<PAGE> 1
KEMPER HIGH YIELD FUND
SEMIANNUAL REPORT TO SHAREHOLDERS
FOR THE PERIOD ENDED MARCH 31, 1996
Offering investors the opportunity for a high level of current
income from a diversified portfolio of fixed income securities
"...The economic environment continued to drive strong high
yield bond performance during the first half of the
fiscal year..."
<PAGE> 2
Table of
Contents
2
At A Glance
2
Terms To Know
3
General Economic
Overview
5
Performance Update
7
Individual Holdings
8
Portfolio Statistics
10
Portfolio of
Investments
16
Financial Statements
18
Notes to
Financial Statements
22
Financial Highlights
At a Glance
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 1996
(UNADJUSTED FOR ANY SALES CHARGE):
[BAR GRAPH]
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
CLASS A 5.75%
CLASS B 5.31%
CLASS C 5.33%
LIPPER HIGH CURRENT YIELD
FUNDS CATEGORY AVERAGE* 5.81%
- --------------------------------------------------------------------------------
</TABLE>
[BAR GRAPH]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
3/31/96 9/30/95
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER HIGH YIELD FUND CLASS A $8.08 $8.01
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND CLASS B $8.07 $8.00
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND CLASS C $8.09 $8.02
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND RANKINGS
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER
HIGH CURRENT YIELD FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #58 OF #84 OF #83 OF
130 FUNDS 130 FUNDS 130 FUNDS
- --------------------------------------------------------------------------------
5-YEAR #26 OF N/A N/A
63 FUNDS
- --------------------------------------------------------------------------------
10-YEAR #1 OF N/A N/A
35 FUNDS
- --------------------------------------------------------------------------------
15-YEAR #1 OF N/A N/A
23 FUNDS
- --------------------------------------------------------------------------------
</TABLE>
Past performance is not predictive of future performance. Returns and net asset
value fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
*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. Rankings
are historical and do not reflect future performance.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND
YIELD INFORMATION FOR THE FUND AS OF MARCH 31, 1996.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTH INCOME: $0.3810 $0.3468 $0.3492
- --------------------------------------------------------------------------------
MARCH DIVIDEND: $0.0635 $0.0585 $0.0586
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 9.43% 8.70% 8.69%
- --------------------------------------------------------------------------------
SEC YIELD+: 8.80% 8.18% 8.27%
- --------------------------------------------------------------------------------
</TABLE>
+Current annualized distribution rate is the latest monthly dividend shown as an
annualized percentage of net asset value on March 31, 1996. Distribution rate
simply measures the level of dividends and is not a complete measure of
performance. The SEC yield is net investment income per share earned over the
month ended March 31, 1996, shown as an annualized percentage of the maximum
offering price on that date. The SEC yield is computed in accordance with a
standardized method prescribed by the Securities and Exchange Commission.
Terms to Know
CYCLICAL ISSUES Cyclical issues are bonds within industries whose earnings tend
to rise quickly when the economy strengthens and fall quickly when the economy
weakens. Examples are housing, automobiles and paper companies. The performance
of noncyclical industries such as food, insurance and drugs is normally not as
directly affected by economic changes.
HIGH YIELD BONDS High yield bonds are issued by companies, often without long
track records of sales and earnings, or by those with questionable credit
strength. High yield bonds pay a higher yield to investors to help compensate
for their greater risk of loss to principal and interest. High yield bonds carry
a credit rating of BB or lower from either Moody's or Standard & Poor's bond
rating services and are considered to be "below investment grade" by these
rating agencies. Such bonds may also be unrated. The bonds present greater risk
to principal and income than higher quality bonds.
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
GENERAL ECONOMIC OVERVIEW
[TIMBERS PHOTO]
Stephen B. Timbers is president, chief executive and chief investment officer
of Zurich Kemper Investments, (ZKI) Inc. ZKI and its affiliates manage
approximately $79 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 first four months of 1996 have provided a few surprises. As the year began,
most of us expected sluggish economic and corporate growth -- which the Federal
Reserve Board would address by reducing short-term interest rates. Yet, what we
experienced was stronger-than-anticipated economic growth, better corporate
earnings and rising interest rates. Although such surprises unsettled the bond
market, the stock market followed a spectacular 1995 with a strong first quarter
in 1996. In the three-month period ended March 31, 1996, the Standard & Poor's
500 Stock Index* gained 5.37 percent.
Where is the economy headed now? Its direction is even less predictable as we
draw nearer to the November elections. Half of the country's leading economists
are forecasting 3 percent growth while an equal number are looking for no better
than 1 percent growth. At Kemper Funds, we suspect that the economy is growing
at a subpar rate of 2 percent. Although commodity prices may suggest otherwise,
we think inflation is holding at less than 3 percent. We see no reason to expect
the Fed to reduce rates to stimulate growth but neither is it likely to raise
rates to control growth. In an environment of stable or gently rising rates, we
would expect corporate earnings to grow at a rate of about 7 to 8 percent --
that's somewhat higher than we believed likely at the start of the year.
Our forecast calls for a generally comfortable environment for investors. But
both the economy and the general direction of the markets are due for a
reversal. In April, the U.S. economy entered its 61st month of consecutive
growth. This is the longest expansion without a single quarter of negative
output growth since George Washington was president. Today's bull market started
in October 1990, which makes it one of the longest running bull markets in
history. By virtue of its length alone, the stock market is vulnerable to a
correction.
As expected, volatility has returned to the market this year. For example: The
stock market's performance on March 8, the date that a surprisingly strong
employment report was released, betrayed some level of investor skittishness.
But while the Standard & Poor's lost 3.1 percent that day, it quickly regained
the ground and moved higher.
CONSUMERS AND JOB SECURITY
The restructuring of corporate America, which is generally credited for its
improved profitability, has been an important influence on the consumer.
Economic growth is heavily dependent upon consumer spending which, in turn, is
a function of inflation, pay raises and fear of job loss. While the first two
have not been a recent concern, fear of losing one's job has dampened consumer
confidence.
Such anxiety in the workplace was the subject of a recent study by the
Council of Economic Advisors. According to that report, more than two-thirds of
the new jobs created in the United States in 1994 and 1995 paid better than the
average job. The report found that the rate at which jobs were eliminated has
risen slightly despite strong economic growth of recent years -- however, it
reported that the length of time most workers spent unemployed has declined.
