<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED APRIL 30, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[LOGO]
Offering investors the opportunity
for high current return
KEMPER DIVERSIFIED
INCOME FUND
"... The move out of this sector (foreign currency
bonds) was the right one for the fund. It enabled
us to invest assets in other sectors where we saw more
opportunity to enhance income-earning potential. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
MANAGEMENT TEAM
6
PERFORMANCE UPDATE
8
PORTFOLIO STATISTICS
9
PORTFOLIO OF
INVESTMENTS
18
FINANCIAL STATEMENTS
20
NOTES TO
FINANCIAL STATEMENTS
24
FINANCIAL HIGHLIGHTS
26
SHAREHOLDERS' MEETING
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME
FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 1998
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 5.76%
CLASS B 5.26%
CLASS C 5.29%
LIPPER MULTI-SECTOR INCOME FUNDS CATEGORY AVERAGE* 4.55%
- --------------------------------------------------------------------------------
</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
4/30/98 10/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER DIVERSIFIED INCOME
FUND CLASS A $6.07 $5.96
- --------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME
FUND CLASS B $6.07 $5.96
- --------------------------------------------------------------------------------
KEMPER DIVERSIFIED INCOME
FUND CLASS C $6.10 $5.99
- --------------------------------------------------------------------------------
</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 #46 of #57 of #56 of
82 funds 82 funds 82 funds
- --------------------------------------------------------------------------------
5-YEAR #2 of N/A N/A
20 funds
- --------------------------------------------------------------------------------
10-YEAR #1 of N/A N/A
5 funds
- --------------------------------------------------------------------------------
15-YEAR #1 of N/A N/A
2 funds
- --------------------------------------------------------------------------------
20-YEAR #1 of N/A N/A
2 funds
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF APRIL 30, 1998.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTHS
INCOME: $.2290 $.2001 $.2035
- --------------------------------------------------------------------------------
APRIL DIVIDEND: $.0365 $.0316 $.0320
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATED: 7.22% 6.25% 6.30%
- --------------------------------------------------------------------------------
SEC YIELD+: 6.70% 6.04% 6.14%
- --------------------------------------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on April 30, 1998. 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, 1998, 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 INCOME STYLE BOX
- --------------------------------------------------------------------------------
[MATURITY QUALITY DIAGRAM]
Source: Morningstar, Inc., Chicago, IL 312-696-6000. (Morningstar's Style Box
is based on a portfolio date as of April 30, 1998.) The 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.
GRAY MONDAY The name used to identify Monday, October 27, 1997. On that day the
Dow Jones Industrial average lost 554 points or 7 percent of its total value.
Gray Monday is a comparison to Black Monday, October 19, 1987, when the market
lost almost 23 percent of its total value.
HEDGING A strategy used to help protect an investment. Financial managers can
use any number of technical and nontechnical procedures to hedge or reduce the
possibility of a loss on an investment.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for the period, assuming the
reinvestment of all dividends. It represents the aggregate percentage or dollar
value change over the period.
YIELD A fund's yield is a measure of the net investment income per share earned
over a specific one-month or 30-day period expressed as a percentage of the
maximum offering price of the fund's shares at the end of the period.
<PAGE> 3
ECONOMIC OVERVIEW
[SILVIA PHOTO]
DR. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS. HE IS ALSO A MEMBER OF THE INVESTMENT POLICY AND STRATEGY COMMITTEE
FOR KEMPER FUNDS.
SILVIA HOLDS BACHELOR OF ARTS AND PH.D. DEGREES IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND HAS A MASTER'S DEGREE IN ECONOMICS FROM BROWN
UNIVERSITY IN PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS
WITH THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT MANAGER FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $200 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS. IT IS ONE OF
THE 10 LARGEST MUTUAL FUND COMPLEXES IN THE UNITED STATES.
DEAR SHAREHOLDERS,
Stable economic growth, low interest rates and sustained lower inflation have
continued to produce a beneficial market environment for investors in the second
quarter of 1998. Despite heightened sensitivity to earnings estimates and
announcements, the market continued to support financial assets. We expect this
favorable climate to continue -- in spite of the sensitivity -- at least over
the shorter term.
As always, expectations have been at the heart of the actions and reactions
that move the markets. Expectations appear to be high, as demonstrated by a
record flow of new cash into mutual funds. As of April 30, 1998, a record $5
trillion in mutual fund assets surpassed total assets of the nation's banks,
according to the Investment Company Institute, a trade organization that
monitors the mutual fund industry, and the Federal Reserve Bank in Washington.
Unfortunately, high expectations often combine with high anxiety -- today's
investors are attuned to even the smallest hint of economic change. The result
is volatility. Many who believe that our long-running bull market is too good to
be true or that stock prices are too high are wondering when the market will
reverse.
While a reversal may not be on the immediate horizon, investors are wise to
watch for several signs that change is underway: rising prices, indicating
higher inflation; repercussions of the Asian economic crisis on American
business, which could appear in the form of reduced earnings; and a continued
widening of our trade deficit, a serious imbalance caused by heightened American
demand for foreign goods and services.
On April 27, expectations were tested by reports that the Federal Reserve
Board ("the Fed") was considering a hike in interest rates. The markets reacted
immediately to this news, driving stock prices downward. But at its monetary
policy meeting on May 19, the Fed chose to leave interest rates alone. In the
coming months, the Fed could raise rates if inflation accelerates or if growth
appears to be too rapid compared to the Fed's expectations.
Our positive outlook for the short term is based primarily on the current
resiliency of our marketplace. The United States appears to be firmly planted in
the middle of an economic cycle, with no evidence of detrimental pressures that
might be associated with the market's phenomenal growth. We are not seeing price
increases for goods and services or a downturn in the housing market, both of
which we might expect late in an economic cycle.
Equities have continued to reward investors. The U.S. stock market, as
measured by the Standard & Poor's 500, gained nearly 14 percent in the first
quarter of 1998 and returned more than 13 percent year-to-date through the end
of May. Bonds have also rewarded investors in terms of real return, which is
total return less the rate of inflation. The high yield and corporate debt
fixed-income markets also have performed well.
U.S. economic growth, as measured by the gross domestic product (GDP)
growth rate, was slightly above 4 percent for the first quarter. Our general
expectation for the year is that growth in all of 1998 will increase between 2.5
and 3 percent over last year. In other words, the economy will remain strong,
but will slow down as the year progresses.
Consumer spending and corporate fixed investment have fueled the economy's
solid growth. Spending on both capital goods and high technology has been
strong. Corporate profits have grown between 5 and 10 percent, which appears to
be acceptable in an environment of stable interest rates. U.S. employment growth
has ranged from 2 to 2.25 percent, continuing to exceed expectations. Consumer
confidence has continued to hit near all-time highs. The increase in output
prices, an indicator of inflation measured by the Consumer Price Index (CPI),
has remained at 1.5 to 2 percent.
Adding to the good news, all seems to be quiet on the domestic policy
front. At the end of February, the U.S. federal budget deficit essentially
vanished. Recent efforts to reduce the deficit, combined with higher federal
revenues due to the robust economy, have left us with an expected budget
surplus of $60 billion to $80 billion for fiscal 1998. To date, our Democratic
president and Republican Congress have not agreed on any significant
legislation regarding tax credits, spending cuts or health care that could
threaten the newfound federal budget surplus.
