<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED APRIL 30, 2000
The fund seeks a high current return
KEMPER STRATEGIC
INCOME FUND
"... Emerging market bonds were the portfolio's bright spot, as returns from
domestic high-yield bonds
were weak and the euro lost value. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
MANAGEMENT TEAM
6
PERFORMANCE UPDATE
8
TERMS TO KNOW
9
PORTFOLIO STATISTICS
10
PORTFOLIO OF INVESTMENTS
20
FINANCIAL STATEMENTS
23
FINANCIAL HIGHLIGHTS
25
NOTES TO
FINANCIAL STATEMENTS
AT A GLANCE
KEMPER STRATEGIC INCOME FUND TOTAL RETURNS
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 2000 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
LIPPER MULTI-SECTOR
KEMPER STRATEGIC INCOME KEMPER STRATEGIC INCOME INCOME CATEGORY
KEMPER STRATEGIC INCOME FUND CLASS A FUND CLASS B FUND CLASS C AVERAGE*
------------------------------------ ----------------------- ----------------------- -------------------
<S> <C> <C> <C>
-1.37 -1.85 -1.68 1.24
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
*LIPPER, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES IN NET ASSET VALUE
WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF SALES CHARGES, IF
SALES CHARGES HAD BEEN INCLUDED, RESULTS MIGHT HAVE BEEN LESS FAVORABLE.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
4/30/00 10/31/99
..........................................................
<S> <C> <C> <C> <C>
KEMPER STRATEGIC INCOME FUND
CLASS A $4.96 $5.26
..........................................................
KEMPER STRATEGIC INCOME FUND
CLASS B $4.96 $5.26
..........................................................
KEMPER STRATEGIC INCOME FUND
CLASS C $4.99 $5.29
..........................................................
</TABLE>
KEMPER STRATEGIC INCOME FUND
RANKINGS AS OF 4/30/00
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER MULTI-SECTOR INCOME FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
....................................................................................
<S> <C> <C> <C> <C> <C>
1-YEAR #108 of 120 funds #112 of 120 funds #110 of 120 funds
....................................................................................
3-YEAR #61 of 78 funds #69 of 78 funds #67 of 78 funds
....................................................................................
5-YEAR #42 of 49 funds #48 of 49 funds #47 of 49 funds
....................................................................................
10-YEAR #1 of 10 funds N/A N/A
....................................................................................
</TABLE>
DIVIDEND AND YIELD REVIEW
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF APRIL 30, 2000
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
.....................................................
<S> <C> <C> <C> <C> <C>
SIX-MONTHS INCOME: $0.2335 $0.2080 $0.2161
.........................................................
APRIL DIVIDEND: $0.0365 $0.0321 $0.0337
.........................................................
ANNUALIZED
DISTRIBUTION RATE: + 8.83% 7.77% 8.10%
.........................................................
SEC YIELD:+ 9.80% 9.23% 9.60%
.........................................................
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON APRIL 30, 2000. DISTRIBUTION RATE
SIMPLY MEASURES THE LEVEL OF DIVIDENDS AND IS NOT A COMPLETE MEASURE OF
PERFORMANCE. THE SEC YIELD IS NET INVESTMENT INCOME PER SHARE EARNED OVER THE
MONTH ENDED APRIL 30, 2000, SHOWN AS AN ANNUALIZED PERCENTAGE OF THE MAXIMUM
OFFERING PRICE ON THAT DATE. THE SEC YIELD IS COMPUTED IN ACCORDANCE WITH THE
STANDARDIZED METHOD PRESCRIBED BY THE SECURITIES AND EXCHANGE COMMISSION. YIELDS
AND DISTRIBUTION RATES ARE HISTORICAL AND WILL FLUCTUATE.
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. THE
FUND MAY ALSO INVEST A SIGNIFICANT PORTION OF ITS ASSETS IN FOREIGN SECURITIES
WHICH PRESENT SPECIAL RISKS INCLUDING FLUCTUATING EXCHANGE RATES, GOVERNMENT
REGULATION AND DIFFERENCES IN LIQUIDITY THAT MAY AFFECT YOUR INVESTMENT.
YOUR FUND'S STYLE
MORNINGSTAR INCOME STYLE BOX
<TABLE>
<S> <C>
[MORNINGSTAR EQUITY STYLE Source: Morningstar, Inc., Chicago, IL (312)
BOX] 696-6000. The Income Style Box placement is based
on a fund's average effective maturity or
duration and the average credit rating of the
bond portfolio.
THE STYLE BOX REPRESENTS A SNAPSHOT OF A FUND'S
PORTFOLIO ON A SINGLE DAY. PLEASE NOTE THAT STYLE
BOXES DO NOT REPRESENT AN EXACT ASSESSMENT OF
RISK AND DO NOT REPRESENT FUTURE PERFORMANCE. THE
FUND'S PORTFOLIO CHANGES FROM DAY TO DAY. A
LONGER-TERM VIEW IS REPRESENTED BY THE FUND'S
MORNINGSTAR CATEGORY, WHICH IS BASED ON ITS
ACTUAL INVESTMENT STYLE AS MEASURED BY ITS
UNDERLYING PORTFOLIO HOLDINGS OVER THE PAST THREE
YEARS. MORNINGSTAR HAS PLACED KEMPER STRATEGIC
INCOME FUND IN THE MULTISECTOR INCOME CATEGORY.
PLEASE CONSULT THE PROSPECTUS FOR A DESCRIPTION
OF INVESTMENT POLICIES.
</TABLE>
<PAGE> 3
ECONOMIC OVERVIEW
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER,
As we enter summer, there isn't much to complain about. For all the yammering
about the "new" economy, the old economy is doing pretty well. Consumers may
hanker for a new GPS handset or a Palm Pilot, but they lust after a suburban
mansion with a garage big enough to hold their luxury car and SUV -- and state
and local governments are laying old-fashioned asphalt almost as fast as
businesses are building the information superhighway. Satisfying both old and
new desires got the economy off to a fast start in the new century -- GDP growth
rose at an annual rate of more than 5 percent in the first quarter. Even with a
modest slowdown possible in the second half, growth for the year 2000 is likely
to be close to 5 percent.
So everyone is happy, right? Well, almost everyone. Consumers seldom have felt
so confident; businesspeople seldom have behaved so expansively. But there's
still one grump: Federal Reserve Board Chairman Alan Greenspan, who's become
increasingly worried that rapid growth will bring on inflation, and raised
interest rates by half a percentage point (0.50%) accordingly on May 16. The
Fed's move puts the benchmark federal funds rate at 6.5 percent, its highest
level since February 1991, and the more symbolic discount rate at 6.0 percent.
Despite Greenspan's attempt to slow spending by raising interest rates,
consumers are still splurging, and they show few signs of stopping. We know this
because shoppers are buying the big-ticket items they usually purchase early in
a cycle -- items such as personal computers, mobile phones, jewelry, fancy
kitchen appliances, exercise equipment and big boats. Why are consumers still
buying despite Greenspan's attempts to slow their splurging? There are three
answers: deflation, wealth and easy credit.
Falling prices have made big-ticket items almost irresistible. Since 1997,
prices of kitchen appliances have fallen 4.5 percent, TVs and VCRs 16 percent
and sporting equipment 6.5 percent. Even auto showrooms no longer produce
sticker shock, and drivers have responded with gusto, buying a record 16.9
million cars and light trucks in 1999. 2000 is likely to be the first year in
which automotive sales top 17 million.
Some of that spending has been made possible by stock market gains: Wall
Street has handed out windfalls to almost anyone holding equities in the past
few years. But consumers who don't own stocks are also spending, thanks to a
decade of debt. Young, poor or new to America? In the 1990s, it didn't matter;
lenders still loved you. While high-income families have been borrowing less,
those lower on the income scale have been borrowing more.
But it's not just consumers that Greenspan is concerned about; businesses are
splurging as well. During 1999, businesses increased spending on computers and
peripherals by 35 percent and spending on communications equipment by 25 percent
(both after adjusting for price declines). Far from slowing down this year, we
expect investment in these two categories to accelerate -- to 40 percent growth
for computers and 30 percent growth for communications equipment.
And just like consumers, businesses are borrowing to buy. You may think that
with booming sales, entrepreneurs are cash-rich and can afford it. But while
1999 saw economy-wide earnings jump 10 percent and profits of Standard and
Poor's (S&P) 500 companies leap nearly 14 percent, internal cash covered less
than 84 percent of capital spending. With the exception of 1998, that's the
lowest on record. Last year alone, corporate debt shot up by more than 11
percent to $560 billion. And new economy companies are no exception; they have
more debt than most people realize, issuing more than half of all convertible
bonds.
