<PAGE> 1
KEMPER
HIGH INCOME TRUST
SEMIANNUAL REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED MAY 31, 1997
" . . . We managed the fund with the
belief that the economy was gaining
momentum and that high yield issues
would likely benefit."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
7
Portfolio Statistics
8
Largest Holdings Shareholders' Meeting
9
Portfolio of Investments
15
Financial Statements
17
Notes to Financial Statements
19
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 1997:
<TABLE>
<CAPTION>
BASED ON BASED ON
NET ASSET MARKET
VALUE PRICE
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER HIGH
INCOME TRUST 6.05% 5.33%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE AND MARKET PRICE
- --------------------------------------------------------------------------------
AS OF AS OF
5/31/97 11/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE $ 9.29 $ 9.20
- --------------------------------------------------------------------------------
MARKET PRICE $10.00 $10.00
- --------------------------------------------------------------------------------
</TABLE>
Investment by the fund in lower quality bonds present greater risk to principal
and interest than investments in high quality bonds.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
The following table shows per share dividend information for the fund as of May
31, 1997.
<TABLE>
<CAPTION>
KEMPER HIGH
INCOME TRUST
- --------------------------------------------------------------------------------
<S> <C>
SIX-MONTH INCOME: $0.4500
- --------------------------------------------------------------------------------
MAY DIVIDEND: $0.0750
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE:
(BASED ON NET ASSET VALUE) 9.69%
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE:
(BASED ON MARKET PRICE) 9.00%
- --------------------------------------------------------------------------------
</TABLE>
Statistical Note: Current annualized distribution rate is the latest monthly
dividend shown as an annualized percentage of net asset value/market price on
the date shown. Distribution rate simply measures the level of dividends and is
not a complete measure of performance. Total return measures aggregate change in
net asset value/market price assuming reinvestment of dividends. Returns are
historical and do not represent future performance. Market price, net asset
value and returns fluctuate. Additional information concerning performance is
contained in the Financial Highlights appearing at the end of this report.
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 and 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.
<PAGE> 3
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $80 BILLION IN ASSETS, INCLUDING $45 BILLION IN RETAIL MUTUAL
FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM HARVARD
UNIVERSITY.
DEAR SHAREHOLDER,
The consistently good news on the domestic economy and the recent agreement
between the White House and Republican leaders in Congress to balance the
federal budget has provided the basis for strong stock and bond markets. This
progress on balancing the budget, an initiative that the bond market was
anticipating resolution of more than one year ago, has very positive long term
implications for financial markets.
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 has been discounted in
the higher prices in the stock and bond markets.
Of particular interest to equity investors is the agreement to reduce the
maximum tax rate on capital gains. Although details of the reduction are yet to
be known, the prospect of more favorable tax treatment on gains will have the
short-term effect of supporting stocks -- investors can be expected to postpone
selling until they can qualify for the lower tax rate. With equity sales
essentially "frozen" until the effective date is known, the stock market should
have a considerable underpinning. Once an effective date is determined, we would
expect the pent-up selling to occur. However, then we shall enjoy the long-term
positive effect of the lower tax rate on gains.
Talk of a balanced budget has shifted the spotlight away from the Federal
Reserve Board's upward pressure on interest rates. Having declined to raise
rates in May, the Fed may still act again at a later date. However, this action
may be the last for a while because the economy seems to be slowing down in the
second quarter, after the rapid 5.6 percent annualized growth in the first
quarter of the year. A slower economy would reduce the threat of inflation and
reduce the need for further rate hikes by the Fed.
In fact, a review of the standard measures of the economy shows little to
be concerned about and much to be encouraged by. 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 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 to
3.0 percent rate.
Leadership in the stock market has been quite narrow and concentrated in
the first half of 1997 in large, multinational companies with familiar consumer
brand names. The recent rally after the announcement of a balanced budget
agreement suggests that valuations of smaller capitalization stocks are
compelling and the market is broadening.
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.
3
<PAGE> 4
ECONOMIC OVERVIEW
- -------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- -------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on mutual fund
performance.
The following are some significant economic guideposts and their
investment rationale that may help your investment decision-making. The
10-year Treasury rate and the prime rate are prevailing interest rates. The
other data report year-to-year percentage changes.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (6/30/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.49 6.58 6.87 6.28
PRIME RATE(2) 8.5 8.25 8.25 8.8
INFLATION RATE(3) 2.3 3.04 2.95 2.76
THE U.S. DOLLAR(4) 5.52 4.59 8.35 -7.04
CAPITAL GOODS ORDERS(5)* 8.17 2.23 2.44 8.24
INDUSTRIAL PRODUCTION(5) 3.84 4.84 3.38 2.36
EMPLOYMENT GROWTH(6) 2.12 2.41 2.18 2.46
</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 May 31, 1997.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
Our recommendation to shareholders is to stay the course and to fight the
temptation to try to time when and where you should be invested without help.