The graph below tracks Bureau of Labor Statistics data that show the recent
relationship between number of jobs created versus the number of jobs lost.
[LINE GRAPH]
<TABLE>
<S> <C> <C>
12/31/90 -0.06 -0.02
12/31/91 -0.3 0.04
12/31/92 0.12 -0.03
12/31/93 0.3 0.07
12/31/94 0.18 0.07
12/31/95 -0.08 -0.04
3/31/96 0.49 -0.01
</TABLE>
3
<PAGE> 4
GENERAL ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund
performance.
The following are some significant 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 (3/31/96) 6 Months ago 1 year ago 2 years ago
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.27 6.04 7.06 6.97
Prime rate(2) 8.25 8.75 9.00 6.45
Inflation rate(3) 2.84 2.81 3.05 2.36
The U.S. dollar(4) 4.53 -1.05 -11.46 2.70
Capital goods orders(5) 6.24 8.53 9.44 20.01
Industrial production(6) 1.32 1.92 3.89 5.17
Employment growth(7) 1.44 1.80 2.60 2.93
</TABLE>
1 Falling interest rates in recent years have been a big plus for financial
assets.
2 The interest rate that commercial lenders charge their best borrowers.
3 Inflation reduces an investor's real return. In the last five years, inflation
has been as high as 6%. The low, moderate inflation of the last few years has
meant high real returns.
4 Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
5 These influence corporate profits and equity performance.
6 An influence on corporate profits and equity performance.
7 An influence on family income and retail sales.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
Such ebb and flow is to be expected in investing, especially at this point in
the cycle. Attempting to "prepare" for a correction is futile, we believe. Those
whose caution caused them to excuse themselves from the market early this year,
for example, would have forgone the quarter's significant gain.
Several opportunities exist today for the careful investor. First, having
settled down some from a raucous 1995, the technology sector continues to enjoy
the product and market demand that make it the dominant sector of the 1990s.
Second, equity investors willing to look overseas may find opportunities in
countries whose economies today are at a point where the U.S. economy was in
1995. Our forecast assumes that strength in foreign markets could boost those
countries' currencies, which would weaken the value of the dollar.
We expect the fixed-income markets to continue to be sensitive to interest
rate and inflation news. However, for as long as economic growth is positive and
earnings are growing, we believe the high-yield market is one market segment
that has significant potential.
Finally, we look for political activity to have less and less bearing on the
markets' performance. Although they may continue to debate tax reform, federal
budget deficit reduction and health care reform, the incumbent legislators are
running out of time to take action before the November elections. If there is
any suspense by November, it is likely to be in whether the Republicans can
retain control of Congress. Their success would make a balanced budget and tax
reform likely agenda topics for 1997.
With that 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
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
ZURICH KEMPER INVESTMENTS, INC.
April 29, 1996
*THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
4
<PAGE> 5
PERFORMANCE UPDATE
[MCNAMARA PHOTO]
MICHAEL MCNAMARA HAS BEEN WITH ZURICH KEMPER INVESTMENTS, INC. (ZKI) SINCE
1972, AND IS SENIOR VICE PRESIDENT OF ZKI AND PORTFOLIO CO-MANAGER OF KEMPER
HIGH YIELD FUND. MR. MCNAMARA RECEIVED A B.S. DEGREE IN BUSINESS ADMINISTRATION
FROM THE UNIVERSITY OF MISSOURI AND AN M.B.A. FROM LOYOLA UNIVERSITY.
[RESIS PHOTO]
HARRY RESIS JOINED ZURICH KEMPER INVESTMENTS, INC. IN 1988 AND IS SENIOR VICE
PRESIDENT OF ZKI AND PORTFOLIO CO-MANAGER OF KEMPER HIGH YIELD FUND. MR. RESIS
RECEIVED A B.A. IN FINANCE FROM MICHIGAN STATE UNIVERSITY.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED
ON MARKET AND OTHER CONDITIONS.
FOLLOWING AN EXCELLENT YEAR FOR THE HIGH YIELD MARKET, PORTFOLIO CO-MANAGERS
MICHAEL MCNAMARA AND HARRY RESIS EXPLAIN HOW THEY HAVE ADJUSTED THE FUND'S
INVESTMENTS TO ENHANCE EARNINGS WHILE PREPARING FOR A POTENTIAL SLOW-DOWN IN
THE GROWTH OF CORPORATE EARNINGS.
Q. KEMPER HIGH YIELD FUND CLASS A SHARES RETURNED 5.75 PERCENT DURING THE
FIRST SIX MONTHS OF THE FUND'S FISCAL YEAR. WAS THIS PERFORMANCE IN-LINE WITH
YOUR EXPECTATIONS?
A. The economic environment continued to drive strong high yield bond
performance during the first half of the fiscal year, and the fund met our
expectations. Corporate earnings continued to grow. From October 1995 through
January 1996, interest rates declined and slow economic growth was sustained.
In February, perceptions of a strengthening economy caused market rates to
begin rising, with a significant jump in March as higher than anticipated gains
in employment figures were reported.
Although this news hurt many income funds in the government market, it
did not have the same impact in the high yield market. That's because when the
economy is growing, credit quality becomes less of a concern to investors in
high yield corporate bonds. A stronger economy assumes that more growth in
corporate earnings will occur. And solid earnings are essential for companies
to continue paying the interest on their outstanding bond issues.
Q. WHAT TYPES OF ADJUSTMENTS DID YOU MAKE TO THE FUND DURING THE PERIOD?
A. Throughout most of 1995, we were fairly aggressive with our investment
strategy. The market was recovering from a difficult 1994 and the economy had
begun to grow, albeit slowly. The fund was heavily invested in bonds of
cyclical companies throughout most of 1995 because we had faith that the
economy's growth would continue.
Cyclical industries are those that produce or support the production of
discretionary goods such as new homes or automobiles. Companies within these
types of industries tend to flourish when the economy is expanding but are
normally the first to suffer when the economy contracts. By contrast, defensive
industries tend to be less sensitive to economic slowdowns because they support
nondiscretionary spending on items such as food or health and beauty products.
