<PAGE> 1
KEMPER
MULTI-MARKET INCOME TRUST
SEMIANNUAL REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED MAY 31, 1997
" . . . We managed the fund fairly
defensively early in the period by shortening the
fund's duration and reducing exposure to some sectors."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Management Team
6
Performance Update
8
Portfolio Statistics
9
Portfolio of
Investments
16
Financial Statements
18
Notes to
Financial Statements
21
Financial Highlights
22
Shareholders' Meeting
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 MULTI-MARKET INCOME
TRUST 1.84% 3.17%
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NET ASSET VALUE AND MARKET PRICE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
5/31/97 11/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE $10.71 $ 10.97
- --------------------------------------------------------------------------------
MARKET PRICE $10.50 $10.625
- --------------------------------------------------------------------------------
</TABLE>
The fund may invest in lower-rated and non-rated securities, which present
greater risk of loss to principal and interest than higher rated securities, and
in foreign securities which present special risk considerations including
fluctuating foreign exchange rates, foreign government regulations and differing
degrees of liquidity.
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
The following table shows per share dividend information for the fund as of May
31, 1997.
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
SIX-MONTH INCOME: $ 0.4550
- --------------------------------------------------------------------------------
MAY DIVIDEND: $ 0.0725
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE:
(BASED ON NET ASSET VALUE) 8.12%
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION RATE:
(BASED ON MARKET PRICE) 8.29%
- --------------------------------------------------------------------------------
</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
BOND RALLY A sharp, short-lived rise in bond values after a period of either
little movement or falling values.
EMERGING MARKETS A developing or emerging country that is in the initial stages
of its industrial cycle. Developing or "emerging" markets involve exposure to
economic structures that are generally less diverse and mature than in the
United States and to political systems that may be less stable.
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 or change
in the value of an investment in the fund over the period.
VOLATILITY The characteristic of an investment that causes it to rise or fall
sharply in price in a relatively short time period.
<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
MANAGEMENT TEAM
KEMPER MULTI-MARKET INCOME TRUST
PORTFOLIO MANAGEMENT TEAM
[BEIMFORD PHOTO]
J. Patrick Beimford, Jr., joined Zurich Kemper Investments, Inc. (ZKI) in 1976
and is executive vice president of ZKI and portfolio co-manager of Kemper
Multi-Market Income Trust. Beimford received a bachelor of science and
industrial management degree from Purdue University and earned an M.B.A. from
the University of Chicago.
[CESSINE PHOTO]
Robert Cessine is a senior vice president of ZKI and portfolio co-manager of
Kemper Multi-Market Income Trust. He joined the company in 1993. Cessine
received both his B.S. and M.S. from the University of Wisconsin.
[JOHNS PHOTO]
Gordon Johns joined ZKI in 1988 and is managing director of Zurich Investment
Management Limited, London and a portfolio co-manager of Kemper Multi-Market
Income Trust. Johns graduated from Balliol College, Oxford, with a B.A. in law.
[MCNAMARA PHOTO]
Mike McNamara has been with ZKI since 1972 and is senior vice president of ZKI
and portfolio co-manager of Kemper Multi-Market 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 Multi-Market Income Trust. Resis
received a B.A. in Finance from Michigan State University.
[TRUTTER PHOTO]
Jonathan Trutter has been with ZKI since 1989. He is a first vice president of
ZKI and a portfolio co-manager of Kemper Multi-Market Income Trust. Trutter
received a bachelor's degree with dual majors in East Asian Languages and
International Relations from the University of Southern California. He earned a
master's of management degree from Kellogg Graduate School of Business at
Northwestern University.
The views expressed in this report reflect those of the portfolio management
team only through the end of the period of the report, as stated on the cover.
The managers' views are subject to change at any time, based on market and other
conditions.
5
<PAGE> 6
PERFORMANCE UPDATE
THE PORTFOLIO MANAGEMENT TEAM OF KEMPER MULTI-MARKET INCOME TRUST DISCUSSES THE
ECONOMIC ENVIRONMENT OVER THE LAST SIX MONTHS. THEY EXPLAIN HOW THEY ADJUSTED
THE FUND'S DURATION TO WEATHER THE FEDERAL RESERVE BOARD'S SHORT-TERM INTEREST
RATE INCREASE (IN MARCH) AND TO BENEFIT FROM THE REBOUND IN THE BOND MARKET
AFTERWARDS.
Q DURING THE FUND'S SEMIANNUAL PERIOD -- DECEMBER 1, 1996, THROUGH MAY 31,
1997 -- THE FEDERAL RESERVE BOARD (THE FED) INCREASED SHORT-TERM INTEREST RATES.
WHAT WAS BEHIND THE FED'S ACTION?
A Signs of stronger economic growth and concerns of potentially higher
inflation led to the Fed's 0.25 percent interest rate tightening. Here's what
was going on.
