<PAGE> 1
KEMPER
DIVERSIFIED INCOME FUND
SEMIANNUAL REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED APRIL 30, 1997
Offering Investors The Opportunity For High Current Return
" . . . We managed the fund fairly
defensively throughout the period by shortening the
fund's duration and reducing exposure to some sectors."
[KEMPER FUND LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Management Team
6
Performance Update
8
Portfolio Statistics
9
Portfolio of Investments
15
Financial Statements
17
Notes to Financial Statements
22
Financial Highlights
AT A GLANCE
- -------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME
FUND TOTAL RETURNS
- -------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1997
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 2.68%
CLASS B 2.04%
CLASS C 2.24%
LIPPER
MULTI-SECTOR INCOME
CATEGORY AVERAGE* 3.24%
- -------------------------------------------------------------------------------
</TABLE>
Returns and rankings are historical and do not represent future performance.
Returns and net asset value fluctuate. Shares are redeemable at current net
asset value, which may be more or less than original cost.
*Lipper Analytical Services, Inc. returns and rankings are based upon changes in
net asset value with all dividends reinvested and do not include the effect of
sales charges and, if they had, results may have been less favorable.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
04/30/97 10/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER DIVERSIFIED INCOME
FUND CLASS A $5.90 $5.99
- --------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME
FUND CLASS B $5.89 $5.99
- --------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME
FUND CLASS C $5.92 $6.01
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME
FUND RANKINGS*
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER MULTI-SECTOR INCOME FUNDS CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #44 OF 62 FUNDS #54 OF 62 FUNDS #53 OF 62 FUNDS
- --------------------------------------------------------------------------------------------------
5-YEAR #2 OF 10 FUNDS N/A N/A
- --------------------------------------------------------------------------------------------------
10-YEAR #1 OF 4 FUNDS
- --------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF APRIL 30, 1997.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS INCOME $0.2490 $0.2214 $0.2241
- --------------------------------------------------------------------------------
APRIL DIVIDEND $0.0415 $0.0368 $0.0368
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+ 8.44% 7.50% 7.46%
- --------------------------------------------------------------------------------
SEC YIELD+ 6.23% 5.60% 5.66%
- --------------------------------------------------------------------------------
</TABLE>
+Current annualized distribution rate is the latest monthly dividend shown as an
annualized percentage of net asset value on April 30, 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 April 30, 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 your investment.
TERMS TO KNOW
YOUR FUND'S STYLE
MATURITY
SHORT INTERMEDIATE LONG
QUALITY
/ / / / / / HIGH
/ / /x/ / / MEDUIUM
/ / / / / / LOW
- -------------------------------------------------------------------------------
MORNINGSTAR FIXED-INCOME FUNDS STYLE BOX
- -------------------------------------------------------------------------------
Source: Morningstar, Inc., Chicago, IL (312) 696-6000. (Morningstar Style Box is
based on a portfolio date as of April 30, 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 INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $80 BILLION IN ASSETS, INCLUDING $45 BILLION IN RETAIL MUTUAL
FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM HARVARD
UNIVERSITY.
DEAR SHAREHOLDER,
The agreement between the White House and Republican leaders in Congress to
balance the federal budget has effectively ended the market correction that
began in the first quarter. Such sudden progress on balancing the budget, an
initiative that the bond market was anticipating resolution on more than one
year ago, is positive news.
The next several weeks will find Congress and the Clinton administration
negotiating toward a final agreement. Unlike previous failed proposals that
sought to balance the budget principally by increasing income taxes, the current
plan -- which starts from the base of a relatively small deficit -- proposes to
slow the growth of federal spending. As such, its prospects are promising.
Natural skeptics are waiting to see specific legislation to see if the
agreement has teeth. While we are optimistic, we need to temper our enthusiasm.
Much of the good news associated with a balanced budget was quickly discounted
in the higher prices in the stock and bond markets.
Of particular interest to equity investors is the agreement to reduce the
maximum tax rate on capital gains. Although details of the reduction are yet to
be known, the prospect of more favorable tax treatment on gains will have the
short-term effect of supporting stocks -- investors can be expected to postpone
selling until they can qualify for the lower tax rate. With equity sales
essentially "frozen" until the effective date is known, the stock market should
have a considerable underpinning. Once an effective date is determined, we would
expect the pent-up selling to occur. However, then we shall enjoy the long-term
positive effect of the lower tax rate on gains.
Talk of a balanced budget has shifted the spotlight away from the Federal
Reserve Board's upward pressure on interest rates. Having declined to raise
rates in May, the Fed may still act again at a later date. However, this action
may be the last for a while because the economy seems to be slowing down in the
second quarter, after the rapid 5.6 percent growth in the first quarter of the
year. A slower economy would reduce the threat of inflation and reduce the need
for further rate hikes by the Fed.
In fact, a review of the standard measures of the economy shows little to
be concerned about. As has been the pattern for more than five years, a few
strong quarters followed by a few weak quarters have produced an overall 2
percent to 3 percent rate of growth in gross domestic product (GDP). Job
creation and the unemployment rate are consistent with a moderately expanding
economy. Corporate profits continue to grow at an expected 4 to 5 percent rate
in 1997. The Consumer Price Index continues to track at a 2.5 percent to 3.0
percent rate.