Financial assets react much quicker today to events. Volatility has returned to
the market and with it heightened uncertainty. Now is the time to rely on your
financial representative for the expertise and the long-term investing
discipline that he or she can provide.
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.
July 11, 1997
4
<PAGE> 5
PERFORMANCE UPDATE
[MCNAMARA PHOTO]
MIKE 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 INCOME
TRUST. MCNAMARA GRADUATED WITH A B.S. IN BUSINESS ADMINISTRATION FROM THE
UNIVERSITY OF MISSOURI AND EARNED AN M.B.A. FROM LOYOLA UNIVERSITY.
[RESIS PHOTO]
HARRY RESIS IS A SENIOR VICE PRESIDENT WITH ZKI. HE JOINED THE COMPANY IN 1988
AND IS A PORTFOLIO CO-MANAGER OF KEMPER HIGH INCOME TRUST. 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.
PORTFOLIO CO-MANAGERS MICHAEL MCNAMARA AND HARRY RESIS DISCUSS THEIR THOUGHTS
ON WHAT CAUSED THE HIGH YIELD MARKET'S RECENT CORRECTION AND EXPLAIN WHY THEY
REMAIN UPBEAT ABOUT HIGH YIELD BOND INVESTMENTS AND KEMPER HIGH INCOME TRUST.
Q WOULD YOU EXPLAIN THE CONTRIBUTING FACTORS THAT CAUSED THE RECENT MARKET
CORRECTION?
A High yield bonds performed well throughout most of the six-month reporting
period. However, a series of events that began in February contributed to the
brief market downturn that we experienced this spring.
The Federal Reserve Board's (the Fed) 0.25 percent interest rate increase in
late March was the most significant basis for the short-lived correction. 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 many 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
was hit harder than it might have been if Greenspan had not expressed his
concern about the market's bull run.
Q HAS THE HIGH YIELD MARKET BOUNCED BACK?
A Yes. In April high yield bonds posted modest returns and then rallied in
May as it became clear that another Fed tightening was not imminent. Although
future market conditions can not be predicted with certainty, we firmly believe
what happened in March was simply a short-term market correction and not the
indicator of an oncoming bear market. Remember, the reason 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 a good thing for high yield bonds because it erodes their
value. However, the Fed's move was preemptive. At this point inflation is still
quite tame and growth in the economy, although positive, has subsided somewhat
since the March rate hike. 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. It generates consumer
5
<PAGE> 6
PERFORMANCE UPDATE
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 bullish 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 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. Economic growth,
low inflation and a lack of defaults are critical components of a healthy high
yield market and we're now experiencing all three.
Q HOW DID YOU MANAGE THE FUND IN ANTICIPATION OF A POTENTIAL INTEREST RATE
INCREASE?
A We managed the fund with the belief that the economy was gaining momentum
and that high yield issues would likely benefit.
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 17 percent of the portfolio.
B-rated issues were increased by 4 percent.
While we altered the credit quality of the portfolio, we maintained 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 pay a higher rate of interest than cash pay
bonds and better support the fund's dividend.
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 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 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 current low rate of defaults are both positive indicators.
6
<PAGE> 7
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
ON 5/31/97 ON 11/30/96
- ----------------------------------------------------------------------------
<S> <C> <C>
HIGH YIELD BONDS 94% 96%
- ----------------------------------------------------------------------------
CASH AND EQUIVALENTS 5 3
- ----------------------------------------------------------------------------
PREFERRED AND COMMON STOCK 1 1
- ----------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 5/31/97 ON 11/30/96
LONG-TERM FIXED INCOME
SECURITIES RATINGS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
ON 5/31/97 ON 11/30/96
- ----------------------------------------------------------------------------
<S> <C> <C>
AAA 2% --
- ----------------------------------------------------------------------------
A 1 --
- ----------------------------------------------------------------------------
BBB 1 --
- ----------------------------------------------------------------------------
BB 15 21%
- ----------------------------------------------------------------------------
B 76 71
- ----------------------------------------------------------------------------
OTHER 5 8
- ----------------------------------------------------------------------------
100% 100%
</TABLE>
The ratings of Standard and Poor's Corporation (S&P) and Moody's Investors
Services, Inc. (Moody's) represent their opinions as to the quality of
securities that they undertake to rate. The percentage shown reflects the higher
of Moody's or S&P ratings. Portfolio composition will change over time. Ratings
are relative and subjective and not absolute standards of quality.
