Nine West Group, 9.00%, 2007 760 756
Pathmark Stores
12.625%, 2002 290 293
9.625%, 2003 1,600 1,504
Petro Shopping Centers, 10.50%, 2007 3,050 3,180
Riddell Sports, 10.50%, 2007 2,730 2,828
Specialty Retailers
8.50%, 2005 260 265
9.00%, 2007 460 467
Staples, Inc., 7.125%, 2007 1,000 1,010
Travelcenters America, 10.25%, 2007 3,830 3,993
----------------------------------------------------------------------------
30,088
- -------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS--3.1% Allied Waste Industries
10.25%, 2006 600 650
(b) 11.30%, 2007 2,350 1,613
Case Corp., 6.75%, 2007 1,350 1,359
Continental Airlines
7.75%, 2014 1,021 1,097
6.90%, 2018 1,000 1,015
Corporate Express, Inc., 9.125%, 2004 940 959
Delta Air Lines, 9.875%, 2008 1,347 1,537
Harman International, 7.32%, 2007 1,500 1,548
Outdoor Systems
9.375%, 2006 1,870 1,968
8.875%, 2007 1,550 1,600
TFM, S.A. de CV, 10.25%, 2007 5,370 5,289
(b)Transtar Holdings, L.P., 13.375%, 2003 670 576
United Airlines, 9.56%, 2018 2,000 2,408
Universal Outdoor, 9.75%, 2006 2,800 3,108
USA Waste Services, 7.00%, 2004 2,000 2,032
----------------------------------------------------------------------------
26,759
----------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(Cost: $402,944) 415,216
----------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES
COMMON AND PREFERRED STOCKS--.3% OR PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(c)Capital Pacifics Holdings 4,435shs. $ 4
Clark USA, PIK, preferred 3,500 355
Crown American Realty, preferred 16,450 892
(c)Empire Gas Corp., warrants 2,208 11
(c)Foamex International, warrants 1,200 34
(c)Intelcom Group, Inc. 4,026 56
Sinclair Capital, preferred 13,500 1,465
----------------------------------------------------------------------------
TOTAL COMMON AND PREFERRED STOCKS
(Cost: $2,556) 2,818
----------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--5.53% to 5.69%
INSTRUMENTS--2.6% Due--November and December, 1997
(Cost: $22,441) $ 22,500 22,441
----------------------------------------------------------------------------
TOTAL INVESTMENTS--97.1%
(Cost: $822,674) 836,527
----------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--2.9% 25,016
----------------------------------------------------------------------------
NET ASSETS--100% $861,543
----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Variable rate security. Rate shown is effective rate on October 31, 1997 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.
Based on the cost of investments of $822,674,000 for federal income tax purposes
at October 31, 1997, the gross unrealized appreciation was $22,757,000, the
gross unrealized depreciation was $8,904,000 and the net unrealized appreciation
on investments was $13,853,000.
See accompanying Notes to Financial Statements.