The fixed-income market was volatile in the first half of the period as a
result of the ongoing concern about the direction of interest rates. In December
the market suffered when Federal Reserve Board Chairman Alan Greenspan commented
that investors were acting with "irrational exuberance" and that he believed
there were many overvalued securities. Signs of strong retail sales and low
unemployment figures also concerned the market as it signaled that economic
growth might be gaining momentum. In February relatively high gross domestic
product figures were released that confirmed the market's fear that the economy
had been strong at the end of 1996. Greenspan then intimated that a rate
increase would likely be necessary to slow economic growth and ward off
inflation. Greenspan again expressed his concern in February about the high
valuations in the market. The Fed raised interest rates in late March and a
sell-off ensued in both bond and equity markets. As a result bond yields rose
and prices of securities fell.
By the end of April, however, signs of the economy slowing began to surface
and inflation remained benign. This helped fixed-income investments begin to
gain back some of the ground they had lost earlier. Market yields declined the
last two months of the period on the perception that the economy was losing some
of its earlier momentum. In May the market rallied when the Fed met and chose
not to adjust interest rates.
Q HOW DID YOU MANAGE THE FUND IN LIGHT OF THE CHANGING RATE ENVIRONMENT?
A We managed the fund fairly defensively early in the period by shortening
the fund's duration and reducing exposure to some sectors. We shortened the
overall duration of the fund to 3.5 years at the end of March from 5.4 years at
the start of the period. Duration is a measurement of a fund's sensitivity to
interest rates. The shorter the duration, the less sensitive it is to interest
rate changes. This means that because of the shorter duration, the fund's
performance was less impacted by the spike in interest rates than it would have
been with a longer duration. In April as market yields began to fall again, we
lengthened duration somewhat and continued to extend it through May as it became
more apparent that a Fed intervention was not imminent.
Q HOW DID YOU SHORTEN DURATION?
A We shortened duration primarily by increasing the level of cash and cash
equivalents in the fund. Typically, we try to keep the fund's cash position
relatively low, because it limits the amount of interest income that the fund
can generate. However, the cash position helped the fund when the market sold
off in March after the Fed tightened.
At the start of the period, the fund had a 7 percent position in one- to
three-year Treasuries (which we categorize as cash equivalents) and no cash
reserves. By the end of March, cash reserves represented 13 percent of the
portfolio, while short-term Treasuries accounted for 12 percent of the fund's
investments.
Although this high cash position helped us greatly in March and into
April as rates were rising, we began looking for opportunities to reallocate
the cash back into sectors that appeared attractive. By the end of the period,
cash equivalents (including one- to three-year Treasuries) represented 17% of
the portfolio, down from a high of 25% of the portfolio. We will continue to
look for investments that will enable us to reduce this cash position further.
6
<PAGE> 7
PERFORMANCE UPDATE
Q WERE THERE ANY OTHER SIGNIFICANT ADJUSTMENTS THAT YOU MADE TO THE
PORTFOLIO?
A We made a significant reduction in our investment in foreign currency
bonds. At the end of the period, the sector represented 10 percent of assets
down from 25 percent at the start of the period.
The reason for the reduction was two-fold. First, we believed the U.S. bond
market had more potential to outperform foreign bonds on an absolute level.
Yields in many foreign markets are well below yields achievable through U.S.
investments. Secondly, by reducing our foreign currency holdings, the fund's
diversification was better aligned with that of funds with similar investment
objectives.
Q WHAT WERE THE BEST PERFORMING SECTORS IN WHICH THE FUND INVESTS?
A Emerging market investments and high yield bonds provided strong
performance throughout most of the period. Both sectors, however, experienced
brief corrections in March, due in part to the Fed's interest rate hike.
High yield bonds were also impacted by a comment that Fed Chairman Alan
Greenspan made about the historically tight spreads in the high yield market and
his concern about whether or not the market would be able to sustain its
performance. Greenspan shocked the market with the comment in February and with
the subsequent rate increase, high yield bonds suffered in March and their
spreads widened. In April investors returned to the high yield market believing
the drop in values to be a short-term correction, not the start of a bear
market. We had reduced our holdings in high yield bonds prior to the March
correction, which helped mitigate potential losses for the fund. We now believe
that the fundamentals of the high yield market look strong. Economic growth is
moderate, inflation is benign and there are virtually no defaults in the high
yield market. We anticipate adding to the fund's high yield holdings.
We are also optimistic about the emerging markets sector. We had reduced
the fund's emerging markets allocation to about 2 percent by the time the sector
corrected in March from 7 percent at the start of December. Since that time,
however, we've started to see a turnaround and plan to invest in more emerging
market debt for the fund. We believe that currently, these investments offer an
attractive rate of current income and have the potential for strong performance.
Q WHAT ABOUT THE GOVERNMENT BOND MARKET?
A We favored mortgages over Treasuries for most of the period. Mortgages tend
to outperform Treasuries when rates trend upward, which was the environment over
the last six months. Unless the market begins to rally and yields fall
substantially, we plan to continue adding mortgages to the portfolio because of
their higher income and potential for price appreciation.
