<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MAY 31, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD (SM)
[LOGO]
KEMPER HIGH INCOME TRUST
KEMPER
HIGH INCOME
"... We have been investing more in a lower quality
issues... which has helped support the funds's
income earning potential... we're making [these
investments] because the issues make sense given
the current strength of the economy. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
7
Portfolio Statistics
8
Largest Holdings
9
Portfolio of Investments
17
Financial Statements
19
Notes to Financial Statements
21
Financial Highlights
22
Shareholder's Meeting
AT A GLANCE
- -------------------------------------------------------
TOTAL RETURNS
- -------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 1998
- -------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------
BASED ON BASED ON
NET ASSET VALUE MARKET PRICE
- -------------------------------------------------------
<S> <C> <C>
KEMPER HIGH
INCOME TRUST 6.04% 2.80%
- -------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------
NET ASSET VALUE AND MARKET PRICE
- -------------------------------------------------------
AS OF AS OF
5/31/98 11/30/97
- -------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE $9.55 $9.44
- -------------------------------------------------------
MARKET PRICE $10.00 $10.19
- -------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------
DIVIDEND REVIEW
- -------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD
INFORMATION FOR THE FUND AS OF MAY 31, 1998.
KEMPER HIGH
INCOME TRUST
- -------------------------------------------------------
<S> <C>
SIX-MONTHS INCOME: $0.4500
- -------------------------------------------------------
MAY DIVIDEND: $0.0750
- -------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE
(BASED ON NET ASSET VALUE) 9.42%
- -------------------------------------------------------
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.
Investments by the fund in lower quality bonds present greater risk to principal
and interest than investments in higher quality bonds.
TERMS TO KNOW
GRAY MONDAY The name used to identify Monday, October 27, 1997. On that day the
Dow Jones Industrial Average lost 554 points or 7 percent of its total value.
Gray Monday is a comparison to Black Monday, October 19, 1987, when the market
lost almost 23 percent of its total value.
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.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for a specified period, assuming the
reinvestment of all dividends. It represents the aggregate percentage change in
the value of an investment in the fund over the period. Total return may be
based upon net asset value or market price.
<PAGE> 3
ECONOMIC OVERVIEW
[SILVIA PHOTO]
Dr. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS. HE IS ALSO A MEMBER OF THE INVESTMENT POLICY AND STRATEGY COMMITTEE
FOR KEMPER FUNDS.
SILVIA HOLDS BACHELOR OF ARTS AND PH.D. DEGREES IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND HAS A MASTER'S DEGREE IN ECONOMICS FROM BROWN
UNIVERSITY IN PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS
WITH THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT MANAGER FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $218 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS. IT IS ONE OF
THE 10 LARGEST MUTUAL FUND COMPLEXES IN THE UNITED STATES.
DEAR SHAREHOLDERS,
Stable economic growth, low interest rates and sustained low inflation continued
to produce a beneficial market environment for investors in the second quarter
of 1998. Despite heightened sensitivity to earnings estimates and announcements,
the economy continued to support financial assets. We expect this favorable
climate to continue -- in spite of the sensitivity -- at least over the shorter
term.
As always, expectations have been at the heart of the actions and reactions
that move the markets. Expectations appear to be high, as demonstrated by a
record flow of new cash into mutual funds. As of April 30, 1998, a record $5
trillion in mutual fund assets surpassed total assets of the nation's banks,
according to the Investment Company Institute, a trade organization that
monitors the mutual fund industry, and the Federal Reserve Bank in Washington.
Unfortunately, high expectations often combine with high anxiety -- today's
investors are attuned to even the smallest hint of economic change. The result
is volatility. Many who believe that our long-running bull market is too good to
be true or that stock prices are too high are wondering when the market will
reverse.
While a reversal may not be on the immediate horizon, investors are wise to
watch for several signs that change is underway: rising prices, indicating
higher inflation; repercussions of the Asian economic crisis on American
business, which could appear in the form of reduced earnings; and a continued
widening of our trade deficit, a serious imbalance caused by heightened American
demand for foreign goods and services.
But at its monetary policy meeting at the end of the second quarter, the
Federal Reserve Board (the Fed) again chose to leave interest rates alone. In
the coming months, the Fed could raise interest rates if inflation accelerates
or if growth appears to be too rapid compared to the Fed's expectations.
Our positive outlook for the short term is based primarily on the current
resiliency of our marketplace. The United States appears to be firmly planted in
the middle of an economic cycle, with no evidence of detrimental pressures that
might be associated with the market's phenomenal growth. We are not seeing
widespread price increases for goods and services or a downturn in the housing
market, both of which we might expect late in an economic cycle.
Equities have continued to reward investors. The U.S. stock market, as
measured by the Standard & Poor's 500, gained nearly 18 percent in the first
half of 1998 but just 3.5 percent in the second quarter as profit concerns moved
front and center. Bonds in 1998 have also rewarded investors in terms of real
return, which is total return less the rate of inflation. The Treasury and high
yield debt markets have performed particularly well.
U.S. economic growth, as measured by the gross domestic product (GDP) growth
rate, was slightly above 5 percent for the first quarter. Our general
expectation for the year is that growth in all of 1998 will increase between 2.5
and 3 percent over last year. In other words, the economy will remain strong,
but will continue to slow down as the year progresses.
Consumer spending and corporate fixed investment have fueled the economy's
solid growth. Spending on both capital goods and high technology has been
strong. Corporate profit growth has continued to slow, which appears to be
acceptable to investors in an environment of stable interest rates. U.S.
employment growth has ranged from 2 to 2.25 percent, continuing to exceed
expectations. Consumer confidence has remained at all-time highs. The increase
in output prices, an indicator of inflation measured by the Consumer Price Index
(CPI), has stayed at 1.5 to 2 percent.
Adding to the good news, all seems to be quiet on the domestic policy front.
At the end of February, the U.S. federal budget deficit essentially vanished.