Just as we see a limited downside to today's rising interest rate
environment, so is there a limited upside in the near future. The effect of
higher rates will have to work itself through the economy. Higher rates have
significant implications for corporate profitability, debt issuance, credit
extension and international trade. Post-correction cash flows into the financial
markets will be a subject of great scrutiny. One of the factors driving the
stock market to its recent all-time high was the unprecedented high level of
investment through mutual funds, 401(k)s and qualified contribution plans. It is
realistic to expect that, on the margin, some of that cash will find a home in
short-term, liquid investments while the stock market sorts itself out.
Leadership in the stock market has been quite narrow and concentrated for
the past six months in large, multinational companies with familiar consumer
brand names. The recent rally after the announcement of a balanced budget
agreement suggests that valuations of smaller capitalization stocks are
compelling and the market is broadening.
Higher interest rates are, of course, anathema to the fixed-income market.
However, bond investors in the last few weeks have been cheered by the balanced
budget proposal and by expectations that interest rates would not go much
higher. We expect the bond market to trade in a very narrow range -- with
long-term interest rates no lower than 6.50 percent
3
<PAGE> 4
ECONOMIC OVERVIEW
and no higher than 7.25 percent. One positive effect of the stock market
correction was the widening of spreads available on high yield bonds. As a
consequence, high yield bonds today are more reasonably priced.
A natural response to increased volatility in the U.S. equity market is to
look abroad. In fact, the valuations of many international markets are more
attractive than the U.S. However, the weak German and Japanese economies make it
difficult to identify many exciting near-term opportunities without careful
research.
Our recommendation to shareholders is to stay the course and to fight the
temptation to try to time when and where you should be invested without help.
Financial assets react much quicker today to events. Volatility has returned to
the market and with it heightened uncertainty. Now is the time to rely on your
financial representative for the expertise and the long-term investing
discipline that he or she can provide.
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recessions 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 (5/31/97) 6 MONTHS AGO 1 YEAR AGO 2 YEAR AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.71 6.3 6.91 6.17
PRIME RATE(2)* 8.5 8.25 8.25 9
INFLATION RATE(3)* 2.3 3.31 2.75 3.04
THE U.S. DOLLAR(4) 6.55 4.36 9.15 -9.31
CAPITAL GOODS ORDERS(5)* 8.28 2.42 3.93 17.47
INDUSTRIAL PRODUCTION(5) 4.28 4.36 3.34 2.88
EMPLOYMENT GROWTH(6) 2.13 2.15 2.09 2.7
</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 April 30, 1997.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this commentary as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
June 9, 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 EXECUTIVE VICE PRESIDENT OF ZKI 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 KEMPER IN 1988 AND IS A 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 A 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.
[VANDENBERG 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
22 YEARS OF FIXED-INCOME PORTFOLIO MANAGEMENT EXPERIENCE. HE RECEIVED BOTH A
BACHELORS 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
THE PORTFOLIO MANAGEMENT TEAM OF KEMPER DIVERSIFIED INCOME FUND DISCUSSES THE
ECONOMIC ENVIRONMENT OVER THE LAST SIX MONTHS AND HOW THEY CUT THE FUND'S
DURATION TO HELP MINIMIZE THE IMPACT OF THE FEDERAL RESERVE BOARD'S SHORT-TERM
INTEREST RATE INCREASE THAT OCCURRED IN MARCH.
Q DURING THE FUND'S SEMIANNUAL PERIOD -- NOVEMBER 1, 1996, THROUGH APRIL 30,
1997 -- THE FEDERAL RESERVE BOARD (THE FED) INCREASED SHORT-TERM INTEREST RATES.
WHAT WAS BEHIND THE FED'S ACTION?
A Signs of stronger economic growth and concerns of potentially higher
inflation led to the Fed's 0.25 percent interest rate tightening. Here's what
was going on.
The fixed-income market was volatile during most of the period, as a result
of the ongoing concern about the direction of interest rates. At the start of
the fiscal year, the market was also unnerved by fears that the Republicans
might lose control of the U.S. Congress, which many felt would dash the
likelihood of a balanced budget agreement in 1997. The market rallied with the
outcome of the election, which kept a Republican majority in Congress and the
outlook for bonds remained positive until December.
In December fear crept back into the market when Federal Reserve Board
Chairman Alan Greenspan commented that investors were acting with "irrational
exuberance" and that he believed there were many overvalued securities. Signs of
strong retail sales and low unemployment figures also concerned the market as it
signaled that economic growth might be gaining momentum. In February relatively
high gross domestic product figures were released that confirmed the market's
fear that the economy had been strong at the end of 1996. Greenspan then
intimated that a rate increase would likely be necessary to slow economic growth
and ward off inflation. Greenspan again expressed his concern in February about
the high valuations in the market. The Fed raised interest rates in late March
and a sell-off ensued in both bond and equity markets. As a result, bond yields
rose and prices of securities fell.
By the end of April, however, signs of the economy slowing began to surface
and inflation remained benign. This helped fixed-income investments begin to
gain back some of the ground they had lost earlier. As a result, market yields
began to fall again.
Q HOW DID YOU MANAGE THE FUND IN LIGHT OF THE RISING RATE ENVIRONMENT?
A We managed the fund fairly defensively throughout the period by shortening
the fund's duration and reducing exposure to some sectors. We shortened the
overall duration of the fund to 4.1 years at the end of April from 5.0 years at
the start of the period. 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.
Q HOW DID YOU SHORTEN DURATION?
A We shortened duration primarily 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, the cash position helped the fund when the market sold
off in March as interest rates rose.