Q WHAT'S YOUR OUTLOOK FOR THE BOND MARKET?
A Our outlook for the market is optimistic. The current economic environment
with relatively modest growth and benign inflation is a positive one for the
sectors in which the fund invests.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 5/31/97 ON 11/30/96
- --------------------------------------------------------------------------------
<S> <C> <C>
HIGH YIELD CORPORATE BONDS 27% 35%
- --------------------------------------------------------------------------------
EMERGING MARKETS (U.S. DOLLAR-DENOMINATED) 3 7
- --------------------------------------------------------------------------------
FOREIGN CURRENCY BONDS 10 25
- --------------------------------------------------------------------------------
HIGH GRADE CORPORATE BONDS 5 1
- --------------------------------------------------------------------------------
MORTGAGES 23 12
- --------------------------------------------------------------------------------
TREASURY NOTES AND BONDS 15 13
- --------------------------------------------------------------------------------
TREASURIES 1-3 YEARS 14 7
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 3 --
- --------------------------------------------------------------------------------
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 65% 54%
- --------------------------------------------------------------------------------
AA -- 2
- --------------------------------------------------------------------------------
A 3 4
- --------------------------------------------------------------------------------
BBB 3 --
- --------------------------------------------------------------------------------
BB 7 14
- --------------------------------------------------------------------------------
B 21 24
- --------------------------------------------------------------------------------
OTHER 1 2
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[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>
6.0 YEARS 9.4 YEARS
- --------------------------------------------------------------------------------
</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. Ratings are relative and subjective and not absolute
standards of quality.
* Portfolio composition is subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER MULTI-MARKET TRUST
PORTFOLIO OF INVESTMENTS AT MAY 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS--56.5% AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Notes
8.125%, 1998 $ 11,000 $ 11,174
8.25%, 1998 8,000 8,198
8.875%, 1998 10,000 10,386
9.25%, 1998 6,000 6,222
8.875%, 1999 5,000 5,218
U.S. Treasury Bonds
9.125%, 2009 6,400 7,227
13.875%, 2011 1,500 2,206
12.00%, 2013 3,500 4,887
12.50%, 2014 7,605 11,087
13.25%, 2014 3,900 5,900
Government National Mortgage Association
6.50%, 2023-2026 7,001 6,679
7.50%, 2022-2027 7,836 7,831
9.00%, 2027 5,000 5,266
Federal National Mortgage Association
7.00%, 2025-2027 14,007 13,620
7.50%, 2027 4,000 3,984
9.00%, 2025 1,585 1,683
Federal Home Loan Mortgage Corporation
6.50%, 2023 7,353 7,040
9.50%, 2019 2,751 2,954
------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost: $121,902) 121,562
------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS--13.1%
- -----------------------------------------------------------------------------------------------------------------------
(Principal amount in local currency, (a)Republic of Argentina,
unless otherwise indicated) (PRINCIPAL AMOUNT IN U.S. DOLLARS)
6.75%, 2005 1,329 1,241
Commonwealth of Australia,
9.50%, 2003 569 485
Republic of Austria,
5.875%, 2000 4,410 385
Kingdom of Belgium,
9.00%, 2003 29,731 1,004
(a)Federal Republic of Brazil,
(PRINCIPAL AMOUNT IN U.S. DOLLARS)
6.875%, 2006 1,287 1,186
Government of Canada,
7.50%, 2003 1,956 1,519
Kingdom of Denmark,
8.00%, 2001 4,163 713
Republic of Finland,
10.00%, 2001 1,000 232
French Treasury
8.50%, 2000 6,482 1,255
8.50%, 2002 5,720 1,160
6.75%, 2003 1,070 201
8.50%, 2008 3,226 679
German Bundesrepublic,
8.25%, 2001 6,115 4,075
Government of Ireland,
9.25%, 2003 76 133
Italian Treasury,
10.50%, 2000 4,665,000 3,037
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government of the Netherlands,
7.00%, 2003 2,334 $ 1,329
Commonwealth of New Zealand,
10.00%, 2002 142 107
Republic of Poland,
(PRINCIPAL AMOUNT IN U.S. DOLLARS)
4.00%, 2014 1,000 843
Republic of Portugal,
11.875%, 2005 38,330 294
Kingdom of Spain,
8.00%, 2004 174,460 1,324
Kingdom of Sweden,
10.25%, 2003 4,000 614
United Kingdom,
9.50%, 2005 1,680 3,121
United Mexican States
(PRINCIPAL AMOUNT IN U.S. DOLLARS)
8.50%, 2002 600 604
11.50%, 2026 450 500
Republic of Venezuela
(PRINCIPAL AMOUNT IN U.S. DOLLARS)
6.50%, 2007 1,750 1,595
6.750%, 2020 700 533
----------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost: $29,038) 28,169
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--31.5%
- ---------------------------------------------------------------------------------------------------------------------
AEROSPACE--1.2% Airplanes Pass Through Trust, 10.875%, 2019 $ 220 244
Fairchild Corp., 12.00%, 2001 725 732
Greenwich Air Services, 10.50%, 2006 315 363
Howmet Inc., 10.00%, 2003 440 476
K & F Industries, Inc., 10.375%, 2004 240 253
RHI Holdings, 11.875%, 1999 70 70
UNC, Inc., 11.00%, 2006 445 520
----------------------------------------------------------------------------
2,658
- ---------------------------------------------------------------------------------------------------------------------
BROADCASTING, CABLESYSTEMS
AND PUBLISHING--4.4%
Affinity Group, Inc., 11.50%, 2003 315 337
(b)Bell Cablemedia PLC
11.95%, 2004 590 525
11.875%, 2005 30 25
Big Flower Press, Inc., 10.75%, 2003 336 360
Busse Broadcasting, 11.625%, 2000 120 127
Cablevision Systems Corp., 10.50%, 2016 340 354
(b)Capstar Broadcasting, 12.75%, 2009 110 67
(b)Charter Communications, 14.00%, 2007 440 284
Comcast Cablevision, 8.375%, 2007 525 541
(b)Comcast UK Cable Partners Ltd., 11.20%, 2007 1,080 791
(b)Diamond Cable Communications PLC, 10.75%, 2007 220 128
Frontiervision, 11.00%, 2006 290 300
Granite Broadcasting Corp., 10.375%, 2005 590 604
Intermedia Capital Partners, 11.25%, 2006 380 403
International Cabletel Inc.