Can we expect a little more excitement from overseas? A full-scale global
recession from last year's Asian economic crisis seems unlikely at this point.
The crisis has yet
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 (5/31/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 5.65 5.81 6.49 6.91
PRIME RATE(2) 8.5 8.5 8.5 8.25
INFLATION RATE(3)* 1.5 1.89 2.23 2.89
THE U.S. DOLLAR(4) 6.86 10.26 5.52 9.15
CAPITAL GOODS ORDERS(5)* 9.28 10.28 7.16 3.48
INDUSTRIAL PRODUCTION(5)* 3.85 5.76 4.28 3.79
EMPLOYMENT GROWTH(6) 2.61 2.8 2.5 2.13
</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 April 30, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
to hurt most U.S. businesses and investors. Quite the contrary. While the mere
threat of repercussions from the Asian crisis added to the anxiety mentioned
earlier, it has also had the effect of keeping U.S. interest rates and prices in
check, making the U.S. economy all the more attractive to investors around the
world.
In the global economy, the U.S. dollar continues to appreciate in value
compared to other currencies. In fact, more capital is flowing into U.S. markets
as investors generally avoid Asia. Europe also has been benefiting from the
crisis. Canada, which is a commodity-producing exporter, has been somewhat
negatively affected as commodity prices have fallen. Political unrest in
Indonesia, nuclear tests in India and Pakistan and economic turmoil in Russia
have been keeping international investors on the edges of their seats.
Other major developments abroad include the final selection of countries to
participate in Europe's single currency next year. Many European countries are
adopting more restrictive fiscal policy and reducing inflation in anticipation
of the momentous European Economic and Monetary Union (EMU). But after the EMU
is established in 1999, tensions may indeed mount as countries work to adapt to
the new structure.
As we approach the turn of the century, one caveat remains: Don't
underestimate the potential of the Year 2000 computer code problem. It appears
that a significant number of federal government agencies will not meet the
criteria necessary to avoid the problem. Many businesses are revealing that
billions of dollars are being spent on the situation. Some experts say a global
recession is in store. Others adamantly disagree. In any event, we may indeed
see a reduction in capital spending toward the end of 1998 and the first half of
next year as companies focus on fixing existing computers rather than on
purchasing new equipment. We'll keep you posted!
Thank you for your continued support. We appreciate the opportunity to
serve your investment needs.
Sincerely,
/s/ John E. Silvia
JOHN E. SILVIA
June 10, 1998
4
<PAGE> 5
MANAGEMENT TEAM
KEMPER DIVERSIFIED INCOME FUND
PORTFOLIO MANAGEMENT TEAM
[BEIMFORD PHOTO]
J. PATRICK BEIMFORD, JR., JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1976 AND IS
A MANAGING DIRECTOR AND LEAD PORTFOLIO 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 MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS AND AN
OFFICER OF KEMPER DIVERSIFIED INCOME FUND. HE JOINED THE COMPANY IN 1993.
CESSINE RECEIVED BOTH A B.S. AND M.S. FROM THE UNIVERSITY OF WISCONSIN.
[JOHNS PHOTO]
GORDON JOHNS JOINED SCUDDER KEMPER INVESTMENTS IN 1988. HE IS AN OFFICER OF
KEMPER DIVERSIFIED INCOME FUND. JOHNS GRADUATED FROM BALLIOL COLLEGE, OXFORD,
WITH A B.A. IN LAW.
[MCNAMARA PHOTO]
MIKE MCNAMARA HAS BEEN WITH THE ORGANIZATION SINCE 1972 AND IS A MANAGING
DIRECTOR AND AN OFFICER 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 MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS. HE JOINED THE
COMPANY IN 1988 AND IS AN OFFICER OF KEMPER DIVERSIFIED INCOME FUND. RESIS
RECEIVED A B.A. IN FINANCE FROM MICHIGAN STATE UNIVERSITY.
[VANDENBERG PHOTO]
RICHARD VANDENBERG JOINED SCUDDER KEMPER INVESTMENTS IN MARCH 1996 AND IS A
MANAGING DIRECTOR. HE IS ALSO AN OFFICER OF KEMPER DIVERSIFIED INCOME FUND.
VANDENBERG HAS 25 YEARS OF FIXED-INCOME PORTFOLIO MANAGEMENT EXPERIENCE. HE
RECEIVED A BACHELOR'S DEGREE AND 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 SIX-MONTH REPORTING PERIOD -- NOVEMBER 1, 1997 THROUGH APRIL 30, 1998 -- WAS
A RELATIVELY CALM PERIOD AFTER A TUMULTUOUS MARKET DOWNTURN IN LATE OCTOBER
1997. THE PORTFOLIO MANAGEMENT TEAM OF KEMPER DIVERSIFIED INCOME FUND
CONCENTRATED ITS EFFORTS ON ADJUSTING THE PORTFOLIO COMPOSITION TO ENHANCE THE
FUND'S INCOME-EARNING POTENTIAL
Q HOW DID THE KEMPER DIVERSIFIED INCOME FUND PERFORM DURING THE SEMIANNUAL
PERIOD?
A The total return for the fund's Class A shares was 5.76 percent
(unadjusted for any sales charge). Unadjusted returns for Class B and C shares
were 5.26 percent and 5.29 percent respectively.
Q WHAT CAN YOU TELL US ABOUT THE GLOBAL ECONOMY AND HOW IT AFFECTED THE
MARKETS IN WHICH THE FUND INVESTS?
A As you probably recall, right before the start of the fiscal period there
was a severe economic crisis in Southeast Asia that triggered steep, but
temporary declines in world markets. Much of what occurred from November through
April was in some way linked to that dramatic, but brief downturn on October 27,
1997, now referred to as Gray Monday.
The theme during much of the six-month period was "flight-to-quality"
buying. We saw investors, still worried about the Asia crisis, favoring those
investments with high credit quality ratings, such as U.S. Treasuries and
mortgages. Even high yield investors tended to favor the most highly-rated high
yield bonds at some points. This quality-driven buying was especially prevalent
immediately after the market decline in November and December.
In response to this trend, Treasuries rallied in December, pushing the
benchmark 30-year Treasury yield to a low of a 5.92 percent on December 31.
Remember a bond's yield and price are inversely related. As the yield of a bond
falls, its price rises. The decline of Treasury yields was positive for
government bond investors. As time progressed, investor confidence improved,
lessening the degree of flight-to-quality buying.
Despite the trouble in Asia, the U.S. stock market continued to soar to
new highs. This, in turn, reinforced confidence in the high yield market, where
record levels of new issues were brought to market and gobbled up by investors.
Performance in the high yield market was positive throughout the period.
Emerging market investments also gained momentum after suffering through
some of the steepest declines in October. These securities excelled through
most of the six-month period and were the top-performing income asset class
during that time according to Salomon Brothers Total Rate-of-Return Indexes.