[PIE CHART] [PIE CHART]
ON 5/31/97 ON 11/30/96
AVERAGE MATURITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
ON 5/31/97 ON 11/30/96
- ----------------------------------------------------------------------------
<S> <C> <C>
AVERAGE MATURITY 7.3 YEARS 7.7 YEARS
- ----------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
7
<PAGE> 8
LARGEST HOLDINGS
THE FUND'S FIVE LARGEST CORPORATE BOND HOLDINGS
REPRESENTING 8.5% OF THE FUND'S TOTAL NET ASSETS ON MAY 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Holdings Percent
- ------------------------------------------------------------------------------------
<S> <C> <C>
1. BELL CABLEMEDIA PLC 1.8%
2. TELEWEST COMMUNICATIONS PLC 1.8%
3. VIDOTRON HOLDINGS PLC 1.7%
4. INTERNATIONAL CABLETEL INC. 1.6%
5. ROGERS CANTEL 1.6%
</TABLE>
SHAREHOLDERS' MEETING
ANNUAL SHAREHOLDERS' MEETING
On May 29, 1997, an annual shareholders' meeting was held. Kemper High Income
Trust shareholders were asked to vote on two separate issues: re-election of the
eight members to the Board of Trustees and ratification of Ernst & Young LLP as
independent auditors. We are pleased to report that all nominees were elected
and the selection of Ernst & Young LLP as the fund's auditors was ratified.
Following are the results for each issue:
1) Re-election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
James E. Akins 20,136,645 486,464
Arthur R. Gottschalk 20,203,948 419,161
Frederick T. Kelsey 20,192,997 430,112
Dominique P. Morax 20,180,448 442,661
Fred B. Renwick 20,146,655 476,454
Stephen B. Timbers 20,221,023 402,086
John B. Tingleff 20,234,991 388,118
John G. Weithers 20,237,702 385,407
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
20,292,609 128,342 202,157
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER HIGH INCOME TRUST
PORTFOLIO OF INVESTMENTS AT MAY 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS--2.1% AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Notes, 8.875%, 1999 $ 4,400 $ 4,592
(Cost: $4,594)
CORPORATE OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------------
AEROSPACE--3.6% Airplanes Pass Through Trust, 10.875%, 2019 990 1,099
Fairchild Corp., 12.00%, 2001 2,580 2,606
Greenwich Air Services, 10.50%, 2006 360 415
Howmet Inc., 10.00%, 2003 220 238
K & F Industries, Inc.
11.875%, 2003 660 698
10.375%, 2004 1,150 1,210
RHI Holdings, 11.875%, 1999 885 889
UNC, Inc., 11.00%, 2006 510 595
------------------------------------------------------------------------
7,750
- -----------------------------------------------------------------------------------------------------------------
BROADCASTING, CABLESYSTEMS Affinity Group, Inc., 11.50%, 2003 1,420 1,519
AND PUBLISHING--21.2% American Radio Systems, 9.00%, 2006 990 1,012
(b)Australis Holdings, 15.00%, 2002 2,750 1,691
(b)Bell Cablemedia PLC
11.95%, 2004 4,270 3,800
11.875%, 2005 210 172
Big Flower Press, Inc., 10.75%, 2003 1,911 2,045
Busse Broadcasting, 11.625%, 2000 480 509
CAI Wireless Systems, 12.25%, 2002 1,000 335
CCA Holdings, 13.00%, 1999 1,000 1,156
Cablevision Systems Corp.
9.875%, 2013 840 842
10.50%, 2016 1,040 1,082
(b)Capstar Broadcasting, 12.75%, 2009 1,400 856
(b)Charter Communications, 14.00%, 2007 1,600 1,032
Comcast Cellular, 9.50%, 2007 1,500 1,502
Comcast Corp., 9.125%, 2006 820 845
(b)Comcast UK Cable Partners Ltd., 11.20%, 2007 3,510 2,571
(b)CS Wireless, 11.375%, 2006 1,960 495
(b)Diamond Cable Communications Plc, 10.75%, 2007 640 373
Frontiervision, 11.00%, 2006 780 807
Granite Broadcasting Corp., 12.75%, 2002 2,250 2,436
Innova S De R.L., 12.875%, 2007 1,000 1,033
International Cabletel Inc.