At the start of the period, the fund had a 7 percent position in one- to
three-year Treasuries (which we categorize as cash equivalents) and no cash
reserves. By the end of March, cash reserves represented 12 percent of the
portfolio, while short-term Treasuries accounted for 15 percent of the fund's
investments.
Although this high cash position helped us greatly in March and into April
as rates were rising, we've begun looking for opportunities to reallocate the
cash back into sectors that appear attractive.
Q WERE THERE ANY OTHER SIGNIFICANT ADJUSTMENTS THAT YOU MADE TO THE
PORTFOLIO?
A We made a significant reduction in our investment in foreign currency
bonds. At the end of the period, the sector represented 10 percent of assets
6
<PAGE> 7
PERFORMANCE UPDATE
down from 25 percent at the start of the period.
The reason for the reduction was two-fold. First, we believed that the U.S.
bond market had more potential to outperform foreign bonds on an absolute level.
Yields in many foreign markets are well below yields achievable through U.S.
investments. Secondly, by reducing our foreign currency holdings, the fund's
diversification was better aligned with that of funds with similar investment
objectives.
Q WHAT WERE THE BEST PERFORMING SECTORS IN WHICH THE FUND INVESTS?
A Emerging market investments and high yield bonds provided strong
performance throughout most of the period. Both sectors, however, experienced
brief corrections in March, due in part to the Fed's interest rate hike.
High yield bonds were also impacted by a comment that Fed Chairman Alan
Greenspan made about the historically tight spreads in the high yield market and
his concern about whether or not the market would be able to sustain its
performance. Greenspan shocked the market with the comment in February and with
the subsequent rate increase, high yield bonds suffered in March and their
spreads widened. In April investors returned to the high yield market believing
the drop in values to be a short-term correction, not the start of a bear
market. We had reduced our holdings in high yield bonds prior to the March
correction, which helped mitigate potential losses for the fund. We believe now
that the fundamentals of the high yield market look strong. Economic growth is
moderate, inflation is benign and there are virtually no defaults in the high
yield market. We are now ready to add to the fund's high yield holdings.
We are also optimistic about the emerging markets sector. However, we had
reduced the fund's allocation to about 2 percent by the time the sector
corrected in March from 6 percent at the start of November. Since that time
we've started to see a turnaround and plan to invest in more emerging market
debt for the fund. We believe that, currently, these investments' offer an
attractive rate of current income and have the potential for strong performance.
Q WHAT ABOUT THE GOVERNMENT BOND MARKET?
A We favored mortgages over Treasuries for most of the period. Mortgages tend
to outperform Treasuries when rates trend upward, which was the environment over
the last six months. Unless the market begins to rally and yields fall
substantially, we plan to maintain a significant weighting in mortgages because
of their higher income and potential for price appreciation.
Q WHAT'S YOUR OUTLOOK FOR THE BOND MARKET?
A Our outlook for the market is somewhat optimistic. We believe that since
March there has been some slowing in the economy. The possibility for another
interest rate tightening does still exist. However, we don't feel that the Fed
will need to be aggressive in order to keep growth slow and inflation benign. If
rates remain somewhat stable or continue to move lower, the bond market and
Kemper Diversified Income Fund have the potential to perform well.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
ON 4/30/97 ON 10/31/96
- ------------------------------------------------------------------------------
<S> <C> <C>
HIGH YIELD CORPORATES 25% 35%
- ------------------------------------------------------------------------------
EMERGING MARKETS 2 6
- ------------------------------------------------------------------------------
FOREIGN CURRENCY BONDS 10 25
- ------------------------------------------------------------------------------
HIGH GRADE CORPORATES 4 1
- ------------------------------------------------------------------------------
MORTGAGES 23 13
- ------------------------------------------------------------------------------
TREASURY NOTES & BONDS 12 13
- ------------------------------------------------------------------------------
CASH AND EQUIVALENTS 24 7
- ------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 4/30/97 ON 10/31/96
*Portfolio composition is subject to change.