(b) 12.75%, 2005 810 608
(b) 11.50%, 2006 50 34
10.00%, 2007 90 90
Multicanal Participacoes, 12.625%, 2004 260 294
Neodata Services, 12.00%, 2003 430 459
Newsquest Capital PLC, 11.00%, 2006 50 54
Rogers Communications, 10.875%, 2004 1,000 1,045
Sinclair Broadcasting Group, Inc., 10.00%, 2003 480 497
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STC Broadcasting, 11.00%, 2007 $ 160 $ 169
Sullivan Broadcasting, 10.25%, 2005 310 317
(b)TeleWest Communications PLC, 11.00%, 2007 685 475
TV Azteca, 10.50%, 2007 70 72
(b)Videotron Holdings PLC
11.125%, 2004 255 228
11.00%, 2005 250 206
----------------------------------------------------------------------------
9,394
- ----------------------------------------------------------------------------------------------------------------------
CHEMICALS AND Agriculture, Mining and Chemicals, Inc., 10.75%,
AGRICULTURE--1.6% 2003 200 211
Atlantis Group, Inc., 11.00%, 2003 350 355
Hines Horticulture, 11.75%, 2005 680 722
(b)NL Industries Inc., 13.00%, 2005 70 66
Pioneer Americas Acquisition Corp., 13.375%, 2005 290 345
Polymer Group Inc., 12.25%, 2002 207 227
Rexene Corp., 11.75%, 2004 555 619
Terra Industries Inc., 10.50%, 2005 190 205
Texas Petrochemicals, 11.125%, 2006 300 321
UCC Investors Holdings, Inc., 10.50%, 2002 410 449
----------------------------------------------------------------------------
3,520
- ----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--2.1% Brooks Fiber
(b) 10.875%, 2006 100 68
(b) 11.875%, 2006 400 259
10.00%, 2007 130 131
(b)Call-Net Enterprise Inc., 13.25%, 2004 290 248
(b)Cellular, Inc., 11.75%, 2003 150 146
CommNet Cellular, 11.25%, 2005 100 115
(b)ICG Holdings, 13.50%, 2005 520 367
Intermedia Communications of Florida Inc.,
13.50%, 2005, with warrants expiring 2000 440 507
(b)Millicom International Cellular S.A., 13.50%,
2006 770 566
Nextlink Communications, 12.50%, 2006 120 127
(b)PanAmSat, L.P., 11.375%, 2003 450 432
Telex Communications, Inc., 10.50%, 2007 250 259
USA Mobile Communications, Inc. II
9.50%, 2004 100 94
14.00%, 2004 370 399
Western Wireless, 10.50%, 2006 480 487
Winstar Equipment, 12.50%, 2004 200 195
----------------------------------------------------------------------------
4,400
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS AFC Enterprises, 10.25%, 2007 100 100
AND SERVICES--3.0% AMF Group
10.875%, 2006 860 921
(b) 12.25%, 2006 160 112
Cinemark USA, Inc., 9.625%, 2008 270 275
Coinmach Corporation, 11.75%, 2005 530 588
Commemorative Brands Inc., 11.00%, 2007 220 232
Dimon, Inc., 8.875%, 2006 750 773
(b)Dr. Pepper Bottling Holdings, Inc., 11.625%,
2003 370 366
Herff Jones, Inc., 11.00%, 2005 170 182
Kinder-Care Learning Centers, 9.50%, 2009 440 424
Petro Stopping Centers, 10.50%, 2007 720 745
Premier Parks Inc., 12.00%, 2003 380 422
(b)Six Flags Theme Park, 12.25%, 2005 850 863
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Van De Kamps, Inc., 12.00%, 2005 $ 400 $ 443
Windy Hill Pet Food, 9.75%, 2007 50 51
----------------------------------------------------------------------------
6,497
- ---------------------------------------------------------------------------------------------------------------------
DRUGS AND Dade International Inc., 11.125%, 2006 400 447
HEALTH CARE--1.2% DVI, Inc., 9.875%, 2004 100 101
Integrated Health Services, 9.50%, 2007 160 165
Magellan Health Services, 11.25%, 2004 210 234
MedPartners, Inc., 7.375%, 2006 500 494