After the start of the fiscal year, we began reducing the fund's exposure
to cyclical companies. Although the economy was still growing, it was moving
at a sluggish pace, which concerned us. If the economy grows too slowly, it is
more difficult for
5
<PAGE> 6
PERFORMANCE UPDATE
some companies to pay the interest on their bonds, which increases the risk of
default. While some cyclical companies do fine in a slow growth economy, others
that are highly leveraged, may not. In October 1995, cyclicals represented 52
percent of the portfolio, but by the end of March we had reduced cyclicals to 48
percent of the fund.
To accommodate for the ongoing slow economic growth, we reduced our
cyclical exposure primarily to highly leveraged companies in the steel,
retailing and paper industries. It was in those industries where we saw the
greatest potential for weakening. This reduction was offset by increased
exposure to the telecommunications and cable/media industries -- all areas
where we expected sustained strong performance. Although signs of stronger
economic growth surfaced late in the period, we didn't alter our cautious
outlook for highly leveraged cyclical companies. We still anticipate slower
growth in corporate earnings for 1996 and want to position the fund somewhat
defensively to lessen its exposure to default risk.
Q. IF SLOWER CORPORATE EARNINGS ARE EXPECTED THIS YEAR, SHOULD WE ALSO
EXPECT AN INCREASE IN THE HIGH YIELD ISSUE DEFAULT RATE?
A. The high yield market enjoyed a relatively low rate of defaults in 1995.
However, default rates should climb back to their historical levels of
between 3 and 4 percent in 1996. We saw defaults pick up slightly during the
last few months of 1995, but then slow again during the first few months of
1996.
Defaults tend to occur according to a somewhat predictable schedule -- you
don't expect a company to get into financial trouble until at least a year or
two after it has issued debt. If it borrowed too much or overestimated its
potential or underestimated its competition, for example, that's when the issuer
starts to have trouble making coupon payments. Defaults have been practically
nonexistent in the last few years because most of the credits have been
relatively young. As issues age, we are confident that the default rate should
climb back to its norm.
Of course, we always consider the possibility for default when analyzing a
possible investment. But default is the risk we assume and why we tend to earn
higher yields on the fund's investments. It's also the reason we do not try to
"shoot the moon" on any one credit. While we are permitted greater
concentration, our largest investment currently represents only 1.93 percent of
the fund's total net assets. And most of the fund's other investments each
account for less than 1 percent of total net assets. By diversification, we
limit the exposure the fund has to any one credit. That way, if a default does
occur, it can not severely impact the fund's overall performance.
Q. WHAT CAN YOU TELL US ABOUT THE QUALITY OF THE FUND'S HOLDINGS?
A. In November, BB-rated bonds represented 28 percent of the portfolio and
B-rated bonds accounted for 64 percent of the investments. That composition was
kept fairly stable until interest rates began to rise in January. At that
point, we reduced our BB-rated holdings and added more B-rated bonds. Let's
discuss why we made these adjustments.
For the first three and a half months of the year, interest rates were
falling and the fund held a relatively large investment in BB bonds. BB-rated
bonds are the highest quality securities that are still considered to be high
yield or below investment grade bonds. The closer a bond is to an investment-
grade security, the more it tends to perform in-line with interest rates.
Therefore, as interest rates fell, BB-rated bonds realized more price
appreciation than lower quality bonds. Although the yields on the BB-rated
bonds were less than B-rated bonds, the price appreciation they were
experiencing made the investment worthwhile. Further adding to the scenario
was the growing demand for BB-rated bonds from life insurance companies, which
have traditionally invested in only investment-grade debt. This additional
demand for BB-rated bonds has had the effect of widening the yield spread
differential between B-rated bonds and BB-rated bonds, making the higher
quality bonds relatively expensive.
In January, we began reducing our exposure to BB-rated bonds
6
<PAGE> 7
PERFORMANCE UPDATE
and adding more B-rated bonds. Interest rates began to rise and BB-rated bonds
no longer offered either the yield or the price appreciation potential that we
wanted for the fund. By the close of the period BB-rated bonds represented 21
percent of the portfolio, while B-rated bonds accounted for 70 percent.
Q. WERE THERE ANY BONDS THAT PERFORMED PARTICULARLY WELL?
A. Waxman Industries, a supplier of plumbing, electrical and hardware
products, provided a great boost to the fund during the period. One of
its subsidiaries, Barnett, Inc., issued its stock through an initial public
offering. This offering boosted the price of some of our Waxman bonds
significantly. These bonds have provided solid earnings with very little credit
concern. Their recent rise in price substantiates the strength of the company's
management and operations.
Q. WHAT ABOUT DISAPPOINTMENTS?
A. Three of the fund's issues defaulted during the year. The bonds were
issued by ColorTile, a home improvement retailer, Burlington Motor Freights,
a trucking company and Beatrice Ltd., a Canadian dairy company. All three
were hurt by the debt they had taken on and the effect that 1994's rising
interest rate environment had on their businesses. Currently, the companies are
all in the midst of restructuring their debt.
Q. WILL THE HIGH YIELD BOND MARKET BE ABLE TO SUSTAIN ITS MOMENTUM?
A. Our outlook for the high yield bond market is positive, although we
don't expect corporate earnings to keep pace with their 1994 and 1995
levels. This slowdown in earnings and the aging of issues will most likely lead
to an increased default rate, but we do not believe that it will be alarming.
Our investment focus will continue to be on healthy companies that are
positioned to perform well in the current slow growth economy.
INDIVIDUAL HOLDINGS
TOP FIVE CORPORATE HOLDINGS
- -------------------------------------------------------------------------------
1. CONTINENTAL A cable television operator offering a wide variety of
CABLEVISION, television programming to home subscribers throughout the
INC U.S.
- -------------------------------------------------------------------------------
2. OWENS An international diversified manufacturer of packaging
ILLINOIS, products including glass bottles, plastic containers and
INC. closures among other packaging products.
- -------------------------------------------------------------------------------
3. THRIFTY Operates drug store chains in the western United States
PAYLESS under the "PayLess Drug" and "Thrifty Drug" names. The
HOLDINGS, company, through a subsidiary, also operates "Bi-Mart"
INC. membership discount stores.
- -------------------------------------------------------------------------------
4. PAGING Through its 59 offices provides paging services in 116
NETWORK, Standard Metropolitan Statistical areas (SMSAs) located in
INC. 50 states and the District of Columbia. The company provides
local paging service, wide area metropolitan service,
regional paging service and nationwide paging service.