YEARS TO MATURITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
ON 4/30/97 ON 10/31/96
- ------------------------------------------------------------------------------
<S> <C> <C>
CASH EQUIVALENTS 7% --
- --------------------------------------------------------------------------
1-10 YEARS 52 73%
- --------------------------------------------------------------------------
10-20 YEARS 25 19
- --------------------------------------------------------------------------
20+ YEARS 16 8
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 4/30/97 ON 10/31/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
ON 4/30/97 ON 10/31/96
- -----------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 6.5 YEARS 8.2 YEARS
- ----------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS AT APRIL 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--58.4% PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Notes
8.875%, 1997 $ 12,300 $ 12,494
8.125%, 1998 37,000 37,619
8.25%, 1998 35,000 35,875
8.875%, 1998 10,000 10,391
9.25%, 1998 72,000 74,767
8.875%, 1999 20,000 20,881
U.S. Treasury Bonds
9.125%, 2009 28,100 31,639
13.875%, 2011 4,350 6,388
12.00%, 2013 9,200 12,818
12.50%, 2014 24,905 36,194
13.25%, 2014 7,000 10,560
Federal National Mortgage Association
7.00%, 2025-2027 74,044 71,773
7.50%, 2027 31,000 30,709
9.00%, 2025 6,079 6,433
Government National Mortgage Association
6.50%, 2023-2024 11,099 10,513
7.50%, 2022-2027 28,047 27,896
9.00%, 2022 20,000 20,988
Federal Home Loan Mortgage Corporation
6.50%, 2012 8,000 7,780
9.50%, 2019 10,557 11,311
------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $479,056) 477,029
------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS--12.1%
- -----------------------------------------------------------------------------------------------------------------------------
(PRINCIPAL AMOUNT IN LOCAL CURRENCY, (a)Republic of Argentina,
UNLESS OTHERWISE INDICATED) (PRINCIPAL AMOUNT IN U.S. DOLLARS)
6.75%, 2005 5,044 4,625
Commonwealth of Australia,
9.50%, 2003 2,155 1,847
Republic of Austria,
5.875%, 2000 16,710 1,441
Kingdom of Belgium,
9.00%, 2003 112,656 3,767
(a)Federal Republic of Brazil,
(PRINCIPAL AMOUNT IN U.S. DOLLARS)
6.875%, 2006 5,049 4,557
Government of Canada,
7.50%, 2003 7,413 5,632
Kingdom of Denmark,
8.00%, 2001 15,774 2,653
Republic of Finland,
10.00%, 2001 4,000 921
French Treasury
8.50%, 2000 2,044 392
8.50%, 2002 37,824 7,591
6.75%, 2003 23,636 4,405
German Bundesrepublic,
8.25%, 2001 23,170 15,280
Government of Ireland,
9.25%, 2003 302 523
Italian Treasury,
10.50%, 2000 14,810,000 9,496
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government of the Netherlands,
7.00%, 2003 8,845 $ 4,986
Commonwealth of New Zealand,
10.00%, 2002 608 455
Republic of Poland,
(PRINCIPAL AMOUNT IN U.S. DOLLARS)
4.00%, 2014 4,000 3,260
Republic of Portugal,
10.625%, 2003 159,540 1,119
Kingdom of Spain,
10.30%, 2002 560,100 4,524
Kingdom of Sweden,
10.25%, 2003 16,400 2,462
United Kingdom,
8.50%, 2005 6,425 11,138
United Mexican States,
(PRINCIPAL AMOUNT IN U.S. DOLLARS)
8.50%, 2002 2,250 2,239
Republic of Venezuela,
(PRINCIPAL AMOUNT IN U.S. DOLLARS)
6.50%, 2007 6,250 5,520
-----------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $103,467) 98,833
-----------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--28.8%
- ----------------------------------------------------------------------------------------------------------------------
AEROSPACE--1.4% Airlines Pass Through Trust, 10.875%, 2019 1,200 1,326
Fairchild Corp., 12.00%, 2001 1,975 1,995
Greenwich Air Services, 10.50%, 2006 1,220 1,409
Howmet Inc., 10.00%, 2003 1,560 1,677
K & F Industries, Inc., 10.375%, 2004 1,650 1,724
RHI Holdings, 11.875%, 1999 1,415 1,422
UNC, Inc., 11.00%, 2006 1,730 1,990
-----------------------------------------------------------------------------
11,543
- ----------------------------------------------------------------------------------------------------------------------
BROADCASTING, CABLESYSTEMS Affinity Group, Inc., 11.50%, 2003 1,480 1,585
AND PUBLISHING--4.1% (b)Bell Cablemedia PLC
11.95%, 2004 2,120 1,866
11.875%, 2005 100 81
Big Flower Press, Inc., 10.75%, 2003 1,275 1,351
Busse Broadcasting, 11.625%, 2000 430 453
Cablevision Systems Corp., 10.50%, 2016 1,200 1,212
(b)Charter Communications, 14.00%, 2007 1,530 929
Comcast Cablevision, 8.375%, 2007 2,000 2,018
(b)Comcast UK Cable Partners Ltd., 11.20%,
2007 4,200 2,945
(b)Diamond Cable Communications PLC, 10.75%,
2007 830 496
Frontiervision, 11.00%, 2006 1,060 1,065
Granite Broadcasting Corp., 10.375%, 2005 1,590 1,608
Intermedia Capital Partners, 11.25%, 2006 1,360 1,401
International Cabletel Inc.