Tenet Healthcare, 8.625%, 2003 1,000 1,036
----------------------------------------------------------------------------
2,477
- ---------------------------------------------------------------------------------------------------------------------
ENERGY AND Benton Oil & Gas Co., 11.625%, 2003 225 244
RELATED SERVICES--1.7% Coda Energy, 10.50%, 2006 290 305
Commonwealth Edison, 6.40%, 2005 250 232
Empire Gas Corp., 7.00%, with warrants, 2004 270 245
Flores & Rucks Inc., 13.50%, 2004 180 213
Forman Petro UNT, 13.50%, 2004 130 128
Gulf Canada Resources Ltd., 8.35%, 2006 500 521
Magnum Hunter, 10.00%, 2007 220 221
Oryx Energy Co., 8.375%, 2004 1,000 1,030
United Meridian Corp., 10.375%, 2005 450 486
Wiser Oil Co., 9.50%, 2007 100 100
----------------------------------------------------------------------------
3,725
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES, Chelsea GCA Realty, 7.75%, 2001 660 665
HOMEBUILDERS Cityscape Financial Corp., 12.75%, 2004 225 225
AND REAL ESTATE--3.9% Corporacion Andina de Fomento, 7.79%, 2017 1,000 990
Del Webb Corp., 9.75%, 2008 670 672
DR Investments, 7.45%, 2007 500 500
Forecast Group L.P., 11.375%, 2000 80 77
Fortress Group, 13.75%, 2003 40 42
Guangdong Enterprises, 8.875%, 2007 500 503
Hovnanian Kent, 11.25%, 2002 226 235
Intertek Finance, 10.25%, 2006 200 208
J.M. Peters Co., 12.75%, 2002 85 85
Lehman Brothers, 7.375%, 2007 1,000 988
Presley Companies, 12.50%, 2001 30 30
Svenska Handlsbanken, 7.125%, 2049 2,000 1,941
UDC Homes, 12.50%, 2000 160 160
U.S. West Cap Funding, 7.30%, 2007 1,000 992
Williams Scotsman, 9.875%, 2007 100 100
----------------------------------------------------------------------------
8,413
- ---------------------------------------------------------------------------------------------------------------------
HOTELS AND GAMING--1.3% Eldorado Resorts, 10.50%, 2006 500 534
Empress River Casino, 10.75%, 2002 230 245
Harvey's Casino Resorts, 10.625%, 2006 530 563
Hilton Hotels
7.375%, 2002 250 251
7.95%, 2007 100 101
Players International, 10.875%, 2005 220 229
Station Casinos Inc., 10.125%, 2006 400 401
Trump Atlantic City, 11.25%, 2006 400 392
----------------------------------------------------------------------------
2,716
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANUFACTURING, METALS AND Aftermarket Technology, 12.00%, 2004 $ 240 $ 266
MINING--4.9% Alvey Systems, 11.375%, 2003 270 278
Bar Technologies, 13.50%, 2001 300 297
Bellweather Exploration, 10.875%, 2007 100 106
Collins & Aikman Corp., 11.50%, 2006 590 661
Crain Industries, Inc., 13.50%, 2005 250 283
Day International Group, Inc., 11.125%, 2005 860 912
Essex Group Inc., 10.00%, 2003 305 317
Euramax International PLC, 11.25%, 2006 465 492
EV International, 11.00%, 2007 185 194
Fairfield Manufacturing Co., 11.375%, 2001 180 189
(b)Foamex - JPS Automotive L.P., 14.00%,
with warrants, 2004 310 287
Foamex L.P.
11.25%, 2002 200 211
9.875%, 2007 300 305
GS Technologies
12.00%, 2004 90 97
12.25%, 2005 180 197
IMO Industries, 11.75%, 2006 465 467
Jordan Industries, 10.375%, 2003 300 301
JPS Automotive Products Corp., 11.125%, 2001 150 164
Key Plastics, 10.25%, 2007 100 105
Knoll Inc., 10.875%, 2006 730 803
Motors and Gears, Inc. 10.75%, 2006 350 362
Newflo Corp., 13.25%, 2002 300 325
Philips Electronics N.V., 7.20%, 2026 1,000 989
Spinnaker Industries, 10.75%, 2006 300 302
Terex Corp. Unit, 13.25%, 2002 290 323
Thermadyne Industries, Inc.