Political events, such as problems with Iraq and ongoing scandals in
Washington involving the President, stalled the markets at times, but never had
a profound impact on investment performance. The Federal Reserve Board met to
discuss interest rates and decided to leave them unchanged. All in all, it was a
fairly stable six-month period, with relatively strong economic growth but no
real signs of a pickup in inflation. It was a good period for fixed-income
investments.
Q WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE FUND?
A The most significant move that we made was to eliminate the fund's
position in foreign currency bonds. The reason for this was two-fold. First, we
believed that the U.S. bond market had more potential to outperform foreign
bonds on an absolute level. Secondly, yields in many foreign markets were well
below yields achievable through U.S. investments.
When we had been invested in these types of bonds, we hedged them back to
the U.S. dollar to minimize currency risk, which in turn limited the income the
fund could earn. The move out of this sector was the right one for the fund. It
enabled us to invest assets in other sectors where we saw more opportunity to
enhance income-earning potential.
Q DID YOU MAKE ANY OTHER SIGNIFICANT PORTFOLIO ADJUSTMENTS?
A During the period, the market enjoyed 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, emerging
market investments, and U.S. Treasuries.
Ever increasing demand for high yield bonds fueled gains in the market as
corporate earnings continued to be strong. Record levels of supply kept pace
with demand and
6
<PAGE> 7
PERFORMANCE UPDATE
a great deal of new, lower-quality issues were consumed by the market. We stayed
away from many of these riskier issues, favoring higher-quality (generally
B-rated) bonds, from fundamentally strong companies. Although these
higher-quality 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.
Emerging market investments excelled during the period. We took advantage
of this performance by increasing our allocation to 12 percent on April 30,
from 7 percent at the start of the period. Since there is more risk associated
with emerging market investments, they pay a higher rate of income. This
increased level of income should be beneficial for the fund's income-earning
potential, and we believe that the trade-off in risk vs. return was
appropriate. Additionally, we are now able to benefit from a larger pool of
emerging market investment talent, made possible through the recent alliance of
Zurich Kemper Investments, Inc. with Scudder Stevens & Clark, Inc. These
enhanced resources will help us identify a wider variety of investment options
in the emerging markets sector, which should be beneficial for the fund.
Q GIVEN THE FLIGHT-TO-QUALITY BUYING YOU DISCUSSED, WHAT ROLE DID THE FUND'S
TREASURIES PLAY?
A We have always maintained a significant allocation to U.S. Treasuries.
Given the recent bias towards quality issues, we increased the fund's Treasury
allocation to take advantage of the strong performance. On April 30, Treasuries
represented 30 percent of the fund. In addition to performance, Treasuries play
an important role in maintaining a high overall credit-rating for the fund. They
offset some of the lower-quality high yield and emerging market investments in
the fund. This provides investors with the potential for high returns with lower
volatility. At the end of the period the average credit quality of the fund was
BBB rated.
Q WHAT'S YOUR OUTLOOK FOR FIXED-INCOME MARKETS AND THE FUND IN PARTICULAR?
A Our outlook is for economic growth to continue at a moderate pace. We
don't anticipate that inflationary pressures will gain momentum. Given that type
of environment, the bond markets and Kemper Diversified Income Fund should enjoy
good performance.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 4/30/98 ON 10/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
HIGH YIELD CORPORATES 48% 42%
- --------------------------------------------------------------------------------
EMERGING MARKETS 12 5
- --------------------------------------------------------------------------------
FOREIGN CURRENCY BONDS -- 5
- --------------------------------------------------------------------------------
HIGH GRADE CORPORATES 4 7
- --------------------------------------------------------------------------------
MORTGAGES 5 7
- --------------------------------------------------------------------------------
TREASURY NOTES & BONDS 30 29
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 1 5
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 4/30/98 ON 10/31/97
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 4/30/98 ON 10/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH EQUIVALENTS 1% 5%
- --------------------------------------------------------------------------------
1-10 YEARS 49 51
- --------------------------------------------------------------------------------
11-20 YEARS 22 28
- --------------------------------------------------------------------------------
21+ YEARS 28 16
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 4/30/98 ON 10/31/97
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 4/30/98 ON 10/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 13.8 years 10.9 years
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS AT APRIL 30, 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--35.6% PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury bonds
13.875%, 2011 $ 4,350 $ 6,562
12.00%, 2013 9,200 13,485
13.25%, 2014 18,000 28,595
10.625%, 2015 28,210 42,236
8.875%, 2017 20,675 27,346
6.125%, 2027 150,400 153,972
Federal Home Loan Mortgage Corporation,
6.50%, 2023 25,399 25,303
Government National Mortgage Association,
6.50%, 2023-2024 25,092 24,935
----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost: $315,143) 322,434
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS--11.8%
- ---------------------------------------------------------------------------------------------------------------------
(principal amount in U.S. dollars) (a)Republic of Argentina
6.625%, 2005 8,550 7,849
5.50%, 2023 7,000 5,311
9.75%, 2027 7,000 6,745
(a)Federal Republic of Brazil
6.625%, 2006 8,730 7,792
5.25%, 2024 5,000 3,725
10.125%, 2027 12,000 11,685
Republic of Bulgaria,
6.562%, 2011 10,000 7,875
Republic of Poland,
4.00%, 2014 7,990 7,291
Russia Ministry of Finance - Global Bond,
10.00%, 2007 9,220 8,851
United Mexican States
11.375%, 2016 4,000 4,690
6.75%, 2019 5,000 4,681
6.25%, 2019 7,000 5,919
11.50%, 2026 5,000 6,027
Republic of Venezuela
6.812%, 2007 9,524 8,542
9.25%, 2027 10,600 9,354
----------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost: $105,511) 106,337
----------------------------------------------------------------------------
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--50.8% PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSET BACKED Pacific Gas & Electric, 6.42%, 2008 800 809
SECURITIES--.1% Southern California Edison Co.
6.22%, 2004 150 151
6.28%, 2005 300 302
----------------------------------------------------------------------------
1,262
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--50.8% PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BROADCASTING, Affinity Group, Inc., 11.50%, 2003 $ 1,480 $ 1,569
CABLESYSTEMS American Banknote Corp., 11.250%, with
AND PUBLISHING--6.2% warrants, 2007 1,300 1,323
(b)American Lawyer, 12.25%, 2008 230 149
Busse Broadcasting, 11.625%, 2000 430 464
CSC Holdings, Inc.