(b) 12.75%, 2005 2,690 1,950
(b) 11.50%, 2006 200 131
10.00%, 2007 330 323
Multicanal Participacoes, 12.625%, 2004 920 1,007
Neodata Services, 12.00%, 2003 1,500 1,598
Netsat Servicos, 12.75%, 2004 700 724
Newsquest Capital PLC, 11.00%, 2006 190 198
Rogers Communications, 10.875%, 2004 3,000 3,124
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sinclair Broadcasting Group, Inc., 10.00%,
2003 $ 1,660 $ 1,687
STC Broadcasting, 11.00%, 2007 590 606
Sullivan Broadcasting, 10.25%, 2005 1,160 1,172
(b)TeleWest Communications PLC, 11.00%, 2007 3,065 2,077
TV Azteca, 10.50%, 2007 285 281
(b)Videotron Holdings PLC
11.125%, 2004 1,100 968
11.00%, 2005 840 680
-----------------------------------------------------------------------------
33,536
- ----------------------------------------------------------------------------------------------------------------------
CHEMICALS AND Agriculture, Mining and Chemicals, Inc.,
AGRICULTURE--1.5% 10.75%, 2003 710 749
Atlantis Group, Inc., 11.00%, 2003 1,328 1,348
Hines Horticulture, 11.75%, 2005 2,690 2,784
(b)NL Industries Inc., 13.00%, 2005 280 259
Pioneer Americas Acquisition Corp., 13.375%,
2005 1,020 1,173
Polymer Group Inc., 12.25%, 2002 813 888
Rexene Corp., 11.75%, 2004 1,900 2,119
Terra Industries Inc., 10.50%, 2005 650 692
Texas Petrochemicals, 11.125%, 2006 1,000 1,051
UCC Investors Holdings, Inc., 10.50%, 2002 1,460 1,588
-----------------------------------------------------------------------------
12,651
- ----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--1.7% (b)Brooks Fiber
10.875%, 2006 330 215
11.875%, 2006 1,370 853
(b)Call-Net Enterprises Inc., 13.25%, 2004 850 718
(b)Cellular, Inc., 11.75%, 2003 705 659
CommNet Cellular, 11.25%, 2005 370 386
(b)ICG Holdings, 13.50%, 2005 1,785 1,183
IMPSAT Corp., 12.125%, 2003 930 963
Intermedia Communications of Florida Inc.,
13.50%, 2005, with warrants expiring 2000 1,515 1,695
(b)Millicom International Cellular S.A.,
13.50%, 2006 2,120 1,492
Nextlink Communications, 12.50%, 2006 485 500
(b)PanAmSat, L.P., 11.375%, 2003 1,880 1,788
USA Mobile Communications, Inc. II
9.50%, 2004 330 281
14.00%, 2004 1,280 1,318
Western Wireless, 10.50%, 2006 1,880 1,861
-----------------------------------------------------------------------------
13,912
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS AMF Group
AND SERVICES--2.7% 10.875%, 2006 3,010 3,145
(b) 12.25%, 2006 580 391
Cinemark USA, Inc., 9.625%, 2008 1,030 1,025
Coinmach Corp., 11.75%, 2005 2,120 2,337
Dimon, Inc., 8.875%, 2006 2,750 2,814
(b)Dr. Pepper Bottling Holdings, Inc.,
11.625%, 2003 1,290 1,255
Herff Jones, Inc., 11.00%, 2005 600 636
Kinder-Care Learning Centers, 9.50%, 2009 1,160 1,099
Petro Stopping Centers, 10.50%, 2007 3,050 3,111
Premier Parks Inc., 12.00%, 2003 940 1,034
Scholastic Brands, 11.00%, 2007 760 779
(b)Six Flags Theme Park, 12.25%, 2005 3,680 3,606
Van De Kamps, Inc., 12.00%, 2005 600 656
-----------------------------------------------------------------------------
21,888
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DRUGS AND HEALTH CARE--1.0% Dade International Inc., 11.125%, 2006 $ 1,000 $ 1,095
DVI, Inc., 9.875%, 2004 360 353
Magellan Health Services, 11.25%, 2004 900 997
MedPartners, Inc., 7.375%, 2006 4,000 3,934
Tenet Healthcare, 8.625%, 2003 2,000 2,048
-----------------------------------------------------------------------------
8,427
- ----------------------------------------------------------------------------------------------------------------------
ENERGY AND Benton Oil & Gas Co., 11.625%, 2003 970 1,045
RELATED SERVICES--1.8% Coda Energy, 10.50%, 2006 1,600 1,664
Empire Gas Corp., 7.00%, with warrants, 2004 1,260 1,107
Flores & Rucks Inc., 13.50%, 2004 700 823
Gulf Canada Resources Ltd., 8.35%, 2006 4,000 4,097
Oryx Energy Co., 8.375%, 2004 4,000 4,071
TransTexas Gas Corp., 11.50%, 2002 150 167
United Meridian Corp., 10.375%, 2005 1,570 1,680
-----------------------------------------------------------------------------
14,654
- ----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES, HOMEBUILDERS Chelsea GCA Realty, 7.75%, 2001 2,340 2,352
AND REAL ESTATE--3.1% Corporation Andina De Formento, 7.79%, 2017 4,000 3,952
Del Webb Corp., 9.75%, 2008 2,870 2,795
Forecast Group L.P., 11.375%, 2000 825 771
Hovnanian Kent, 11.25%, 2002 1,984 2,034
Intertek Finance, 10.25%, 2006 650 670
J.M. Peters Co., 12.75%, 2002 310 301
Lehman Brothers, 7.375%, 2007 4,000 3,910
Presley Companies, 12.50%, 2001 110 106
Ryland Group, 10.50%, 2006 1,330 1,370
Svenska Handlsbanken, 7.125%, 2049 3,000 2,896
U.S. West Cap Funding, 7.30%, 2007 4,000 3,934
-----------------------------------------------------------------------------
25,091
- ----------------------------------------------------------------------------------------------------------------------
HOTELS AND GAMING--1.0% Eldorado Resorts, 10.50%, 2006 960 1,015
Empress River Casino, 10.75%, 2002 810 861
Harvey's Casino Resorts, 10.625%, 2006 2,020 2,131
Players International, 10.875%, 2005 1,475 1,534
Station Casinos Inc., 10.125%, 2006 2,360 2,342
-----------------------------------------------------------------------------
7,883
- ----------------------------------------------------------------------------------------------------------------------
MANUFACTURING, METALS Aftermarket Technology, 12.00%, 2004 885 973
AND MINING--4.5% Alvey Systems, 11.375%, 2003 2,115 2,189
Collins & Aikman Corp., 11.50%, 2006 2,090 2,302
Crain Industries, Inc., 13.50%, 2005 700 790
Day International Group, Inc., 11.125%, 2005 3,060 3,182
Essex Group Inc., 10.00%, 2003 980 1,009
Euramax International PLC, 11.25%, 2006 1,695 1,776
EV International, 11.00%, 2007 400 410
Fairfield Manufacturing Co., 11.375%, 2001 620 648
(b)Foamex - JPS Automotive L.P., 14.00%, with
warrants, 2004 1,140 1,033
Foamex L.P., 11.25%, 2002 800 844
GS Technologies
12.00%, 2004 330 348
12.25%, 2005 650 694
IMO Industries, 11.75%, 2006 1,775 1,775
Jordan Industries, 10.375%, 2003 1,070 1,043
JPS Automotive Products Corp., 11.125%, 2001 1,530 1,675
Key Plastics, 10.25%, 2007 350 357
Knoll Inc., 10.875%, 2006 2,320 2,523
Motors and Gears, Inc., 10.75%, 2006 1,300 1,303
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Newflo Corp., 13.25%, 2002 $ 1,070 $ 1,156
Penda Industries, Inc., 10.75%, 2004 130 131
Philips Electronics N.V., 7.20%, 2026 4,000 3,954
Spinnaker Industries, 10.75%, 2006 1,230 1,242
Terex Corp. Unit, 13.25%, 2002 1,060 1,169
Thermadyne Industries, Inc.