10.00%, 2007 230 231
(b) 12.75%, 2005 4,270 3,203
(b) 11.50%, 2006 160 108
Multicanal Participacoes, 12.625%, 2004 670 759
Neodata Services, 12.00%, 2003 1,290 1,377
Newsquest Capital PLC, 11.00%, 2006 730 787
(b)People's Choice TV Unit, 13.125%, 2004 1,590 588
STC Broadcasting, 11.00%, 2007 420 444
Sinclair Broadcasting Group, Inc., 10.00%, 2003 3,240 3,357
Sullivan Broadcasting
10.25%, 2005 320 327
13.25%, 2006 630 769
TV Azteca, 10.50%, 2007 220 226
(b)Telewest Communications PLC,
11.00%, 2007 5,490 3,809
(b)UIH Australia Pacific, Inc., 14.00%, 2006 1,020 558
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL
CORPORATE OBLIGATIONS AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(b)Videotron Holdings PLC
11.125%, 2004 $ 3,290 $ 2,936
11.00%, 2005 840 691
------------------------------------------------------------------------
46,283
- -----------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES--.7% Allied Waste Industries
10.25%, 2006 460 490
(b) 11.30%, 2007 700 426
Outdoor Systems, Inc., 9.375%, 2006 110 112
Universal Outdoor Holdings, Inc., 9.75%, 2006 580 600
------------------------------------------------------------------------
1,628
- -----------------------------------------------------------------------------------------------------------------
CHEMICALS AND Atlantis Group, Inc., 11.00%, 2003 1,605 1,629
AGRICULTURE--5.6% Hines Horticulture, 11.75%, 2005 510 542
NL Industries Inc.
11.75%, 2003 860 947
(b) 13.00%, 2005 940 893
Pioneer Americas Acquisition Corp.,
13.375%, 2005 950 1,131
Polymer Group, Inc., 12.25%, 2002 1,430 1,569
Rexene Corp., 11.75%, 2004 1,790 1,996
Terra Industries Inc., 10.50%, 2005 1,600 1,728
Texas Petrochemicals, 11.125%, 2006 700 748
UCC Investors Holdings, Inc.
10.50%, 2002 720 788
11.00%, 2003 260 280
------------------------------------------------------------------------
12,251
- -----------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--11.8% Brooks Fiber
(b) 10.875%, 2006 450 305
(b) 11.875%, 2006 1,390 902
10.00%, 2007 370 374
(b)Call-Net Enterprises Inc., 13.25%, 2004 3,000 2,571
(b)Cellular, Inc., 11.75%, 2003 1,465 1,425
(b)Communication Cellular, 13.125%, with warrants,
2003 2,000 1,545
CommNet Cellular, 11.25%, 2005 580 667
Dobson Communication Corp., 11.75%, 2007 1,200 1,173
(b)ICG Holdings, 13.50%, 2005 2,790 1,967
Intermedia Capital Partners, 11.25%, 2006 1,040 1,102
Intermedia Communications of Florida Inc.,
13.50%, 2005 with warrants expiring 2000 1,915 2,215
McCaw Intl. Ltd., zero coupon, 2007 650 315
(b)McLeod Inc., 10.50%, 2007 220 132
(b)Millicom International Cellular S.A., 13.50%, 2006 1,540 1,132
Nextlink Communications, 12.50%, 2006 335 354
Paging Network, Inc.
10.125%, 2007 20 19
10.00%, 2008 350 330
(b)PanAmSat, L.P., 11.375%, 2003 2,710 2,602
Rogers Cantel
11.125%, 2002 2,553 2,653
9.375%, 2008 150 156
9.75%, 2016 645 676
Telex Communications, 10.50%, 2007 680 705
USA Mobile Communications, Inc. II
9.50%, 2004 690 645
14.00%, 2004 630 679
Vanguard Cellular Systems, 9.375%, 2006 260 264
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL
CORPORATE OBLIGATIONS AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Western Wireless
10.50%, 2006 $ 240 $ 244
10.50%, 2007 80 81
Winstar Equipment, 12.50%, 2004 600 585
------------------------------------------------------------------------
25,818
- -----------------------------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS--3.7% American Builders, 10.625%, 2007 250 258
(b)American Standard Inc., 10.50%, 2005 950 930
(b)Building Materials Corp. of America, 11.75%, 2004 3,205 2,893
Nortek, 9.875%, 2004 1,330 1,357
Triangle Pacific Corp., 10.50%, 2003 2,185 2,327
Waxman Industries, Inc.