- -------------------------------------------------------------------------------
5. COMCAST A communications company with domestic and international
CORPORATION interest in cable television, wireless and wireline
telecommunications and television programming. The company
provides cable service to 18 states and over 500
communities. In addition, Comcast has a majority interest in
QVC, Inc., an electronics retailer.
- -------------------------------------------------------------------------------
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
ON 3/31/96 ON 9/30/95
<S> <C> <C>
BONDS 91% 89%
- ---------------------------------------------------------------------------
CASH AND EQUIVALENTS 5 8
- ---------------------------------------------------------------------------
PREFERRED AND COMMON STOCK 4 3
- ---------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/96 ON 9/30/95
YEARS TO MATURITY
<TABLE>
<CAPTION>
ON 3/31/96 ON 9/30/95
<S> <C> <C>
CASH AND EQUIVALENTS 6% 8%
- ---------------------------------------------------------------------------
1-10 YEARS 83 84
- ---------------------------------------------------------------------------
10-20 YEARS 10 7
- ---------------------------------------------------------------------------
OVER 20 YEARS 1 1
- ---------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/96 ON 9/30/95
8
<PAGE> 9
PORTFOLIO STATISTICS
QUALITY
<TABLE>
<CAPTION>
ON 3/31/96 ON 9/30/95
<S> <C> <C>
AAA TO A -- 7%
- ---------------------------------------------------------------------------
BB 21% 25
- ---------------------------------------------------------------------------
B 70 59
- ---------------------------------------------------------------------------
OTHER 9 9
- ---------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/96 ON 9/30/95
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS MARCH 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AEROSPACE--2.7%
Fairchild Corporation, 12.00%, 2001 $ 31,200 $ 31,200
Howmet Inc., 10.00%, 2003 4,510 4,746
K & F Industries, Inc.
13.75%, 2001 8,000 8,300
11.875%, 2003 19,830 21,466
RHI Holdings, 11.875%, 1999 15,805 15,489
Sequa Corporation, 8.75%, 2001 11,380 10,925
-------------------------------------------------------------------------------
92,126
- ----------------------------------------------------------------------------------------------------------------
BROADCASTING,
CABLESYSTEMS
AND PUBLISHING--21.2%
Adelphia Communications Corporation,
12.50%, 2002 19,370 20,387
Affinity Group, Inc., 11.50%, 2003 21,400 21,748
American Radio System, 9.00%, 2006 25,130 24,502
(b)American Telecasting
14.50%, 2004 5,270 3,933
14.50%, 2005 15,700 10,362
(b)Australis Media Corporation, 14.00%, 2003 28,930 19,817
(b)Bell Cablemedia PLC, 11.95%, 2004 19,980 14,311
Big Flower Press, Inc., 10.75%, 2003 18,792 19,168
CF Cable TV Inc., 11.625%, 2005 20,205 21,720
Cablevision Industries Corporation, 9.25%, 2008 8,800 9,438
Cablevision Systems Company
9.25%, 2005 11,880 11,821
9.875%, 2013 7,725 8,034
9.875%, 2023 4,490 4,625
Century Communications Corporation
9.50%, 2000 5,520 5,658
11.875%, 2003 9,125 9,764
9.50%, 2005 24,920 25,356
Comcast Corporation
9.125%, 2006 13,400 13,350
9.50%, 2008 19,640 19,885
10.625%, 2012 13,285 14,348
(b)Comcast UK Cable Partners Limited, 11.20%,
2007 39,615 22,927
Continental Cablevision, Inc.
9.00%, 2008 20,180 22,021
9.50%, 2013 39,430 44,014
(b)CS Wireless, 11.375%, 2006 39,320 21,233
(b)Diamond Cable Communications PLC,
11.75%, 2005 10,130 5,920
(b)Echostar Communications, 12.875%, 2004 38,190 27,783
EZ Communications, 9.75%, 2005 15,670 15,513
Granite Broadcasting Corp.
10.375%, 2005 18,050 18,230
9.375%, 2005 6,560 6,199
(b)International Cabletel Incorporated
12.75%, 2005 51,040 32,857
11.50%, 2006 7,880 4,492
Katz Corporation, 12.75%, 2002 17,300 19,289
(b)Neodata Services, 12.00%, 2003 23,290 23,174
(b)People's Choice TV, Unit, 13.125%, 2004 33,355 21,097
Rogers Cablesystems Limited
9.625%, 2002 9,290 9,569
10.00%, 2005 12,750 13,228
Sinclair Broadcasting Group, Inc., 10.00%, 2003 26,355 26,091
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sullivan Broadcasting
10.25%, 2005 $ 5,380 $ 5,299
13.25%, 2006 12,850 12,143
(b)Telewest PLC, 11.00%, 2007 46,553 28,165
Viacom International Inc., 8.00%, 2006 31,025 29,396
(b)Videotron Holdings PLC
11.125%, 2004 6,845 4,860
11.00%, 2005 15,580 9,815
Young Broadcasting Inc.
11.75%, 2004 6,375 6,933
9.00%, 2006 15,120 14,099
-------------------------------------------------------------------------------
722,574
- ----------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES--2.0%
Allied Waste Industry, 12.00%, 2004 10,440 11,380
Corporate Express Inc., 9.125%, 2004 18,760 19,135
Monarch Marking Systems, 12.50%, 2003 17,510 18,823
Outdoor Systems, 10.75%, 2003 18,685 18,825
-------------------------------------------------------------------------------
68,163
- ----------------------------------------------------------------------------------------------------------------
CHEMICALS AND
AGRICULTURE--6.3%
Agriculture, Mining and Chemicals, Inc.,
10.75%, 2003 9,450 10,253
Arcadian Partners, L.P., 10.75%, 2005 21,170 22,969
Atlantis Group, Inc., 11.00%, 2003 25,355 23,073
Crain Industries, Inc., 13.50%, 2005 11,700 12,051
G-I Holdings Inc., zero coupon, 1998 43,410 34,620
Hines Horticulture, 11.75%, 2005 9,350 9,911
Pioneer Americas Acquisition Corp., 13.375%,
2005 10,380 11,107
Polymer Group Inc., 12.25%, 2002 18,540 20,301
Rexene Corporation, 11.75%, 2004 27,375 28,333
Terra Industries Inc., 10.50%, 2005 12,200 13,207
UCC Investors Holdings, Inc., 10.50%, 2002 28,620 29,908
-------------------------------------------------------------------------------
215,733
- ----------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--9.9%
(b)Arch Communications Group, 10.875%, 2008 18,040 10,373
(b)Brooks Fiber, 10.875%, 2006 9,980 5,838
CAI Wireless Systems, 12.25%, 2002 15,150 16,097
(b)Call-Net Enterprises Inc., 13.25%, 2004 15,280 11,221
(a)(b)Celcaribe S.A., 13.50%, 2004 14,400 13,752
(b)Cellular, Inc. 11.75%, 2003 9,475 7,675
(b)Charter Communications, 14.00%, 2007 24,520 12,628
(b)Comcel, 13.125%, 2003 30,800 17,864
Commnet Celluar, 11.25%, 2005 7,010 7,466
(b)Intelcom Group, Inc., 13.50%, with warrants,
2005 20,490 13,705
Intermedia Communications of Florida Inc.,
13.50%, 2005 with warrants expiring 2000 16,300 19,356
IXC Communication Services, 12.50%, 2005 11,160 11,271
(b)MFS Communications Co., 8.875%, 2006 27,415 17,066
Mobilemedia Communications, 9.375%, 2007 21,565 21,134
Paging Network, Inc.
