<PAGE> 1
KEMPER
HIGH YIELD FUND
SEMIANNUAL REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED MARCH 31, 1997
Offering investors the opportunity for a high level of CURRENT INCOME
from a diversified portfolio of fixed income securities
" . . . We managed the fund
defensively because we believed that the economy was
gaining momentum and that the Fed would most likely
tighten interest rates in response . . ."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
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, 1997
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- -----------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 3.41%
CLASS B 3.08%
CLASS C 3.11%
LIPPER HIGH CURRENT YIELD
FUNDS CATEGORY AVERAGE* 4.36%
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
NET ASSET VALUE
- -----------------------------------------------------------------------------
AS OF AS OF
3/31/97 9/30/96
- -----------------------------------------------------------------------------
<S> <C> <C>
KEMPER HIGH YIELD FUND
CLASS A $8.11 $8.23
- -----------------------------------------------------------------------------
KEMPER HIGH YIELD FUND
CLASS B $8.11 $8.22
- -----------------------------------------------------------------------------
KEMPER HIGH YIELD FUND
CLASS C $8.13 $8.24
- -----------------------------------------------------------------------------
</TABLE>
* Lipper Analytical Services, Inc. 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. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
The fund may invest in lower-rated and non-rated securities which present
greater risk of loss to principal and interest than high-rated securities.
- -----------------------------------------------------------------------------
KEMPER HIGH YIELD FUND RANKINGS*
- -----------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER CURRENT HIGH YIELD FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #91 OF 154 FUNDS #115 OF 154 FUNDS #112 OF 154 FUNDS
- -----------------------------------------------------------------------------
5-YEAR #26 OF 61 N/A N/A
- -----------------------------------------------------------------------------
10-YEAR #7 OF 44 N/A N/A
- -----------------------------------------------------------------------------
15-YEAR #1 OF 23 N/A N/A
- -----------------------------------------------------------------------------
</TABLE>
- -----------------------------------------------------------------------------
DIVIDEND REVIEW
- -----------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE
FUND AS OF MARCH 31, 1997.
<TABLE>
<CAPTION>
A B C
SHARES SHARES SHARES
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTH INCOME: $0.3990 $0.3627 $0.3656
- -----------------------------------------------------------------------------
MARCH DIVIDEND: $0.0665 $0.0604 $0.0614
- -----------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION
RATE+: 9.84% 8.94% 9.06%
- -----------------------------------------------------------------------------
SEC YIELD+: 8.17% 7.65% 7.68%
- -----------------------------------------------------------------------------
</TABLE>
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on March 31, 1997. Distribution
rate simply measures the level of dividends and is not a complete measure of
performance. The SEC yield is net investment income per share earned over the
month ended March 31, 1997, shown as an annualized percentage of the maximum
offering price on that date. The SEC yield is computed in accordance with the
standardized method prescribed by the Securities and Exchange Commission.
TERMS TO KNOW
KEMPER FUNDS' STYLE
FIXED STYLE BOX
- -----------------------------------------------------------------------------
MORNINGSTAR FIXED-INCOME STYLE BOX
- -----------------------------------------------------------------------------
Maturity applies to taxable open-end funds: for short less than four years; for
intermediate between four and 10 years; for long greater than 10 years. The
average credit quality rating of a bond portfolio: funds that have an average
credit rating of AAA or AA are high quality; A or BBB are medium quality; below
BB, low quality.
Please note that style boxes do not represent an exact assessment of risk and
do not represent future performance. Please consult the prospectus for a
description of investment policies.
<PAGE> 3
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $79 BILLION IN ASSETS, INCLUDING $42 BILLION IN RETAIL MUTUAL
FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM HARVARD
UNIVERSITY.
DEAR SHAREHOLDER,
The agreement between the White House and Republican leaders in Congress to
balance the federal budget has effectively ended the market correction that
began in the first quarter. Such sudden progress on balancing the budget, an
initiative that the bond market was anticipating resolution on more than one
year ago, is positive news.
The next several weeks will find Congress and the Clinton administration
negotiating toward a final agreement. Unlike previous failed proposals that
sought to balance the budget principally by increasing income taxes, the current
plan -- which starts from the base of a relatively small deficit -- proposes to
slow the growth of federal spending. As such, its prospects are promising.
Natural skeptics are waiting to see specific legislation to see if the
agreement has teeth. While we are optimistic, we need to temper our enthusiasm.
Much of the good news associated with a balanced budget was quickly discounted
in the higher prices in the stock and bond markets.
Of particular interest to equity investors is the agreement to reduce the
maximum tax rate on capital gains. Although details of the reduction are yet to
be known, the prospect of more favorable tax treatment on gains will have the
short-term effect of supporting stocks -- investors can be expected to postpone
selling until they can qualify for the lower tax rate. With equity sales
essentially "frozen" until the effective date is known, the stock market should
have a considerable underpinning. Once an effective date is determined, we would
expect the pent-up selling to occur once that date is reached. However, then we
shall enjoy the long-term positive effect of the lower tax rate on gains.
Talk of a balanced budget has shifted the spotlight away from the Federal
Reserve Board's upward pressure on interest rates. Nevertheless, we look for the
Fed to raise rates in May. This action may be the last for a while because the
economy seems to be slowing down in the second quarter, after the rapid 5.6
percent growth in the first quarter of the year. An economic slowdown would
reduce the threat of inflation and reduce the need for further rate hikes by the
Fed.
In fact, a review of the standard measures of the economy shows little to
be concerned about. As has been the pattern for more than five years, a few
strong quarters followed by a few weak quarters have produced an overall 2
percent to 3 percent rate of growth in gross domestic product (GDP). Job
creation and the unemployment rate are consistent with a moderately expanding
economy. Corporate profits continue to grow at an expected 4 to 5 percent rate
in 1997. The Consumer Price Index continues to track at a 2.5 percent to 3.0
percent rate.