7.875%, 2007 420 432
8.125%, 2009 1,370 1,439
10.50%, 2016 1,200 1,401
Capstar Broadcasting
9.25%, 2007 1,570 1,633
(b) 12.75%, 2009 1,850 1,388
Chancellor Media Corp, 8.125%, 2005 660 661
(b)Charter Communications, 14.00%, 2007 2,775 2,234
Comcast Cablevision, 8.50%, 2027 625 728
(b)Comcast UK Cable Partners, Ltd.,
11.20%, 2007 4,200 3,423
(b)DIVA Systems Corp., 12.625%, 2008 3,620 1,973
(b)Diamond Cable Communications, PLC
13.25%, 2004 2,025 1,883
11.75%, 2005 1,100 877
10.75%, 2007 1,300 916
Frontiervision
11.00%, 2006 1,200 1,332
(b) 11.875%, 2007 2,560 1,971
Granite Broadcasting Corp., 10.375%, 2005 1,590 1,677
Intermedia Capital Partners, 11.25%, 2006 1,360 1,523
(b)International Cabletel, Inc., 12.75%,
2005 2,430 2,096
Mediacom LLC, 8.50%, 2008 580 575
NTL, 10.00%, 2007 380 407
News America Holdings, Inc., 9.25%, 2013 830 998
Newsquest Capital, PLC, 11.00%, 2006 114 128
(b)PX Escrow Corp., 9.625%, 2006 1,565 1,119
SFX Entertainment, Inc., 9.125%, 2008 1,825 1,770
Sinclair Broadcasting Group, Inc., 8.75%,
2007 830 848
Star Choice, 13.00%, 2005 875 927
Sullivan Broadcasting, 10.25%, 2005 1,160 1,253
(b)21st Century Telecom Group, Inc.,
12.25%, 2008 4,100 2,347
Tele-Communications, Inc., 9.80%, 2012 2,650 3,325
(b)TeleWest Communications, PLC, 11.00%,
2007 3,065 2,475
(b)Transwestern Holdings, 11.875%, 2008 3,100 2,116
Transwestern Publishing, 9.625%, 2007 5,040 5,267
(b)United International Holdings, 10.75%,
2008 2,700 1,708
----------------------------------------------------------------------------
56,355
- ---------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES--.8% Allied Waste Industries
10.25%, 2006 600 663
(b) 11.30%, 2007 2,350 1,733
Corporate Express, Inc., 9.125%, 2004 940 949
Intertek Finance, 10.25%, 2006 650 691
Outdoor Systems, Inc.
9.375%, 2006 2,410 2,555
8.875%, 2007 1,010 1,050
----------------------------------------------------------------------------
7,641
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CHEMICALS AND Agriculture, Mining and Chemicals, Inc.,
AGRICULTURE--1.6% 10.75%, 2003 $ 710 $ 756
Atlantis Group, Inc., 11.00%, 2003 1,328 1,374
Hines Horticulture, 11.75%, 2005 2,690 2,935
Huntsman Corp., 9.50%, 2007 1,740 1,753
Huntsman Polymer Corp. 11.75%, 2004 1,900 2,083
(b)NL Industries, Inc., 13.00%, 2005 280 286
Octel Developments, PLC, 10.00%, 2006 530 530
Terra Industries, Inc., 10.50%, 2005 650 704
Texas Petrochemicals, 11.125%, 2006 2,350 2,573
UCC Investors Holdings, Inc., 10.50%, 2002 1,460 1,650
----------------------------------------------------------------------------
14,644
- ---------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--9.2% Cable & Wireless Communication, 6.625%,
2005 700 703
(b)Call-Net Enterprise, Inc.
13.25%, 2004 370 348
9.27%, 2007 1,080 753
Communication and Power Industry, Inc.,
12.00%, 2005 550 616
(b)Crown Castle International Corp.,
10.625% 2007 3,000 2,070
Dobson Communications Corp., 11.75%, 2007 2,000 2,175
Econophone, Inc., 13.50%, with warrants,
2007 2,541 2,982
Esprit Telecom, 11.50%, 2007 1,275 1,390
(b)Focal Communications Corp., 12.125%,
2008 4,730 2,791
GCI General Communication, 9.75%, 2007 1,700 1,794
(b)ICG Holdings, 13.50%, 2005 2,735 2,318
(b)ICG Services, Inc.
10.00%, 2008 1,280 819
9.875%, 2008 700 429
(b)IPC Information Systems, 10.875%, 2008 1,900 1,387
Interamerica Communications, 14.00%, 2007 320 330
(b)Intermedia Communications, 12.25%, 2006 1,350 1,100
Intermedia Communications of Florida, Inc.
(b) 11.25%, 2007 2,080 1,672
8.875%, with warrants, 2007 770 795
(b)KMC Telecom Holdings, Inc., 12.50%,
2008 2,100 1,271
Level 3 Communications, 9.125%, 2008 2,500 2,475
Long Distance International, 12.25%, 2008 1,300 1,320
MGC Communications, 13.00%, with warrants,
2004 1,500 1,643
McLeod, Inc.
(b) 10.50%, 2007 4,060 3,045
9.25%, 2007 960 1,020
Metronet Communications
12.00%, 2007 560 664
(b) 10.75%, 2007 700 480
(b)Millicom International Cellular, S.A.,
13.50%, 2006 1,890 1,503
Netia Holdings
(b) 11.25%, 2007 875 619
10.25%, 2007 300 308
(b)Nextel Communications
9.75%, 2004 1,530 1,473
10.65%, 2007 710 479
9.75%, 2007 1,910 1,227
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nextlink Communications
12.50%, 2006 $ 1,385 $ 1,593
(b) 9.45%, 2008 930 584
9.00%, 2008 1,170 1,193
(b)PTC International Finance, B.V.,
10.75%, 2007 8,390 5,810
Performance Systems International, Inc.,
10.00%, 2005 1,100 1,123
(b)Pinnacle Holdings, 10.00%, 2008 4,800 3,048
Primus Telecommunications Group, 11.75%,
with warrants, 2004 1,000 1,130
RCN Corp., 10.00%, 2007 3,680 3,892
(b)SBA Communication, 12.00%, 2008 3,000 1,785
Salem Communications, 9.50%, 2007 980 1,024
Satelites Mexicanos, S.A. de C.V.,
10.125%, 2004 660 674
Telex Communications, 10.50%, 2007 960 871
Teligent, Inc.
11.50%, 2007 5,000 5,200
(b) 11.50%, 2008 1,100 627
USA Mobile Communications, Inc. II,
14.00%, 2004 1,030 1,141
Vanguard Cellular Systems, 9.375%, 2006 1,440 1,512
Viatel, Inc.
(b) 12.50%, 2008 1,200 738
11.25%, 2008 930 988
Winstar Communications
15.00%, 2007 1,190 1,523
11.00%, 2008 330 320
10.00%, 2008 855 836
Winstar Equipment,
12.50%, 2004 230 258
Winstar Equipment II Corp., 12.50%, 2004 2,400 2,694
Worldcom, Inc.
7.75%, 2004 and 2007 2,125 2,339
----------------------------------------------------------------------------
82,902
- ---------------------------------------------------------------------------------------------------------------------
CONSTRUCTION Airxcel, 11.00%, 2007 1,330 1,410
MATERIALS--2.1% Brand Scafford Services, Inc., 10.25%,
2008 500 510
(b)Building Materials Corporation of
America, 11.75%, 2004 2,700 2,632
Desa International, 9.875%, 2007 4,900 5,010
Falcon Building Products, Inc., 9.50%,
2007 2,025 2,050
Kevco, 10.375%, 2007 2,180 2,267
Nortek, Inc., 9.125%, 2007 2,390 2,447
Terex Corp., 8.875%, 2008 1,300 1,290
Waxman Industries, Inc.