11.75%, 2002 36,340 39,747
10.125%, 2007 8,410 8,820
(b)PanAmSat, L.P., 11.375%, 2003 44,585 37,451
Rogers Cantel, 11.125%, 2002 28,712 30,632
(b)Shared Technologies, 12.25%, 2006 12,480 8,861
USA Mobile Communications, Inc. II
9.50%, 2004 8,170 8,088
14.00%, 2004 16,290 19,141
-------------------------------------------------------------------------------
338,186
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSTRUCTION
MATERIALS--4.8%
American Standard Inc.
10.875%, 1999 $ 21,027 $ 22,709
9.25%, 2016 16,435 16,640
(b)Building Materials Corporation of America,
11.75%, 2004 41,650 30,821
Nortek, Inc., 9.875%, 2004 25,045 23,793
Triangle Pacific Corp., 10.50%, 2003 26,565 28,159
Waxman Industries, Inc.
12.25%, 1998 11,310 11,536
13.75%, 1999 14,713 13,242
(b) 12.75%, 2004 27,080 15,435
(a) 800,453 warrants expiring 2004 1,201
-------------------------------------------------------------------------------
163,536
- ----------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS
AND SERVICES--5.7%
AMF Group, 10.875%, 2006 6,670 6,637
(c)Beatrice Foods, Inc., 12.00%, 2001 31,870 8,605
Cinemark USA, Inc., 12.00%, 2002 13,096 14,340
Coinmach Corporation, 11.75%, 2005 35,710 36,067
(b)Dr. Pepper Bottling Holdings, Inc., 11.625%,
2003 18,629 15,648
Herff Jones, Inc., 11.00%, 2005 10,600 11,289
P & C Food Markets Inc., 11.50%, 2001 15,395 15,703
Premier Parks Inc., 12.00%, 2003 9,690 10,320
(b)Six Flags Theme Park, 12.25%, 2005 40,280 33,432
Van De Kamps, Inc., 12.00%, 2005 8,950 9,442
West Point Stevens Inc., 9.375%, 2005 34,045 33,705
-------------------------------------------------------------------------------
195,188
- ----------------------------------------------------------------------------------------------------------------
DRUGS AND HEALTH
CARE--3.3%
Amerisource Distribution Corp., 11.25%, 2005 11,489 12,609
Dade International Inc., 13.00%, 2005 9,910 11,099
Magellan Health Services, 11.25%, 2004 28,260 30,945
Ornda Healthcorporation
12.25%, 2002 12,700 13,780
11.375%, 2004 11,960 13,395
Tenet Healthcare
9.625%, 2002 7,470 7,993
10.125%, 2005 20,060 21,464
-------------------------------------------------------------------------------
111,285
- ----------------------------------------------------------------------------------------------------------------
ENERGY AND RELATED
SERVICES--3.7%
Chesapeake Energy Corporation, 10.50%, 2002 15,565 16,304
Clark USA Inc, 10.875%, 2005 5,710 5,953
Coda Energy, 10.50%, 2006 14,370 14,442
Empire Gas Corporation, 7.00%, with warrants,
2004 14,640 13,004
Falcon Drilling, 8.875%, 2003 5,000 4,987
Gerrity Oil & Gas, 11.75%, 2004 3,056 3,209
Gulf Canada Resources Limited
9.25%, 2004 7,135 7,287
9.625%, 2005 5,000 5,206
Plains Resources, 10.25%, 2006 15,590 15,707
Sante Fe Energy Resources, Inc., 11.00%, 2004 12,395 13,449
United Meridian Corp., 10.375%, 2005 9,730 10,216
Vintage Petroleum, 9.00%, 2005 16,580 16,166
-------------------------------------------------------------------------------
125,930
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL SERVICES,
HOMEBUILDERS AND
REAL ESTATE--2.0%
Capital Pacific Holdings, 12.75%,
with warrants, 2002 $ 11,330 $ 10,875
Continental Homes Holding, 12.00%, 1999 14,245 15,527
Forecast Group L.P., 11.375%, 2000 10,291 6,483
Hovnanian Kent, 11.25%, 2002 13,612 12,591
Presley Companies, 12.50%, 2001 24,025 21,742
-------------------------------------------------------------------------------
67,218
- ----------------------------------------------------------------------------------------------------------------
LODGING AND GAMING--3.0%
Bally's Park Place Funding, Inc., 9.25%, 2004 23,220 23,394
Empress River Casino, 10.75%, 2002 22,180 22,845
Players International Inc., 10.875%, 2005 20,230 20,230
Station Casinos, 10.125%, 2006 12,400 12,292
Trump Plaza Funding Inc., 10.875%, 2001 21,040 23,433
Trump Taj Mahal, PIK, 11.35%, 1999 391 411
-------------------------------------------------------------------------------
102,605
- ----------------------------------------------------------------------------------------------------------------
MANUFACTURING, METALS
AND MINING--11.6%
Aftermarket Technology, 12.00%, 2004 11,140 12,087
Alvey Systems, 11.375%, 2003 9,980 10,404
Bar Technologies, 13.50%, 2001 12,500 12,391
Bluebird Body Company, 11.75%, 2002 24,585 25,077
Day International Group, Inc., 11.125%, 2005 20,970 21,599
Essex Group Incorporated, 10.00%, 2003 19,990 20,390
Fairfield Manufacturing Company, 11.375%, 2001 13,340 13,607
(b)Foamex--JPS Automotive L.P., 14.00%, with
warrants, 2004 16,620 10,138
Foamex L.P.