Just as we see a limited downside to today's rising interest rate
environment, so is there a limited upside in the near future. The effect of
higher rates will have to work itself through the economy. Higher rates have
significant implications for corporate profitability, debt issuance, credit
extension and international trade. Post-correction cash flows into the
financial markets will be a subject of great scrutiny. One of the factors
driving the stock market to its recent all-time high was the unprecedented high
level of investment through mutual funds, 401(k)s and qualified contribution
plans. It is realistic to expect that, on the margin, some of that cash will
find a home in short-term, liquid investments while the stock market sorts
itself out.
Leadership in the stock market has been quite narrow and concentrated for
the past six months in large, multinational companies with familiar consumer
brand names. The recent rally after the announcement of a balanced budget
agreement suggests that once monetary policy is also more certain, leadership
may broaden to include small capitalization stocks.
Higher interest rates are, of course, anathema to the fixed-income market.
However, bond investors in the last few weeks have been cheered by the balanced
budget proposal and by expectations that interest rates would not go much
higher. We expect the bond market to trade in a very narrow range -- with long-
term interest rates no lower than 6.75 percent and no
3
<PAGE> 4
ECONOMIC OVERVIEW
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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 (4/30/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1)* 6.69 6.53 6.51 7.06
PRIME RATE(2)* 8.3 8.25 8.25 9
INFLATION RATE(3)* 2.79 2.99 2.83 3.05
THE U.S. DOLLAR(4) 9.32 3.46 8.51 -10.02
CAPITAL GOODS ORDERS(5)* 6.34 7.46 7.42 9.96
INDUSTRIAL PRODUCTION(5)* 5.62 3.27 2.57 3.73
EMPLOYMENT GROWTH(6) 2.23 2.2 2.07 2.79
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6%. The low, moderate inflation of the last
few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of March 31, 1997.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
higher than 7.25 percent. One positive effect of the stock market correction was
the widening of spreads available on high yield bonds. As a consequence, high
yield bonds today are more reasonably priced.
A natural response to increased volatility in the U.S. equity market is to
look abroad. In fact, the valuations of many international markets are more
attractive than the U.S. However, the weak German and Japanese economies make it
difficult to identify many exciting near-term opportunities without careful
research.
Our recommendation to shareholders is to stay the course and to fight the
temptation to try to time when and where you should be invested. Financial
assets react much quicker today to events. Volatility has returned to the market
and with it heightened uncertainty. Now is the time to rely on your financial
representative for the expertise and the long-term investing discipline that he
or she can provide.
With this commentary as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
May 8, 1997
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 ZKI 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.
HIGH YIELD CORRECTION OR BEAR MARKET? PORTFOLIO CO-MANAGERS MICHAEL MCNAMARA AND
HARRY RESIS DISCUSS THEIR THOUGHTS ON WHAT CAUSED THE HIGH YIELD MARKET'S RECENT
SLIP IN PERFORMANCE AND EXPLAIN WHY THEY REMAIN UPBEAT ABOUT HIGH YIELD BOND
INVESTMENTS AND KEMPER HIGH YIELD FUND.
Q HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD OCTOBER 1996 THROUGH
MARCH 1997?
A The fund gained during the six-month period and Class A shares returned
3.41 percent (unadjusted for sales charges). Performance was inhibited, though,
at the end of the period primarily by an increase in short-term interest rates
by the Federal Reserve Board (the Fed).
We are pleased to report, however, that as of March 31, 1997, the fund was
ranked a five-star fund by Morningstar, Inc. for all major time periods*. Kemper
High Yield Fund holds Morningstar's five-star, "highest," overall rating and
five stars for the three-, five- and 10-year time periods. The fund was ranked
among 1,172, 630 and 258 taxable bond funds, respectively.
Q WOULD YOU EXPLAIN THE CONTRIBUTING FACTORS THAT CAUSED THE RECENT MARKET
DOWNTURN?
A High yield bonds performed well five out of the six months in this
reporting period. However, a series of events that began in February contributed
to the downturn in the market that we experienced in March.
The Federal Reserve Board's 0.25 percent interest rate increase in late
March was the most significant basis for the recent market weakness. But the
magnitude of the sell-off that occurred as a result of the rate increase was
also fueled by comments made in February by Federal Reserve Board Chairman Alan
Greenspan. Greenspan, who doesn't often discuss the high yield market,
expressed his concern about the historically tight spreads in the market and
whether or not the strong performance of high yield bonds could be sustained.
He also commented that investors were perhaps acting with "irrational
exuberance" and that the values of securities might be inflated.
These remarks upset the high yield market, and planted a seed of doubt in
many investors' minds. At about the same time, stronger than anticipated
economic growth statistics were released and Greenspan intimated that a
tightening of interest rates might be necessary to keep inflation at bay. In
March, the Fed did increase short-term rates, which in-turn initiated a sharp
sell-off in the securities markets and a widening of high yield spreads. The
high yield market
- ---------------
*Morningstar, Inc. proprietary ratings reflect risk-adjusted performance through
March 31, 1997. The ratings are subject to change every month. Morningstar
ratings are calculated from the funds' three-, five- and 10-year returns (with
fee adjustments) in excess of 90-day Treasury bill returns, and a risk factor
that reflects fund performance below 90-day Treasury bill returns. Ten percent
of the funds in a rating category receive five stars.
5
<PAGE> 6
PERFORMANCE UPDATE
was hit harder than it might have been if Greenspan had not expressed his
concern about the market's bull run.
Q DO YOU EXPECT HIGH YIELD BONDS TO BOUNCE BACK?
A Although future market conditions can not be predicted with certainty, we
firmly believe that what happened in March was simply a short-term market
correction and not the start of a long-term bear market. Remember, the reason
that the Fed increased short-term rates was because the economy had begun to
grow at a faster pace. This pick-up in growth caused concern that inflation
might begin to creep up as well.
Inflation is not good for high yield bonds because it erodes their value.
However, the Fed's move was pre-emptive. At this point inflation is still quite
tame and we are optimistic that the Fed will be successful in slowing the
economy and warding off inflation. Inflation is a lagging indicator and
generally rises after economic growth has already gained momentum. Economic
growth, on the other hand, is positive for companies issuing high yield debt.