(b) 12.75%, 2004 300 251
(a) 55,106 warrants expiring 2004 118
------------------------------------------------------------------------
8,134
- -----------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS AMF Group
AND SERVICES--8.6% 10.875%, 2006 1,170 1,253
(b) 12.25%, 2006 1,130 788
Avondale Mills, 10.25%, 2006 930 970
Cinemark USA, Inc., 9.625%, 2008 720 734
Coinmach Corp., 11.75%, 2005 2,120 2,353
Commemorative Brands, 11.00%, 2007 740 781
(b)Dr. Pepper Bottling Holdings, Inc.,
11.625%, 2003 1,335 1,322
Herff Jones, Inc., 11.00%, 2005 490 524
Kinder-Care Learning Centers, 9.50%, 2009 1,760 1,696
Petro Stopping Centers, 10.50%, 2007 1,260 1,304
Pillowtex Corp., 10.00%, 2006 250 263
Plastic Container, 10.00%, 2006 40 42
Premier Parks Inc., 12.00%, 2003 990 1,099
(b)Six Flags Theme Park, 12.25%, 2005 3,120 3,167
Van De Kamps, Inc., 12.00%, 2005 500 554
West Point Stevens, Inc., 9.375%, 2005 1,680 1,743
Windy Hill Pet Food, 9.75%, 2007 190 192
------------------------------------------------------------------------
18,785
- -----------------------------------------------------------------------------------------------------------------
DRUGS AND Dade International Inc., 11.125%, 2006 770 860
HEALTHCARE--2.3% DVI, Inc., 9.875%, 2004 380 383
Integrated Health Services, 9.50%, 2007 460 475
Magellan Health Services, 11.25%, 2004 1,220 1,360
Tenet Healthcare
8.00%, 2005 460 462
10.125%, 2005 1,040 1,135
8.625%, 2007 440 444
------------------------------------------------------------------------
5,119
- -----------------------------------------------------------------------------------------------------------------
ENERGY AND RELATED Bellwether Exploration Co., 10.875%, 2007 380 405
SERVICES--6.2% Benton Oil & Gas Co., 11.625%, 2003 1,015 1,101
Coda Energy, 10.50%, 2006 1,240 1,305
Empire Gas Corp., 7.00%, with warrants, 2004 1,570 1,418
Flores & Rucks Inc., 13.50%, 2004 1,050 1,244
Forcenergy Gas Exploration
9.50%, 2006 620 642
8.50%, 2007 460 447
Forman Petroleum, 13.50%, 2004 370 364
Gulf Canada Resources Ltd.,
9.625%, 2005 549 586
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL
CORPORATE OBLIGATIONS AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Magnum Petroleum, 10.00%, 2007 $ 620 $ 622
Mesa Operating Co., 10.625%, 2006 500 563
Parker Drilling Corp., 9.75%, 2006 910 946
Plains Resources, 10.25%, 2006 780 831
United Meridian Corp., 10.375%, 2005 1,410 1,523
Vintage Petroleum
9.00%, 2005 950 974
8.625%, 2009 120 119
Wiser Oil Co., 9.50%, 2007 380 380
------------------------------------------------------------------------
13,470
- -----------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES, Cityscape Financial Corp., 12.75%, 2004 665 665
HOME BUILDERS AND Continental Homes Holding, 10.00%, 2006 740 781
REAL ESTATE--5.0% Del Webb Corp., 9.75%, 2008 540 541
Forecast Group L.P., 11.375%, 2000 660 634
Fortress Group, 13.75%, 2003 710 742
GMAC, 5.976%, 2002 1,200 1,197
Hovnanian Kent, 11.25%, 2002 1,568 1,633
Intertek Finance, 10.25%, 2006 520 541
Kaufman & Broad Home Corp., 9.625%, 2006 680 695
J.M. Peters Co., 12.75%, 2002 820 820
Presley Companies, 12.50%, 2001 1,625 1,617
UDC Homes, 12.50%, 2000 580 580
Williams Scotsman, 9.875%, 2007 370 371
------------------------------------------------------------------------
10,817
- -----------------------------------------------------------------------------------------------------------------
HOTEL AND GAMING--3.0% Eldorado Resorts, 10.50%, 2006 690 737
Empress River Casino, 10.75%, 2002 1,025 1,093
Harvey's Casino Resorts, 10.625%, 2006 310 329
Players International, 10.875%, 2005 685 712
Station Casinos Inc., 10.125%, 2006 880 882
Trump Atlantic City, 11.25%, 2006 2,830 2,773
------------------------------------------------------------------------
6,526
- -----------------------------------------------------------------------------------------------------------------
MANUFACTURING, METALS Aftermarket Technology, 12.00%, 2004 712 790
AND MINING--16.0% Alvey Systems, 11.375%, 2003 480 494
Bar Technologies, 13.50%, with warrants, 2001 1,390 1,411
Collins & Aikman Corp., 11.50%, 2006 1,410 1,579
Crain Industries, Inc., 13.50%, 2005 960 1,087
Day International Group, Inc., 11.125%, 2005 2,320 2,459
Delco Remy International, 10.625%, 2006 1,090 1,147
Essex Group Inc., 10.00%, 2003 320 333
Euramax International PLC, 11.25%, 2006 1,165 1,232
EV International, 11.00%, 2007 665 697
Fairfield Manufacturing Co., 11.375%, 2001 1,355 1,423
Foamex--JPS Automotive L.P., 14.00%,
with warrants, 2004 900 834
Foamex L.P.