All this debt could cause problems. Although we've increased our 2001
inflation outlook to nearly 3 percent -- an entire percentage point higher than
our prediction three months ago -- we're not particularly worried about
inflation. It's the heavy borrowing we're concerned about. Debt continues to
exceed income growth, and when Greenspan succeeds in slowing the economy with
higher interest rates (which he will succeed in doing), all of the debt American
consumers and businesses are taking on could be tricky to handle. Private
financial obligations must be paid with personal income and corporate profits.
When the economy slows, personal income stagnates and corporate profits often
fall -- which makes it harder to pay off those debts. Consumers and businesses
may have to sell their assets to pay off the debt, and they may risk going into
default.
That being the case, a gradual economic slowdown may be in everyone's best
interest. But "gradual" is the key. Both the old and new economy have a lot
riding on the Fed's ability to rein in growth softly and smoothly, because
abrupt slowdowns encourage consumers and businesses to sell assets -- and
perhaps risk bankruptcy -- to pay off debt, as described above.
A gradual slowdown seems to be what the Fed is seeking, but for all of
Greenspan's semi-tough talk, some indicators suggest that monetary policy has
actually been lax. Broad money and credit creation have vastly exceeded
economic activity since 1995, and no central bank can allow that to continue
indefinitely without creating
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 (5/31/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.40 6.00 5.50 5.60
Prime rate (2) 9.50 8.50 7.75 8.50
Inflation rate (3)* 3.00 2.60 2.30 1.50
The U.S. dollar (4) 4.30 -0.70 -0.90 6.40
Capital goods orders (5)* 17.00 12.30 2.50 14.50
Industrial production (5)* 6.10 3.70 2.90 5.20
Employment growth (6) 2.60 2.20 2.30 2.60
</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 4/30/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
inflation. If we begin to see higher core inflation, the Fed will have to deal
with all that money it's created in a less gradualist manner -- and that could
get tricky. Financial turmoil accompanied each of the Fed's last two efforts to
slow the economy down. In 1994, there was a bond market meltdown that resulted
in a Mexican debt crisis. After a more timid Fed tightening in 1997, crises in
Asia were followed by problems with Russian debt, Brazilian debt and a large
American hedge fund. We don't think this is a coincidence: The global debt
market is so vast and interconnected that it's highly vulnerable to a rise in
the cost of its basic raw material -- short-term funds.
Let's hope, then, that the Fed can slow the economy without upsetting the
financial applecart, because that could affect everyone. After all, the old
economy and the new economy are wedded in many ways. Much of the money that
flows to IPOs is available because mature industries have borrowed to carry out
mergers and share buybacks. Old economy companies are the biggest customers of
new economy products. And e-commerce sites are all about moving traditional
goods over old-fashioned highways. Despite a lot of talk about old and new,
we're all in this economy together.
Happily, financial markets got some better news along that front in late May
and early June. A range of economic data, from retail sales to mortgage
applications to the all-important employment report, began to point to somewhat
softer economic growth. If the Fed believes that the economy is finally slowing
in response to its tightening, the end of the rate hikes could be in sight.
Markets certainly were willing to believe, and they staged a strong relief rally
in late May and early June. While we don't expect a quick end to market
volatility, a slowdown in growth would be most welcome, and would make the
outlook for both stocks and bonds better for the remainder of the year.
Sincerely,
Scudder Kemper Investments Economics Group
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF SCUDDER KEMPER
INVESTMENTS, INC. AS OF JUNE 6, 2000, AND MAY NOT ACTUALLY COME TO PASS. THIS
INFORMATION IS SUBJECT TO CHANGE. NO PART OF THIS MATERIAL IS INTENDED AS AN
INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
MANAGEMENT TEAM
KEMPER STRATEGIC INCOME FUND
PORTFOLIO MANAGEMENT TEAM
[BEIMFORD JR. PHOTO]
J. PATRICK BEIMFORD JR. JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1976 AND IS A
MANAGING DIRECTOR AND LEAD PORTFOLIO MANAGER OF KEMPER STRATEGIC INCOME FUND. HE
IS A CHARTERED FINANCIAL ANALYST.
[I SALTZMAN PHOTO]
ISABEL SALTZMAN IS THE PRODUCT LEADER AND SENIOR PORTFOLIO MANAGER FOR SCUDDER
KEMPER INVESTMENTS' EMERGING MARKETS BOND GROUP. A NATIVE OF CHILE, SALTZMAN
RECEIVED A BACHELOR'S DEGREE IN POLITICAL SCIENCE AND ECONOMICS FROM TUFTS
UNIVERSITY AND A MASTER'S DEGREE FROM THE SCHOOL OF INTERNATIONAL AFFAIRS,
COLUMBIA UNIVERSITY. SHE HAS 18 YEARS OF EMERGING-MARKET INVESTMENT EXPERIENCE.
[CESSINE PHOTO]
ROBERT CESSINE IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC. AND
PORTFOLIO MANAGER OF KEMPER STRATEGIC INCOME FUND. HE JOINED THE COMPANY IN 1993
AND IS A CHARTERED FINANCIAL ANALYST.
[DOYLE PHOTO]
DAN DOYLE IS A FIRST VICE PRESIDENT OF SCUDDER KEMPER INVESTMENTS, INC. AND A
HIGH-YIELD BOND TRADER. HE IS A CHARTERED FINANCIAL ANALYST.
[VANDENBERG PHOTO]
RICHARD VANDENBERG, WITH MORE THAN 25 YEARS OF INVESTMENT MANAGEMENT EXPERIENCE,
IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC. AND IS LEAD PORTFOLIO
MANAGER OF SCUDDER KEMPER'S FIXED-INCOME GOVERNMENT AND MORTGAGE FUNDS.
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.
5
<PAGE> 6
PERFORMANCE UPDATE
PRESERVING CAPITAL PROVED CHALLENGING AS DOMESTIC BONDS FACED A SUBSTANTIAL
TIGHTENING IN FEDERAL RESERVE MONETARY POLICY AND THE EURO FELL SHARPLY IN VALUE
SINCE OCTOBER. IF NOT FOR ITS EUROPEAN EXPOSURE, THE FUND WOULD HAVE
OUTPERFORMED THE AVERAGE OF ITS PEERS FOR THE PERIOD.
Q HOW DID GLOBAL FIXED-INCOME MARKETS BEHAVE AND KEMPER STRATEGIC INCOME
FUND PERFORM DURING THE FIRST HALF OF FISCAL YEAR 2000?
A The period between October 31, 1999, and April 30, 2000, was a
challenging time for fixed-income investors around the world. Emerging market
bonds were the portfolio's bright spot, as returns from domestic high-yield
bonds were weak and the euro lost value. In most established bond markets,
returns for the first half of fiscal year 2000 were disappointing. For the fund,
preserving capital was difficult as the Federal Reserve tightened monetary
policy.
Kemper Strategic Income Fund's -1.37 percent total return (Class A shares
unadjusted for sales charge) for the six months ended April 30 was less than
that of the average 1.24 percent return of its Lipper peers (multisector income
funds) and less than the 1.51 percent return of the fund's unmanaged benchmark,
the Lehman Brothers Government/ Corporate index, a group of investment-grade
bonds that vary in maturity and quality.
The biggest factor affecting fund performance during the period was its
holdings in euro-denominated bonds. As the euro declined sharply in value
against the U.S. dollar, the value of the fund's holdings dropped. To preserve
capital, we reduced the fund's position in euro securities from approximately 25
percent to 17 percent between October 1999 and April 30. While we would have
liked to liquidate our entire position, a gradual approach was necessary to
stabilize and maintain the fund's income potential. As opportunities arise in
the coming months, we may further reduce the fund's weighting in
euro-denominated bonds.
Q WHY HAS THE EURO FALLEN AND HOW MUCH DID IT AFFECT THE FUND?
A At the start of the current fiscal year, it took more than $1.05 to buy a
euro. By April 2000, a euro was worth 91 cents. We think this decline resulted
from two reasons. First, U.S. economic growth has been stronger than in Europe,
prompting investors to keep a greater share of their investments in U.S. dollars
rather than euros. Higher domestic interest rates made U.S. dollar deposits more
attractive. Second, the European Central Bank has faced a credibility problem
with investors that it has yet to address.
Kemper Strategic Income Fund's euro weighting cost the fund approximately 350
basis points (3.5 percent) in return for the six months ended April 30. If not
for its European exposure, the fund would have outperformed the average of its
peers for the period. Euro-denominated bonds lost an average of 11.68 percent of
their value between October and April, according to Merrill Lynch.