Stronger growth generates consumer spending, which fuels corporate earnings and
enables companies to meet their coupon payments. Growth at a controlled rate,
which is what we've been experiencing, is fundamentally good for high yield
bonds.
The second reason we're not bearish about the long-term prospects for high
yield bonds is because of the current low rate of defaults in the high yield
market. This of course is very positive for high yield investors because it
means that the coupons on high yield investments are being paid consistently.
The reason for the lack of defaults can be attributed to the economic expansion
the U.S. has been experiencing over the last six years. The economy has been
growing slowly but consistently and inflation has remained relatively benign.
Growth, low inflation and a lack of defaults are critical components of a
healthy high yield market and we're experiencing all three at this point in
time.
Q HOW DID YOU MANAGE THE FUND IN ANTICIPATION OF A POTENTIAL INTEREST RATE
INCREASE?
A We managed the fund defensively because we believed that the economy was
gaining momentum and that the Fed would most likely tighten interest rates in
response.
Specifically, we reduced the fund's level of BB-rated bonds. BB-rated bonds
are the highest quality securities that are still considered to be high yield,
or below investment grade bonds. Reducing our BB holdings made sense because the
closer a bond is to an investment-grade security, the more it tends to perform
in-line with interest rates. And, as interest rates rise, the value of
Treasuries and higher quality bonds tends to fall. At the start of the period,
21 percent of the fund's portfolio was invested in BB-rated bonds, while on
March 31, 1997, BB-rated bonds accounted for just 16 percent of the portfolio.
In making this adjustment we increased B-rated holdings by 8 percent and
eliminated all A- and AA-rated bonds from the portfolio altogether.
In addition to altering the credit quality of the portfolio, we reduced our
position in deferred interest bonds. Deferred interest bonds are purchased at a
discount to their par value and do not start paying interest until later in the
life of the loan. These securities have a longer duration and tend to perform
poorly in a rising interest rate environment. Duration is a measurement of a
security's sensitivity to interest rates. The longer the duration, the more
sensitive it is to interest rate changes. The shorter duration that resulted
from the sale of these deferred interest bonds helped the fund's performance as
interest rates jumped in March.
Q WHAT OTHER TYPES OF ADJUSTMENTS DID YOU MAKE TO THE FUND?
A We continued to move away from issues by companies that we considered to be
deeply cyclical. 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.
The fund is still heavily invested in cyclical holdings because of their
long-term earnings potential. However, over the
6
<PAGE> 7
PERFORMANCE UPDATE
six-month period, we focused on adding issues from companies that, although
cyclical, have less cyclicality, or have some degree of independence from
changes in the overall U.S. economy.
Q DID YOU MAKE ANY SIGNIFICANT CHANGES TO PARTICULAR INDUSTRY HOLDINGS?
A We favored issues from the international cable sector over domestic cable
holdings. Although domestic cable holdings have performed well for the fund in
the past, we feel that the industry has matured to a point where the returns
have begun to diminish. Many domestic companies are now at a point where
significant expenditures are needed to upgrade their systems to compete with
direct broadcasting technology. We feel that in many cases these costs will
inhibit the companies' profitability and return potential.
On the other hand, the international cable sector, specifically in the
United Kingdom, has lagged the U.S. and now seems poised for significant
growth. We are continuing to look for investment opportunities in this cable
industry sector.
Q WHAT'S YOUR OUTLOOK FOR THE HIGH YIELD MARKET?
A As mentioned earlier, we're quite optimistic about the long-term outlook
for the high yield market. We believe that the economic environment combined
with the low rate of defaults are both positive indicators. We will continue to
manage the fund somewhat defensively until interest rates have stabilized.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
ON 3/31/97 ON 9/30/96
- ----------------------------------------------------------------------------
<S> <C> <C>
BONDS 93% 91%
- ----------------------------------------------------------------------------
CASH EQUIVALENTS 4 6
- ----------------------------------------------------------------------------
PREFERRED AND COMMON STOCK 3 2
- ----------------------------------------------------------------------------
TREASURIES 1-3 YEARS -- 1
- ----------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/97 ON 9/30/96
YEARS TO MATURITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
ON 3/31/97 ON 9/30/96
- ----------------------------------------------------------------------------
<S> <C> <C>
CASH AND EQUIVALENTS 4% 6%
- ----------------------------------------------------------------------------
1-10 87 84
- ----------------------------------------------------------------------------
10-20 7 9
- ----------------------------------------------------------------------------
OVER 20 2 1
- ----------------------------------------------------------------------------
100% 100%
[PIE CHART] [PIE CHART]
ON 3/31/97 ON 9/30/96
</TABLE>
* Portfolio composition is subject to change.
8
<PAGE> 9
PORTFOLIO STATISTICS
QUALITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ON 3/31/97 ON 9/30/96
- -------------------------------------------------------------------------------
<S> <C> <C>
AAA -- 2%
- -------------------------------------------------------------------------------
A -- 1
- -------------------------------------------------------------------------------
BB 16% 21
- -------------------------------------------------------------------------------
B 76 68
- -------------------------------------------------------------------------------
OTHER 8 8
- -------------------------------------------------------------------------------
100% 100%
[PIE CHART] [PIE CHART]
ON 3/31/97 ON 9/30/96
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS AT MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AEROSPACE--3.4% Airplanes Pass Through Trust, 10.875%, 2019 $ 21,130 $ 22,926
Fairchild Corporation, 12.00%, 2001 37,830 38,208
Greenwich Air Services, 10.50%, 2006 7,660 8,752
Howmet Inc., 10.00%, 2003 4,510 4,826
K & F Industries, Inc.