(b) 12.75%, 2004 370 342
(c) 222,607 warrants expiring 2004 456
Werner Holdings, 10.00%, 2007 850 889
----------------------------------------------------------------------------
19,303
- ---------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS AMF Bowling World
AND SERVICES--4.4% (b) 12.25%, 2006 355 288
10.875%, 2006 3,010 3,311
Cinemark USA, Inc., 9.625%, 2008 3,030 3,166
Coinmach Corp., 11.75%, 2005 3,120 3,471
Dimon, Inc., 8.875%, 2006 825 833
Grupo Azucarero Mexico, S.A. de C.V.,
11.50%, 2005 1,160 940
Hedstrom Corp., 10.00%, 2007 2,860 2,931
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Herff Jones, Inc., 11.00%, 2005 $ 1,050 $ 1,144
IMPAC Group, Inc., 10.125%, 2008 1,600 1,632
Imperial Home Decor Group, Inc.,
11.00%, 2008 900 934
Kinder-Care Learning Centers, 9.50%, 2009 2,990 2,997
Mastellone Hermanos, S.A., 11.75%, 2008 1,300 1,326
Nabisco, Inc., 6.375%, 2035 1,050 1,022
Nine West Group, 9.00%, 2007 630 611
Perkins Family Restaurants, L.P.,
10.125%, 2007 650 686
Premier Parks, Inc., 12.00%, 2003 660 733
Riddell Sports, Inc., 10.50%, 2007 3,230 3,359
Royal Caribbean, 8.25%, 2005 750 809
(b)Sealy Mattress, 10.875%, 2007 1,025 687
(b)Six Flags Theme Park, 12.25%, 2005 4,330 4,833
Spin Cycle, 12.75%, 2005 1,570 1,115
United Artists Theatre, 9.75%, 2008 2,320 2,337
Van De Kamps, Inc., 12.00%, 2005 900 1,017
----------------------------------------------------------------------------
40,182
- ---------------------------------------------------------------------------------------------------------------------
DRUGS AND Dade International, Inc., 11.125%, 2006 1,000 1,103
HEALTH CARE--1.8% Jackson Products, Inc., 9.50%, 2005 830 838
Magellan Health Services, 9.00%, 2008 2,880 2,887
Multicare Co., 9.00%, 2007 1,995 1,988
Paracelsus Healthcare, 10.00%, 2006 480 497
(b)Paragon Healthcare Networks, 10.50%,
2007 8,770 5,788
Tenet Healthcare, 8.625%, 2003 2,000 2,118
Vencor, 9.875%, 2005 1,300 1,315
----------------------------------------------------------------------------
16,534
- ---------------------------------------------------------------------------------------------------------------------
ENERGY AND RELATED Abraxas Petroleum, 11.50%, 2004 110 114
SERVICES--2.8% Bellweather Exploration Co., 10.875%, 2007 2,000 2,105
Benton Oil & Gas Co.
11.625%, 2003 3,000 3,217
9.375%, 2007 680 675
Chesapeake Energy Corp., 9.625%, 2005 990 995
Coho Energy, Inc., 8.875%, 2007 420 397
Commonwealth Edison
7.375%, 2004 850 882
7.00%, 2005 250 257
Dailey International, 9.50%, 2008 1,400 1,400
Denbury Management, 9.00%, 2008 280 278
Espirito Santos Centrais Electricas S.A.,
10.00%, 2007 2,140 2,049
Forcenergy Gas Exploration, 9.50%, 2006 2,320 2,372
GTE North Inc., 6.90%, 2008 1,400 1,454
Hyder PLC, 6.875%, 2007 600 611
Mariner Energy, 10.50%, 2006 300 311
Michael Petroleum Corp., 11.50%, 2005 600 594
Pacalta Resources, Ltd., 10.75%, 2004 2,000 2,050
Parker Drilling Corp., 9.75%, 2006 240 255
Plains Resources, 10.25%, 2006 1,660 1,789
RAM Energy, 11.50%, 2008 600 606
Rutherford-Moran Oil Corp., 10.75%, 2004 740 788
United Meridian Corp., 10.375%, 2005 1,570 1,735
Yorkshire Power Finance, 6.496%, 2008 100 99
----------------------------------------------------------------------------
25,033
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL SERVICES, BCH Cayman Islands, 7.70%, 2006 $ 1,000 $ 1,067
HOME BUILDERS Beazer Homes
AND REAL ESTATE--3.2% 9.00%, 2004 200 200
8.875%, 2008 970 963
Del Webb Corp., 9.75%, 2008 3,060 3,167
Falcon Holding Group L.P.
(b) 9.285%, 2010 1,610 1,022
8.375%, 2010 1,760 1,738
Forecast Group, L.P., 11.375%, 2000 1,125 1,086
Fortress Group, 13.75%, 2003 2,560 2,861
Green Tree Financial Corp., 7.29%, 2030 2,500 2,496
Hovnanian Enterprises, 11.25%, 2002 1,984 2,056
Lehman Brothers Holdings, 7.375%, 2007 2,000 2,104
NCNB/Nationsbank Corp., 9.50%, 2004 1,000 1,158
NVR, Inc., 8.00%, 2005 645 634
New Millen Home Building, 12.00%, 2004 250 244
Presley Companies, 12.50%, 2001 90 86
Schuler Homes, 9.00%, 2008 650 640
Scotland International B.V., 8.80%, 2004 700 780
UDC Homes, 12.50%, 2000 740 755
U.S. West Cap Funding
7.90%, 2027 1,000 1,138
7.95%, 2097 1,250 1,440
Williams Scotsman, Inc., 9.875%, 2007 2,790 2,930
----------------------------------------------------------------------------
28,565
- ---------------------------------------------------------------------------------------------------------------------
HOTELS AND Eldorado Resorts, 10.50%, 2006 1,120 1,229
GAMING--.9% Empress River Casino, 10.75%, 2002 810 871
HMH Properties, 8.875%, 2007 190 209
Hard Rock Hotel, 9.25%, 2005 450 459
Harvey's Casino Resorts, 10.625%, 2006 2,630 2,932
Players International, 10.875%, 2005 1,475 1,608
Trump Atlantic City, 11.25%, 2006 540 536
----------------------------------------------------------------------------
7,844
- ---------------------------------------------------------------------------------------------------------------------
MANUFACTURING, METALS AEI Holdings, 10.00%, 2007 830 863
AND MINING--8.3% Accuride, 9.25%, 2008 1,400 1,403
Aftermarket Technology, 12.00%, 2004 885 979
Alvey Systems, 11.375%, 2003 1,555 1,664
Bar Technologies, 13.50%, 2001 2,030 2,182
Centaur Mining, 11.00%, 2007 2,850 2,978
Collins & Aikman Corp., 11.50%, 2006 1,200 1,344
Columbus McKinnon, 8.50%, 2008 400 396
Day International Group, Inc.
11.125%, 2005 2,660 2,899
9.50%, 2008 420 425
Doe Run Co.