11.25%, 2002 2,020 2,131
9.875%, 2007 700 712
GS Technologies
12.00%, 2004 310 334
12.25%, 2005 510 558
Gulf States Steel, 13.50%, with warrants, 2003 1,150 1,140
Hayes Wheels International, Inc., 11.00%, 2006 1,340 1,471
IMO Industries, 11.75%, 2006 860 864
Jordan Industries, 10.375%, 2003 1,020 1,025
JPS Automotive Products Corp., 11.125%, 2001 1,370 1,500
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL
CORPORATE OBLIGATIONS AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Key Plastics, 10.25%, 2007 $ 520 $ 543
Knoll Inc., 10.875%, 2006 700 770
MMI Companies, 11.25%, 2007 300 318
Motors and Gears, Inc., 10.75%, 2006 900 931
Neenah Corp., 11.125%, 2007 400 424
Newflo Corp., 13.25%, 2002 1,380 1,494
Renco Metals, 11.50%, 2003 590 625
Spinnaker Industries, 10.75%, 2006 910 917
Terex Corp. Unit, 13.25%, 2002 1,120 1,249
Thermadyne Industries, Inc.
10.25%, 2002 792 830
10.75%, 2003 985 1,029
WCI Steel Inc., 10.00%, 2004 1,300 1,342
Weirton Steel Corp., 11.375%, 2004 780 823
Wells Aluminum, 10.125%, 2005 360 367
------------------------------------------------------------------------
34,883
- -----------------------------------------------------------------------------------------------------------------
PAPER, FOREST PRODUCTS, BPC Holding Corp., 12.50%, 2006 620 663
AND CONTAINERS--7.9% BWAY Corp., 10.25%, 2007 450 478
Berry Plastics Corp., 12.25%, 2004 1,000 1,098
Container Corporation of America,
11.25%, 2004 955 1,034
Fonda Group, 9.50%, 2007 490 474
Gaylord Container Corp., 12.75%, 2005 1,300 1,424
Maxxam Group, Inc.
11.25%, 2003 1,215 1,251
(b) 12.25%, 2003 770 708
National Fiberstock Corp., 11.625%, 2002 910 937
Owens-Illinois, Inc.
11.00%, 2003 730 810
9.95%, 2004 800 846
Printpack, Inc.
9.875%, 2004 270 282
10.625%, 2006 910 965
Riverwood International
10.25%, 2006 450 447
10.875%, 2008 2,545 2,316
Specialty Paperboard, 9.375%, 2006 640 646
Stone-Consolidated Corp.