11.875%, 2003 19,830 21,020
10.375%, 2004 24,950 25,823
UNC, Inc., 11.00%, 2006 10,300 12,051
------------------------------------------------------------------------
133,606
- -----------------------------------------------------------------------------------------------------------------
BROADCASTING, CABLESYSTEMS Affinity Group, Inc., 11.50%, 2003 21,400 22,791
AND PUBLISHING--14.9%
American Radio Systems, 9.00%, 2006 18,490 18,028
(b)Bell Cablemedia PLC
11.95%, 2004 29,960 25,953
11.875%, 2005 1,490 1,186
Big Flower Press, Inc., 10.75%, 2003 20,594 21,727
Busse Broadcasting, 11.625%, 2000 10,860 11,457
CAI Wireless Systems, 12.25%, 2002 15,150 7,272
Cablevision Systems Corporation
9.25%, 2005 5,880 5,601
9.875%, 2013 9,350 8,976
10.50%, 2016 24,755 24,507
(b)Capstar Broadcasting, 12.75%, 2009 15,000 8,025
CCA Holdings, 13.00%, 1999 18,400 20,611
Century Communications Corporation,
11.875%, 2003 20,095 21,100
(b)Charter Communications, 14.00%, 2007 30,410 18,246
Comcast Corporation, 9.125%, 2006 19,100 19,219
(b)Comcast UK Cable Partners Ltd., 11.20%, 2007 45,225 29,566
(b)CS Wireless, 11.375%, 2006 39,320 12,189
(b)Diamond Cable Communications Plc, 10.75%,
2007 13,520 7,368
Frontiervision, 11.00%, 2006 15,650 15,533
Granite Broadcasting Corp., 10.375%, 2005 15,470 15,451
Innova S De R.L., 12.875%, 2007 22,600 22,374
Intermedia Capital Partners, 11.25%, 2006 19,880 20,178
(b)International Cabletel Inc.
12.75%, 2005 48,310 33,817
11.50%, 2006 6,560 4,002
Multicanal Participacoes, 12.625%, 2004 13,330 14,596
Neodata Services, 12.00%, 2003 23,290 24,571
Newsquest Capital PLC, 11.00%, 2006 22,990 23,680
(b)People's Choice TV Unit, 13.125%, 2004 31,605 12,010
Sinclair Broadcasting Group, Inc., 10.00%, 2003 26,040 26,008
STC Broadcasting, 11.00%, 2007 9,240 9,148
Sullivan Broadcasting
10.25%, 2005 6,190 6,082
13.25%, 2006 12,850 14,970
Telewest Communications PLC
9.625%, 2006 24,815 23,822
(b) 11.00%, 2007 16,953 11,020
TV Azteca, 10.50%, 2007 4,640 4,533
(b)UIH Australia Pacific, Inc., 14.00%, 2006 20,390 10,297
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(b)Videotron Holdings PLC
11.125%, 2004 $ 7,825 $ 6,690
11.00%, 2005 14,600 11,461
------------------------------------------------------------------------
594,065
- -----------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES--2.2% Allied Waste Industries, 10.25%, 2006 11,970 12,344
Corporate Express Inc., 9.125%, 2004 18,760 18,103
Intertek Finance, 10.25%, 2006 13,190 13,355
Monarch Marking Systems, 12.50%, 2003 17,510 20,399
Outdoor Systems, Inc., 9.375%, 2006 13,040 12,779
Universal Outdoor Holdings, Inc., 9.75%, 2006 11,690 11,544
------------------------------------------------------------------------
88,524
- -----------------------------------------------------------------------------------------------------------------
CHEMICALS AND Agriculture, Mining and Chemicals, Inc.,
AGRICULTURE--4.8% 10.75%, 2003 15,080 15,834
Atlantis Group, Inc., 11.00%, 2003 25,355 26,116
Hines Horticulture, 11.75%, 2005 13,450 14,257
NL Industries Inc.
11.75%, 2003 18,960 19,908
(b) 13.00%, 2005 10,440 9,344
Pioneer Americas Acquisition Corporation,
13.375%, 2005 13,060 14,497
Polymer Group Inc., 12.25%, 2002 13,244 14,436
Rexene Corporation, 11.75%, 2004 31,845 34,552
Terra Industries Inc., 10.50%, 2005 12,200 12,932
Texas Petrochemicals, 11.125%, 2006 15,000 15,675
UCC Investors Holdings, Inc., 10.50%, 2002 10,480 11,161
------------------------------------------------------------------------
188,712
- -----------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--10.1% (b)Brooks Fiber, 11.875%, 2006 30,510 18,115
(b)Call-Net Enterprises Inc., 13.25%, 2004 17,060 14,266
(b)Cellular, Inc., 11.75%, 2003 29,035 26,712
(b)Comcel, 13.125%, with warrants, 2003 30,800 23,408
CommNet Cellular, 11.25%, 2005 10,935 11,263
Dobson Communication Corp., 11.75%, 2007 17,000 16,660
(b)ICG Holdings, 13.50%, 2005 44,550 30,071
IMPSAT Corp., 12.125%, 2003 13,260 13,691
Intermedia Communications of Florida Inc.,
13.50%, 2005 with warrants expiring 2000 25,680 28,702
McCaw Intl. Ltd., zero coupon, 2007 20,060 9,428
(b)Millicom International Cellular S.A.,
13.50%, 2006 38,790 25,698
Netsat Servicos, 12.75%, 2004 9,950 10,298
Nextlink Communications, 12.50%, 2006 9,950 10,037
Paging Network, Inc.
10.125%, 2007 4,450 3,977
10.00%, 2008 8,445 7,632
(b)PanAmSat, L.P., 11.375%, 2003 61,385 57,702
Rogers Cantel
11.125%, 2002 23,212 24,140
9.75%, 2016 12,755 12,946
USA Mobile Communications, Inc. II
9.50%, 2004 7,230 6,182
14.00%, 2004 15,150 15,832
Vanguard Cellular Systems, 9.375%, 2006 14,340 14,268
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Western Wireless
10.50%, 2006 $ 3,570 $ 3,485
10.50%, 2007 5,920 5,779
Winstar Equipment, 12.50%, 2004 13,620 13,314
----------------------------------------------------------------------------
403,606
- ---------------------------------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS--2.9% American Standard Inc., 9.25%, 2016 17,615 18,099
(b)Building Materials Corp. of America, 11.75%, 2004 51,930 45,828
Nortek, 9.875%, 2004 15,935 15,736
Triangle Pacific Corp., 10.50%, 2003 26,565 28,093
Waxman Industries, Inc.