11.25%, 2002 19,820 19,324
11.875%, 2004 8,440 8,102
Great Dane Holding Company, 12.75%, 2001 23,478 21,247
GS Technologies,
12.00%, 2004 26,545 26,711
12.25%, 2005 12,850 13,011
Gulf States Steel, 13.50%, with warrants, 2003 20,680 19,129
Jordan Industries, 10.375%, 2003 21,935 20,290
JPS Automotive Products Corporation,
11.125%, 2001 25,380 25,126
Knoll Inc., 10.875%, 2006 12,880 13,170
Newflo Corporation, 13.25%, 2002 14,500 15,116
NS Group Inc., 13.50%, 2003 21,440 19,832
Pace Industries, Inc., 10.625%, 2002 7,840 7,213
Penda Industries Inc., 10.75%, 2004 10,430 8,553
Terex Corp Unit, 13.75%, 2002 13,700 13,700
Thermadyne Industries, Inc.
10.25%, 2002 13,376 13,510
10.75%, 2003 25,116 25,241
-------------------------------------------------------------------------------
394,968
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PAPER, FOREST PRODUCTS
AND CONTAINERS--8.5%
Berry Plastics Corporation, 12.25%,
with warrants, 2004 $ 7,020 $ 7,722
Container Corporation of America, 11.25%, 2004 29,080 29,807
Crown Paper, 11.00%, 2005 19,360 17,763
Gaylord Container Corporation
12.75%, 2005 28,850 29,138
1,805,934 warrants expiring 2002 15,802
Maxxam Group, Inc.
(b) 12.25%, 2003 11,890 8,442
11.25%, 2003 17,705 17,174
Owens-Illinois, Inc.
11.00%, 2003 15,057 16,506
9.75%, 2004 28,335 28,972
9.95%, 2004 19,845 20,440
Repap New Brunswick Inc., 10.625%, 2005 23,150 22,456
Riverwood International, 10.875%, 2008 28,770 28,860
Stone Container Corporation, 10.75%, 2002 20,770 20,718
Sweetheart Cup Company Inc., 10.50%, 2003 14,350 14,637
Williamhouse--Regency, 13.00%, 2005 9,640 10,761
-------------------------------------------------------------------------------
289,198
- ----------------------------------------------------------------------------------------------------------------
RETAILING--5.5%
(c)Color Tile, Inc., 10.75%, 2001 20,480 1,434
Dominick's, 10.875%, 2005 12,000 12,750
Finlay Fine Jewelry Corporation, 10.625%, 2003 14,130 13,706
Pamida Holdings, 11.75%, 2003 36,915 31,378
Pathmark Stores, Inc.
11.625%, 2002 16,015 15,775
12.625%, 2002 24,025 24,145
Penn Traffic Company
10.25%, 2002 4,020 3,945
10.375%, 2004 10,390 10,156
Ralph's Grocery Company, 10.45%, 2004 10,760 10,356
Thrifty Payless Holdings, PIK, 11.625%, 2006 8,000 8,280
Thrifty Payless Inc.
11.75%, 2003 31,050 35,785
12.25%, 2004 19,370 21,501
-------------------------------------------------------------------------------
189,211
- ----------------------------------------------------------------------------------------------------------------
TECHNOLOGY--.7%
Communication and Power Industry, Inc.,
12.00%, 2005 7,975 8,254
Computervision Corporation, 11.375%, 1999 16,207 17,017
-------------------------------------------------------------------------------
25,271
- ----------------------------------------------------------------------------------------------------------------
TRANSPORTATION--.9%
(c)Burlington Motor Holdings Inc., 11.50%, 2003 20,750 3,943
GPA Group PLC, 10.875%, 2019 14,400 14,796
OMI Corp., 10.25%, 2003 4,750 4,465
(b)Transtar Holdings, L.P., 13.375%, 2003 10,100 7,070
-------------------------------------------------------------------------------
30,274
-------------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--91.8%
(Cost: $3,091,937) $3,131,466
-------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON AND PREFERRED STOCK/LONG OPTIONS SHARES/CONTRACTS VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BCP/Essex Holding, PIK, preferred 362,949shs. $ 9,255
Cablevision Systems, PIK, preferred 227,000 22,587
Computervision Corporation 3,112,436 32,292
(c)Echostar Communications 299,250 10,100
(c)Gaylord Container Corporation 124,216 1,141
(c)Grand Union Company 941,858 5,651
(c)Great Bay Power 21,293 186
K-III Communications, PIK, preferred 115,000 11,385
(c)Sullivan Broadcasting 205,600 2,056
(c)Thrifty Payless Inc. 187,530 844
(c)UGI Inc. 58,467 73
(c)Walter Industries, Inc. 211,888 2,913
-----------------------------------------------------------------------------
TOTAL COMMON AND
PREFERRED STOCKS--2.9%
(Cost: $104,581) 98,483
-----------------------------------------------------------------------------
LONG PUT OPTIONS--.1%
U.S. Treasury Note Futures
June '96, 110
(Cost: $786) 420cts. 729
-----------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET
INSTRUMENTS--1.8%
Yields--5.27%-5.55%
Due--April '96
(Cost: $66,017) $ 66,200 66,018
-----------------------------------------------------------------------------
TOTAL INVESTMENTS--96.6%
(Cost: $3,263,321) 3,296,696
-----------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS
LIABILITIES--3.4% 116,162
-----------------------------------------------------------------------------
NET ASSETS--100% $3,412,858
-----------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The following securities may require registration under the Securities Act
of 1933 or an exemption therefrom in order to effect sale in the ordinary course
of business; they were valued at cost on the dates of acquisition. These
securities are valued at fair value as determined in good faith by the Board of
Trustees of the Fund. There were no market quotations available for unrestricted
securities of the same class on the dates of acquisition or on March 31, 1996.
At this date the value of the Portfolio's restricted securities was $14,953,000,
which represented .44% of net assets.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
DATE OF NUMBER OF UNIT
ACQUISITION SHARES COST
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Celcaribe S.A., 13.50%, 2004 May 1994 $14,400 $80.13
- ------------------------------------------------------------------------------------------
Waxman Industries, warrants expiring 2004 June 1994 800,453shs. 2.00
- ------------------------------------------------------------------------------------------
</TABLE>
(b) Deferred interest obligation; currently zero coupon under terms of the
initial offering.