Recent efforts to reduce the deficit, combined with higher federal revenues due
to the robust economy, have left us with an expected budget surplus of $60
billion to $80 billion for fiscal 1998. To date, our Democratic president and
Republican Congress have not agreed on any significant legislation regarding tax
credits, spending cuts or health care that could threaten the newfound federal
budget surplus.
Can we expect a little more excitement from overseas? A full-scale global
recession from last year's Asian economic crisis seems unlikely at this point.
Although the crisis has impacted exporters in particular, it has yet to hurt
most U.S. businesses and investors. Quite the
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 (6/30/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <S> <C>
10-YEAR TREASURY RATE(1) 5.5 5.54 6.22 6.87
PRIME RATE(2) 8.5 8.5 8.5 8.25
INFLATION RATE(3)* 1.75 1.7 2.3 2.82
THE U.S. DOLLAR(4) 9.54 9.32 7.32 8.35
CAPITAL GOODS ORDERS(5)* 10.51 14.37 8.58 2.44
INDUSTRIAL PRODUCTION(5)* 4.42 5.74 3.91 3.99
EMPLOYMENT GROWTH(6) 2.62 2.88 2.56 2.23
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6 percent. The low, moderate inflation of
the last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of May 31, 1998.
contrary. While the mere threat of repercussions from the Asian crisis added to
the anxiety mentioned earlier, it has also had the effect of keeping U.S.
interest rates and prices in check, making the U.S. economy all the more
attractive to investors around the world.
In the global economy, the U.S. dollar continues to appreciate in value
compared to other currencies. In fact, more capital is flowing into U.S.
markets as investors generally avoid Asia. Europe also has been benefiting from
the crisis. Canada, which is a commodity-producing exporter, has been somewhat
negatively affected as commodity prices have fallen. Political unrest in
Indonesia, nuclear tests in India and Pakistan and economic turmoil in Russia
have been keeping international investors on the edges of their seats.
Other major developments abroad include the final selection of
countries to participate in Europe's single currency next year. Many European
countries are adopting more restrictive fiscal policy and reducing inflation in
anticipation of their momentous entry into the European Economic and Monetary
Union (EMU). But after the EMU is established in 1999, tensions may indeed
mount as countries work to adapt to the new structure.
As we approach the turn of the century, one caveat remains: Don't
underestimate the potential of the Year 2000 computer code problem. It appears
that a significant number of federal government agencies will not meet the
criteria necessary to avoid the problem. Many businesses are revealing that
billions of dollars are being spent on the situation. Some experts say a global
recession is in store. Others adamantly disagree. In any event, we may indeed
see a reduction in capital spending toward the of 1998 and the first half of
next year as companies focus on fixing existing computers rather than on
purchasing new equipment. We'll keep you posted!
Thank you for your continued support. We appreciate the opportunity to
serve your investment needs.
Sincerely,
/s/ John E. Silvia
JOHN E. SILVIA
July 10, 1998
4
<PAGE> 5
PERFORMANCE Update
[MCNAMARA PHOTO]
Michael McNamara joined Scudder Kemper Investments, Inc. in 1972, and is a
managing director. He is a co-lead portfolio manager of Kemper High Income Trust
and directs all research for the fund. He earned a bachelor's from the
University of Missouri and an M.B.A. from Loyola University.
[RESIS PHOTO]
Harry Resis joined Scudder Kemper Investments in 1988 and is a managing
director. He is co-lead portfolio manager of Kemper High Income Trust and
handles all of the trading activity for the fund. Resis holds a bachelor's
degree 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.
CONTINUED STRENGTH IN THE ECONOMY, LOW INFLATION
AND LOW INTEREST RATES, COMBINED WITH RECORD LEVELS
OF HIGH YIELD BOND SUPPLY AND DEMAND, SUPPORTED
ONGOING STRENGTH IN THE HIGH YIELD MARKET. CO-LEAD
PORTFOLIO MANAGERS HARRY RESIS AND MICHAEL MCNAMARA
EXPLAIN THEIR INVESTMENT APPROACH AND DISCUSS THE
FACTORS DRIVING PERFORMANCE IN THE FUND.
Q HOW DID KEMPER HIGH INCOME TRUST PERFORM FOR THE SEMIANNUAL PERIOD,
DECEMBER 1, 1997 THROUGH MAY 31, 1998?
A The fund gained in both market value and net asset value. In market value,
the fund gained 2.80 percent and on May 31, shares of the fund were trading at a
market price of $10.00. Total return for the fund based on net asset value was
6.04 percent, slightly outperforming the Salomon Brothers Extended High Yield
Index return of 6.00 percent for the same period.
Q WHAT FACTORS ARE SUPPORTING THIS STRONG PERFORMANCE?
A The past six months have been a continuation of an ideal environment for
high yield bonds. Basically, over the last three years we've experienced stable
economic growth amid relatively benign inflation. This environment has helped
corporate earnings to grow, and the equity market to flourish. On the other
hand, this slow growth economy has kept interest rates and Treasury yields
relatively low.
Investors look at a number of factors when deciding which type of bond to
invest in. As yields (coupon rates) on Treasuries remain low, many people have
looked to other types of bonds to find more income. High yield bonds are
attractive because they pay higher rates of income in return for the higher
level of risk associated with them. Over the past several years, investors have
been willing to accept more risk to earn more income on their investments. This
has paid off as the economy and strong performance of high yield issuers has led
to relatively few defaulted bonds.
This strong performance has supported record high supply levels in the high
yield market, offset by record levels of demand. Open-end high yield mutual fund
flows in 1997 were a record $22 billion, up from $16 billion the year before.
And, those figures include only cash flows coming into the market from open-end
mutual funds. They don't include the flows from closed-end mutual funds,
insurance companies, pension funds and foreign investors, places we know
billions of dollars keep coming in, more than offsetting this record supply.
What this supply and demand scenario seems to be saying is that investors are
becoming more comfortable with the risk involved in the high yield market. As a
result, this demand, coupled with strong economic fundamentals has been driving
the strong high yield market performance.