10.25%, 2002 165 173
10.75%, 2003 230 240
WCI Steel Inc., 10.00%, 2004 500 516
Weirton Steel Corp., 11.375%, 2004 210 222
Wells Aluminum Corp., 10.125%, 2005 100 102
----------------------------------------------------------------------------
10,486
- ---------------------------------------------------------------------------------------------------------------------
PAPER, FOREST PRODUCTS Berry Plastics Corp., 12.25%, 2004 150 165
AND CONTAINERS--2.2% BPC Holding Corp., 12.50%, 2006 230 246
Container Corporation of America, 11.25%, 2004 150 162
Fonda Group, 9.50%, 2007 135 131
Gaylord Container Corp., 12.75%, 2005 370 405
Maxxam Group, Inc.
11.25%, 2003 500 515
(b) 12.25%, 2003 90 83
National Fiberstock Corp., 11.625%, 2002 420 433
Printpack, Inc.
9.875%, 2004 50 52
10.625%, 2006 170 180
Riverwood International
10.25%, 2006 140 139
10.875%, 2008 2,180 1,984
Stone Container Corp.
12.25%, 2002 40 41
11.50%, 2006 290 293
- ---------------------------------------------------------------------------------------------------------------------
4,829
- ---------------------------------------------------------------------------------------------------------------------
RETAILING--1.6% Ameriking, 10.75%, 2006 190 199
Cole National Group, 9.875%, 2006 600 633
Dominick's Finer Foods, 10.875%, 2005 210 234
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT OR SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federated Department Stores, Inc., 10.00%, 2001 $ 500 $ 548
Finlay Fine Jewelry Corp., 10.625%, 2003 655 694
Guitar Center Management, 11.00%, 2006 87 98
J. C. Penney, 7.60%, 2007 500 509
Pathmark Stores, Inc., 12.625%, 2002 140 143
Travelcenters America, 10.25%, 2007 410 419
----------------------------------------------------------------------------
3,477
- ---------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS--2.4% Allied Waste
10.25%, 2006 180 192
(b) 11.30%, 2007 200 122
(b) American Standard Inc., 10.50%, 2005 540 529
(b) Building Materials Corporation of America,
11.75%, 2004 770 695
Communication and Power Industry, Inc., 12.00%,
2005 140 154
Computervision Corp., 11.375%, 1999 1,030 1,008
Corporate Express Inc., 9.125%, 2004 220 218
CSX Corp., 7.45%, 2007 350 353
Delta Air Lines, 9.875%, 2008 457 505
Neenah Corp., 11.125%, 2007 110 117
Outdoor Systems, Inc., 9.375%, 2006 30 30
(b) Transtar Holdings, L.P., 13.375%, 2003 200 168
United Airlines, 9.56%, 2018 750 850
Waxman Industries, Inc.
(b) 12.75%, 2004 100 84
(c) 12,154 warrants expiring 2004 26
- ---------------------------------------------------------------------------------------------------------------------
5,051
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(Cost: $64,957) 67,643
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
COMMON AND PREFERRED Capital Pacific Holdings 1,185shs. 1
STOCKS(c)--.2% Intelcom Group, Inc. 1,056 11
Sinclair Capital 3,600 383
----------------------------------------------------------------------------
TOTAL COMMON AND PREFERRED STOCKS
(Cost: $365) 395
----------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--5.70% to 5.90%
INSTRUMENTS--8.4% Due--June 1997
Dynamic Funding Corp. $ 8,000 7,995
Mid-Atlantic Fuel Co. 10,000 9,997
----------------------------------------------------------------------------
TOTAL MONEY MARKET INSTRUMENTS
(Cost: $17,992) 17,992
----------------------------------------------------------------------------
TOTAL INVESTMENTS--109.7%
(Cost: $234,254) 235,761
----------------------------------------------------------------------------
LIABILITIES, LESS OTHER ASSETS--(9.7%) (20,765
----------------------------------------------------------------------------
NET ASSETS--100% $214,996
----------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Variable rate security. Rate shown is effective rate on May 31, 1997 and
date shown represents the final maturity of the obligation.
(b) Deferred interest obligation; currently zero coupon under the terms of the
initial offering.
(c) Non-income producing securities.
Based on the cost of investments of $234,254,000 for federal income tax purposes
at May 31, 1997, the gross unrealized appreciation was $4,113,000, the gross
unrealized depreciation was $2,606,000 and the net unrealized appreciation on
investments was $1,507,000.
See accompanying Notes to Financial Statements.