10.25%, 2002 1,417 1,467
10.75%, 2003 262 270
WCI Steel Inc., 10.00%, 2004 1,600 1,616
Weirton Steel Corp., 11.375%, 2004 760 777
-----------------------------------------------------------------------------
36,656
- ----------------------------------------------------------------------------------------------------------------------
PAPER, FOREST PRODUCTS, Berry Plastics Corp., 12.25%, 2004 505 555
AND CONTAINERS--2.5% BPC Holding Corp., 12.50%, 2006 810 850
Container Corporation of America, 11.25%, 2004 545 589
Fonda Group, 9.50%, 2007 710 675
Gaylord Container Corp., 12.75%, 2005 1,320 1,419
Maxxam Group, Inc.
11.25%, 2003 2,080 2,101
(b) 12.25%, 2003 150 137
National Fiberstock Corp., 11.625%, 2002 800 821
Owens-Illinois, Inc., 11.00%, 2003 1,890 2,100
Printpack, Inc.
9.875%, 2004 170 174
10.625%, 2006 1,270 1,314
Riverwood International
10.25%, 2006 460 432
10.875%, 2008 8,420 7,052
Stone Container Corp.
9.875%, 2001 230 217
11.50%, 2006 2,570 2,403
-----------------------------------------------------------------------------
20,839
- ----------------------------------------------------------------------------------------------------------------------
RETAILING--1.6% Ameriking, 10.75%, 2006 330 341
Cole National Group, 9.875%, 2006 2,500 2,575
Dominick's Finer Foods, 10.875%, 2005 760 836
Federated Department Stores, Inc., 10.00%,
2001 4,000 4,343
Finlay Fine Jewelry Corp., 10.625%, 2003 4,070 4,294
Guitar Center Management, 11.00%, 2006 307 333
-----------------------------------------------------------------------------
12,722
- ----------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS--1.9% Allied Waste Industries, 10.25%, 2006 600 631
(b)Building Materials Corp. of America,
11.75%, 2004 2,700 2,403
Communication and Power Industry, Inc.,
12.00%, 2005 550 598
Computervision Corp., 11.375%, 1999 3,250 3,234
Continental Airlines, 7.42%, 2008 2,400 2,396
Corporate Express Inc., 9.125%, 2004 940 912
Delta Air Lines, 9.875%, 2008 1,384 1,529
Neenah Corp., 11.125%, 2007 420 434
(b)Transtar Holdings, L.P., 13.375%, 2003 670 563
United Airlines, 9.56%, 2018 2,000 2,226
Waxman Industries, Inc.
(b) 12.75%, 2004 370 307
(c) 222,607 warrants expiring 2004 557
-----------------------------------------------------------------------------
15,790
-----------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(Cost: $229,643) 235,592
-----------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
COMMON AND PREFERRED STOCKS--.2% NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(c)Capital Pacific Holdings 4,345shs. $ 4
(c)Intelcom Group, Inc. 4,026 40
(c)Sinclair Capital 13,500 1,357
-----------------------------------------------------------------------------
TOTAL COMMON AND PREFERRED STOCKS
(Cost: $1,371) 1,401
<Caotuib> -----------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS--14.7% PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Yields--5.41% to 5.76%
Due--May and June 1997
Conagra Inc. $ 10,000 10,000
Dynamic Funding Corp. 15,000 14,897
Enron Corp. 9,800 9,794
Enserch Corp. 10,000 9,992
GTE Corp. 10,000 9,992
Goldman Sachs Group L.P. 10,000 9,994
Phillip Morris Cos, Inc. 15,000 14,991
Sanwa Business Credit 10,700 10,660
Strategic Asset Funding 9,600 9,556
Transamerica Finance Group 10,000 9,970
Whirlpool Financial Corp. 10,000 9,998
-----------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS
(Cost: $119,847) 119,844
-----------------------------------------------------------------------------
TOTAL INVESTMENTS--114.2%
(Cost: $933,384) 932,699
-----------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(14.2%) (116,235)
-----------------------------------------------------------------------------
NET ASSETS--100% $816,464
-----------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
(a) Variable rate security. Rate shown is effective rate on April 30, 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 $933,384,000 for federal income tax purposes
at April 30, 1997, the gross unrealized appreciation was $13,119,000, the gross
unrealized depreciation was $13,804,000 and the net unrealized depreciation on
investments was $685,000.