18
<PAGE> 19
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, 1997, 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 1993. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
October 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Diversified Income Fund at October 31, 1997, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the fiscal
periods since 1993, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 16, 1997
19
<PAGE> 20
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------
Investments, at value
(Cost: $822,674) $ 836,527
- ------------------------------------------------------------------------------
Cash 7,569
- ------------------------------------------------------------------------------
Receivable for:
Investments sold 28,529
- ------------------------------------------------------------------------------
Interest 16,695
- ------------------------------------------------------------------------------
Fund shares sold 1,832
- ------------------------------------------------------------------------------
TOTAL ASSETS 891,152
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------------
Payable for:
Investments purchased 27,172
- ------------------------------------------------------------------------------
Fund shares redeemed 1,297
- ------------------------------------------------------------------------------
Management fee 408
- ------------------------------------------------------------------------------
Distribution services fee 197
- ------------------------------------------------------------------------------
Administrative services fee 169
- ------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 279
- ------------------------------------------------------------------------------
Trustees' fees and other 87
- ------------------------------------------------------------------------------
Total liabilities 29,609
- ------------------------------------------------------------------------------
NET ASSETS $ 861,543
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------------
Paid-in capital $ 972,609
- ------------------------------------------------------------------------------
Accumulated net realized loss on sales of investments and
foreign currency transactions (127,130)
- ------------------------------------------------------------------------------
Net unrealized appreciation on investments and assets and
liabilities in foreign currencies 13,252
- ------------------------------------------------------------------------------
Undistributed net investment income 2,812
- ------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 861,543
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($549,133,000 / 92,013,000 shares outstanding) $5.96
- ------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $6.24
- ------------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($297,074,000 / 49,842,000 shares outstanding) $5.96
- ------------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($15,328,000 / 2,557,000 shares outstanding) $5.99
- ------------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($8,000 / 1,400 shares outstanding) $5.88
- ------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended October 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------------
Interest income $ 72,725
- ------------------------------------------------------------------------------
Expenses:
Management fee 4,664
- ------------------------------------------------------------------------------
Distribution services fee 2,231
- ------------------------------------------------------------------------------
Administrative services fee 1,864
- ------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 2,403
- ------------------------------------------------------------------------------
Professional fees 72
- ------------------------------------------------------------------------------
Reports to shareholders 157
- ------------------------------------------------------------------------------
Trustees' fees and other 32
- ------------------------------------------------------------------------------
Total expenses 11,423
- ------------------------------------------------------------------------------
NET INVESTMENT INCOME 61,302
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------------
Net realized gain on sales of investments and foreign
currency transactions 14,708
- ------------------------------------------------------------------------------
Net realized loss from futures transactions (7,606)
- ------------------------------------------------------------------------------
Net realized gain 7,102
- ------------------------------------------------------------------------------
Change in net unrealized appreciation on investments and
assets and liabilities in foreign currencies (5,336)
- ------------------------------------------------------------------------------
Net gain on investments 1,766
- ------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 63,068
- ------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------------------
Net investment income $ 61,302 56,476
- --------------------------------------------------------------------------------------------
Net realized gain 7,102 8,190
- --------------------------------------------------------------------------------------------
Change in net unrealized appreciation (5,336) 7,415
- --------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 63,068 72,081
- --------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (66,506) (70,190)
- --------------------------------------------------------------------------------------------
Net increase from capital share transactions 86,229 22,639
- --------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 82,791 24,530
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------
Beginning of year 778,752 754,222
- --------------------------------------------------------------------------------------------
END OF YEAR (including undistributed
net investment income of
$2,812 and $6,346, respectively) $ 861,543 778,752
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
21
<PAGE> 22
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 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. Financial futures and options are valued
at the settlement price established each day by the
board of trade or exchange on which they are
traded. Forward foreign currency contracts are
valued at the forward rates prevailing on the day
of valuation. Over-the-counter traded options are
valued based upon prices provided by market makers.
Other securities and assets are valued at fair
value as determined in good faith by the Board of
Trustees.
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 the results of operations resulting from
changes in foreign exchange rates with net realized
and unrealized gain (loss) on investments, 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
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
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,
1997 the Fund had $12,834,000 in purchase
commitments outstanding (1.5% 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, 1997, amounting to approximately
$126,968,000, is available to offset future taxable
gains. If not applied, the loss carryover expires
during the period 1998 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. Zurich
Investment Management Limited, an affiliate of ZKI,
serves as sub-advisor with respect to foreign
securities investments in the Fund, and is paid by
ZKI for its services. The Fund incurred a
management fee of $4,664,000 for the year ended
October 31, 1997.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with Zurich Kemper
Distributors, Inc. (ZKDI). Underwriting commissions
paid in connection with the distribution of Class A
shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS ALLOWED
RETAINED BY ZKDI BY ZKDI TO FIRMS
---------------- -------------------
<S> <C> <C>
Year ended October 31, 1997 $178,000 1,166,000
</TABLE>
For services under the distribution services
agreement, the Fund pays ZKDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, ZKDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, ZKDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees and
commissions paid in connection with the sale of
Class B and Class C shares and CDSC received in
connection with the redemption of such shares are
as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES
RECEIVED BY ZKDI PAID BY ZKDI TO FIRMS
----------------- ---------------------
<S> <C> <C>
Year ended October 31, 1997 $2,655,000 3,017,000
</TABLE>
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with ZKDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays ZKDI a fee at an annual rate of up to
.25% of average daily net assets of each class.