Q HIGH-YIELD BONDS WERE THE LARGEST COMPONENT OF THE PORTFOLIO DURING THE
FIRST HALF OF FISCAL YEAR 2000. CAN YOU ELABORATE ON MARKET CONDITIONS IN THE
HIGH-RISK DEBT MARKET SINCE OCTOBER?
A The returns from high-yield bonds were modest for the six months ended
April 30, 2000. The total return of the unmanaged Merrill Lynch High Yield
Master index, a group of lower-rated bonds that vary in quality, was 0.25
percent for the period. The price component of the index fell 4.07 percent. For
many high-yield investors, preserving capital was a challenge, as income did not
offset losses in principal value.
One reason for the high-yield market's weakness was anemic investor demand.
This past autumn and winter, the lure of potentially higher returns from equity
investments, particularly technology stocks, prompted some investors to
liquidate high-yield holdings and redeploy assets. As the U.S. economy enjoyed
the best of times, some investors behaved as if high-yield bonds faced the worst
of times. Ironically, in January and February, high-yield bonds outperformed the
Declining value of the euro since its debut 16 months ago
This chart shows what a euro was worth in U.S. dollars between 12/31/98 and
4/30/00, it is not intended to represent the past or future performance of any
Kemper fund.
[BAR GRAPH]
<TABLE>
<CAPTION>
EURO EXCHANGE RATE
------------------
<S> <C>
12/98 1.1665
1.1355
1.1015
3/99 1.0807
1.0581
1.0403
6/99 1.0306
1.0700
1.0589
9/99 1.0667
1.0526
1.0071
12/99 1.0092
0.9715
0.9668
3/00 0.9575
4/00 0.9107
</TABLE>
SOURCE: BLOOMBERG BUSINESS NEWS.
6
<PAGE> 7
PERFORMANCE UPDATE
unmanaged Standard & Poor's 500 index.
Q COULD YOU DESCRIBE HOW THE FUND'S HIGH-YIELD BONDS WERE POSITIONED DURING
THE PERIOD?
A In a difficult environment, we believed success depended on not losing
sight of the fact that the underpinnings of the high-yield debt market were
sound. Since mid-1999, bond default rates dropped and commodity prices
rebounded, helping many "old- economy" companies meet debt payments. During the
period, we focused on larger, more liquid bond issues, and on companies with
relatively solid cash flow and proven management.
Since October 1999, the difference in yield, or spread, between 10-year
Treasuries and comparable-maturity high-yield bonds widened to more than 630
basis points (6.3 percent). Given that 10-year Treasury bonds yielded 6.22
percent at the end of April, 2000 high-yield bonds offered double the yield of
government bonds for investors willing to assume additional risk. That's why we
had a majority of the fund's assets in the high-yield category.
Q WHAT HAS BEEN THE HISTORICAL EXPERIENCE OF THE HIGH-YIELD BOND MARKET
DURING PERIODS OF STOCK MARKET WEAKNESS?
A For seven times since October 1987, high-yield bonds outperformed the
Standard & Poor's 500 index during months when the S&P 500 declined 5 percent or
more. While we can't say this pattern will continue, we believe that high-yield
bonds deserve a place in a well-balanced portfolio now more than ever. After
five years of strong equity market performance, many investors have portfolios
that are heavily laden with large-cap stocks. We think it would be a mistake for
investors to overlook the opportunity to maintain the diversification that this
asset class offers.
Q HOW HAVE OTHER TYPES OF DOMESTIC BONDS FARED SINCE OCTOBER?
A Strong economic growth prompted the Federal Reserve to raise its
short-term interest-rate target three times since October by a total of 75 basis
points (0.75 percent) to 6.00 percent. This past winter, the government also
announced a buyback plan for 30-year Treasuries. These two events decreased the
attractiveness of most types of intermediate-term (two- to 10-year) bonds.
Prices of intermediate, investment-grade corporate bonds and other non-Treasury
debt generally fell.
Q YOU SAID THAT EMERGING MARKET BONDS WERE THE PORTFOLIO'S BRIGHT SPOT. HOW
WELL HAVE THEY DONE AND WHY?
A Investors are expecting that growth will pick up steam in emerging
markets in the coming months. Bonds in some countries such as Mexico have
rallied since October as rating services have upgraded certain government debt
to investment-grade. The fund benefited from this trend because we had made
Mexico one of the fund's largest emerging market holdings. Overall, the Lehman
Brothers Emerging Markets Bond index rose 12.82 percent for the six months ended
April 30. The index is an unmanaged group of higher-risk overseas debt issued by
governments and corporations in either U.S. dollars or local currencies.
Q FINALLY, HOW ARE YOU POSITIONING THE PORTFOLIO FOR THE ROAD AHEAD?
A At some point, we believe there is potential for equity-like returns from
domestic high-yield securities and higher prices for most categories of U.S. and
overseas bonds. First, however, the Fed needs to be convinced that domestic
inflation will not become problematic. This would help alleviate the need for
Europe and countries in other regions to raise interest rates to match the Fed.
Although we think short-term bond market volatility may continue for the rest
of fiscal year 2000, some long-term positive
HIGH-YIELD BOND PERFORMANCE VS. S&P 500 INDEX
During months when the S&P 500 declined by 5 percent or more from 1987 to 2000.
[BAR GRAPH]
<TABLE>
<CAPTION>
MERRILL LYNCH HIGH
YIELD MASTER
INDEX* S&P 500
------------------ -------
<S> <C> <C>
10/87 -2.67 -21.53
11/87 2.53 -8.24
1/90 -1.95 -6.71
8/90 -3.83 -9.03
8/97 -0.17 -5.60
8/98 -4.32 -14.45
1/00 -0.38 -5.02
</TABLE>
SOURCE: BLOOMBERG BUSINESS NEWS AND MERRILL LYNCH.
7
<PAGE> 8
PERFORMANCE UPDATE
trends are in place. First, a robust U.S. economy and a recovering global
economy are helping debtors meet their bond obligations. Second, the default
rate for higher-risk bonds has been declining since the end of the second
quarter of 1999.
We recognize that we have work to do to increase the fund's competitive
positioning. We are confident in the long-term soundness of our investment
strategy, an approach that enabled the fund to achieve a #1 performance ranking
among its Lipper peers for the 10-year period ended April 30, 2000. (See page 2
for all rankings for all time periods.) Today's exceptionally dynamic global
bond market environment demands patience from fixed-income investors, and we
appreciate the confidence that investors have shown in our team.
TERMS TO KNOW
BASIS POINT The movement of interest rates or yields expressed in hundredths of
a percent. For example, an increase in yield from 5 percent to 5.50 percent is
50 basis points.
CREDIT SPREAD The difference in yields between higher-quality and lower-quality
bonds, typically comparing the same types of bonds. For example, if AAA-rated
corporate bonds yield 5 percent, and BBB-rated corporate bonds yield 6 percent,
the credit spread is 1 percent. When the spread becomes less because the higher
yield drops or the lower yield rises, the spread is said to "narrow." When the
opposite occurs, the spread is said to "widen."
DEFAULT Failure of a borrower to pay what is owed when it is owed. The default
rate of high-yield bonds can be measured as the percentage of bond issuers who
are not meeting their obligations at a given point in time.
EURO The monetary unit that is gradually replacing the national currencies of
most established Western European countries with the exception of the United
Kingdom. Introduced at the start of 1999 for large commercial transactions, euro
currency is expected to be in general circulation next year.
FEDERAL FUNDS RATE The interest rate that banks charge each other on overnight
loans. The Federal Reserve Board's Open Market Committee sets a target rate to
either make credit more easily available or tighten monetary policy in an
attempt to avoid economic imbalances such as high inflation.
INVERTED YIELD CURVE A market phenomenon in which intermediate-term bonds
(securities with one- to 10-year maturities) have higher income potential and
current yields than long-term bonds (securities with 10- to 30-year maturities).
Historically it has occurred during a period of rising short-term interest rates
and been viewed as an indicator of a future economic slowdown.
8
<PAGE> 9
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 4/30/00 ON 10/31/99
<S> <C> <C> <C> <C>
HIGH YIELD CORPORATES 48% 52%
................................................................................
EMERGING MARKETS 28 --
................................................................................
FOREIGN CURRENCY BONDS 17 43
................................................................................
CASH AND EQUIVALENTS 1 1
................................................................................