See accompanying Notes to Financial Statements.
14
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------
Investments, at value
(Cost: $933,384) $ 932,699
- -------------------------------------------------------------------------
Cash 1,127
- -------------------------------------------------------------------------
Receivable for:
Fund shares sold 1,443
- -------------------------------------------------------------------------
Investments sold 2,163
- -------------------------------------------------------------------------
Interest 17,157
- -------------------------------------------------------------------------
TOTAL ASSETS 954,589
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------
Payable for:
Fund shares redeemed 267
- -------------------------------------------------------------------------
Investments purchased 136,858
- -------------------------------------------------------------------------
Management fee 376
- -------------------------------------------------------------------------
Distribution services fee 181
- -------------------------------------------------------------------------
Administrative services fee 147
- -------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 241
- -------------------------------------------------------------------------
Trustees' fees and other 55
- -------------------------------------------------------------------------
Total liabilities 138,125
- -------------------------------------------------------------------------
NET ASSETS $ 816,464
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------
Paid-in capital $ 966,934
- -------------------------------------------------------------------------
Accumulated net realized loss on sales of investments and
foreign currency transactions (154,752)
- -------------------------------------------------------------------------
Net unrealized depreciation on investments and assets and
liabilities in foreign currencies (262)
- -------------------------------------------------------------------------
Undistributed net investment income 4,544
- -------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 816,464
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
THE PRICING OF SHARES
- -------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($521,916,000 / 88,534,000 shares outstanding) $5.90
- -------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net asset value or 4.50%
of offering price) $6.18
- -------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share
($283,542,000 / 48,146,000 shares outstanding) $5.89
- -------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share
($11,002,000 / 1,858,000 shares outstanding) $5.92
- -------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($4,000 / 700 shares outstanding) $5.89
- -------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------
Interest income $ 35,901
- ------------------------------------------------------------------------
Expenses:
Management fee 2,257
- ------------------------------------------------------------------------
Distribution services fee 1,070
- ------------------------------------------------------------------------
Administrative services fee 890
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 1,148
- ------------------------------------------------------------------------
Professional fees 42
- ------------------------------------------------------------------------
Reports to shareholders 68
- ------------------------------------------------------------------------
Trustees' fees and other 16
- ------------------------------------------------------------------------
Total expenses 5,491
- ------------------------------------------------------------------------
NET INVESTMENT INCOME 30,410
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------
Net realized gain on sales of investments and foreign
currency transactions 9,923
- ------------------------------------------------------------------------
Net realized loss from futures transactions (2,781)
- ------------------------------------------------------------------------
Net realized gain 7,142
- ------------------------------------------------------------------------
Change in net unrealized appreciation on investments and
assets and liabilities in foreign currencies (18,850)
- ------------------------------------------------------------------------
Net loss on investments (11,708)
- ------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 18,702
- ------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
APRIL 30, OCTOBER 31,
1997 1996
- -------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 30,410 56,476
- -------------------------------------------------------------------------------------------------
Net realized gain 7,142 8,190
- -------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation (18,850) 7,415
- -------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 18,702 72,081
- -------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (32,212) (70,190)
- -------------------------------------------------------------------------------------------------
Net increase from capital share transactions 51,222 22,639
- -------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 37,712 24,530
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------------
Beginning of period 778,752 754,222
- -------------------------------------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment income of
$4,544 and $6,346, respectively) $816,464 778,752
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
16
<PAGE> 17
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. Exchange traded financial futures and
options are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. 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.
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date (date the order to buy or sell is
executed). Dividend income is recorded on the
ex-dividend date and interest income is recorded on
the accrual basis. Interest income includes
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
April 30, 1997 the Fund had $131,841,000 in
purchase commitments outstanding (16% of net
assets), with a corresponding amount of assets
segregated.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class 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 for the six
months ended April 30, 1997. The accumulated net
realized loss on sales of investments for federal
income tax purposes at April 30, 1997, amounting to
approximately $159,220,000, 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. 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 $2,257,000 for the six months
ended April 30, 1997.
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Zurich Kemper Distributors,
Inc. (ZKDI) (formerly known as Kemper Distributors,
Inc.). 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>
Six months ended April 30, 1997 $92,000 575,000
</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
AND CDSC COMMISSIONS AND
RECEIVED BY DISTRIBUTION FEES
ZKDI PAID BY ZKDI TO FIRMS
----------------- ---------------------
<S> <C> <C>
Six months ended April 30, 1997 $1,252,000 1,470,000
</TABLE>
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>
Six months ended April 30, 1997 $890,000 941,000 5,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Zurich Kemper Service Company (ZKSvC) (formerly
known as Kemper Service Company) is the shareholder
service agent of the Fund. Under the agreement,
ZKSvC received shareholder services fees of
$792,000 for the six months ended April 30, 1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the six months ended April 30, 1997, the
Fund made no payments to its officers and incurred
trustees' fees of $13,000 to independent trustees.