Q WITH SO MUCH DEMAND FOR HIGH YIELD BONDS, ARE YOU FINDING IT MORE
CHALLENGING TO LOCATE APPROPRIATE BONDS FOR THE FUNDS?
A Much of the new supply in the high yield market is in lower-quality bonds
(below B-rated and nonrated issues). Lower credit quality implies more risk, but
these bonds offer higher yields to compensate for the assumed higher risk.
5
<PAGE> 6
PERFORMANCE UPDATE
So, it is a bit more difficult to find higher quality bonds (B-rated and higher)
today. We have been investing more in lower quality issues than we were a year
ago, which has helped support the fund's income earning potential. However,
we're not making these investments simply because they're available, we're
making them because the issues make sense given the current strength of the
economy. The economy has given these weaker credits a greater likelihood of
flourishing. If we sense that the economy is beginning to shift, we'll change
our strategy.
Q WHAT OTHER CHANGES HAVE YOU MADE TO THE FUND'S PORTFOLIO COMPOSITION?
A In the past six months we've increased our level of deferred interest
bonds to be more in line with other high yield funds. Deferred interest bonds
have low credit quality ratings. They are purchased at a discount to their par
value and do not start paying interest until later in the life of the loan. They
tend to have a longer duration, making them sensitive to interest rate changes.
We feel that the economic environment and interest rates will remain stable,
making deferred interest bonds a good investment for the fund.
Q HAS THE ASIAN MARKET CRISIS NEGATIVELY AFFECTED THE HIGH YIELD MARKET?
A The Asian crisis is having a stronger impact on large, major companies
that do business in Asia. Most high yield bond issuers are companies that are
considered "small cap" and that conduct business primarily in the United States,
so the negative impact was barely felt by the U.S. high yield market. We do
believe, however, that all of the affects of Asia have not yet been felt by the
U.S. economy. We expect that they may be revealed in a slight slow down of gross
domestic product growth in the second quarter of 1998. We don't think the impact
will be significant, but we will watch it closely and monitor its effects on the
U.S. economy and the high yield market.
Q DO YOU FORESEE ANY ALLOCATION CHANGES TO THE FUND IN THE NEAR FUTURE?
A Not really. We've gotten slightly more aggressive over the past few months
by buying lower credit-quality issues. This adjustment has paid off, but we
don't plan to increase our positions in these bottom-tier investments
dramatically. We plan to keep a close eye on the economy and the high yield
market and make our investment decisions based on the direction of both.
Q SO HIGH YIELD FUNDS CONTINUE TO BE A GOOD CHOICE FOR INVESTORS TODAY?
A Definitely. All indicators point to continued strength in the high yield
market. Defaults remain relatively low and supply and demand continue to grow at
a breakneck pace. For both income-oriented and total return-oriented investors,
the high yield market makes a great deal of sense right now.
YEAR 2000
YEAR 2000 ISSUE
Like other registered investment companies and financial and business
organizations worldwide, the fund could be adversely affected if computer
systems on which the fund relies, which primarily include those used by the
Manager, its affiliates or other service providers, are unable to correctly
process date-related information on and after January 1, 2000. This risk is
commonly called the Year 2000 Issue. Failure to successfully address the Year
2000 Issue could result in interruptions to and other material adverse effects
on the fund's business and operations. The Manager has commenced a review of the
Year 2000 Issue as it may affect the fund and is taking steps it believes are
reasonably designed to address the Year 2000 Issue, although there can be no
assurances that these steps will be sufficient. In addition, there can be no
assurances that the Year 2000 Issue will not have an adverse effect on the
companies whose securities are held by the fund or on global markets or
economies generally.
6
<PAGE> 7
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 5/31/98 ON 11/30/97
- --------------------------------------------------------------------------
<S> <C> <C> <C>
HIGH YIELD BONDS 94% 94%
- --------------------------------------------------------------------------
CASH AND EQUIVALENTS 2 3
- --------------------------------------------------------------------------
SHORT-TERM TREASURIES 2 2
- --------------------------------------------------------------------------
PREFERRED AND COMMON STOCK 2 1
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
CORPORATE LONG-TERM FIXED INCOME
SECURITIES RATINGS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 5/31/98 ON 11/30/97
- --------------------------------------------------------------------------
<S> <C> <C> <C>
AAA 2% 2%
- --------------------------------------------------------------------------
BBB -- 1
- --------------------------------------------------------------------------
BB 14 15
- --------------------------------------------------------------------------
B 72 75
- --------------------------------------------------------------------------
OTHER 12 7
- --------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART]
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.
AVERAGE MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ON 5/31/98 ON 11/30/97
- --------------------------------------------------------------------------
<S> <C> <C> <C>
AVERAGE MATURITY 7.7 years 7.6 years
- --------------------------------------------------------------------------
</TABLE>
*Portfolio composition and holdings are subject to change.
7
<PAGE> 8
LARGEST HOLDINGS
THE FUND'S FIVE LARGEST HOLDINGS*
Representing 8.1 percent of the fund's total net assets on May 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
HOLDINGS PERCENT
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
TELEWEST COMMUNICATIONS
1. 2.0%
- --------------------------------------------------------------------------------
SIX FLAGS THEME PARK
2. 1.8%
- --------------------------------------------------------------------------------
INTERNATIONAL CABLETEL
3. 1.5%
- --------------------------------------------------------------------------------
COINMACH CORP.