12.00%, 2003 900 936
11.25%, 2005 1,950 2,047
Doskocil Manufacturing Co., 10.125%, 2007 1,030 1,082
Dyersburg Corp., 9.75%, 2007 3,295 3,394
E-P Acquisition, Inc., 9.375%, 2008 250 252
Earle M. Jorgensen Co., 9.50%, 2005 2,630 2,623
Euramax International, PLC, 11.25%, 2006 4,165 4,550
Foamex, L.P.
13.50%, 2005 890 1,028
9.875%, 2007 640 691
GS Technologies
12.00%, 2004 330 361
12.25%, 2005 650 731
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Great Central Mines LTD, 8.875%, 2008 $ 825 $ 825
(b)Grove Holdings LLC, 11.56% 2009 340 198
Grove Investors, 14.50%, 2010 650 650
Grove Worldwide LLC, 9.25%, 2008 650 652
Hayes Wheels International, Inc., 9.125%,
2007 1,000 1,050
JPS Automotive Products Corp.,
11.125%, 2001 1,530 1,706
Knoll, Inc., 10.875%, 2006 1,638 1,847
Koppers Industries, 9.875%, 2007 3,650 3,750
MMI Products, Inc., 11.25%, 2007 2,150 2,370
Motors and Gears, Inc., 10.75%, 2006 1,620 1,725
NSM Steel
12.00%, 2006 1,530 1,453
12.25%, 2008 1,820 1,765
Neenah Corp., 11.125%, 2007 2,790 3,076
Park-Ohio Industries, 9.25%, 2007 2,660 2,753
Prestolite Electric, Inc. 9.625%, 2008 975 999
Renco Steel Holdings, 10.875%, 2005 1,060 1,087
Scovill Fasteners, 11.25%, 2007 2,200 2,294
Spinnaker Industries, Inc., 10.75%, 2006 5,110 5,302
Thermadyne Industries, Inc.
10.25%, 2002 1,497 1,557
10.75%, 2003 262 280
Venture Holdings, 9.50%, 2005 1,540 1,575
WCI Steel, Inc., 10.00%, 2004 300 311
Wells Aluminum Corp., 10.125%, 2005 2,970 3,156
Wheeling-Pittsburgh Corp., 9.25%, 2007 1,670 1,703
----------------------------------------------------------------------------
74,912
- ---------------------------------------------------------------------------------------------------------------------
PAPER, FOREST PRODUCTS AEP Industries, Inc., 9.875%, 2007 650 674
AND CONTAINERS--3.8% BPC Holding Corp., 12.50%, 2006 810 887
Berry Plastics Corp., 12.25%, 2004 505 550
Doman Industries, Ltd., 9.25%, 2007 2,280 2,291
Fonda Group, 9.50%, 2007 2,000 1,960
Gaylord Container Corp.
12.75%, 2005 2,220 2,375
9.75%, 2007 520 527
9.875%, 2008 4,000 3,930
Graham Packaging Co.
9.25%, 2008 660 663
(b) 10.75%, 2009 610 384
Maxxam Group, Inc.
(b) 12.25%, 2003 150 153
11.25%, 2003 2,080 2,200
National Fiberstock Corp., 11.625%, 2002 910 965
Norampac, 9.50%, 2008 1,830 1,885
Pindo Deli Finance Mauritius, Ltd.,
10.75%, 2007 70 57
Plainwell, Inc., 11.00%, 2008 1,040 1,072
Printpack, Inc.
9.875%, 2004 170 178
10.625%, 2006 1,700 1,819
Riverwood International
10.25%, 2006 1,000 1,035
10.625%, 2007 525 554
10.875%, 2008 4,045 4,075
(b)SF Holdings Group, Inc., 12.75%, 2008 1,000 560
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stone Container Corp.
9.875%, 2001 $ 2,960 $ 3,049
12.25%, 2002 190 196
11.50%, 2006 950 1,036
U.S. Can Corp., 10.125%, 2006 1,030 1,084
------------------------------------------------------------------------------
34,159
- -----------------------------------------------------------------------------------------------------------------------
RETAILING--3.5% AFC Enterprises, 10.25%, 2007 3,120 3,315
Advantica Restaurant Company, 11.25%, 2008 4,015 4,216
Ameriking, 10.75%, 2006 1,999 2,139
Cole National Group, 9.875%, 2006 700 756
Federated Department Stores, Inc., 10.00%,
2001 2,000 2,193
Finlay Enterprises, 9.00%, 2008 500 504
Galey & Lord, 9.125%, 2008 860 863
Guitar Center Management, 11.00%, 2006 307 342
Iron Age Holdings, Corp.
9.875%, 2008 630 633
(b) 12.125%, 2009 570 323
(b)J. Crew Group, Inc., 13.125%, 2008 2,000 1,040
J. Crew Operating Corp., 10.375%, 2007 1,040 988
Jafra Cosmetics International, Inc.,
11.750%, 2008 850 856
Krystal Co., 10.25%, 2007 870 900
Pathmark Stores, 9.625%, 2003 3,040 3,070
Petro Stopping Centers, 10.50%, 2007 3,050 3,816
Phillips Van-Heusen, 9.50%, 2008 990 990
Specialty Retailers, 9.00%, 2007 460 475
TravelCenters America, Inc., 10.25%, 2007 3,830 4,041
------------------------------------------------------------------------------
31,460
- -----------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--.4% Axiohm Transaction Solutions, Inc.,
9.750%, 2007 750 763
Dell Computer Corp., 7.10%, 2028 400 400
Viasystems, Inc., 9.75%, 2007 2,700 2,821
------------------------------------------------------------------------------
3,984
- -----------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.7% Canadian Airlines Corp., 10.00%, 2005 1,000 1,010
Continental Airlines
7.75%, 2014 996 1,058
6.90%, 2018 1,000 1,002
Delta Air Lines
9.875%, 2008 1,347 1,532
9.75%, 2021 2,500 3,226
TFM, S.A. de C.V., 10.25%, 2007 5,370 5,518
(b)Transtar Holdings, L.P., 13.375%, 2003 670 615
Trans World Airlines, Inc., 11.375%, 2006 960 960
------------------------------------------------------------------------------
14,921
------------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(Cost: $444,015) 459,701
------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES
OR
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON AND PREFERRED (c)Capital Pacifics Holdings 4,345 shs. $ 4
STOCKS--.8% Clark USA, PIK, preferred 3,701 396
Crown American Realty, preferred 18,450 1,015
Day International Exchange, PIK, preferred 360 372
Dobson Communication, PIK, preferred 493 531
Eagle-Picher Holdings 180 1,040
(c)Empire Gas Corp., warrants 2,208 11
(c)Foamex International, warrants 1,200 24
(c)Intelcom Group, Inc. 4,026 74
Nextel, PIK, preferred 1,360 1,455
Nextlink Communication, convertible
preferred 2,500 118
SF Holdings, PIK, preferred 30 274
Sinclair Capital, preferred 13,500 1,471
21st Century Telecom Group, Inc., preferred 220 246
------------------------------------------------------------------------------
TOTAL COMMON AND PREFERRED STOCKS
(Cost: $6,518) 7,031
------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--5.50% to 5.63%
INSTRUMENTS--16.2% Due--May 1998
Countrywide Home Loans $ 33,000 32,945
Merrill Lynch & Co., Inc. 22,000 21,962
Mid-Atlantic Fuel Co. 20,000 20,000
Sanwa Business Credit 27,000 26,904
Other 45,000 44,930
------------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS--16.2%
(Cost: $146,744) 146,741
------------------------------------------------------------------------------
TOTAL INVESTMENTS--115.2%
(Cost: $1,017,931) 1,042,244
------------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(15.2)% (137,898)
------------------------------------------------------------------------------
NET ASSETS--100% $ 904,346
------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Variable rate security. Rate shown is the effective rate on April 30, 1998
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 $1,017,931,000 for federal income tax
purposes at April 30, 1998, the gross unrealized appreciation was $25,872,000,
the gross unrealized depreciation was $1,559,000 and the net unrealized
appreciation on investments was $24,313,000.