OTHER 6 4
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
YEARS TO MATURITY
<TABLE>
<CAPTION>
ON 4/30/00 ON 10/31/99
<S> <C> <C> <C> <C>
1-10 YEARS 90% 83%
................................................................................
11-20 YEARS 8 11
................................................................................
21+ YEARS 2 6
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
AVERAGE MATURITY
<TABLE>
<CAPTION>
ON 4/30/00 ON 10/31/99
<S> <C> <C> <C> <C>
AVERAGE MATURITY 6.2 years 8.6 years
--------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER STRATEGIC INCOME FUND
Portfolio of Investments at April 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
REPURCHASE AGREEMENTS--0.0% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
State Street Bank and Trust Company,
5.68%, to be repurchased at $154,073
on 05/01/2000
(Cost $154,000)** $ 154,000 $ 154,000
---------------------------------------------------------------------------
<CAPTION>
SHORT-TERM NOTES--4.5%
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan Bank, 5.880%,
05/01/2000 6,000,000 6,000,000
Federal Home Loan Mortgage Corp.
5.87%, 05/05/2000 20,000,000 19,987,022
---------------------------------------------------------------------------
TOTAL SHORT TERM NOTES
(Cost: $25,987,022) 25,987,022
---------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FOREIGN BONDS--38.8%
<S> <C> <C> <C> <C> <C> <C>
U.S.$ DENOMINATED--22.1%
Federative Republic of Brazil, 9.375%,
04/07/2008 6,250,000 5,187,500
Federative Republic of Brazil,
11.625%, 04/15/2004 2,875,000 2,854,875
Kappa Beheer BV, 10.625%, 07/15/2009 130,000 133,900
Kingdom of Morocco, Restructuring and
Consolidation Agreement, Tranche A,
Floating Rate Bond, LIBOR plus
.8125%, 6.844%, 01/01/2009 20,129,887 17,915,600
Mexican United States, 9.875%,
01/15/2007 7,950,000 8,168,625
Republic of Bulgaria, Floating Rate
Bond, LIBOR plus .8125%, 6.500%,
07/28/2011 36,500,000 27,557,500
Republic of Columbia, 8.625%,
04/01/2008 2,150,000 1,601,750
Republic of Panama, Past Due Interest
Bond, LIBOR plus .8125%, 6.500%,
07/17/2016 4,092,579 3,294,526
Republic of Turkey, 12.000%,
12/15/2008 840,000 896,700
Republic of Turkey, 12.375%,
06/15/2009 14,700,000 15,857,625
Republic of Venezuela, Debt Conversion
Bond, Floating Rate Bond, Series DL,
LIBOR plus .875%, 7.000%,
12/18/2007 (b) 20,761,775 16,246,089
United Mexican States, 10.375%,
02/17/2009 3,550,000 3,731,938
United Mexican States Global Bond,
11.375%, 09/15/2016 (b) 10,000,000 11,312,500
United Mexican States, 11.500%,
05/15/2026 10,000,000 11,787,500
---------------------------------------------------------------------------
126,546,628
</TABLE>
10 The accompanying notes are an integral part of the financial statements.
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
NON U.S. $ DENOMINATED--16.7%
Federal Republic of Germany, 6.000%,
01/04/2007 (b) $30,166,220 $ 28,584,954
Federal Republic of Germany, 6.000%,
07/04/2007 (b) 44,998,662 42,684,912
Kingdom of Spain, 6.000%, 01/31/2008
(b) 26,000,000 24,405,431
---------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost: $253,963,097) 222,221,925
---------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CORPORATE BONDS--55.5%
<S> <C> <C> <C> <C> <C> <C>
CONSUMER DISCRETIONARY--5.9%
AFC Enterprises, 10.250%, 05/15/2007 3,240,000 3,175,200
AMF Bowling, Inc, 10.875%, 06/15/2006 3,950,000 1,343,000
AMF Bowling, Inc., Step-up Coupon, 0%
to 03/15/2001, 12.250% to 03/15/2006 995,000 228,850
Advantica Restaurant Co., 11.250%,
01/15/2008 485,216 320,243
Avis Rent A Car, 11.000%, 05/01/2009 2,210,000 2,303,925
Avondale Mills, 10.250%, 05/01/2006 170,000 158,100
Boca Resorts, Inc., 9.875%, 04/15/2009 3,330,000 3,046,950
Cinemark USA, Inc., Series D, 9.625%,
08/01/2008 2,000,000 1,340,000
Eldorado Resorts, 10.500%, 08/15/2006 1,120,000 1,097,600
Finlay Enterprises, Inc., 9.000%,
05/01/2008 1,290,000 1,148,100
Finlay Fine Jewelry Co., 8.375%,
05/01/2008 710,000 639,000
Galey & Lord, Inc., 9.125%, 03/01/2008 1,080,000 507,600
Guitar Center Management, 11.000%,
07/01/2006 3,297,000 3,198,090
Hines Horticulture, Inc., 11.750%,
10/15/2005 1,748,000 1,748,000
Hollywood Entertainment Corp., Series
B, 10.630%, 08/15/2004 1,030,000 896,100
Imperial Home Decor Group, Inc.,
11.000%, 03/15/2008 720,000 7,200
J. Crew Group, Step-up Coupon, 0% to
10/15/2002, 13.125% to 10/15/2008
(b) 1,050,000 577,500
J. Crew Group, 10.375%, 10/15/2007 2,540,000 2,184,400
Krystal Inc., 10.250%, 10/01/2007 2,450,000 2,186,625
National Vision Association, Ltd.,
12.750%, 10/15/2005 5,450,000 1,907,500
Park Place Entertainment, Inc.,
9.375%, 02/15/2007 1,520,000 1,504,800
Players International, 10.875%,
04/15/2005 1,585,000 1,644,438
Regal Cinemas, Inc., 8.875%,
12/15/2010 1,060,000 381,600
Regal Cinemas, Inc., 9.500%,
06/01/2008 690,000 276,000
Restaurant Co., Step-up Coupon, 0% to
05/15/2003, 11.250% to 05/15/2008 1,480,000 888,000
Sealy Mattress Co., Step-up Coupon, 0%
to 12/15/2002, 10.875% to 12/15/2007 1,595,000 1,116,500
Specialty Retailers, Inc., 8.500%,
07/15/2005 360,000 43,200
Specialty Retailers, Inc., 9.000%,
07/15/2007 1,760,000 52,800
---------------------------------------------------------------------------
33,921,321
</TABLE>
The accompanying notes are an integral part of the financial statements. 11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
CONSUMER STAPLES--0.3%
Grove Worldwide LLC, 9.250%,
05/01/2008 $ 1,010,000 $ 424,200
Jafra Cosmetics International, Inc.,
11.750%, 05/01/2008 1,435,000 1,377,600
---------------------------------------------------------------------------
1,801,800
-------------------------------------------------------------------------------------------------------------------------