4. 1.4%
- --------------------------------------------------------------------------------
BUILDING MATERIALS CORPORATION OF AMERICA
5. 1.4%
- --------------------------------------------------------------------------------
</TABLE>
*Portfolio holdings and composition are subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER HIGH INCOME TRUST
Portfolio of Investments at May 31, 1998 (unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--2.1% PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bonds
13.375%, 2001 $3,000 $ 3,680
11.75%, 2001 1,000 1,153
--------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost: $4,951) 4,833
--------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS--1.3%
- -----------------------------------------------------------------------------------------------------------------------
(PRINCIPAL AMOUNT Federal Republic of Brazil,
IN U.S. DOLLARS) 9.375%, 2008 1,040 970
Republic of Korea,
8.875%, 2008 1,000 940
United Mexican States,
8.625%, 2008 1,170 1,150
--------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost: $3,152) 3,060
--------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--98.7%
- -----------------------------------------------------------------------------------------------------------------------
BROADCASTING, Affinity Group, Inc., 11.50%, 2003 1,420 1,498
CABLESYSTEMS AND
PUBLISHING--17.8%
American Banknote Corp., 11.25%,
with warrants, 2007 720 724
(b)American Lawyer, 12.25%, 2008 90 58
American Radio Systems, 9.00%, 2006 990 1,059
(b)Australis Holdings
14.00%, 2000 267 174
15.00%, with warrants, 2002 2,750 550
Big Flower Press, Inc., 8.875%, 2007 1,400 1,442
Busse Broadcasting, 11.625%, 2000 480 517
CCA Holdings, 13.00%, 1999 1,000 1,530
CSC Holdings Inc.
9.25%, 2005 100 106
7.875%, 2007 100 103
8.125%, 2009 370 387
9.875%, 2013 840 928
10.50%, 2016 1,140 1,325
Capstar Broadcasting
9.25%, 2007 1,110 1,146
(b) 12.75%, 2009 890 672
Century Communications Corp., 8.375%,
2007 350 354
Chancellor Media Corp., 8.125%, 2007 340 339
(b)Charter Communications, 14.00%, 2007 1,600 1,292
Comcast Cellular Holdings, Inc., 9.50%,
2007 1,180 1,217
Comcast Corp., 9.125%, 2006 820 867
(b)Comcast UK Cable Partners, Ltd.,
11.20%, 2007 3,510 2,883
(b)Diamond Cable Communications, PLC
13.25%, 2004 1,115 1,044
11.75%, 2005 490 393
10.75%, 2007 300 214
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(b)DIVA Systems Corp., 12.625%, 2008 $ 850 $ 450
EZ Communications, 9.75%, 2005 380 410
Frontiervision
11.00%, 2006 840 932
(b) 11.875%, 2007 880 682
Intermedia Capital Partners, 11.25%, 2006 1,040 1,162
(b)International Cabletel, Inc., 12.75%,
2005 3,740 3,282
NTL, 10.00%, 2007 300 321
Newsquest Capital, PLC, 11.00%, 2006 438 491
(b)PX Escrow Corp., 9.62%, 2006 880 627
SFX Entertainment, Inc., 9.125%, 2008 960 936
Salem Communications Corp., 9.50%, 2007 500 523
Sinclair Broadcasting Group, Inc., 8.75%,
2007 1,620 1,644
Star Choice, 13.00%, with warrants, 2005 400 435
Sullivan Broadcasting
10.25%, 2005 320 362
13.25%, 2006 630 1,040
(b)TeleWest Communications, PLC, 11.00%,
2007 5,490 4,419
(b)Transwestern Holdings, 11.875%, 2008 250 166
(b)21st Century Telecom Group, Inc.,
12.25%, 2008 600 342
(b)UIH Australia Pacific, Inc., 14.00%,
with warrants, 2006 710 451
(b)United International Holdings, 10.75%,
2008 1,500 941
--------------------------------------------------------------------------
40,438
- -----------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES--1.6% Allied Waste Industries
10.25%, 2006 460 504
(b) 11.30%, 2007 1,100 807
Corporate Express, Inc., 4.50%, 2000 70 64
General Binding Corp., 9.375%, 2008 350 352
Intertek Finance, 10.25%, 2006 520 550
Outdoor Systems, Inc.
9.375%, 2006 760 802
8.875%, 2007 530 549
--------------------------------------------------------------------------
3,628
- -----------------------------------------------------------------------------------------------------------------------
CHEMICALS AND Atlantis Group, Inc., 11.00%, 2003 1,605 1,657
AGRICULTURE--4.4%
Hines Horticulture, 11.75%, 2005 510 561
Huntsman Polymer Corp., 11.75%, 2004 1,790 1,969
NL Industries, Inc.
11.75%, 2003 860 948
(b) 13.00%, 2005 940 966
Octel Developments, PLC, 10.00%, 2006 270 275
Terra Industries, Inc., 10.50%, 2005 1,610 1,749
Texas Petrochemicals, 11.125%, 2006 890 970
UCC Investors Holdings, Inc., 10.50%,
2002 720 815
--------------------------------------------------------------------------
9,910
- -----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--16.8% American Cellular Corp., 10.625%, 2008 430 427
(b)Call-Net Enterprises, Inc.
13.25%, 2004 1,270 1,205
9.27%, 2007 490 342
Communication and Power Industry, Inc.,
12.00%, 2005 600 672
(b)Communications Cellular, 13.125%, with
warrants, 2003 2,000 1,680
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(b)Crown Castle International Corp.,
10.625%, 2007 $1,500 $ 1,013
Dobson Communication Corp., 11.75%, 2007 1,200 1,290
Econophone, Inc., 13.50%, with warrants,
2007 1,390 1,628
Esprit Telecom, 11.50%, 2007 690 738
(b)Focal Communication Corp., 12.125%,
2008 710 431
GCI General Communication, 9.75%, 2007 920 959
(b)ICG Holdings, 13.50%, 2005 2,940 2,470
(b)ICG Services, Inc.
10.00%, 2008 640 403
9.875%, 2008 400 244
(b)IPC Information Systems, 10.875%, 2008 1,000 725
Interamerica Communication, 14.00%, 2007 170 170
(b)Intermedia Communications, 12.25%,
2006 430 350
Intermedia Communications of Florida,
Inc.,
(b) 11.25%, 2007 1,800 1,314
8.875%, 2007 with warrants 300 509
(b)KMC Telecom Holdings, Inc., 12.50%,
2008 1,240 744
Level 3 Communications
10.375%, 2007 330 366
9.125%, 2008 500 487
Long Distance International, 12.25%, 2008 700 707
MGC Communications, 13.00%,
with warrants, 2004 830 913
McLeod, Inc.