(c) Non-income producing security. In the case of a bond, generally denotes the
issuer has defaulted on the payment of principal or interest or has filed
for bankruptcy.
"PIK" denotes that interest or dividends are paid in kind.
Based on the cost of investments of $3,263,321 for federal income tax purposes
at March 31, 1996, the aggregate gross unrealized appreciation was $162,788,000,
the aggregate gross unrealized depreciation was $129,413,000 and the net
unrealized appreciation of investments was $33,375,000.
See accompanying Notes to Financial Statements.
15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------
Investments, at value
(Cost: $3,263,321) $3,296,696
- -------------------------------------------------------------------------------------------------------
Cash 32,202
- -------------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 3,879
- -------------------------------------------------------------------------------------------------------
Investments sold 64,363
- -------------------------------------------------------------------------------------------------------
Interest and dividends 73,093
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS 3,470,233
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------------------------------------
Payable for:
Fund shares redeemed 955
- -------------------------------------------------------------------------------------------------------
Investments purchased 52,961
- -------------------------------------------------------------------------------------------------------
Management fee 1,508
- -------------------------------------------------------------------------------------------------------
Distribution services fee 588
- -------------------------------------------------------------------------------------------------------
Administrative services fee 575
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 776
- -------------------------------------------------------------------------------------------------------
Other 12
- -------------------------------------------------------------------------------------------------------
Total liabilities 57,375
- -------------------------------------------------------------------------------------------------------
NET ASSETS $3,412,858
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------------------------------------
Paid-in capital $3,472,399
- -------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (179,022)
- -------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 33,375
- -------------------------------------------------------------------------------------------------------
Undistributed net investment income 86,106
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $3,412,858
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- -------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($2,445,326 / 302,675 shares outstanding) $8.08
- -------------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net
asset value or 4.50% of offering price) $8.46
- -------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($912,997 / 113,098 shares outstanding) $8.07
- -------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price per share
($30,212 / 3,732 shares outstanding) $8.09
- -------------------------------------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($24,323 / 3,010 shares outstanding) $8.08
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
16
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended March 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------
Interest income $182,447
- -------------------------------------------------------------------------------------------------------
Expenses:
Management fee 9,504
- -------------------------------------------------------------------------------------------------------
Distribution services fee 3,779
- -------------------------------------------------------------------------------------------------------
Administrative services fee 3,680
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 3,065
- -------------------------------------------------------------------------------------------------------
Professional fees 59
- -------------------------------------------------------------------------------------------------------
Reports to shareholders 233
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 114
- -------------------------------------------------------------------------------------------------------
Total expenses 20,434
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 162,013
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Net realized gain on sales of investments (including options purchased) 13,185
- -------------------------------------------------------------------------------------------------------
Net realized loss from futures transactions (40)
- -------------------------------------------------------------------------------------------------------
Net realized gain 13,145
- -------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 23,522
- -------------------------------------------------------------------------------------------------------
Net gain on investments 36,667
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $198,680
- -------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 162,013 352,388
- ----------------------------------------------------------------------------------------------------------
Net realized gain (loss) 13,145 (61,865)
- ----------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation 23,522 155,866
- ----------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 198,680 446,389
- ----------------------------------------------------------------------------------------------------------
Net equalization credits (charges) (4,999) 2,331
- ----------------------------------------------------------------------------------------------------------
Distribution from net investment income (164,110) (319,210)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions (144,667) 246,415
- ----------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (115,096) 375,925
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------------------------------
Beginning of period 3,527,954 3,152,029
- ----------------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment income of
$86,106 and $93,202, respectively) $3,412,858 3,527,954
- ----------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE FUND Kemper High Yield Fund is an open-end diversified
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 any initial sales charges
but are subject to higher ongoing expenses than
Class A shares and, for shares sold on or after
April 1, 1996, a contingent deferred sales charge
payable upon certain redemptions within one year of
purchase. Class C shares do not convert into
another class. Class I shares are offered to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
Differences in class expenses will result in the
payment of different per share income dividends by
class. Each share represents an identical interest
in the investments of the Fund and has the same
rights.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Portfolio securities that are
traded on a domestic securities exchange are valued
at the last sale price on the exchange where
primarily traded or, if there is no recent sale, at
the last current bid quotation. Portfolio
securities that are primarily traded on foreign
securities exchanges are generally valued at the
preceding closing values of such securities on
their respective exchanges where primarily traded.
Securities not so traded are valued at the last
current bid quotation if market quotations are
available. Exchange traded options are valued at
the last sale price unless there is no sale price,
in which event prices provided by market makers are
used. Over-the-counter traded options are valued
based upon prices provided by market makers.
Financial futures and options thereon are valued at
the settlement price established each day by the
board of trade or exchange on which they are
traded. Forward foreign currency contracts are
valued at the forward rates prevailing on the day
of valuation. Other securities and assets are
valued at fair value as determined in good faith by
the Board of Trustees.
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 fixed income securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
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 March 31, 1996. The accumulated net
realized loss on sales of investments for federal
income tax purposes at March 31, 1996, amounting to
approximately $178,985,000, is available to offset
future taxable gains. If not applied, the loss
carryover expires during the period 1998 through
2004.
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.
EQUALIZATION ACCOUNTING. A portion of proceeds from
sales and cost of redemptions of Fund shares is
credited or charged to undistributed net investment
income so that income per share available for
distribution is not affected by sales or
redemptions of shares.