HEALTH--1.0%
Dade International, Inc., 11.125%,
05/01/2006 950,000 864,500
MEDIQ, Inc., 11.000%, 06/01/2008 1,350,000 135,000
Magellan Health Services, Inc.,
9.000%, 02/15/2008 2,400,000 1,584,000
Mariner Post-Acute Network, Inc.,
Step-up Coupon, 0% to 11/01/2002,
10.500% to 11/01/2007 5,020,000 25,100
Mariner Post-Acute Network, Inc.,
10.500%, 08/01/2006 3,520,000 3,027,200
Vencor, Inc., 9.875%, 05/01/2005 800,000 152,000
---------------------------------------------------------------------------
5,787,800
-------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--14.5%
21st Century Telecom Group, Inc.,
Step-up Coupon, 0% to 02/15/2003,
12.250% to 02/15/2008 4,570,000 3,313,250
21st Century Telecom Group, Inc.,
13.750%, 02/15/2010 285,000 265,050
Allegiance Telecom, Inc., 12.875%,
05/15/2008 2,960,000 3,226,400
Call-Net Enterprises, Inc., Step-up
Coupon, 0% to 08/15/2002, 9.270% to
08/15/2007 390,000 175,500
Call-Net Enterprises, Inc., Step-up
Coupon, 0% to 05/15/2004, 10.800% to
05/15/2009 710,000 262,700
Call-Net Enterprises, Inc., Step-up
Coupon, 0% to 08/15/2003, 8.940% to
08/15/2008 820,000 311,600
Call-Net Enterprises, Inc., 9.375%,
05/15/2009 600,000 414,000
Comunicacion Cellular, S.A., Step-up
Coupon, 0% to 09/29/2000, 14.125% to
03/01/2005 160,000 104,000
Crown Castle International Corp.,
Step-up Coupon, 0% to 11/15/2002,
10.625% to 11/15/2007 1,190,000 862,750
Crown Castle International Corp.,
Step-up Coupon, 0% to 08/01/2004,
11.250% to 08/01/2011 890,000 551,800
Esprit Telecom Group, PLC, 10.875%,
06/15/2008 800,000 672,000
Esprit Telecom Group, PLC, 11.500%,
12/15/2007 2,345,000 2,087,050
Global Crossing Holdings Ltd., 9.500%,
11/15/2009 2,540,000 2,463,800
Global Telesystems Group, 9.875%,
02/15/2005 550,000 418,000
Hermes Europe Railtel BV, 11.500%,
08/15/2007 180,000 162,000
ICG Holdings, Inc., Step-up Coupon, 0%
to 09/15/2000, 13.500% to 09/15/2005 4,765,000 4,526,750
IPC Communications, Inc., Step-up
Coupon, 0% to 11/01/2001, 10.875% to
05/01/2008 2,910,000 2,502,600
</TABLE>
12 The accompanying notes are an integral part of the financial statements.
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
Impsat Corp., 12.375%, 06/15/2008 $ 1,765,000 $ 1,500,250
Intermedia Communications of Florida,
Inc., Step-up Coupon, 0% to
05/15/2001, 12.500% to 05/15/2006 1,800,000 1,683,000
Intermedia Communications of Florida,
Inc., Step-up Coupon, 0% to
07/15/2002, 11.250% to 07/15/2007 1,980,000 1,529,550
KMC Telecom Holdings, Inc., Step-up
Coupon, 0% to 02/15/2003, 12.500% to
02/15/2008 3,830,000 2,029,900
KMC Telecom Holdings, Inc., 13.500%,
05/15/2009 380,000 353,400
Level 3 Communications Inc., 11.250%,
03/15/2010 1,000,000 957,500
Level 3 Communications, Inc., 9.125%,
05/01/2008 1,970,000 1,708,975
MGC Communications, 13.000%,
10/01/2004 2,250,000 2,328,750
McLeod USA, Inc., Step-up Coupon, 0%
to 03/01/2002, 10.500% to 03/01/2007 3,000,000 2,385,000
McLeod USA, Inc., 9.250%, 07/15/2007 550,000 529,375
McLeod USA, Inc., 9.500%, 11/01/2008 370,000 358,900
MetroNet Communications Corp.,
Step-up Coupon, 0% to 11/01/2002,
10.750% to 11/01/2007 850,000 722,500
MetroNet Communications Corp.,
Step-up Coupon, 0% to 06/15/2003,
9.950% to 06/15/2008 2,035,000 1,617,825
Metromedia Fiber Network, Inc.,
10.000%, 11/15/2008 1,530,000 1,457,325
Millicom International Cellular, S.A.,
Step-up Coupon, 0% to 06/01/2001,
13.500% to 06/01/2006 3,850,000 3,272,500
Netia Holdings, 10.250%, 11/01/2007 470,000 401,850
Nextel Communications, Inc., Step-up
Coupon, 0% to 09/15/2002, 10.650% to
09/15/2007 1,825,000 1,368,750
Nextel Communications, Inc., Step-up
Coupon, 0% to 10/31/2002, 9.750% to
10/31/2007 955,000 668,500
Nextel Communications, Inc., 9.375%,
11/15/2009 2,930,000 2,790,825
Nextlink Communications, Inc., Step-up
Coupon, 0% to 04/15/2003, 9.450% to
04/15/2008 930,000 571,950
Nextlink Communications, Inc., Step-up
Coupon, 0% to 06/01/2004, 12.250% to
06/01/2009 1,070,000 631,300
Nextlink Communications, Inc.,
10.750%, 11/15/2008 1,550,000 1,507,375
Nextlink Communications, Inc.,
12.500%, 04/15/2006 2,545,000 2,634,075
PTC International Finance, Step-up
Coupon, 0% to 07/01/2002, 10.750% to
07/01/2007 6,670,000 4,735,700
PTC International Finance, 11.250%,
12/01/2009 270,000 278,100
Primus Telecommunications Group,
11.250%, 01/15/2009 480,000 433,200
Primus Telecommunications Group,
11.750%, 08/01/2004 2,630,000 2,465,625
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
Primus Telecommunications Group,
12.750%, 10/15/2009 $ 1,380,000 $ 1,331,700
SBA Communications Corp., Step-up
Coupon, 0% to 03/01/2003, 12.000% to
03/01/2008 1,610,000 1,094,800
Telecorp PCS, Inc., Step-up-Coupon, 0%
to 04/15/2004, 11.625% to 04/15/2009 1,700,000 1,105,000
Teligent, Inc., Step-up Coupon, 0% to
03/01/2003, 11.500% to 03/01/2008 1,100,000 572,000
Teligent, Inc., 11.500%, 12/01/2007 2,100,000 1,806,000
Tritel PCS Inc., Step-up Coupon, 0% to
05/01/2004, 12.750% to 05/15/2009 1,540,000 1,004,850
Triton Communications, L.L.C., Step-up
Coupon, 0% to 05/01/2003, 11.000% to
05/01/2008 (b) 8,850,000 6,305,625
U.S. Xchange, L.L.C., 15.000%,
07/01/2008 1,090,000 981,000
USA Mobile Communications Holdings,
Inc., 14.000%, 11/01/2004 1,190,000 1,071,000
United Pan-Europe Communications,
10.875%, 11/01/2007 610,000 555,100
Versatel Telecom, 11.875%, 07/15/2009 390,000 382,200
Versatel Telecom, 13.250%, 05/15/2008 930,000 943,950
Versatel Telecom, 13.250%, 05/15/2008 490,000 497,350
Viatel, Inc., Step-up Coupon, 0% to
04/15/2003, 12.500% to 04/15/2008 1,740,000 922,200
Viatel, Inc., 11.250%, 04/15/2008 490,000 416,500
Viatel, Inc., 11.500%, 03/15/2009 363,000 323,070
---------------------------------------------------------------------------
82,553,595
-------------------------------------------------------------------------------------------------------------------------
FINANCIAL--5.7%
Banco Nacional de Desenvolvimiento
Economico e Social, 10.300%,
06/16/2008 29,525,000 26,351,062
HMH Properties, 7.875%, 08/01/2008 1,210,000 1,046,650
Intertek Finance, PLC, 10.250%,
11/01/2006 1,770,000 1,495,650
Spectrasite Holdings, Inc., Step-up
Coupon, 0% to 04/15/2004, 11.250% to
04/15/2009 1,500,000 810,000
Spectrasite Holdings, Inc., Step-up
Coupon, 0% to 07/15/2003, 12.000% to
07/15/2008 2,850,000 1,738,500
Spectrasite Holdings, Inc., 10.750%,
03/15/2010 900,000 882,000
---------------------------------------------------------------------------
32,323,862
-------------------------------------------------------------------------------------------------------------------------
MEDIA--6.4%
AMFM, Inc., Step-up Coupon, 0% to
02/01/2002, 12.750% to 02/01/2009 3,330,000 2,930,400
AMFM, Inc., 9.000%, 10/01/2008 440,000 446,600
American Lawyer Media, Inc., Step-up
Coupon, 0% to 12/15/2002, 12.250% to
12/15/2008 360,000 229,500
Avalon Cable Holdings LLC, Step-up
Coupon, 0% to 12/01/03, 11.875% to
12/01/2008 1,760,000 1,135,200
Charter Communications Holdings LLC,
Step-up Coupon, 0% to 04/01/2004,
9.92% to 04/01/2011 3,700,000 2,035,000
Charter Communications Holdings LLC,
10.000%, 04/01/2009 900,000 873,000
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
Comcast UK Cable Partners, Ltd.,
Step-up Coupon, 0% to 11/15/2000,
11.200% to 11/15/2007 $ 4,200,000 $ 4,000,500
Diamond Cable Communications, PLC,
13.250%, 09/30/2004 2,025,000 2,159,156
Echostar DBS Corp., 9.250%, 02/01/2006 940,000 902,400
Echostar DBS Corp., 9.375%, 02/01/2009 610,000 587,125
Frontiervision Holdings, LP, Step-up
Coupon, 0% to 09/15/2001, 11.875% to
09/15/2007 2,560,000 2,227,200
Frontiervision LP, 11.000%, 10/15/2006 1,200,000 1,224,000
Interep National Radio Sales, Inc.,
10.000%, 07/01/2008 1,070,000 963,000
NTL Communications Corp., Step-up
Coupon, 0% to 10/01/2003, 12.375% to
10/01/2008 740,000 479,150
NTL, Inc., 11.500%, 10/01/2008 2,905,000 2,948,575
Renaissance Media Group, Step-up
Coupon, 0% to 04/15/2003, 10.000% to
04/15/2008 1,000,000 640,000
SFX Entertainment, Inc., 9.125%,
02/01/2008 1,565,000 1,565,000
SFX Entertainment, Inc., 9.125%,
12/01/2008 1,570,000 1,570,000
Sinclair Broadcasting Group, Inc.,