See accompanying Notes to Financial Statements.
17
<PAGE> 18
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investments, at value
(Cost: $1,017,931) $1,042,244
- --------------------------------------------------------------------------
Cash 2,109
- --------------------------------------------------------------------------
Receivable for:
Investments sold 6,820
- --------------------------------------------------------------------------
Fund shares sold 874
- --------------------------------------------------------------------------
Interest 18,974
- --------------------------------------------------------------------------
TOTAL ASSETS 1,071,021
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Payable for:
Investments purchased 165,244
- --------------------------------------------------------------------------
Fund shares redeemed 305
- --------------------------------------------------------------------------
Management fee 425
- --------------------------------------------------------------------------
Distribution services fee 203
- --------------------------------------------------------------------------
Administrative services fee 173
- --------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 234
- --------------------------------------------------------------------------
Trustees' fees 91
- --------------------------------------------------------------------------
Total liabilities 166,675
- --------------------------------------------------------------------------
NET ASSETS $ 904,346
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------
Paid-in capital $ 999,795
- --------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (121,518)
- --------------------------------------------------------------------------
Net unrealized appreciation on investments 24,313
- --------------------------------------------------------------------------
Undistributed net investment income 1,756
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 904,346
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($580,762 / 95,598 shares outstanding) $6.07
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $6.36
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($300,722 / 49,565 shares outstanding) $6.07
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($22,862 / 3,745 shares outstanding) $6.10
- --------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
NET INVESTMENT INCOME
- -----------------------------------------------------------------------
Interest income $37,421
- -----------------------------------------------------------------------
Expenses:
Management fee 2,505
- -----------------------------------------------------------------------
Distribution services fee 1,203
- -----------------------------------------------------------------------
Administrative services fee 1,004
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 1,187
- -----------------------------------------------------------------------
Professional fees 40
- -----------------------------------------------------------------------
Reports to shareholders 159
- -----------------------------------------------------------------------
Trustees' fees and other 35
- -----------------------------------------------------------------------
Total expenses 6,133
- -----------------------------------------------------------------------
NET INVESTMENT INCOME 31,288
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized gain on sales of investments and foreign
currency transactions 6,025
- -----------------------------------------------------------------------
Net realized loss from futures transactions (413)
- -----------------------------------------------------------------------
Net realized gain 5,612
- -----------------------------------------------------------------------
Change in net unrealized appreciation on investments and
assets and liabilities in foreign currencies 11,061
- -----------------------------------------------------------------------
Net gain on investments 16,673
- -----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $47,961
- -----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
APRIL 30, YEAR ENDED
1998 OCTOBER 31,
(UNAUDITED) 1997
- ---------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 31,288 61,302
- ---------------------------------------------------------------------------------------------------
Net realized gain 5,612 7,102
- ---------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 11,061 (5,336)
- ---------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 47,961 63,068
- ---------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (32,344) (66,506)
- ---------------------------------------------------------------------------------------------------
Net increase from capital share transactions 27,186 86,229
- ---------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 42,803 82,791
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------
Beginning of period 861,543 778,752
- ---------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed
net investment income of
$1,756 and $2,812, respectively) $904,346 861,543
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
19
<PAGE> 20
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 three classes of shares. Class A shares
are sold to investors subject to an initial sales
charge. Class B shares are sold without an initial
sales charge but are subject to higher ongoing
expenses than Class A shares and a contingent
deferred sales charge payable upon certain
redemptions. Class B shares automatically convert
to Class A shares six years after issuance. Class C
shares are sold without an initial 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 no longer
offered. 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.
20
<PAGE> 21
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 and includes discount
amortization on fixed income securities. Realized
gains and losses from investment transactions are
reported on an identified cost basis.
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, 1998. The accumulated net
realized loss on sales of investments for federal
income tax purposes at April 30, 1998, amounting to
approximately $117,585,000, 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 INVESTMENT MANAGER COMBINATION. Effective December
31, 1997, Zurich Insurance Company, the parent of
Zurich Kemper Investments, Inc. (ZKI), acquired a
majority interest in Scudder, Stevens & Clark, Inc.
(Scudder), another major investment manager. As a
result of this transaction, the operations of ZKI
were combined with Scudder to form a new global
investment organization named Scudder Kemper
Investments, Inc. (Scudder Kemper). The transaction
resulted in the termination of the Fund's
investment management agreement with ZKI, however,
a new investment management agreement between the
Fund and Scudder Kemper was approved by the Fund's
Board of Trustees and by the Fund's shareholders.
The new management agreement, which was effective
December 31, 1997, is the same in all material
respects as the previous management agreement,
except that Scudder Kemper is the new investment
adviser to the Fund. In addition, the names of the
Fund's principal underwriter and shareholder
service agent were changed to Kemper Distributors,
Inc. (KDI) and Kemper Service Company (KSvC),
respectively.
MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper, 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. The Fund incurred a
management fee of $2,505,000 for the six months
ended April 30, 1998.
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with KDI.
Underwriting commissions paid in connection with
the distribution of Class A shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS ALLOWED
RETAINED BY KDI BY KDI TO FIRMS
--------------- -------------------
<S> <C> <C>
Six months ended April 30, 1998 $86,000 749,000
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, KDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees, CDSC
and commissions related to Class B and Class C
shares as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES
RECEIVED BY KDI PAID BY KDI TO FIRMS
----------------- --------------------
<S> <C> <C>
Six months ended April 30, 1998 $1,441,000 1,659,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, the Fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. KDI in turn has various
agreements with financial services firms that
provide these services and pays these firms based
on assets of Fund accounts the firms service.
Administrative services fees (ASF) paid are as
follows:
<TABLE>
<CAPTION>
ASF PAID BY ASF PAID BY KDI
THE FUND TO KDI TO FIRMS
---------------- ---------------
<S> <C> <C>
Six months ended April 30, 1998 $1,004,000 1,043,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
KSvC is the shareholder service agent of the Fund.