(b) 10.50%, 2007 1,745 1,300
9.25%, 2007 560 582
Metronet Communications
12.00%, with warrants, 2007 360 438
(b) 10.75%, 2007 350 238
(b)Millicom International Cellular, S.A.,
13.50%, 2006 1,540 1,203
Netia Holdings
(b) 11.25%, 2007 440 306
10.25%, 2007 135 134
(b)Nextel Communications
9.75%, 2004 770 744
10.65%, 2007 1,770 1,175
9.75%, 2007 330 212
9.95%, 2008 525 336
Nextlink Communications
12.50%, 2006 385 439
(b) 9.45%, 2008 530 323
9.00%, 2008 610 608
(b)PTC International Finance, B.V.,
10.75%, 2007 1,170 810
Performance Systems International, Inc.,
10.00%, 2005 600 609
Primus Telecommunications Group,
11.75%, with warrants, 2004 600 660
RCN Corp.
10.00%, 2007 550 575
(b) 9.80%, 2008 900 560
Rogers Cantel, 9.75%, 2016 1,265 1,328
(b)SBA Communication, 12.00%, 2008 1,400 861
Satelites Mexicanos, S.A. de C.V.,
10.125%, 2004 360 359
Teligent, Inc.
11.50%, 2007 550 560
(b) 11.50%, 2008 550 303
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
USA Mobile Communications, Inc. II,
14.00%, 2004 $ 510 $ 565
Vanguard Cellular Systems, 9.375%, 2006 230 242
Versatel Telecom, 13.25%, 2008 500 518
Viatel, Inc.
(b) 12.50%, 2008 680 415
11.25%, 2008 500 530
Winstar Communication, 15.00%, 2007 240 302
Winstar Equipment, 12.50%, 2004 920 1,021
--------------------------------------------------------------------------
38,043
- -----------------------------------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS--4.3% American Standard, Inc.
(b) 10.50%, 2005 950 988
9.25%, 2016 270 278
Airxcel, 11.00%, 2007 490 518
Brand Scaffold Services, Inc., 10.25%,
2008 280 286
(b)Building Materials Corporation of
America,
11.75%, 2004 3,205 3,125
Desa International, 9.875%, 2007 770 768
Falcon Building Products, Inc., 9.50%,
2007 420 420
Kevco, 10.375%, 2007 610 634
Nortek, Inc.
9.875%, 2004 1,190 1,226
9.125%, 2007 640 653
Waxman Industries, Inc.
(b) 12.75%, 2004 300 284
(a) 55,106 warrants expiring 2004 102
Werner Holdings, 10.00%, 2007 450 468
--------------------------------------------------------------------------
9,750
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS AMF Bowling World
AND SERVICES--11.6% (b) 12.25%, 2006 692 560
10.875%, 2006 1,470 1,608
Avondale Mills, 10.25%, 2006 930 1,007
CEX Holdings, Inc., 9.625%, 2008 390 394
Cinemark USA, Inc., 9.625%, 2008 720 742
Coinmach Corp., 11.75%, 2005 2,840 3,167
Doskocil Manufacturing Co., 10.125%, 2007 530 562
Dyersburg Corp., 9.75%, 2007 790 802
Grupo Azucarero Mexico, S.A. de C.V.,
11.50%, 2005 760 646
Hedstrom Corp., 10.00%, 2007 530 543
Herff Jones, Inc., 11.00%, 2005 740 814
IMPAC Group, Inc., 10.125%, 2008 560 561
Imperial Home Decor Group Inc., 11.00%,
2008 500 518
Kinder-Care Learning Centers, 9.50%, 2009 1,910 1,931
La Petite Academy, Inc., 10.00%, 2008 340 342
Mastellone Hermonos, 11.75%, 2008 700 714
Nine West Group, 9.00%, 2007 350 341
Outboard Marine, 10.75%, 2008 360 364
Perkins Family Restaurants, L.P.,
10.125%, 2007 350 371
(b)Pinnacle Holdings, 10.00%, 2008 1,000 644
Premier Parks, Inc., 12.00%, 2003 690 764
Purina Mills, Inc., 9.00%, 2010 500 514
(b)Restaurant Co., 11.25%, 2008 740 444
Riddell Sports, Inc., 10.50%, 2007 560 577
(b)Sealy Mattress, 10.875%, 2007 300 199
(b)Six Flags Theme Park, 12.25%, 2005 3,545 4,024
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(b)Spin Cycle, 12.75%, 2005 $ 830 $ 589
Van De Kamps, Inc., 12.00%, 2005 660 736
West Point Stevens, Inc., 9.375%, 2005 1,680 1,789
--------------------------------------------------------------------------
26,267
- -----------------------------------------------------------------------------------------------------------------------
DRUGS AND Dade International Inc., 11.125%, 2006 770 859
HEALTHCARE--1.9% Jackson Products, Inc., 9.50%, 2005 450 453
Media Inc., 11.00%, 2008 540 549
Paracelsus Healthcare, 10.00%, 2006 280 287
(b)Paragon Health Networks Inc., 10.50%,
2007 2,360 1,552
Vencor, 9.875%, 2005 670 673
--------------------------------------------------------------------------
4,373
- -----------------------------------------------------------------------------------------------------------------------
ENERGY AND RELATED Bellwether Exploration Co., 10.875%, 2007 735 774
SERVICES--5.7% Benton Oil & Gas Co.