8.750%, 12/15/2007 730,000 635,100
Star Choice Communications, Inc.,
13.000%, 12/15/2005 875,000 888,125
TeleWest Communications, PLC, Step-up
Coupon, 0% to 10/01/2000, 11.000% to
10/01/2007 2,395,000 2,233,337
TeleWest Communications, PLC, 9.625%,
10/01/2006 50,000 47,750
TeleWest Communications, PLC, 11.250%,
11/01/2008 1,250,000 1,262,500
Transwestern Publishing, Step-up
Coupon, 0% to 11/15/2002, 11.875% to
11/15/2008 3,100,000 2,232,000
Transwestern Publishing, 9.625%,
11/15/2007 1,340,000 1,279,700
United International Holdings, Step-up
Coupon, 0% to 02/15/2003, 10.750% to
02/15/2008 1,710,000 1,111,500
---------------------------------------------------------------------------
36,605,818
-------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--2.4%
Coinmach Corp., 11.750%, 11/15/2005 4,370,000 4,107,800
ImPac Group, Inc., 10.125%, 03/15/2008 2,370,000 2,441,100
Integrated Electrical Services, Inc.,
9.375%, 02/01/2009 480,000 374,400
Kindercare Learning Centers, Inc.,
9.500%, 02/15/2009 2,665,000 2,431,813
La Petite Academy, Inc., 10.000%,
05/15/2008 2,430,000 1,458,000
Spincycle, Inc., Step-up Coupon, 0% to
05/01/2001, 12.750% to 05/01/2005 4,010,000 1,203,000
Verio, Inc., 10.625%, 11/15/2009 1,150,000 1,098,250
Verio, Inc., 11.250%, 12/01/2008 690,000 672,750
---------------------------------------------------------------------------
13,787,113
</TABLE>
The accompanying notes are an integral part of the financial statements. 15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
DURABLES--1.1%
Accuride Corp., 9.250%, 02/01/2008 $ 760,000 $ 630,800
Airxcel, 11.000%, 11/15/2007 3,430,000 2,949,800
DeCrane Aircraft Holdings, Inc.,
12.000%, 09/30/2008 2,400,000 2,124,000
Fairchild Corp., 10.750%, 04/15/2009 620,000 341,000
---------------------------------------------------------------------------
6,045,600
-------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--7.6%
Agriculture, Mining and Chemicals,
Inc., 10.750%, 09/30/2003 1,240,000 905,200
Atlantis Group, Inc., 11.000%,
02/15/2003 1,328,000 1,328,000
BPC Holdings Corp., 12.500%,
06/15/2006 2,996,000 2,576,560
Berry Plastics Corp., 12.250%,
04/15/2004 505,000 492,375
Consolidated Container Capital, Inc.,
10.125%, 07/15/2009 740,000 725,200
Consumers International, 10.250%,
04/01/2005 1,220,000 793,000
Day International Group, Inc.,
11.125%, 06/01/2005 2,660,000 2,666,650
Eagle-Picher Holdings, Inc., 9.375%,
03/01/2008 2,510,000 2,120,950
Foamex, L.P., 13.500%, 08/15/2005 810,000 729,000
Fonda Group, 9.500%, 03/01/2007 3,270,000 2,616,000
GS Technologies, 12.000%, 09/01/2004 940,000 470,000
GS Technologies, 12.250%, 10/01/2005 1,260,000 617,400
Gaylord Container Corp., 9.750%,
06/15/2007 2,200,000 1,974,500
Gaylord Container Corp., 9.875%,
02/15/2008 293,705 304,000
Graham Packaging Co., Step-up Coupon,
0% to 01/15/2003, 10.750% to
01/15/2009 610,000 341,600
Grove Holdings LLC, Step-up Coupon, 0%
to 05/01/2003, 11.625% to 05/01/2009 270,000 24,300
Grove Holdings LLC, 14.500%,
05/01/2010 834,183 41,709
Huntsman Package, 11.750%, 12/01/2004 2,100,000 2,037,000
Knoll, Inc., 10.875%, 03/15/2006 1,308,000 1,334,160
Motors and Gears, Inc., 10.750%,
11/15/2006 860,000 825,600
Neenah Corp., 11.125%, 05/01/2007 840,000 655,200
Plainwell, Inc., 11.000%, 03/01/2008 2,200,000 594,000
Printpack, Inc., 10.625%, 08/15/2006 1,700,000 1,615,000
Riverwood International Corp.,
10.625%, 08/01/2007 615,000 616,538
Riverwood International Corp.,
10.875%, 04/01/2008 6,035,000 5,793,600
SF Holdings Group, Inc., Step-up
Coupon, 0% to 03/15/2003, 12.750% to
03/15/2008 1,380,000 734,850
Stone Container Corp., 11.500%,
08/15/2006 670,000 696,800
Stone Container Corp., 12.250%,
04/01/2002 190,000 190,475
</TABLE>
16 The accompanying notes are an integral part of the financial statements.
<PAGE> 17
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
Tenneco Automotive, Inc., 11.625%,
10/15/2009 $ 8,440,000 $ 8,440,000
Texas Petrochemicals, 11.125%,
07/01/2006 1,370,000 1,123,400
---------------------------------------------------------------------------
43,383,067
-------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--0.6%
PSINet, Inc., 10.000%, 02/15/2005 890,000 783,200
PSINet, Inc., 11.000%, 08/01/2009 1,850,000 1,655,750
PSINet, Inc., 11.500%, 11/01/2008 1,290,000 1,180,350
---------------------------------------------------------------------------
3,619,300
-------------------------------------------------------------------------------------------------------------------------
ENERGY--0.9%
Benton Oil & Gas Co., 11.625%,
05/01/2003 366,000 245,220
Chesapeake Energy Corp., 9.625%,
05/01/2005 1,000,000 955,000
Continental Resources, Inc., 10.250%,
08/01/2008 2,420,000 2,141,700
Key Energy Services, Inc., 14.000%,
01/15/2009 590,000 644,575
Pen Holdings, Inc., 9.875%, 06/15/2008 625,000 531,250
R&B Falcon Corp., 9.500%, 12/15/2008 250,000 245,000
R&B Falcon Corp., 11.000%, 03/15/2006 30,000 31,575
RAM Energy, 11.500%, 02/15/2008 420,000 205,800
---------------------------------------------------------------------------
5,000,120
-------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--1.7%
Euramax International, PLC, 11.250%,
10/01/2006 3,695,000 3,713,475
MMI Products, Inc., 11.250%,
04/15/2007 1,980,000 1,980,000
Metal Management, Inc., 10.000%,
05/15/2008 1,830,000 1,335,900
Renco Steel Holdings Co., Series B,
10.875%, 02/01/2005 1,930,000 1,717,700
Republic Technologies International,
13.750%, 07/15/2009 2,780,000 695,000
---------------------------------------------------------------------------
9,442,075
-------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--1.6%
Congoleum Corp., 8.625%, 08/01/2008 2,000,000 1,640,000
Del Webb Corp., 9.750%, 01/15/2008 110,000 90,750
Dimac Corp., 12.500%, 10/01/2008 1,980,000 19,800
Forecast Group, L.P., 11.375%,
12/15/2000 1,125,000 1,125,000
Fortress Group, 13.750%, 05/15/2003 2,560,000 1,459,200
Hovnanian Enterprises, Inc., 9.125%,
05/01/2009 920,000 805,000
Hovnanian Enterprises, Inc., 9.750%,
06/01/2005 490,000 438,550
Lennar Corp, 9.950%, 05/01/2010 970,000 895,436
Lennar Corp., 7.625%, 03/01/2009 200,000 169,000
Nortek, Inc., 9.125%, 09/01/2007 2,390,000 2,210,750
Nortek, Inc., 9.875%, 03/01/2004 130,000 122,850
Nortek, Inc., Series A, 8.875%,
08/01/2008 420,000 381,150
---------------------------------------------------------------------------
9,357,486
</TABLE>
The accompanying notes are an integral part of the financial statements. 17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
TRANSPORTATION--1.1%
Petro Stopping Centers, 10.500%,
02/01/2007 $ 2,200,000 $ 1,914,000
TFM, S.A. de C.V., 10.250%, 06/15/2007 1,320,000 1,174,800
Trans World Airlines, Inc., 11.375%,
03/01/2006 780,000 234,000
Transtar Holdings, Inc., Step-up
Coupon, 0% to 12/15/1999, 13.375% to
12/15/2003 670,000 688,425
Travelcenters America, 10.250%,
04/01/2007 2,180,000 2,092,800
---------------------------------------------------------------------------
6,104,025
-------------------------------------------------------------------------------------------------------------------------
UTILITIES--0.2%
Azurix Corp, 10.750%, 02/15/2010 750,000 742,500
Azurix Corp., 10.375%, 02/15/2007 630,000 630,000
---------------------------------------------------------------------------
1,372,500
-------------------------------------------------------------------------------------------------------------------------
OTHER--4.5%
Riverside Loan Trust II, 7.437%,
07/16/2008 30,000,000 25,552,740
---------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost: $359,772,048) 316,658,222
---------------------------------------------------------------------------
<CAPTION>
PREFERRED STOCKS--1.0% NUMBER OF SHARES
<S> <C> <C> <C> <C> <C> <C>
COMMUNICATIONS--0.5%
CELLULAR TELEPHONE--0.2%
TELEPHONE/ COMMUNICATIONS--0.3%
Dobson Communications, PIK, preferred 1,037 1,036,568
Nextel Communications, Inc., PIK,
preferred 410 393,604
World Access, Inc., convertible
preferred 866 840,020
---------------------------------------------------------------------------
2,270,192