- --------------------------------------------------------------------------------
3 TRANSACTIONS
WITH AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI) (formerly known as Kemper Financial Services,
Inc.), 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 $9,504,000 for the six
months ended March 31, 1996.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS ALLOWED BY KDI
COMMISSIONS ------------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Six months ended
March 31, 1996 $ 349,000 2,481,000 61,000
</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
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
charges 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 the CDSC received in connection with the
redemption of Class B shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS AND DISTRIBUTION
DISTRIBUTION FEES FEES PAID BY KDI
AND CDSC ------------------------------
RECEIVED BY KDI TO ALL FIRMS TO AFFILIATES
----------------- ------------ -------------
<S> <C> <C> <C>
Six months ended
March 31, 1996 $ 4,429,000 3,140,000 73,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each such class. KDI
in turn has various arrangements with financial
services firms that provide these services and pays
these firms based on assets of Fund accounts the
firms service. Administrative services fees (ASF)
paid are as follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY THE ------------------------------
FUND TO KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Six months ended
March 31, 1996 $ 3,680,000 3,754,000 86,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of
$1,982,000 for the six months ended March 31, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the six months ended March 31, 1996, the
Fund made no payments to its officers and incurred
trustees' fees of $28,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended March 31, 1996, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
<TABLE>
<S> <C>
Purchases $2,102,130
Proceeds from sales 2,383,448
</TABLE>
20
<PAGE> 21
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
MARCH 31, 1996 SEPTEMBER 30, 1995
----------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold
------------------------------------------------------------------------------
Class A 45,002 $ 349,130 117,635 $ 876,873
------------------------------------------------------------------------------
Class B 26,984 216,048 65,256 502,035
------------------------------------------------------------------------------
Class C 3,748 30,134 3,063 23,849
------------------------------------------------------------------------------
Class I 924 7,406 3,956 30,746
------------------------------------------------------------------------------
Shares issued in
reinvestment
of dividends
------------------------------------------------------------------------------
Class A 9,186 73,773 18,031 140,351
------------------------------------------------------------------------------
Class B 3,411 27,383 7,152 55,638
------------------------------------------------------------------------------
Class C 109 882 90 706
------------------------------------------------------------------------------
Class I 150 1,206 135 1,070
------------------------------------------------------------------------------
Shares redeemed
------------------------------------------------------------------------------
Class A (70,670) (553,925) (127,013) (959,427)
-----------------------------------------------------------------------------
Class B (33,575) (268,809) (52,707) (407,589)
-----------------------------------------------------------------------------
Class C (2,202) (17,722) (1,398) (10,899)
-----------------------------------------------------------------------------
Class I (1,268) (10,173) (887) (6,938)
-----------------------------------------------------------------------------
Conversion of shares
------------------------------------------------------------------------------
Class A 7,795 62,971 12,509 98,552
-----------------------------------------------------------------------------
Class B (7,803) (62,971) (12,516) (98,552)
-----------------------------------------------------------------------------
NET INCREASE
(DECREASE) FROM
CAPITAL SHARE
TRANSACTIONS $(144,667) $ 246,415
-----------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------------------------
CLASS A
------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.01 7.74 8.12 7.86 7.30
- ------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .37 .83 .73 .81 .85
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .08 .20 (.35) .23 .54
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations .45 1.03 .38 1.04 1.39
- ------------------------------------------------------------------------------------------------------------------
Less distributions from net investment income .38 .76 .76 .78 .83
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.08 8.01 7.74 8.12 7.86
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.75% 14.10 4.64 13.92 19.96
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------------
Expenses .89% .90 .86 .80 .82
- ------------------------------------------------------------------------------------------------------------------
Net investment income 9.31 10.74 9.22 10.22 11.00
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------
CLASS B
------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED MAY 31, 1994 TO
MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.00 7.73 7.96
- --------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .34 .76 .23
- --------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .08 .20 (.23)
- --------------------------------------------------------------------------------------------------------------
Total from investment operations .42 .96 --
- --------------------------------------------------------------------------------------------------------------
Less distributions from net investment income .35 .69 .23
- --------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.07 8.00 7.73
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.31% 13.09 --
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------
Expenses 1.78% 1.77 1.80
- --------------------------------------------------------------------------------------------------------------
Net investment income 8.42 9.87 8.70
- --------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------- -----------------------------------
CLASS C CLASS I
----------------------------------------------- -----------------------------------
SIX MONTHS SIX MONTHS DECEMBER 29,
ENDED YEAR ENDED MAY 31, 1994 ENDED 1994
MARCH 31, SEPTEMBER 30, TO SEPTEMBER 30, MARCH 31, TO SEPTEMBER 30,
1996 1995 1994 1996 1995
- ----------------------------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period $8.02 7.75 7.96 8.01 7.55
- ----------------------------------------------------------------------------------- -----------------------------------
Income from investment
operations:
Net investment income .34 .77 .25 .38 .66
- ----------------------------------------------------------------------------------- -----------------------------------
Net realized and unrealized
gain (loss) .08 .20 (.23) .08 .39
- ----------------------------------------------------------------------------------- -----------------------------------
Total from investment operations .42 .97 .02 .46 1.05
- ----------------------------------------------------------------------------------- -----------------------------------
Less distribution from net
investment income .35 .70 .23 .39 .59
- ----------------------------------------------------------------------------------- -----------------------------------
Net asset value, end of period $8.09 8.02 7.75 8.08 8.01
- --------------------------------------------------------------------------------- -------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.33% 13.13 .27 5.90 14.37
- ----------------------------------------------------------------------------------- -----------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED)
- ----------------------------------------------------------------------------------- -----------------------------------
Expenses 1.69% 1.71 1.74 .59 .61
- ----------------------------------------------------------------------------------- -----------------------------------
Net investment income 8.51 9.93 8.75 9.61 10.70
- ----------------------------------------------------------------------------------- -----------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of period (in
thousands) $3,412,858 3,527,954 3,152,029 1,957,524 1,953,509
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 107% 99 93 101 69
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
23
<PAGE> 24
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR.
President and Trustee Vice President
DAVID W. BELIN MICHAEL A. MCNAMARA
Trustee Vice President
LEWIS A. BURNHAM JOHN E. NEAL
Trustee Vice President
DONALD L. DUNAWAY HARRY E. RESIS, JR.
Trustee Vice President
ROBERT B. HOFFMAN JOHN E. PETERS
Trustee Vice President
DONALD R. JONES PHILIP J. COLLORA
Trustee Vice President
and Secretary
DOMINIQUE P. MORAX CHARLES F. CUSTER
Trustee Vice President and
Assistant Secretary
SHIRLEY D. PETERSON JEROME L. DUFFY
Trustee Treasurer
WILLIAM P. SOMMERS ELIZABETH C. WERTH
Trustee Assistant Secretary
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
800-621-1048
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
120 South LaSalle Street Chicago, IL 60603
http://www.kemper.com
(RECYCLE LOGO)
Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Funds prospectus.
KEMPER LOGO
1014600
KHYF - 3 (5/96) Printed in the U.S.A.