11.625%, 2003 1,185 1,256
9.375%, 2007 170 166
Coho Energy, Inc., 8.875%, 2007 390 367
Dailey International, 9.50%, 2008 570 564
Denbury Management, 9.00%, 2008 560 554
Espirito Santos Centrais Electricas S.A.,
10.00%, 2007 1,110 991
Flores & Rucks, Inc., 9.75%, 2006 330 361
Forcenergy Gas Exploration, 9.50%, 2006 510 515
Mariner Energy, 10.50%, 2006 160 165
Michael Petroleum Corp., 11.50%, 2005 350 352
Northern Offshore ASA., 10.00%, 2005 800 808
Pacalta Resources, Ltd., 10.75%, 2004 1,230 1,252
Parker Drilling Corp., 9.75%, 2006 1,040 1,089
Plains Resources, 10.25%, 2006 395 419
RAM Energy, 11.50%, 2008 300 300
Rutherford-Moran Oil Corp., 10.75%, 2004 380 407
Seven Seas Petroleum Inc., 12.50%, 2005 350 354
Stone Energy Corp., 8.75%, 2007 810 810
United Meridian Corp., 10.375%, 2005 1,335 1,469
--------------------------------------------------------------------------
12,973
- -----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES, Del Webb Corp.
HOME BUILDERS AND 9.75%, 2008 560 566
REAL ESTATE--2.9% 9.375%, 2009 880 862
Forecast Group, L.P., 11.375%, 2000 820 791
Fortress Group, 13.75%, 2003 710 802
Hovnanian Enterprises, 11.25%, 2002 1,568 1,627
Ryland Group, Inc., 8.25%, 2008 960 919
UDC Homes, 12.50%, 2000 650 663
Williams Scotsman, Inc., 9.875%, 2007 370 385
--------------------------------------------------------------------------
6,615
- -----------------------------------------------------------------------------------------------------------------------
HOTELS AND Eldorado Resorts, 10.50%, 2006 770 845
GAMING--2.4% Empress River Casino, 10.75%, 2002 1,175 1,262
HMH Properties
9.50%, 2005 840 909
8.875%, 2007 540 599
Hard Rock Hotel, 9.25%, 2005 250 255
Harvey's Casino Resorts, 10.625%, 2006 680 758
Players International, 10.875%, 2005 685 747
--------------------------------------------------------------------------
5,375
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANUFACTURING, METALS Accuride, 9.25%, 2008 $ 780 $ 778
AND MINING--13.5% Aftermarket Technology, 12.00%, 2004 712 786
Alvey Systems, 11.375%, 2003 420 450
Bar Technologies, 13.50%,
with warrants, 2001 1,160 1,295
Centaur Mining, 11.00%, 2007 500 521
Collins & Aikman Corp., 11.50%, 2006 800 896
Day International Group, Inc., 11.125%,
2005 2,020 2,202
Delco Remy International, 10.625%, 2006 1,090 1,183
Doe Run Co.
12.00%, 2003 150 153
11.250%, 2005 250 254
Earle M. Jorgensen Co., 9.50%, 2005 250 249
Euramax International, PLC, 11.25%, 2006 1,165 1,264
Foamex, L.P.
13.50%, 2005 1,000 1,155
9.875%, 2007 310 335
GS Technologies
12.00%, 2004 310 339
12.25%, 2005 510 570
Great Central Mines LTD, 8.875%, 2008 440 437
Great Lakes Carbon Corp., 10.25%, 2008 360 365
(b)Grove Holdings LLC, 11.56%, 2009 200 118
Grove Investors, 14.50%, 2010 350 352
Grove Worldwide LLC, 9.25%, 2008 350 350
Hayes Wheels International, Inc.
11.00%, 2006 1,340 1,511
9.125%, 2007 115 121
JPS Automotive Products Corp.,
11.125%, 2001 1,330 1,483
Knoll, Inc., 10.875%, 2006 945 1,063
Lodestar Holdings, Inc., 11.50%, 2005 340 342
MMI Products, Inc., 11.25%, 2007 330 362
MTS Systems Corp., 9.375%, 2005 390 386
Metal Management Inc., 10.00%, 2008 520 516
Motors and Gears, Inc., 10.75%, 2006 900 954
NSM Steel
12.00%, 2006 820 738
12.25%, 2008 930 856
Neenah Corp., 11.125%, 2007 1,390 1,529
Park-Ohio Industries, 9.25%, 2007 815 837
Prestolite Electric, 9.625%, 2008 535 546
Renco Metals, 11.50%, 2003 305 328
Renco Steel Holdings, 10.875%, 2005 460 469
Rental Service Corp., 9.00%, 2008 500 496
Scovill Fastners, 11.25%, 2007 450 465
Spinnaker Industries, 10.75%, 2006 1,060 1,102
Venture Holdings, 9.50%, 2005 690 706
Wells Aluminum Corp., 10.125%, 2005 800 846
Wheeling-Pitt Corp., 9.25%, 2007 910 940
--------------------------------------------------------------------------
30,648
- -----------------------------------------------------------------------------------------------------------------------
PAPER, FOREST PRODUCTS AEP Industries Inc., 9.875%, 2007 350 361
AND CONTAINERS--7.9% BPC Holding Corp., 12.50%, 2006 620 676
Berry Plastics Corp., 12.25%, 2004 1,000 1,090
Doman Industries, Ltd.
8.75%, 2004 110 108
9.25%, 2007 580 584
Fonda Group, 9.50%, 2007 590 572
--------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gaylord Container Corp.
9.75%, 2007 $ 340 $ 348
9.875%, 2008 1,300 1,307
Graham Packaging Co.
9.25%, 2008 360 364
(b) 10.75%, 2009 250 156
Maxxam Group, Inc.
(b) 12.25%, 2003 770 801
11.25%, 2003 1,215 1,282
Millar Western Forest Products Ltd.,
9.875%, 2008 380 381
National Fiberstock Corp., 11.625%, 2002 970 1,033
Pindo Deli Finance Mauritius, Ltd.,
10.75%, 2007 40 28
Plainwell Inc., 11.00%, 2008 570 577
Printpack, Inc.