(b) 12.75%, 2004 5,850 4,856
800,453 warrants expiring 2004 2,001
----------------------------------------------------------------------------
114,613
- ---------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS AMF Group
AND SERVICES--8.6% 10.875%, 2006 39,322 40,993
(b) 12.25%, 2006 23,990 16,313
Avondale Mills, 10.25%, 2006 22,400 23,296
Cinemark USA, Inc., 9.625%, 2008 14,750 14,603
Coinmach Corp., 11.75%, 2005 36,420 40,244
(b)Dr. Pepper Bottling Holdings, Inc., 11.625%,
2003 22,209 21,487
Herff Jones, Inc., 11.00%, 2005 15,640 16,735
Kinder-Care Learning Centers, 9.50%, 2009 18,750 18,048
Petro Stopping Centers, 10.50%, 2007 26,000 25,805
Pillowtex Corp., 10.00%, 2006 4,680 4,809
Premier Parks Inc., 12.00%, 2003 12,800 14,048
Scholastic Brands, 11.00%, 2007 15,800 16,195
(b)Six Flags Theme Park, 12.25%, 2005 46,280 44,660
Van De Kamps, Inc., 12.00%, 2005 9,880 10,819
West Point Stevens, Inc., 9.375%, 2005 34,045 34,045
----------------------------------------------------------------------------
342,100
- ---------------------------------------------------------------------------------------------------------------------
DRUGS AND HEALTH CARE--2.7% Dade International Inc., 11.125%, 2006 15,000 16,275
DVI, Inc., 9.875%, 2004 5,860 5,772
Magellan Health Services, 11.25%, 2004 33,660 37,279
Tenet Healthcare
8.00%, 2005 10,040 9,663
10.125%, 2005 27,905 29,858
8.625%, 2007 9,810 9,442
----------------------------------------------------------------------------
108,289
- ---------------------------------------------------------------------------------------------------------------------
ENERGY AND RELATED Benton Oil & Gas Co., 11.625%, 2003 19,835 21,471
SERVICES--7.1% Chesapeake Energy Corporation, 10.50%, 2002 14,645 15,743
Coda Energy, 10.50%, 2006 23,610 24,318
Empire Gas Corporation, 7.00%, with warrants,
2004 21,340 18,511
Ferrellgas Partners, L.P., 9.375%, 2006 16,760 16,592
Flores & Rucks Inc.
13.50%, 2004 20,065 23,376
9.75%, 2006 2,020 2,055
Forcenergy Gas Exploration
9.50%, 2006 10,130 9,953
8.50%, 2007 2,400 2,226
Gulf Canada Resources Limited
9.25%, 2004 12,125 12,549
9.625%, 2005 13,020 13,769
</TABLE>
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mesa Operating Co., 10.625%, 2006 $ 14,280 $ 14,851
Parker Drilling Corp., 9.75%, 2006 9,080 9,216
Plains Resources, 10.25%, 2006 15,590 16,194
TransTexas Gas Corp., 11.50%, 2002 19,300 21,278
United Meridian Corp., 10.375%, 2005 26,295 28,136
Vintage Petroleum
9.00%, 2005 28,420 27,994
8.625%, 2009 2,520 2,363
----------------------------------------------------------------------------
280,595
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES, Continental Homes Holding, 10.00%, 2006 17,000 16,915
HOMEBUILDERS AND Del Webb Corp., 9.75%, 2008 14,850 14,405
REAL ESTATE--3.9% Forecast Group L.P., 11.375%, 2000 10,895 10,187
Fortress Group, 13.75%, 2003 10,700 11,396
Hovnanian Kent, 11.25%, 2002 27,557 28,108
Imperial Credit Industries, 9.875%, 2007 9,920 9,722
J.M. Peters Company, 12.75%, 2002 10,845 10,465
Kaufman & Broad Home Corp., 9.625%, 2006 13,760 13,726
Presley Companies, 12.50%, 2001 27,545 26,168
Ryland Group, 10.50%, 2006 12,550 12,738
----------------------------------------------------------------------------
153,830
- ---------------------------------------------------------------------------------------------------------------------
HOTELS AND GAMING--3.0% Eldorado Resorts, 10.50%, 2006 15,280 16,120
Empress River Casino, 10.75%, 2002 17,573 18,561
Harrahs Entertainment, 10.875%, 2002 1,000 1,055
Harvey's Casino Resorts, 10.625%, 2006 6,170 6,617
Players International, 10.875%, 2005 15,835 16,073
Station Casinos Inc., 10.125%, 2006 32,395 31,180
Trump Atlantic City, 11.25%, 2006 32,275 29,370
----------------------------------------------------------------------------
118,976
- ---------------------------------------------------------------------------------------------------------------------
MANUFACTURING, METALS Aftermarket Technology, 12.00%, 2004 16,624 18,286
AND MINING--15.2% Alvey Systems, 11.375%, 2003 13,015 13,340
Bar Technologies, 13.50%, with warrants, 2001 24,035 24,216
Collins & Aikman Corporation, 11.50%, 2006 25,400 27,686
Crain Industries, Inc., 13.50%, 2005 15,870 17,933
Day International Group, Inc., 11.125%, 2005 25,025 25,901
Delco Remy International, 10.625%, 2006 25,115 26,120
Essex Group Incorporated, 10.00%, 2003 20,360 20,767
Euramax International PLC, 11.25%, 2006 23,595 24,834
EV International, 11.00%, 2007 6,300 6,253
Fairfield Manufacturing Company, 11.375%, 2001 17,560 18,350
(b)Foamex--JPS Automotive L.P., 14.00%, with
warrants, 2004 16,620 15,540
Foamex L.P., 11.25%, 2002 28,510 30,007
GS Technologies
12.00%, 2004 5,875 6,132
12.25%, 2005 8,970 9,475
Gulf States Steel, 13.50%, with warrants, 2003 22,775 21,898
Hayes Wheels International, Inc., 11.00%, 2006 23,070 24,916
IMO Industries, 11.75%, 2006 12,590 12,716
Jordan Industries, 10.375%, 2003 16,255 15,930
JPS Automotive Products Corporation, 11.125%,
2001 27,270 30,133
Key Plastics, 10.25%, 2007 5,450 5,409
Knoll Inc., 10.875%, 2006 15,480 16,796
Motors and Gears, Inc., 10.75%, 2006 17,250 17,509
Newflo Corporation, 13.25%, 2002 17,850 19,367
13
</TABLE>
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Penda Industries, Inc., 10.75%, 2004 $ 2,220 $ 2,220
Renco Metals, 11.50%, 2003 11,740 12,092
Spinnaker Industries, 10.75%, 2006 19,300 19,179
Terex Corp. Unit, 13.25%, 2002 22,340 24,462
Thermadyne Industries, Inc.