9.875%, 2001 240 239
12.25%, 2002 150 154
11.50%, 2006 1,640 1,656
U.S. Can Corp., 10.125%, 2006 700 739
------------------------------------------------------------------------
17,167
- -----------------------------------------------------------------------------------------------------------------
RETAILING--4.5% AFC Enterprises, 10.25%, 2007 380 381
Ameriking, 10.75%, 2006 410 431
Brunos, 10.50%, 2005 1,790 1,873
Cole National Group, 9.875%, 2006 750 791
(a)Color Tile, Inc., 10.75%, 2001 1,260 44
Finlay Fine Jewelry Corp., 10.625%, 2003 1,160 1,230
Guitar Center Management, 11.00%, 2006 280 308
Pamida Holdings, 11.75%, 2003 1,110 1,055
Pathmark Stores
12.625%, 2002 2,090 2,132
9.625%, 2003 100 94
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
CORPORATE OBLIGATIONS OR SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Southland Corp., 5.00%, 2003 $ 802 $ 675
Travelcenters America, 10.25%, 2007 800 818
------------------------------------------------------------------------
9,832
- -----------------------------------------------------------------------------------------------------------------
TECHNOLOGY--1.3% Communication and Power Industry, Inc., 12.00%, 2005 600 662
Computervision Corp., 11.375%, 1999 1,790 1,752
L-3 Communication, 10.375%, 2007 330 347
------------------------------------------------------------------------
2,761
- -----------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.0% (b)Transtar Holdings, L.P., 13.375%, 2003 2,580 2,161
------------------------------------------------------------------------
------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--102.4%
(Cost: $214,630) 223,385
------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
COMMON AND Beatrice Foods 155,316shs. 180
PREFERRED STOCKS(A)--1.0% Benedek Unit, PIK, preferred 10,000 532
Capital Pacific Holdings 3,634 4
Echostar Communications Corp. 11,825 154
Gaylord Container Corp. 13,125 107
Grand Union Co. 9,000 19
Intelcom Group, Inc. 4,950 50
Sinclair Capital 9,500 1,012
Sullivan Broadcasting 10,080 101
------------------------------------------------------------------------
TOTAL COMMON AND PREFERRED STOCKS
(Cost: $2,150) 2,159
------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
MONEY MARKET Yields--5.60% to 5.67%
INSTRUMENTS--2.3% Due--June 1997
(Cost: $4,986) $5,000 4,986
------------------------------------------------------------------------
TOTAL INVESTMENTS--107.8%
(Cost: $226,360) 235,122
------------------------------------------------------------------------
LIABILITIES, LESS OTHER ASSETS--(7.8%) (17,052)
------------------------------------------------------------------------
NET ASSETS--100% $218,070
------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing securities. In the case of a bond, generally denotes
that issuer has defaulted on the payment of 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 $226,360,000 for federal income tax purposes
at May 31, 1997, the gross unrealized appreciation was $11,586,000, the gross
unrealized depreciation was $2,824,000 and the net unrealized appreciation on
investments was $8,762,000.
See accompanying Notes to Financial Statements.
14
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $226,360) $235,122
- ------------------------------------------------------------------------
Receivable for:
Interest 4,693
- ------------------------------------------------------------------------
Investments sold 4,078
- ------------------------------------------------------------------------
TOTAL ASSETS 243,893
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Note payable 20,000
- ------------------------------------------------------------------------
Cash overdraft 1,952
- ------------------------------------------------------------------------
Payable for:
Investments purchased 3,461
- ------------------------------------------------------------------------
Management fee 154
- ------------------------------------------------------------------------
Interest 201
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 28
- ------------------------------------------------------------------------
Trustees' fees 27
- ------------------------------------------------------------------------
Total liabilities 25,823
- ------------------------------------------------------------------------
NET ASSETS $218,070
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $251,047
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (44,855)
- ------------------------------------------------------------------------
Net unrealized appreciation on investments 8,762
- ------------------------------------------------------------------------
Undistributed net investment income 3,116
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $218,070
- ------------------------------------------------------------------------
NET ASSET VALUE PER SHARE, $.01 PAR VALUE
($218,070 / 23,473 shares outstanding) $9.29
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MAY 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
NET INVESTMENT INCOME
- -----------------------------------------------------------------------
Interest $12,473
- -----------------------------------------------------------------------
Expenses:
Management fee 916
- -----------------------------------------------------------------------
Interest expense 598
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 102
- -----------------------------------------------------------------------
Professional fees 35
- -----------------------------------------------------------------------
Reports to shareholders 13
- -----------------------------------------------------------------------
Trustees' fees and other 49
- -----------------------------------------------------------------------
Total expenses 1,713
- -----------------------------------------------------------------------
NET INVESTMENT INCOME 10,760
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized loss on sales of investments (1,904)
- -----------------------------------------------------------------------
Change in net unrealized appreciation on investments 3,735
- -----------------------------------------------------------------------
Net gain on investments 1,831
- -----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $12,591
- -----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MAY 31, NOVEMBER 30,
1997 1996
- -------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 10,760 21,345
- -------------------------------------------------------------------------------------------------
Net realized gain (loss) (1,904) 1,842
- -------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation 3,735 8,404
- -------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 12,591 31,591
- -------------------------------------------------------------------------------------------------
Distribution from net investment income (10,582) (20,992)
- -------------------------------------------------------------------------------------------------
Proceeds from shares issued in reinvestment of dividends
(145 shares and 370 shares, respectively) 1,412 3,548
- -------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 3,421 14,147
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------------
Beginning of period 214,649 200,502
- -------------------------------------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment income of $3,116 and
$2,938, respectively) $218,070 214,649
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES DESCRIPTION OF FUND. The Fund is registered under
the Investment Company Act of 1940 as a
diversified, closed-end management investment
company.