9.875%, 2004 270 286
10.625%, 2006 1,020 1,089
Repap Enterprises Inc., 9.00%, 2004 350 355
Riverwood International
10.25%, 2006 710 731
10.625%, 2007 815 856
10.875%, 2008 1,345 1,369
(b)SF Holdings Group, Inc., 12.75%, 2008 550 296
Stone Container Corp.
12.25%, 2002 550 565
11.50%, 2006 1,300 1,456
Tjiwi Kimia Finance Mauritius, Ltd.,
10.00%, 2004 40 28
U.S. Can Corp., 10.125%, 2006 1,250 1,300
--------------------------------------------------------------------------
17,999
- -----------------------------------------------------------------------------------------------------------------------
RETAILING--5.2% AFC Enterprises, Inc., 10.25%, 2007 1,200 1,273
Advantica Restaurant Company, 11.25%,
2008 965 1,019
Ameriking, 10.75%, 2006 410 443
Cole National Group, 9.875%, 2006 250 269
(a)Color Tile, Inc., 10.75%, 2001 1,260 13
Finlay Enterprises, 9.00%, 2008 300 299
Finlay Fine Jewelry Corp., 8.375%, 2008 400 399
Guitar Center Management, 11.00%, 2006 280 311
Iron Age Holdings, Corp.
9.875%, 2008 350 351
(b) 12.125%, 2009 310 174
J. Crew Group
10.375%, 2007 855 829
(b) 13.125%, 2008 1,290 735
Jafra Cosmetics International, Inc.,
11.75%, 2008 700 700
Krystal Co., 10.25%, 2007 220 226
Pamida Holdings, 11.75%, 2003 630 649
Pathmark Stores, 9.625%, 2003 545 555
Petro Stopping Centers, 10.50%, 2007 1,490 1,602
Specialty Retail Services, Inc.
8.50%, 2005 190 196
9.00%, 2007 340 352
TravelCenters of America, Inc., 10.25%,
2007 1,320 1,389
--------------------------------------------------------------------------
11,784
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TECHNOLOGY--.7% Axiohm Transaction Solutions, Inc.,
9.75%, 2007 $ 400 $ 405
Viasystems, Inc., 9.75%, 2007 1,200 1,215
--------------------------------------------------------------------------
1,620
- -----------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--2.0% Canadian Airlines Corp., 10.00%, 2005 500 507
TFM, S.A. de C.V., 10.25%, 2007 1,010 1,015
Trans World Airlines, Inc., 11.375%, 2006 520 521
(b)Transtar Holdings, L.P., 13.375%, 2003 2,580 2,387
--------------------------------------------------------------------------
4,430
--------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(Cost: $214,967) 223,853
--------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
COMMON AND PREFERRED Benedek Unit, PIK, preferred with
STOCKS--2.5% warrants 5,000shs. 783
(a)Capital Pacific Holdings 4 4
(a)Clark USA, PIK, preferred 1,586 168
Crown American Realty Trust, preferred 12,000 644
(a)EchoStar Communications Corp. 5,825 148
(a)Empire Gas Corp., warrants 1,794 9
(a)Foamex International, warrants 950 19
(a)Gaylord Container Corp. 13,125 110
(a)Gulf States Steel, warrants 1,500 8
(a)Intelcom Group, Inc. 4,950 92
(a)Nextel, PIK, preferred 450 461
Sinclair Capital, preferred 9,500 1,050
(a)Sullivan Broadcasting 10,080 302
Time Warner, PIK, preferred 1,476 1,675
(a)21st Century Telecom Group, Inc.,
preferred 120 131
--------------------------------------------------------------------------
TOTAL COMMON AND PREFERRED STOCKS
(Cost: $4,932) 5,604
--------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yields--5.52% to 5.55%
INSTRUMENTS--1.8% Due--June 1998
(Cost: $3,999) $4,000 3,999
--------------------------------------------------------------------------
TOTAL INVESTMENTS--106.4%
(Cost: $232,001) 241,349
--------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(6.4)% (14,563)
--------------------------------------------------------------------------
NET ASSETS--100% $226,786
--------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security. In 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 the terms of the
initial offering.
PIK denotes that interest or dividend is paid in kind.
Based on the cost of investments of $232,001,000 for federal income tax purposes
at May 31, 1998, the gross unrealized appreciation was $12,788,000, the gross
unrealized depreciation was $3,440,000 and the net unrealized appreciation on
investments was $9,348,000.
See accompanying Notes to Financial Statements.