Under the agreement, KSvC received shareholder
services fees of $957,000 for the six months ended
April 30, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the six months ended April 30,
1998, the Fund made no payments to its officers and
incurred trustees' fees of $16,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended April 30, 1998, investment
transactions (excluding short-term instruments) are
as follows (dollars in thousands):
Purchases $2,180,254
Proceeds from sales 2,114,409
22
<PAGE> 23
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,
1998 1997
---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 11,290 $69,052 21,099 $ 125,985
-------------------------------------------------------------------------------
Class B 8,568 51,918 19,403 116,147
-------------------------------------------------------------------------------
Class C 1,549 9,450 1,933 11,608
-------------------------------------------------------------------------------
Class I -- -- 1 8
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 2,222 13,448 4,612 27,529
-------------------------------------------------------------------------------
Class B 1,107 6,693 2,401 14,136
-------------------------------------------------------------------------------
Class C 76 467 92 564
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES REDEEMED
Class A (14,239) (86,486) (23,040) (137,971)
-------------------------------------------------------------------------------
Class B (5,635) (34,675) (11,474) (68,173)
-------------------------------------------------------------------------------
Class C (437) (2,670) (597) (3,595)
-------------------------------------------------------------------------------
Class I (2) (11) (2) (9)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 4,312 26,170 4,260 25,490
-------------------------------------------------------------------------------
Class B (4,317) (26,170) (4,266) (25,490)
-------------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS $27,186 $ 86,229
-------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------
CLASS A
-----------------------------------------
SIX MONTHS YEAR ENDED OCTOBER 31,
ENDED APRIL ---------------------------
30, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------
Net asset value, beginning of period $5.96 5.99 5.98 5.77 6.23
- ------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .22 .46 .46 .55 .52
- ------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency .12 .01 .12 .16 (.45)
- ------------------------------------------------------------------------------------
Total from investment operations .34 .47 .58 .71 .07
- ------------------------------------------------------------------------------------
Less distribution from net investment
income .23 .50 .57 .50 .53
- ------------------------------------------------------------------------------------
Net asset value, end of period $6.07 5.96 5.99 5.98 5.77
- ------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.76% 8.13 10.27 12.90 1.02
- ------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------
Expenses 1.01% 1.03 1.03 1.09 1.12
- ------------------------------------------------------------------------------------
Net investment income 7.31% 7.68 7.72 9.43 8.81
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------
CLASS B
------------------------------------------------
YEAR ENDED OCTOBER MAY 31
SIX MONTHS 31, TO
ENDED APRIL -------------------- OCTOBER 31,
30, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------
Net asset value, beginning of period $5.96 5.99 5.98 5.77 5.94
- -------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .19 .40 .41 .49 .19
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency .12 .01 .12 .16 (.17)
- -------------------------------------------------------------------------------------------
Total from investment operations .31 .41 .53 .65 .02
- -------------------------------------------------------------------------------------------
Less distribution from net investment
income .20 .44 .52 .44 .19
- -------------------------------------------------------------------------------------------
Net asset value, end of period $6.07 5.96 5.99 5.98 5.77
- -------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.26% 7.13 9.23 11.87 .35
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------
Expenses 1.96% 1.98 1.96 2.04 1.97
- -------------------------------------------------------------------------------------------
Net investment income 6.36% 6.73 6.79 8.48 8.01
- -------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------
CLASS C
------------------------------------------
SIX MONTHS YEAR ENDED MAY 31
ENDED OCTOBER 31, TO
APRIL 30, ----------------- OCTOBER 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------
Net asset value, beginning of
period $5.99 6.01 6.00 5.79 5.95
- --------------------------------------------------------------------------
Income from investment
operations:
Net investment income .19 .42 .41 .50 .20
- --------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments
and foreign currency .12 .01 .12 .16 (.17)
- --------------------------------------------------------------------------
Total from investment
operations .31 .43 .53 .66 .03
- --------------------------------------------------------------------------
Less distribution from net
investment income .20 .45 .52 .45 .19
- --------------------------------------------------------------------------
Net asset value, end of period $6.10 5.99 6.01 6.00 5.79
- --------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.29% 7.37 9.33 11.95 .55
- --------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------
Expenses 1.82% 1.85 1.86 1.86 1.96
- --------------------------------------------------------------------------
Net investment income 6.50% 6.86 6.89 8.68 8.02
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -----------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31,
APRIL 30, ------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $904,346 861,543 778,752 754,222 738,014
- -----------------------------------------------------------------------------------------------------
Portfolio turnover rate 486% 347 310 286 179
- -----------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges. Data for
the period ended April 30, 1998 is unaudited.
25
<PAGE> 26
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 3, 1997, a special shareholders' meeting was held and adjourned as
necessary. Kemper Diversified Income Fund shareholders were asked to vote on
five separate issues: election of the nine members to the Board of Trustees,
ratification of Ernst & Young LLP as independent auditors, approval of a new
investment management agreement with Scudder Kemper Investments, Inc., approval
of changes in the fund's fundamental investment policies to permit a
master/feeder fund structure and approval of a new rule 12b-1 distribution plan
with Zurich Kemper Distributors, Inc. for Class B shares and Class C shares. The
following are the results for each issue:
1) Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
David W. Belin 89,040,659 1,599,272
Lewis A. Burnham 89,117,688 1,522,243
Donald L. Dunaway 89,116,342 1,523,588
Robert B. Hoffman 89,114,630 1,525,300
Donald R. Jones 89,113,215 1,526,715
Shirley D. Peterson 89,012,815 1,627,115
Daniel Pierce 88,978,429 1,661,501
William P. Sommers 89,106,058 1,533,873
Edmond D. Villani 88,979,095 1,660,836
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the current fiscal year.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
87,952,563 659,414 2,027,954
</TABLE>
3) Approval of a new investment management agreement with Scudder Kemper
Investments, Inc.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
83,423,029 1,387,667 3,137,135
</TABLE>
4) Approval of changes in the fund's fundamental investment policies to permit a
master/feeder fund structure.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
73,927,801 2,578,383 4,577,427
</TABLE>
5) To approve a new rule 12b-1 distribution plan with Zurich Kemper
Distributors, Inc.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
Class B 25,703,837 500,546 1,110,748
Class C 1,309,973 16,999 25,083
</TABLE>
26
<PAGE> 27
NOTES
27
<PAGE> 28
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK CASADY ROBERT C. PECK, JR.
Chairman and Trustee President Vice President
DAVID W. BELIN PHILIP J. COLLORA KATHRYN L. QUIRK
Trustee Vice President and Vice President
Secretary
LEWIS A. BURNHAM HARRY E. RESIS, JR.
Trustee JOHN R. HEBBLE Vice President
Treasurer
DONALD L. DUNAWAY RICHARD L. VANDENBERG
Trustee ROBERT S. CESSINE Vice President
Vice President
ROBERT B. HOFFMAN LINDA J. WONDRACK
Trustee JERALD K. HARTMAN Vice President
Vice President
DONALD R. JONES MAUREEN E. KANE
Trustee THOMAS W. LITTAUER Assistant Secretary
Vice President
SHIRLEY D. PETERSON CAROLINE PEARSON
Trustee ANN M. MCCREARY Assistant Secretary
Vice President
WILLIAM P. SOMMERS ELIZABETH C. WERTH
Trustee MICHAEL A. MCNAMARA Assistant Secretary
Vice President
EDMOND D. VILLANI
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER 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
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER 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 in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Income Funds prospectus.
KDIF-3 (6/98) 1048360