-------------------------------------------------------------------------------------------------------------------------
FINANCIAL--0.2%
REAL ESTATE
Crown American Realty Trust, preferred 24,970 873,950
---------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
MEDIA--0.2%
BROADCASTING & ENTERTAINMENT
Sinclair Capital, preferred 13,500 1,248,750
---------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--0.1%
CONTAINERS & PAPER--0.0%
SF Holdings Group, Inc., PIK,
preferred 7 31,500
SF Holdings Group, Inc., PIK,
preferred 30 135,000
---------------------------------------------------------------------------
166,500
MACHINERY/ COMPONENTS--0.1%
Eagle-Picher Holdings, Inc., preferred 180 540,000
---------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
ENERGY--0.0%
OIL & GAS PRODUCTION
Clark USA, PIK, preferred 3,570 71,400
---------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost: $7,107,107) 5,170,792
---------------------------------------------------------------------------
<CAPTION>
COMMON STOCKS--0.2%
<S> <C> <C> <C> <C> <C> <C>
COMMUNICATIONS--0.2%
TELEPHONE/COMMUNICATIONS
21st Century Telecom Group, Inc.,
Warrants* 220 44,000
AT&T Canada Inc. * 1,920 81,840
Econophone, Inc., Warrants* 1,425 242,250
Intelcom Group, Inc., Warrants* 4,026 80,520
Intermedia Communications of Florida,
Inc., Warrants* 1,060 169,600
KMC Telecom Holdings, Inc., Warrants* 2,100 16,800
MGC Communications* 5,900 289,100
</TABLE>
18 The accompanying notes are an integral part of the financial statements.
<PAGE> 19
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE
<S> <C> <C> <C> <C> <C> <C>
Primus Telecommunications Group,
Warrants* 1,000 $ 40,000
Star Choice Communications, Warrants* 20,265 103,859
---------------------------------------------------------------------------
1,067,969
-------------------------------------------------------------------------------------------------------------------------
FINANCIAL--0.0%
OTHER FINANCIAL COMPANIES--0.0%
Ono Finance PLC, Warrants* 550 82,500
---------------------------------------------------------------------------
SERVICE INDUSTRIES--0.0%
MISCELLANEOUS CONSUMER--0.0%
Spincycle, Inc., Warrants* 4,010 40
---------------------------------------------------------------------------
PRINTING/PUBLISHING--0.0%
American Banknote Corp., Warrants* 1,300 13
---------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
DURABLES--0.0%
AEROSPACE
Decrane Holdings Co., Warrants* 2,740 0
---------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--0.0%
CONTAINERS & PAPER
SF Holdings Group, Inc. * 387 4
---------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
ENERGY--0.0%
OIL/GAS TRANSMISSION
Empire Gas Corp., Warrants* 2,208 221
---------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--0.0%
STEEL & METALS
Republic Technologies International,
Warrants* 2,780 28
---------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--0.0%
BUILDING MATERIALS--0.0%
Waxman Industries, Inc., Warrants* 222,607 2,226
---------------------------------------------------------------------------
HOMEBUILDING--0.0%
Capital Pacific Holdings, Warrants* 4,345 2,172
---------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost: $652,633) 1,155,173
---------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $647,635,907) (a) $571,347,134
---------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
* Non-income producing security.
** Repurchase agreements are fully collateralized by U.S. Treasury or Government
agency securities.
(a) The cost for federal income tax purposes was $647,635,907. At April 30,
2000, the net unrealized depreciation for all securities based on tax cost
was $76,288,773. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess market value over tax cost
of $15,707,063, and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$91,995,836.
(b) At April 30, 2000, these securities, in part or in whole, have been
segregated to cover initial margin requirements for open futures contracts.
PIK denotes that interest or dividend is paid in kind.
At April 30, 2000, open futures contracts sold short were as follows:
<TABLE>
<CAPTION>
EXPIRATION AGGREGATE MARKET
FUTURES DATE CONTRACTS FACE VALUE($) VALUE($)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Euro Bond June 8, 2000 638 59,641,520 60,931,414
---------------------------------------------------------------------------------------------------------------------
Total unrealized depreciation on futures
contracts sold short 1,289,894
</TABLE>
The accompanying notes are an integral part of the financial statements. 19
<PAGE> 20
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
as of April 30, 2000 (unaudited)
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $647,635,907) $ 571,347,134
-----------------------------------------------------------------------------
Cash 103,778
-----------------------------------------------------------------------------
Foreign currency, at value (cost $150,835) 150,835
-----------------------------------------------------------------------------
Receivable for investments sold 2,744,923
-----------------------------------------------------------------------------
Interest receivable 15,135,478
-----------------------------------------------------------------------------
Receivable for Fund shares sold 144,291
-----------------------------------------------------------------------------
Unrealized appreciation on forward currency exchange
contracts 1,131,775
-----------------------------------------------------------------------------
TOTAL ASSETS 590,758,214
-----------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased 1,801,417
-----------------------------------------------------------------------------
Payable for Fund shares redeemed 1,249,560
-----------------------------------------------------------------------------
Payable for daily variation margin on open futures contracts 214,649
-----------------------------------------------------------------------------
Accrued management fee 281,010
-----------------------------------------------------------------------------
Other accrued expenses and payables 1,119,321
-----------------------------------------------------------------------------
Total liabilities 4,665,957
-----------------------------------------------------------------------------
NET ASSETS, AT VALUE $ 586,092,257
-----------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income $ 1,764,881
-----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on
-----------------------------------------------------------------------------
Investments (76,288,773)
-----------------------------------------------------------------------------
Futures (1,289,894)
-----------------------------------------------------------------------------
Foreign currency related transactions 835,720
-----------------------------------------------------------------------------
Accumulated net realized gain (loss) (102,906,419)
-----------------------------------------------------------------------------
Paid-in capital 763,976,742
-----------------------------------------------------------------------------
NET ASSETS, AT VALUE $ 586,092,257
-----------------------------------------------------------------------------
NET ASSET VALUE AND OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($415,362,510 / 83,736,924 outstanding shares of
beneficial interest, $.01 par value, unlimited number of
shares authorized) $4.96
-----------------------------------------------------------------------------
Maximum offering price per share (100 / 95.50 of $4.96) $5.19
-----------------------------------------------------------------------------
CLASS B SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share
($148,061,130 / 29,864,961 outstanding shares of
beneficial interest, $.01 par value, unlimited number of
shares authorized) $4.96
-----------------------------------------------------------------------------
CLASS C SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share
($22,668,617 / 4,545,338 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $4.99