16
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1998 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $232,001) $241,349
- ------------------------------------------------------------------------
Cash 1,609
- ------------------------------------------------------------------------
Receivable for:
Interest 4,372
- ------------------------------------------------------------------------
Investments sold 2,027
- ------------------------------------------------------------------------
TOTAL ASSETS 249,357
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Note payable 20,000
- ------------------------------------------------------------------------
Payable for:
Investments purchased 2,250
- ------------------------------------------------------------------------
Management fee 161
- ------------------------------------------------------------------------
Interest 120
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 26
- ------------------------------------------------------------------------
Trustees' fees 14
- ------------------------------------------------------------------------
Total liabilities 22,571
- ------------------------------------------------------------------------
NET ASSETS $226,786
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $253,890
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (40,035)
- ------------------------------------------------------------------------
Net unrealized appreciation on investments 9,348
- ------------------------------------------------------------------------
Undistributed net investment income 3,583
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $226,786
- ------------------------------------------------------------------------
NET ASSET VALUE PER SHARE, $.01 PAR VALUE
($226,786 / 23,752 shares outstanding) $9.55
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
17
<PAGE> 18
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MAY 31, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ---------------------------------------------------------------------
NET INVESTMENT INCOME
- ---------------------------------------------------------------------
Interest $12,667
- ---------------------------------------------------------------------
Dividends 142
- ---------------------------------------------------------------------
Total investment income 12,809
- ---------------------------------------------------------------------
Expenses:
Management fee 963
- ---------------------------------------------------------------------
Interest expense 617
- ---------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 73
- ---------------------------------------------------------------------
Professional fees 28
- ---------------------------------------------------------------------
Reports to shareholders 40
- ---------------------------------------------------------------------
Trustees' fees and other 18
- ---------------------------------------------------------------------
Total expenses 1,739
- ---------------------------------------------------------------------
NET INVESTMENT INCOME 11,070
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ---------------------------------------------------------------------
Net realized gain on sales of investments 3,101
- ---------------------------------------------------------------------
Net realized loss from futures transactions (30)
- ---------------------------------------------------------------------
Net realized gain 3,071
- ---------------------------------------------------------------------
Change in net unrealized appreciation on investments (977)
- ---------------------------------------------------------------------
Net gain on investments 2,094
- ---------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $13,164
- ---------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
MAY 31, ENDED
1998 NOVEMBER 30,
(UNAUDITED) 1997
- -------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 11,070 21,553
- -------------------------------------------------------------------------------------------
Net realized gain (loss) 3,071 (169)
- -------------------------------------------------------------------------------------------
Change in net unrealized appreciation (977) 5,298
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 13,164 26,682
- -------------------------------------------------------------------------------------------
Distribution from net investment income (10,709) (21,255)
- -------------------------------------------------------------------------------------------
Proceeds from shares issued in reinvestment of dividends
(139 shares and 285 shares, respectively) 1,412 2,843
- -------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 3,867 8,270
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------
Beginning of period 222,919 214,649
- -------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed
net investment income of
$3,583 and $3,222, respectively) $226,786 222,919
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
18
<PAGE> 19
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 and 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 and therefore no
federal income tax provision is required. The
accumulated net realized loss on sales of
investments for federal income tax purposes at May
31, 1998, amounting to approximately $37,773,000,
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.
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2 TRANSACTIONS WITH MANAGEMENT AGREEMENT. The Fund has a management
AFFILIATES agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a management fee at an
annual rate of .85% of average weekly net assets.
The Fund incurred a management fee of $963,000 for
the six months ended May 31, 1998.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of $20,000
for the six months ended May 31, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the six months ended May 31,
1998, the Fund made no payments to its officers and
incurred trustees' fees of $13,000 to independent
trustees.
- --------------------------------------------------------------------------------
3 INVESTMENT For the six months ended May 31, 1998, investment
TRANSACTIONS transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $161,909
Proceeds from sales 162,004
- --------------------------------------------------------------------------------
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% (5.99% at
May 31, 1998) which is payable quarterly. The loan
amount and rate are reset periodically under a
credit facility which is available until June 30,
1999.
20
<PAGE> 21
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, -----------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.44 9.20 8.73 8.33 9.45
- --------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .91 .91 .91 .88
- --------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .10 .23 .46 .39 (1.10)
- --------------------------------------------------------------------------------------------------------------
Total from investment operations .56 1.14 1.37 1.30 (.22)
- --------------------------------------------------------------------------------------------------------------
Distribution from net investment income .45 .90 .90 .90 .90
- --------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.55 9.44 9.20 8.73 8.33
- --------------------------------------------------------------------------------------------------------------
MARKET VALUE, END OF PERIOD $10.00 10.19 10.00 9.50 8.38
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------
Based on net asset value 6.04% 12.99 16.56 16.30 (2.55)
- --------------------------------------------------------------------------------------------------------------
Based on market value 2.80% 11.98 16.12 25.81 1.47
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------
Expenses 1.52% 1.56 1.59 1.52 1.64
- --------------------------------------------------------------------------------------------------------------
Net investment income 9.77% 9.84 10.33 10.64 9.91
- --------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $226,786 222,919 214,649 200,502 188,294
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 97% 79 74 85 83
- --------------------------------------------------------------------------------------------------------------
Total debt outstanding at end of period (in thousands) $ 20,000 20,000 20,000 20,000 20,000
- --------------------------------------------------------------------------------------------------------------
Asset coverage per $1,000 of debt $ 12,300 12,100 11,700 11,000 10,400
- --------------------------------------------------------------------------------------------------------------
</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. Data for the period ended May 31, 1998 is unaudited.
21
<PAGE> 22
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 3, 1997, a special shareholders' meeting was held and adjourned as
necessary. Kemper High Income Trust shareholders were asked to vote on three
separate issues: election of the two members to the Board of Trustees,
ratification of Ernst & Young LLP as independent auditors, and approval of a new
investment management agreement with Scudder Kemper Investments, Inc., The
following are the results for each issue:
1) Election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
Daniel Pierce 18,217,862 353,412
Edmond D. Villani 18,232,384 338,890
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the current fiscal year.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
18,341,000 89,497 140,778
</TABLE>
3) Approval of a new investment management agreement with Scudder Kemper
Investments, Inc.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
16,663,224 259,785 379,335 1,268,931
</TABLE>
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES AND OFFICERS OFFICERS
TRUSTEES MARK S. CASADY
President
DANIEL PIERCE
Chairman and Trustee PHILIP J. COLLORA
Vice President and
JAMES E. AKINS Secretary
Trustee
JOHN R. HEBBLE
ARTHUR R. GOTTSCHALK Treasurer
Trustee
JERARD K. HARTMAN
FREDERICK T. KELSEY Vice President
Trustee
THOMAS W. LITTAUER
FRED B. RENWICK Vice President
Trustee
ANN M. MCCREARY
JOHN B. TINGLEFF Vice President
Trustee
MICHAEL A. MCNAMARA
EDMOND D. VILLANI Vice President
Trustee
ROBERT C. PECK, JR.
JOHN G. WEITHERS Vice President
Trustee
KATHRYN L. QUIRK
Vice President
HARRY E. RESIS, JR.
Vice President
LINDA J. WONDRACK
Vice President
MAUREEN E. KANE
Assistant Secretary
CAROLINE PEARSON
Assistant Secretary
ELIZABETH C. WERTH
Assistant Secretary
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- ----------------------------------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419066
Kansas City, MO 64141
- ----------------------------------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania
Kansas City, MO 64105
</TABLE>
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