10.25%, 2002 11,146 11,620
10.75%, 2003 10,536 10,957
UCAR Global, 12.00%, 2005 35,060 39,355
WCI Steel Inc., 10.00%, 2004 20,100 19,799
Weirton Steel Corp., 11.375%, 2004 16,200 16,362
----------------------------------------------------------------------------
605,560
- ---------------------------------------------------------------------------------------------------------------------
PAPER, FOREST PRODUCTS, BPC Holding Corp., 12.50%, 2006 12,240 12,730
AND CONTAINERS--8.8% Berry Plastics Corporation, 12.25%, 2004 18,185 19,640
Container Corporation of America, 11.25%, 2004 7,730 8,310
Fonda Group, 9.50%, 2007 9,955 9,358
Four M Corporation, 12.00%, 2006 9,220 9,243
Gaylord Container Corporation, 12.75%, 2005 20,850 22,727
Maxxam Group, Inc.
11.25%, 2003 24,325 24,690
(b) 12.25%, 2003 7,265 6,466
National Fiberstock Corporation, 11.625%, 2002 11,810 12,017
Owens-Illinois, Inc.
11.00%, 2003 8,255 9,101
9.75%, 2004 42,525 44,651
9.95%, 2004 13,062 13,715
Printpack, Inc.
9.875%, 2004 5,310 5,390
10.625%, 2006 19,210 19,690
Riverwood International
10.25%, 2006 11,660 10,727
10.875%, 2008 57,540 47,183
Specialty Paperboard, 9.375%, 2006 17,920 17,718
Stone Container Corporation
11.50%, 2006 36,860 36,123
11.875%, 2016 5,900 5,959
U.S. Can Corp., 10.125%, 2006 13,710 14,053
----------------------------------------------------------------------------
349,491
- ---------------------------------------------------------------------------------------------------------------------
RETAILING--4.5% Ameriking, 10.75%, 2006 9,715 9,812
Brunos, 10.50%, 2005 37,580 38,144
Cole National Group, 9.875%, 2006 19,490 19,685
(a)Color Tile, Inc., 10.75%, 2001 20,480 819
Dominick's Finer Foods, 10.875%, 2005 3,600 3,879
Finlay Fine Jewelry Corporation, 10.625%, 2003 28,300 29,149
Guitar Center Management, 11.00%, 2006 22,575 24,155
Pamida Holdings, 11.75%, 2003 21,845 19,770
Pathmark Stores
12.625%, 2002 24,685 25,611
9.625%, 2003 7,125 6,733
----------------------------------------------------------------------------
177,757
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OR SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MISCELLANEOUS--.8%
Communication and Power Industry, Inc., 12.00%,
2005 $ 7,975 $ 8,773
Computervision Corporation, 11.375%, 1999 16,207 16,369
(b)Transtar Holdings, L.P., 13.375%, 2003 10,100 8,181
--------------------------------------------------------------------------------
33,323
--------------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--92.9%
(Cost: $3,660,921) 3,693,047
--------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
COMMON AND (a)Beatrice Foods 2,106,337 shs. 46,339
PREFERRED Benedek Unit, PIK, preferred 90,000 9,720
STOCKS (a)Capital Pacific Holdings 54,431 54
Computervision Corporation 3,112,436 16,729
(a)Echostar Communications 218,250 4,474
Gaylord Container Corporation 1,805,934 10,948
(a)Grand Union Company 549,300 1,957
(a)Intelcom Group, Inc., 68,617 744
(a)Sinclair Capital 210,400 20,619
Sullivan Broadcasting 205,600 2,056
--------------------------------------------------------------------------------
TOTAL COMMON AND PREFERRED STOCKS--2.9%
(Cost: $109,658) 113,640
--------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yields--5.34% to 5.43%
INSTRUMENTS--.4% Due--April 1997
(Cost: $14,947) $ 15,000 14,944
--------------------------------------------------------------------------------
TOTAL INVESTMENTS--96.2%
(Cost: $3,786,527) 3,821,631
--------------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES--3.8% 150,906
--------------------------------------------------------------------------------
NET ASSETS--100% $3,972,537
--------------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- ------------------------------------------------------------------------------
(a) Non-income producing security. In the case of a bond, generally denotes that
issuer has defaulted on the payment of principal or interest or has filed
for bankruptcy.
(b) Deferred interest obligation; currently zero coupon under terms of the
initial offering.
Based on the cost of investments of $3,786,527,000 for federal income tax
purposes at March 31, 1997, the gross unrealized appreciation was $145,273,000,
the gross unrealized depreciation was $110,169,000 and the net unrealized
appreciation on investments was $35,104,000.
See accompanying Notes to Financial Statements.