INVESTMENT VALUATION. Investments are stated at
value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Portfolio securities that are
traded on a domestic securities exchange are valued
at the last sale price on the exchange where
primarily traded or, if there is no recent sale, at
the last current bid quotation. Portfolio
securities that are primarily traded on foreign
securities exchanges are generally valued at the
preceding closing values of such securities on
their respective exchanges where primarily traded.
Securities not so traded are valued at the last
current bid quotation if market quotations are
available. Exchange traded financial futures and
options are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. 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.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies during the six
months ended May 31, 1997. The accumulated net
realized loss on sales of investments for federal
income tax purposes at May 31, 1997, amounting to
approximately $42,579,000, is available to offset
future taxable gains. If not applied, the loss
carryover expires during the period 1998 through
2005.
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.
OTHER CONSIDERATIONS. The Fund invests a
substantial portion of its assets in high yield
bonds. These bonds ordinarily are in the lower
rating categories of recognized rating agencies or
are non-rated, and thus involve more risk than
higher rated bonds.
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2 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 .85% of average weekly net assets. The Fund
incurred a management fee of $916,000 for the six
months ended May 31, 1997.
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 service fees of $22,000
for the six months ended May 31, 1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the six months ended May 31, 1997, the Fund
made no payments to its officers and incurred
trustees' fees of $11,000 to independent trustees.
- --------------------------------------------------------------------------------
3 INVESTMENT
TRANSACTIONS For the six months ended May 31, 1997, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $107,253
Proceeds from sales 107,221
- --------------------------------------------------------------------------------
4 NOTE PAYABLE The note payable represents a $20,000,000 loan from
Bank of America which was outstanding throughout
the six months. The note bears interest at the
London Interbank Offered Rate plus .275% (5.91% at
May 31, 1997) which is payable quarterly. The loan
amount and rate are reset periodically under a
credit facility which is available until June 30,
1999.
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, -----------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.20 8.73 8.33 9.45 8.70
- ------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .91 .91 .88 .99
- ------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .08 .46 .39 (1.10) .71
- ------------------------------------------------------------------------------------------------------------
Total from investment operations .54 1.37 1.30 (.22) 1.70
- ------------------------------------------------------------------------------------------------------------
Distribution from net investment income .45 .90 .90 .90 .95
- ------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.29 9.20 8.73 8.33 9.45
- ------------------------------------------------------------------------------------------------------------
MARKET VALUE, END OF PERIOD $10.00 10.00 9.50 8.38 9.13
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------
Based on net asset value 6.05% 16.56 16.30 (2.55) 20.62
- ------------------------------------------------------------------------------------------------------------
Based on market value 5.33% 16.12 25.81 1.47 11.00
- ------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------------
Expenses 1.55% 1.59 1.52 1.64 1.82
- ------------------------------------------------------------------------------------------------------------
Net investment income 10.02% 10.33 10.64 9.91 11.08
- ------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $218,070 214,649 200,502 188,294 211,194
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 72% 74 85 83 98
- ------------------------------------------------------------------------------------------------------------
Total debt outstanding at end of period (in
thousands) $ 20,000 20,000 20,000 20,000 20,000
- ------------------------------------------------------------------------------------------------------------
Asset coverage ratio per $1,000 of debt 11.9 11.7 11.0 10.4 11.6
- ------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return based on net asset value reflects changes in the Fund's net
asset value during the period. Total return based on market value reflects
changes in market value. Each figure includes reinvestment of dividends.
These figures will differ depending upon the level of any discount from or
premium to net asset value at which the Fund's shares trade during the
period.
19
<PAGE> 20
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS CHARLES R. MANZONI, JR.
President and Trustee Vice President
JAMES E. AKINS MICHAEL A. MCNAMARA
Trustee Vice President
ARTHUR R. GOTTSCHALK JOHN E. NEAL
Trustee Vice President
FREDERICK T. KELSEY ROBERT C. PECK
Trustee Vice President
DOMINIQUE P. MORAX HARRY E. RESIS, JR.
Trustee Vice President
FRED B. RENWICK PHILIP J. COLLORA
Trustee Vice President
and Secretary
JOHN B. TINGLEFF
Trustee JEROME L. DUFFY
Treasurer
JOHN G. WEITHERS
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT ZURICH KEMPER SERVICE COMPANY
P.O. Box 419066
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.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
[RECYCLED LOGO]
Printed on recycled paper.
KHIT - 3 (7/97) 1034800
Printed in the U.S.A. [KEMPER FUNDS LOGO]