ZKDI in 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 ZKDI
ASF PAID BY ----------------------------
THE FUND TO ZKDI TO ALL FIRMS TO AFFILIATES
---------------- ------------ -------------
<S> <C> <C> <C>
Year ended October 31, 1997 $1,864,000 1,930,000 9,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Zurich Kemper Service Company (ZKSvC) is the
shareholder service agent of the Fund. Under the
agreement, ZKSvC received shareholder services fees
of $1,681,000 for the year ended October 31, 1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the year ended October 31, 1997, the Fund
made no payments to its officers and incurred
trustees' fees of $27,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended October 31, 1997, investment
transactions (excluding short-term instruments) are
as follows (dollars in thousands):
Purchases $2,965,413
Proceeds from sales 3,012,229
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996
---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 21,099 $125,985 13,566 $ 80,537
-------------------------------------------------------------------------------
Class B 19,403 116,147 11,847 70,188
-------------------------------------------------------------------------------
Class C 1,933 11,608 1,092 6,475
-------------------------------------------------------------------------------
Class I 1 8 5 29
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 4,612 27,529 4,911 29,059
-------------------------------------------------------------------------------
Class B 2,401 14,136 2,405 14,237
-------------------------------------------------------------------------------
Class C 92 564 49 294
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES REDEEMED
Class A (23,040) (137,971) (19,272) (114,353)
-------------------------------------------------------------------------------
Class B (11,474) (68,173) (10,233) (60,748)
-------------------------------------------------------------------------------
Class C (597) (3,595) (514) (3,060)
-------------------------------------------------------------------------------
Class I (2) (9) (3) (19)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 4,260 25,490 2,536 15,078
-------------------------------------------------------------------------------
Class B (4,266) (25,490) (2,537) (15,078)
-------------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL
SHARE TRANSACTIONS $ 86,229 $ 22,639
-------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The Fund has entered into exchange traded financial
futures contracts in order to help protect itself
from anticipated market conditions and, as such,
bears the risk that arises from entering into these
contracts
At the time the Fund enters into a futures
contract, it is required to make a margin deposit
with its custodian. Subsequently, gain or loss is
recognized and payments are made on a daily basis
between the Fund and its broker as the market value
of the futures contract fluctuates. At October 31,
1997, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $73,000. The Fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures positions
open at October 31, 1997:
<TABLE>
<CAPTION>
FACE EXPIRATION LOSS AT
TYPE AMOUNT MONTH 10/31/97
------------------------------------------------------------------------
<S> <C> <C> <C>
Eurodollar $ 3,752,000 December '97 (19,000)
------------------------------------------------------------------------
Eurodollar 11,031,000 March '98 (43,000)
------------------------------------------------------------------------
Eurodollar 1,404,000 June '98 (9,000)
------------------------------------------------------------------------
TOTAL $(71,000)
------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
7 FORWARD FOREIGN
CURRENCY CONTRACTS In order to help 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 currencies in
exchange for U.S. Dollars. 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, 1997,
the Fund had entered into forward contracts for the
foreign currencies corresponding to the foreign
government bonds in its portfolio. The settlement
dates on the contracts occur throughout November,
1997, and the aggregate unrealized loss on the
contracts amounted to $601,000 at October 31, 1997.