15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investments, at value
(Cost: $3,786,527) $3,821,631
- --------------------------------------------------------------------------
Receivable for:
Fund shares sold 9,891
- --------------------------------------------------------------------------
Investments sold 189,606
- --------------------------------------------------------------------------
Interest 98,187
- --------------------------------------------------------------------------
TOTAL ASSETS 4,119,315
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Cash overdraft 86,775
- --------------------------------------------------------------------------
Payable for:
Fund shares redeemed 4,273
- --------------------------------------------------------------------------
Investments purchased 51,230
- --------------------------------------------------------------------------
Management fee 1,931
- --------------------------------------------------------------------------
Distribution services fee 807
- --------------------------------------------------------------------------
Administrative services fee 782
- --------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 843
- --------------------------------------------------------------------------
Trustees' fees and other 137
- --------------------------------------------------------------------------
Total liabilities 146,778
- --------------------------------------------------------------------------
NET ASSETS $3,972,537
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------
Paid-in capital $4,008,750
- --------------------------------------------------------------------------
Accumulated net realized loss on investments (158,346)
- --------------------------------------------------------------------------
Net unrealized appreciation on investments 35,104
- --------------------------------------------------------------------------
Undistributed net investment income 87,029
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $3,972,537
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($2,811,043 / 346,527 shares outstanding) $8.11
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net asset value or 4.50%
of offering price) $8.49
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share
($1,062,710 / 131,107 shares outstanding) $8.11
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share
($72,661 / 8,937 shares outstanding) $8.13
- --------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($26,123 / 3,220 shares outstanding) $8.11
- --------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------
<S> <C>
Interest income $213,842
- ------------------------------------------------------------------------
Expenses:
Management fee 11,204
- ------------------------------------------------------------------------
Distribution services fee 4,571
- ------------------------------------------------------------------------
Administrative services fee 4,600
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 3,381
- ------------------------------------------------------------------------
Professional fees 48
- ------------------------------------------------------------------------
Reports to shareholders 277
- ------------------------------------------------------------------------
Trustees' fees and other 228
- ------------------------------------------------------------------------
Total expenses 24,309
- ------------------------------------------------------------------------
NET INVESTMENT INCOME 189,533
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
- ------------------------------------------------------------------------
<S> <C>
Net realized loss on sales of investments (8,409)
- ------------------------------------------------------------------------
Net realized loss from futures transactions (172)
- ------------------------------------------------------------------------
Net realized loss (8,581)
- ------------------------------------------------------------------------
Change in net unrealized appreciation on investments (41,220)
- ------------------------------------------------------------------------
Net loss on investments (49,801)
- ------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $139,732
- ------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
1997 1996
- ---------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 189,533 336,758
- ---------------------------------------------------------------------------------------------------
Net realized gain (loss) (8,581) 42,422
- ---------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (41,220) 66,471
- ---------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 139,732 445,651
- ---------------------------------------------------------------------------------------------------
Net equalization credits (charges) (2,880) 7,259
- ---------------------------------------------------------------------------------------------------
Distribution from net investment income (198,645) (338,218)
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) from capital share transactions (62,609) 454,293
- ---------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (124,402) 568,985
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------
Beginning of period 4,096,939 3,527,954
- ---------------------------------------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment income of
$87,029 and $99,021, respectively) $3,972,537 4,096,939
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE Kemper High Yield Fund is an open-end diversified
FUND 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 a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares are offered to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
Differences in class expenses will result in the
payment of different per share income dividends by
class. All shares of the Fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT INVESTMENT VALUATION. Investments are stated at
ACCOUNTING POLICIES value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Portfolio securities that are
traded on a domestic securities exchange are valued
at the last sale price on the exchange where
primarily traded or, if there is no recent sale, at
the last current bid quotation. Portfolio
securities that are primarily traded on foreign
securities exchanges are generally valued at the
preceding closing values of such securities on
their respective exchanges where primarily traded.
Securities not so traded are valued at the last
current bid quotation if market quotations are
available. Exchange traded financial futures and
options are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Forward foreign
currency contracts are valued at the forward rates
prevailing on the day of valuation.
Over-the-counter traded options are valued based
upon prices provided by market makers. Other
securities and assets are valued at fair value as
determined in good faith by the Board of Trustees.
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 and therefore no
federal income tax provision is required. The
accumulated net realized loss on sales of
investments for federal income tax purposes at
March 31, 1997, amounting to approximately
$158,290,000, is available to offset future taxable
gains. If not applied, the loss carryover expires
during the period 1998 through 2006.
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), 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 $11,204,000 for the
six months ended March 31, 1997.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with Zurich Kemper
Distributors, Inc. (ZKDI) (formerly known as Kemper
Distributors, Inc.). Underwriting commissions paid
in connection with the distribution of Class A
shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY ZKDI
COMMISSIONS ----------------------------
RETAINED BY ZKDI TO ALL FIRMS TO AFFILIATES
---------------- ------------ -------------
<S> <C> <C> <C>
Six months ended March 31, 1997 $772,000 5,471,000 97,000
</TABLE>
For services under the distribution services
agreement, the Fund pays ZKDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, ZKDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, ZKDI receives any contingent
deferred sales
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
charges (CDSC) from redemptions of Class B and
Class C shares. Distribution fees and commissions
paid in connection with the sale of Class B and
Class C shares and the CDSC received in connection
with the redemption of such shares are as follows:
<TABLE>
<CAPTION>
DISTRIBUTION
FEES AND CDSC COMMISSIONS AND
RECEIVED BY DISTRIBUTION FEES PAID
ZKDI BY ZKDI TO FIRMS
----------------- ----------------------
<S> <C> <C>
Six months ended March 31, 1997 $5,310,000 7,941,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with ZKDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays ZKDI a fee at an annual rate of up to
.25% of average daily net assets of each class.