- --------------------------------------------------------------------------------
4 TRANSACTIONS INVESTMENT For the six months ended April 30, 1997, investment
transactions (excluding short-term instruments) are
as follows (dollars in thousands):
Purchases $1,351,224
Proceeds from sales 1,380,331
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
APRIL 30, OCTOBER 31,
1997 1996
---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------
SHARES SOLD
<S> <C> <C> <C> <C>
Class A 10,189 $ 61,009 13,566 $ 80,537
-------------------------------------------------------------------------------
Class B 10,125 60,521 11,847 70,188
-------------------------------------------------------------------------------
Class C 1,004 6,034 1,092 6,475
-------------------------------------------------------------------------------
Class I 1 3 5 29
-------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-------------------------------------------------------------------------------
Class A 2,209 13,173 4,911 29,059
-------------------------------------------------------------------------------
Class B 1,122 6,684 2,405 14,237
-------------------------------------------------------------------------------
Class C 37 224 49 294
-------------------------------------------------------------------------------
SHARES REDEEMED
-------------------------------------------------------------------------------
Class A (10,469) (62,584) (19,272) (114,353)
-------------------------------------------------------------------------------
Class B (5,355) (31,954) (10,233) (60,748)
-------------------------------------------------------------------------------
Class C (312) (1,880) (514) (3,060)
-------------------------------------------------------------------------------
Class I (2) (8) (3) (19)
-------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 1,523 9,087 2,536 15,078
-------------------------------------------------------------------------------
Class B (1,524) (9,087) (2,537) (15,078)
-------------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE
TRANSACTIONS $ 51,222 $ 22,639
-------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
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 April 30,
1997, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $1,977,000. The Fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures positions
open at April 30, 1997:
<TABLE>
<CAPTION>
EXPIRATION GAIN AT
TYPE FACE AMOUNT MONTH 4/30/97
-------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Note $26,798,000 June '97 $214,000
-------------------------------------------------------------------------
Eurodollar 18,368,000 June '97 24,000
-------------------------------------------------------------------------
Eurodollar 8,225,000 September '97 11,000
-------------------------------------------------------------------------
Eurodollar 8,207,000 December '97 14,000
-------------------------------------------------------------------------
Eurodollar 7,729,000 March '98 14,000
-------------------------------------------------------------------------
Eurodollar 2,106,000 June '98 4,000
-------------------------------------------------------------------------
TOTAL $281,000
-------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 currency 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 April 30, 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 May, 1997,
and the aggregate unrealized gain on the contracts
amounted to $423,000 at April 30, 1997.
21
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------------
CLASS A
------------------------------------------------
SIX MONTHS YEAR ENDED OCTOBER 31,
ENDED --------------------------------
APRIL 30,
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $5.99 5.98 5.77 6.23 5.65
- ----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .24 .46 .55 .52 .59
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency (.08) .12 .16 (.45) .58
- ----------------------------------------------------------------------------------------------------
Total from investment operations .16 .58 .71 .07 1.17
- ----------------------------------------------------------------------------------------------------
Less distribution from net investment income .25 .57 .50 .53 .59
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $5.90 5.99 5.98 5.77 6.23
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.68% 10.27 12.90 1.02 21.60
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------
Expenses 1.04% 1.03 1.09 1.12 1.10
- ----------------------------------------------------------------------------------------------------
Net investment income 7.85% 7.72 9.43 8.81 9.74
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------
CLASS B
--------------------------------------------------
SIX MONTHS YEAR ENDED OCTOBER 31,
ENDED ------------------------ MAY 31 TO
APRIL 30, 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 .20 .41 .49 .19
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency (.08) .12 .16 (.17)
- -------------------------------------------------------------------------------------------------------
Total from investment operations .12 .53 .65 .02
- -------------------------------------------------------------------------------------------------------
Less distribution from net investment income .22 .52 .44 .19
- -------------------------------------------------------------------------------------------------------
Net asset value, end of period $5.89 5.99 5.98 5.77
- -------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.04% 9.23 11.87 .35
- -------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------------------
Expenses 1.94% 1.96 2.04 1.97
- -------------------------------------------------------------------------------------------------------
Net investment income 6.95% 6.79 8.48 8.01
- -------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------- --------------------------
CLASS C CLASS I
---------------------------------------- --------------------------
SIX MONTHS YEAR ENDED SIX MONTHS NOVEMBER 22,
ENDED OCTOBER 31, MAY 31 TO ENDED 1995 TO
APRIL 30, ------------- OCTOBER 31, APRIL 30, 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 .21 .41 .50 .20 .22 .45
- ------------------------------------------------------------------------------------------ --------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency (.08) .12 .16 (.17) (.08) .12
- ------------------------------------------------------------------------------------------ --------------------------
Total from investment operations .13 .53 .66 .03 .14 .57
- ------------------------------------------------------------------------------------------ --------------------------
Less distribution from net investment income .22 .52 .45 .19 .25 .55
- ------------------------------------------------------------------------------------------ --------------------------
Net asset value, end of period $5.92 6.01 6.00 5.79 5.89 6.00
- --------------------------------------------------------------------------------------- --------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.24% 9.33 11.95 .55 2.30 10.01
- ------------------------------------------------------------------------------------------ --------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------ --------------------------
Expenses 1.85% 1.86 1.86 1.96 1.37 1.27
- ------------------------------------------------------------------------------------------ --------------------------
Net investment income 7.04% 6.89 8.68 8.02 7.52 7.48
- ------------------------------------------------------------------------------------------ --------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -----------------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31,
APRIL 30, -----------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $816,464 778,752 754,222 738,014 328,512
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 278% 310 286 179 80
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
23
<PAGE> 24
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 ZURICH KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER ZURICH KEMPER DISTRIBUTORS, INC.
222 Riverside Plaza Chicago, IL 60606
www.kemper.com
[RECYCLED LOGO]
Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Funds prospectus.
KDIF - 3 (6/97) 1033380
Printed in the U.S.A. [KEMPER FUNDS LOGO]