15
<PAGE> 16
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $234,254) $235,761
- ------------------------------------------------------------------------
Receivable for:
Investments sold 6,508
- ------------------------------------------------------------------------
Interest 3,740
- ------------------------------------------------------------------------
TOTAL ASSETS 246,009
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Cash overdraft 605
- ------------------------------------------------------------------------
Payable for:
Investments purchased 30,243
- ------------------------------------------------------------------------
Management fee 152
- ------------------------------------------------------------------------
Trustees' fees and other 13
- ------------------------------------------------------------------------
Total liabilities 31,013
- ------------------------------------------------------------------------
NET ASSETS $214,996
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $220,090
- ------------------------------------------------------------------------
Accumulated net realized loss on sales of investments and
foreign currency transactions (6,668)
- ------------------------------------------------------------------------
Net unrealized appreciation on investments and assets and
liabilities in foreign currencies 1,574
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $214,996
- ------------------------------------------------------------------------
NET ASSET VALUE PER SHARE, $.01 PAR VALUE
($214,996 / 20,080 shares outstanding) $10.71
- ------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MAY 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
NET INVESTMENT INCOME
- -----------------------------------------------------------------------
Interest income $ 9,351
- -----------------------------------------------------------------------
Expenses:
Management fee 917
- -----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 49
- -----------------------------------------------------------------------
Professional fees 30
- -----------------------------------------------------------------------
Reports to shareholders 11
- -----------------------------------------------------------------------
Trustees' fees and other 51
- -----------------------------------------------------------------------
Total expenses 1,058
- -----------------------------------------------------------------------
NET INVESTMENT INCOME 8,293
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized gain on sales of investments and foreign
currency transactions 2,354
- -----------------------------------------------------------------------
Net realized loss from futures transactions (898)
- -----------------------------------------------------------------------
Net realized gain 1,456
- -----------------------------------------------------------------------
Change in net unrealized appreciation on investments and
assets and liabilities in foreign currencies (5,856)
- -----------------------------------------------------------------------
Net loss on investments (4,400)
- -----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 3,893
- -----------------------------------------------------------------------
</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 $ 8,293 17,341
- --------------------------------------------------------------------------------------------------
Net realized gain 1,456 2,564
- --------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (5,856) 2,929
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,893 22,834
- --------------------------------------------------------------------------------------------------
Distribution from net investment income (9,134) (21,361)
- --------------------------------------------------------------------------------------------------
Proceeds from shares issued in reinvestment of dividends
(28 shares in 1997 and 119 shares in 1996) 298 1,283
- --------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (4,943) 2,756
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------------
Beginning of period 219,939 217,183
- --------------------------------------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment
income of $231 in 1996) $214,996 219,939
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
17
<PAGE> 18
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. Forward foreign currency
contracts are valued at the forward rates
prevailing on the day of valuation. Other
securities and assets are valued at fair value as
determined in good faith by the Board of Trustees.
CURRENCY TRANSLATION. The books and records of the
Fund are maintained in U.S. dollars. All assets and
liabilities initially expressed in foreign currency
values are converted into U.S. dollar values at the
mean between the bid and offered quotations of such
currencies against U.S. dollars as last quoted by a
recognized dealer. If such quotations are not
readily available, the rate of exchange is
determined in good faith by the Board of Trustees.
Income and expenses and purchases and sales of
investments are translated into U.S. dollars at the
rates of exchange prevailing on the respective
dates of such transactions. The Fund includes that
portion of the results of operations resulting from
changes in foreign exchange rates with net realized
and unrealized gain (loss) on investments, as
appropriate.
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 all fixed income
securities and premium amortization on
mortgage-backed securities. Realized gains and
losses from investment transactions are reported on
an identified cost basis.
The Fund may purchase securities with delivery or
payment to occur at a later date. At the time the
Fund enters into a commitment to purchase a
security, the transaction is recorded and the value
of the security is reflected in the net asset
value. The value of the security may vary with
market fluctuations. No interest accrues to the
Fund until payment takes place. At the time the
Fund enters into this type of transaction it is
required to segregate cash or other liquid assets
equal to the value of the securities purchased. At
May 31, 1997, the Fund had $21,750,000 in
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
purchase commitments outstanding (10% of net
assets) with a corresponding amount of assets
segregated.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies for the six
months ended May 31, 1997. The accumulated net
realized loss on sales of investments for federal
income tax purposes at May 31, 1997, amounting to
approximately $7,957,000, is available to offset
future taxable gains. If not applied, the loss
carryover expires during the period 2002 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.
- --------------------------------------------------------------------------------
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 $917,000 for the six
months ended May 31, 1997. Zurich Investment
Management Limited, an affiliate of ZKI, serves as
subadvisor with respect to foreign securities
investments in the Fund, and is paid by ZKI for its
services.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Zurich Kemper Service Company (ZKSvC) (formerly
known as Kemper Service Company) is the shareholder
service agent of the Fund. Under the agreement,
ZKSvC received shareholder services fees of $14,000
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 direct 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 $352,980
Proceeds from sales 365,715
- --------------------------------------------------------------------------------
4 FINANCIAL FUTURES
CONTRACTS The Fund has entered into exchange traded financial
futures contracts in order to help protect itself
from anticipated market conditions and, as such,
bears the risk that arises from entering into these
contracts.