ZKDI in turn has various agreements with financial
services firms that provide these services and pays
these firms based on assets of Fund accounts the
firms service. Administrative services fees (ASF)
paid are as follows:
<TABLE>
<CAPTION>
ASF PAID BY ZKDI
ASF PAID BY THE -----------------------------
FUND TO ZKDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Six months ended March 31, 1997 $4,600,000 4,706,000 22,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Zurich Kemper Service Company (ZKSvC) (formerly
known as Kemper Service Company) is the shareholder
service agent of the Fund. Under the agreement,
ZKSvC received shareholder services fees of
$2,232,000 for the six months ended March 31, 1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the six months ended March 31, 1997, the
Fund made no payments to its officers and incurred
trustees' fees of $24,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended March 31, 1997, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $2,291,999
Proceeds from sales 2,297,326
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, SEPTEMBER 30,
1997 1996
----------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------------
SHARES SOLD
---------------------------------------------------------------------------------
Class A 67,163 $ 537,046 119,890 $ 932,368
---------------------------------------------------------------------------------
Class B 41,283 338,729 71,697 573,147
---------------------------------------------------------------------------------
Class C 5,654 46,488 8,808 70,603
---------------------------------------------------------------------------------
Class I 1,471 12,102 2,785 22,315
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
---------------------------------------------------------------------------------
Class A 10,869 89,555 18,832 151,343
---------------------------------------------------------------------------------
Class B 3,957 32,593 6,906 55,478
---------------------------------------------------------------------------------
Class C 288 2,382 299 2,414
---------------------------------------------------------------------------------
Class I 165 1,360 300 2,407
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
SHARES REDEEMED
---------------------------------------------------------------------------------
Class A (90,658) (726,473) (112,436) (879,849)
---------------------------------------------------------------------------------
Class B (42,309) (345,311) (52,980) (422,563)
---------------------------------------------------------------------------------
Class C (4,083) (33,400) (4,106) (32,901)
---------------------------------------------------------------------------------
Class I (2,151) (17,680) (2,554) (20,469)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
CONVERSION OF SHARES
---------------------------------------------------------------------------------
Class A 5,523 45,886 15,982 129,116
---------------------------------------------------------------------------------
Class B (5,527) (45,886) (16,001) (129,116)
---------------------------------------------------------------------------------
NET INCREASE (DECREASE)
FROM CAPITAL SHARE
TRANSACTIONS $ (62,609) $ 454,293
---------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------
CLASS A
-----------------------------------------
SIX MONTHS YEAR ENDED
ENDED SEPTEMBER 30,
MARCH 31, -------------
1997 1996 1995 1994 1993
--------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.23 8.01 7.74 8.12 7.86
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .37 .76 .83 .73 .81
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.09) .23 .20 (.35) .23
- ----------------------------------------------------------------------------------------
Total from investment operations .28 .99 1.03 .38 1.04
- ----------------------------------------------------------------------------------------
Less distributions from net investment
income .40 .77 .76 .76 .78
- ----------------------------------------------------------------------------------------
Net asset value, end of period $8.11 8.23 8.01 7.74 8.12
- ----------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.41% 13.00 14.10 4.64 13.92
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------
Expenses .90% .88 .90 .86 .80
- ----------------------------------------------------------------------------------------
Net investment income 9.19% 9.45 10.74 9.22 10.22
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION> --------------------------------------------
CLASS B
--------------------------------------------
SIX MONTHS YEAR ENDED MAY 31
ENDED SEPTEMBER 30, TO
MARCH 31, ------------- SEPTEMBER 30,
1997 1996 1995 1994
--------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.22 8.00 7.73 7.96
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .34 .69 .76 .23
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.09) .23 .20 (.23)
- -----------------------------------------------------------------------------------------
Total from investment operations .25 .92 .96 --
- -----------------------------------------------------------------------------------------
Less distributions from net investment
income .36 .70 .69 .23
- -----------------------------------------------------------------------------------------
Net asset value, end of period $8.11 8.22 8.00 7.73
- -----------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.08% 12.02 13.09 --
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------
Expenses 1.77% 1.77 1.77 1.80
- -----------------------------------------------------------------------------------------
Net investment income 8.32% 8.56 9.87 8.70
- -----------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------
CLASS C
-------------------------------------------------
SIX MONTHS YEAR ENDED MAY 31
ENDED SEPTEMBER 30, TO
MARCH 31, ------------- SEPTEMBER 30,
1997 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------
Net asset value, beginning of period $8.24 8.02 7.75 7.96
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .35 .69 .77 .25
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.09) .23 .20 (.23)
- -----------------------------------------------------------------------------------------
Total from investment operations .26 .92 .97 .02
- -----------------------------------------------------------------------------------------
Less distribution from net investment
income .37 .70 .70 .23
- -----------------------------------------------------------------------------------------
Net asset value, end of period $8.13 8.24 8.02 7.75
- -----------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.11% 12.06 13.13 .27
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------
Expenses 1.72% 1.71 1.71 1.74
- -----------------------------------------------------------------------------------------
Net investment income 8.37% 8.62 9.93 8.75
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------
CLASS I
-------------------------------------------------
SIX MONTHS YEAR DECEMBER 29, 1994
ENDED ENDED TO
MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------
Net asset value, beginning of period $8.23 8.01 7.55
- -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .38 .78 .66
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.09) .23 .39
- -----------------------------------------------------------------------------------------
Total from investment operations .29 1.01 1.05
- -----------------------------------------------------------------------------------------
Less distribution from net investment
income .41 .79 .59
- -----------------------------------------------------------------------------------------
Net asset value, end of period $8.11 8.23 8.01
- -----------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 3.52% 13.32 14.37
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------
Expenses .68% .61 .61
- -----------------------------------------------------------------------------------------
Net investment income 9.41% 9.72 10.70
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, -------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $3,972,537 4,096,939 3,527,954 3,152,029 1,957,524
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 90% 102 99 93 101
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
23
<PAGE> 24
TRUSTEES&OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR.
President and Trustee Vice President
DAVID W. BELIN MICHAEL A. MCNAMARA
Trustee Vice President
LEWIS A. BURNHAM CHARLES R. MANZONI, JR.
Trustee Vice President
DONALD L. DUNAWAY JOHN E. NEAL
Trustee Vice President
ROBERT B. HOFFMAN HARRY E. RESIS
Trustee Vice President
DONALD R. JONES PHILIP J. COLLORA
Trustee Vice President
and Secretary
DOMINIQUE P. MORAX
Trustee JEROME L. DUFFY
Treasurer
SHIRLEY D. PETERSON
Trustee ELIZABETH C. WERTH
Assistant Secretary
WILLIAM P. SOMMERS
Trustee
- ----------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- ----------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT ZURICH KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- ----------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- ----------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER ZURICH KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[RECYCLED LOGO]
Printed on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Fund prospectus.
KHYF - 3 (5/97) 1031810
Printed in the U.S.A. KEMPER FUNDS LOGO