25
<PAGE> 26
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------
Class A
----------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------
Net asset value, beginning of year $5.99 5.98 5.77 6.23 5.65
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .46 .55 .52 .59
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency .01 .12 .16 (.45) .58
- ----------------------------------------------------------------------------------------
Total from investment operations .47 .58 .71 .07 1.17
- ----------------------------------------------------------------------------------------
Less distribution from net investment
income .50 .57 .50 .53 .59
- ----------------------------------------------------------------------------------------
Net asset value, end of year $5.96 5.99 5.98 5.77 6.23
- ----------------------------------------------------------------------------------------
TOTAL RETURN 8.13% 10.27 12.90 1.02 21.60
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------
Expenses 1.03% 1.03 1.09 1.12 1.10
- ----------------------------------------------------------------------------------------
Net investment income 7.68 7.72 9.43 8.81 9.74
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------
Class B
--------------------------------------
YEAR ENDED MAY 31 TO
OCTOBER 31, OCTOBER 31,
1997 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------
Net asset value, beginning of period $5.99 5.98 5.77 5.94
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .40 .41 .49 .19
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency .01 .12 .16 (.17)
- --------------------------------------------------------------------------------------
Total from investment operations .41 .53 .65 .02
- --------------------------------------------------------------------------------------
Less distribution from net investment income .44 .52 .44 .19
- --------------------------------------------------------------------------------------
Net asset value, end of period $5.96 5.99 5.98 5.77
- --------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.13% 9.23 11.87 .35
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------
Expenses 1.98% 1.96 2.04 1.97
- --------------------------------------------------------------------------------------
Net investment income 6.73 6.79 8.48 8.01
- --------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 27
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------- ---------------------------------------
CLASS C CLASS I
---------------------------------- ---------------------------------------
YEAR ENDED MAY 31 TO YEAR ENDED NOVEMBER 22, 1995 TO
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995 1994 1997 1996
- --------------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------- --------------------------------------
Net asset value, beginning of period $6.01 6.00 5.79 5.95 6.00 5.98
- --------------------------------------------------------------------------------- --------------------------------------
Income from investment operations:
Net investment income .42 .41 .50 .20 .36 .45
- --------------------------------------------------------------------------------- --------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency .01 .12 .16 (.17) .01 .12
- --------------------------------------------------------------------------------- --------------------------------------
Total from investment operations .43 .53 .66 .03 .37 .57
- --------------------------------------------------------------------------------- --------------------------------------
Less distribution from net investment income .45 .52 .45 .19 .49 .55
- --------------------------------------------------------------------------------- --------------------------------------
Net asset value, end of period $5.99 6.01 6.00 5.79 5.88 6.00
- --------------------------------------------------------------------------------- --------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.37% 9.33 11.95 .55 6.33 10.01
- --------------------------------------------------------------------------------- --------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------- --------------------------------------
Expenses 1.85% 1.86 1.86 1.96 2.64 1.27
- --------------------------------------------------------------------------------- --------------------------------------
Net investment income 6.86 6.89 8.68 8.02 6.07 7.48
- --------------------------------------------------------------------------------- --------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $861,543 778,752 754,222 738,014 328,512
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 347% 310 286 179 80
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
27
<PAGE> 28
TRUSTEES&OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS ROBERT S. CESSINE PHILIP J. COLLORA
President and Trustee Vice President Vice President and
Secretary
DAVID W. BELIN CHARLES R. MANZONI, JR.
Trustee Vice President JEROME L. DUFFY
Treasurer
LEWIS A. BURNHAM MICHAEL A. MCNAMARA
Trustee Vice President ELIZABETH C. WERTH
Assistant Secretary
DONALD L. DUNAWAY JOHN E. NEAL
Trustee Vice President
ROBERT B. HOFFMAN ROBERT C. PECK, JR.
Trustee Vice President
DONALD R. JONES HARRY E. RESIS, JR.
Trustee Vice President
SHIRLEY D. PETERSON JONATHAN W. TRUTTER
Trustee Vice President
WILLIAM P. SOMMERS RICHARD L. VANDENBERG
Trustee Vice President
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER ZURICH KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER ZURICH KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[KEMPER FUNDS LOGO]
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Income Funds prospectus.
KDIF - 2 (12/97) 1040990
Printed in the U.S.A.