At the time the Fund enters into a futures
contract, it is required to make a margin deposit
with its custodian. Subsequently, gain or loss is
recognized and payments are made on a daily basis
between the Fund and its broker as the market value
of the futures contract fluctuates. At May 31,
1997, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $1,174,000. The Fund also
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
had liquid securities in its Portfolio in excess of
the face amount of the following short futures
positions open at May 31, 1997:
<TABLE>
<CAPTION>
FACE EXPIRATION GAIN (LOSS) AT
TYPE AMOUNT MONTH 5/31/97
----------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Note $10,952,000 June '97 $ (31,000)
----------------------------------------------------------------
U.S. Treasury Note 23,935,000 September '97 (96,000)
----------------------------------------------------------------
Eurodollar 6,110,000 September '97 --
----------------------------------------------------------------
Eurodollar 1,876,000 December '97 --
----------------------------------------------------------------
Eurodollar 1,874,000 March '98 1,000
----------------------------------------------------------------
Eurodollar 468,000 June '98 --
----------------------------------------------------------------
TOTAL $(126,000)
----------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
5 FORWARD FOREIGN
CURRENCY CONTRACTS In order to help protect itself against a decline
in the value of particular foreign currencies
against the U.S. Dollar, the Fund has entered into
forward contracts to deliver foreign currency in
exchange for U.S. Dollars. The Fund bears the
market risk that arises from changes in foreign
exchange rates, and accordingly, the unrealized
gain (loss) on these contracts is reflected in the
accompanying financial statements. The Fund also
bears the credit risk if the counterparty fails to
perform under the contract. At May 31, 1997, the
Fund had entered into forward contracts for the
foreign currencies corresponding to the foreign
government bonds in its portfolio. The settlement
dates on the contracts occur during June, 1997, and
the aggregate unrealized gain on the contracts
amounted to $67,000 at May 31, 1997.
20
<PAGE> 21
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, -------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.97 10.90 10.35 11.29 10.88
- ------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .41 .87 .96 .96 1.04
- ------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.21) .27 .60 (.97) .45
- ------------------------------------------------------------------------------------------------
Total from investment operations .20 1.14 1.56 (.01) 1.49
- ------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .46 1.07 1.01 .76 1.08
- ------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- .17 --
- ------------------------------------------------------------------------------------------------
Total dividends .46 1.07 1.01 .93 1.08
- ------------------------------------------------------------------------------------------------
Net asset value per share, end of period $10.71 10.97 10.90 10.35 11.29
- ------------------------------------------------------------------------------------------------
Market value per share, end of period $10.50 10.63 10.75 9.38 11.00
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)
- ------------------------------------------------------------------------------------------------
Based on net asset value 1.84% 11.12 15.90 (.07) 14.29
- ------------------------------------------------------------------------------------------------
Based on market value 3.17% 9.14 26.92 (6.48) 16.83
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------
Expenses .98% .99 1.02 1.03 .97
- ------------------------------------------------------------------------------------------------
Net investment income 7.69% 8.06 9.13 8.80 9.43
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------
Net assets at end of period (in
thousands) $214,996 219,939 217,183 206,220 225,055
- ------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 272% 310 271 253 240
- ------------------------------------------------------------------------------------------------
</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.
21
<PAGE> 22
SHAREHOLDERS' MEETING
ANNUAL SHAREHOLDERS' MEETING
On May 29, 1997, an annual shareholders' meeting was held. Kemper Multi-Market
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 Ernst & Young LLP was approved as the fund's auditors. Following are
the results for each issue:
1) Re-election of Trustees
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
James E. Akins 18,291,340 404,697
Arthur R. Gottschalk 18,341,154 354,883
Frederick T. Kelsey 18,349,151 346,886
Dominique P. Morax 18,312,015 384,022
Fred B. Renwick 18,300,884 395,153
Stephen B. Timbers 18,362,597 333,440
John B. Tingleff 18,361,535 334,502
John G. Weithers 18,360,188 335,849
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
18,401,655 79,009 215,473
</TABLE>
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR. RICHARD L. VANDENBERG
President and Trustee Vice President Vice President
JAMES E. AKINS ROBERT S. CESSINE PHILIP J. COLLORA
Trustee Vice President Vice President and
Secretary
ARTHUR R. GOTTSCHALK CHARLES R. MANZONI, JR.
Trustee Vice President JEROME L. DUFFY
Treasurer
FREDERICK T. KELSEY MICHAEL A. MCNAMARA
Trustee Vice President
DOMINIQUE P. MORAX JOHN E. NEAL
Trustee Vice President
FRED B. RENWICK ROBERT C. PECK
Trustee Vice President
JOHN B. TINGLEFF HARRY E. RESIS, JR.
Trustee Vice President
JOHN G. WEITHERS JONATHAN W. TRUTTER
Trustee Vice President
- --------------------------------------------------------------------------------
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 64141-6066
- --------------------------------------------------------------------------------
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.
KMMIT - 3 (7/97) 1034780
Printed in the U.S.A. [KEMPER FUNDS LOGO]