-----------------------------------------------------------------------------
</TABLE>
20 The accompanying notes are an integral part of the financial statements.
<PAGE> 21
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended April 30, 2000 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 249,059
----------------------------------------------------------------------------
Interest (net of foreign taxes withheld of $93,239) 33,371,685
----------------------------------------------------------------------------
Total income 33,620,744
----------------------------------------------------------------------------
Expenses:
Management fee 1,842,428
----------------------------------------------------------------------------
Services to shareholders 1,127,761
----------------------------------------------------------------------------
Custodian fees 13,301
----------------------------------------------------------------------------
Distribution services fees 755,559
----------------------------------------------------------------------------
Administrative services fees 824,098
----------------------------------------------------------------------------
Auditing 31,304
----------------------------------------------------------------------------
Legal 2,912
----------------------------------------------------------------------------
Trustees' fees and expenses 15,470
----------------------------------------------------------------------------
Reports to shareholders 283,518
----------------------------------------------------------------------------
Registration fees 40,607
----------------------------------------------------------------------------
Other 20,434
----------------------------------------------------------------------------
Total expenses, before expense reductions 4,957,392
----------------------------------------------------------------------------
Expense reductions (24,941)
----------------------------------------------------------------------------
Total expenses, after expense reductions 4,932,451
----------------------------------------------------------------------------
NET INVESTMENT INCOME 28,688,293
----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments (27,249,068)
----------------------------------------------------------------------------
Futures (1,162,943)
----------------------------------------------------------------------------
Foreign currency related transactions (401,408)
----------------------------------------------------------------------------
(28,813,419)
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on:
Investments (7,193,773)
----------------------------------------------------------------------------
Futures (1,289,894)
----------------------------------------------------------------------------
Foreign currency related transactions 888,720
----------------------------------------------------------------------------
(7,594,947)
----------------------------------------------------------------------------
Net gain (loss) on investment transactions (36,408,366)
----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ (7,720,073)
----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 21
<PAGE> 22
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
APRIL 30, ENDED
2000 OCTOBER 31,
(UNAUDITED) 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 28,688,293 69,752,839
-----------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (28,813,419) (23,451,580)
-----------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period (7,594,947) (26,484,087)
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (7,720,073) 19,817,171
-----------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A (20,621,002) (47,238,474)
-----------------------------------------------------------------------------------------------------
Class B (7,001,917) (18,894,258)
-----------------------------------------------------------------------------------------------------
Class C (1,083,494) (2,504,940)
-----------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 40,212,350 178,375,981
-----------------------------------------------------------------------------------------------------
Reinvestment of distributions 18,080,972 44,034,829
-----------------------------------------------------------------------------------------------------
Cost of shares redeemed (155,839,594) (304,053,368)
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions (97,546,272) (81,642,558)
-----------------------------------------------------------------------------------------------------
Increase (decrease) in net assets (133,972,758) (130,463,059)
-----------------------------------------------------------------------------------------------------
Net assets at beginning of period 720,065,015 850,528,074
-----------------------------------------------------------------------------------------------------
Net assets at end of period (including undistributed net
investment income of $1,764,881 and $1,783,000,
respectively) $ 586,092,257 720,065,015
-----------------------------------------------------------------------------------------------------
</TABLE>
22 The accompanying notes are an integral part of the financial statements.
<PAGE> 23
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLES INCLUDE SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
CLASS A
SIX MONTHS
ENDED
APRIL 30, YEAR ENDED OCTOBER 31,
2000 ---------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 5.26 5.60 5.96 5.99 5.98 5.77
---------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .23(a) .49(a) .44(a) .46 .46 .55
---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.30) (.35) (.35) .01 .12 .16
---------------------------------------------------------------------------------------------------------------------
Total from investment operations (.07) .14 .09 .47 .58 .71
---------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.23) (.48) (.45) (.50) (.57) (.50)
---------------------------------------------------------------------------------------------------------------------
Total distributions (.23) (.48) (.45) (.50) (.57) (.50)
---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.96 5.26 5.60 5.96 5.99 5.98
---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (B) (1.37)** 2.43 1.28 8.13 10.27 12.90
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ thousands) 415,363 492,423 549,857 549,133 509,690 498,325
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.22* 1.11 1.04 1.03 1.03 1.09
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.21* 1.10 1.04 1.03 1.03 1.09
---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (%) 8.99* 8.80 7.36 7.68 7.72 9.43
---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 37* 92 751 347 310 286
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
SIX MONTHS
ENDED
APRIL 30, YEAR ENDED OCTOBER 31,
2000 ---------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 5.26 5.59 5.96 5.99 5.98 5.77
---------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .21(a) .43(a) .38(a) .40 .41 .49
---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.30) (.34) (.36) .01 .12 .16
---------------------------------------------------------------------------------------------------------------------
Total from investment operations (.09) (.09) .02 .41 .53 .65
---------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.21) (.42) (.39) (.44) (.52) (.44)
---------------------------------------------------------------------------------------------------------------------
Total distributions (.21) (.42) (.39) (.44) (.52) (.44)
---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.96 5.26 5.59 5.96 5.99 5.98
---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (B) (1.85)** 1.57 .12 7.13 9.23 11.87
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ thousands) 148,061 198,097 271,162 297,074 262,264 252,885
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 2.20* 2.06 2.01 1.98 1.96 2.04
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 2.19* 2.05 2.01 1.98 1.96 2.04
---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (%) 8.01* 7.85 6.39 6.73 6.79 8.48
---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 37* 92 751 347 310 286
---------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
SIX MONTHS
ENDED
APRIL 30, YEAR ENDED OCTOBER 31,
2000 ------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $5.29 5.62 5.99 6.01 6.00 5.79
-----------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .22(a) .45(a) .39(a) .42 .41 .50
-----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.30) (.34) (.36) .01 .12 .16
-----------------------------------------------------------------------------------------------------------------------
Total from investment operations (.08) .11 .03 .43 .53 .66
-----------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.22) (.44) (.40) (.45) (.52) (.45)
-----------------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.44) (.40) (.45) (.52) (.45)
-----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $4.99 5.29 5.62 5.99 6.01 6.00
-----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%)(B) (1.68)** 1.78 0.28 7.37 9.33 11.95
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ thousands) 22,669 29,545 29,509 15,328 6,787 3,012
-----------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.86* 1.87 1.84 1.85 1.86 1.86
-----------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.85* 1.85 1.84 1.85 1.86 1.86
-----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (%) 8.35* 8.05 6.56 6.86 6.89 8.68
-----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 37* 92 751 347 310 286
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of sales charges.
* Annualized.
** Not annualized.
24
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES Kemper Strategic Income Fund (the "Fund") (formerly
known as Kemper Diversified Income Fund) is
registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end,
diversified management investment company organized
as a Massachusetts business trust.
The Fund offers multiple classes of shares. Class A
shares are offered to investors subject to an
initial sales charge. Class B shares are offered
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are offered without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares (none sold
through April 30, 2000) are offered to a limited
group of investors, are not subject to initial or
contingent deferred sales charges and generally
have lower ongoing expenses than other classes.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of the Fund have
equal rights with respect to voting subject to
class specific arrangements.
The Fund's financial statements are prepared in
accordance with generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Investments are stated at value
determined as of the close of regular trading on
the New York Stock Exchange. Securities which are
traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on
the exchange on which the security is traded most
extensively. If no sale occurred, the security is
then valued at the calculated mean between the most
recent bid and asked quotations. If there are no
such bid and asked quotations, the most recent bid
quotation is used. Securities quoted on the Nasdaq
Stock Market ("Nasdaq"), for which there have been
sales, are valued at the most recent sale price
reported. If there are no such sales, the value is
the most recent bid quotation. Securities which are
not quoted on Nasdaq but are traded in another
over-the-counter market are valued at the most
recent sale price, or if no sale occurred, at the
calculated mean between the most recent bid and
asked quotations on such market. If there are no
such bid and asked quotations, the most recent bid
quotation shall be used. Portfolio debt securities
purchased with an original maturity greater than
sixty days are valued by pricing agents approved by
the officers of the trust, whose quotations reflect
broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents
are unable to provide such quotations, the most
recent bid quotation supplied by a bona fide market
maker shall be used. Money market
25
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
instruments purchased with an original maturity of
sixty days or less are valued at amortized cost.
All other securities are valued at their fair value
as determined in good faith by the Valuation
Committee of the Board of Trustees.
FOREIGN CURRENCY TRANSLATIONS. The books and
records of the Fund are maintained in U.S. dollars.
Investment securities and other assets and
liabilities denominated in a foreign currency are
translated into U.S. dollars at the prevailing
exchange rates at period end. Purchases and sales
of investment securities, income and expenses are
translated into U.S. dollars at the prevailing
exchange rates on the respective dates of the
transactions.
Net realized and unrealized gains and losses on
foreign currency transactions represent net gains
and losses between trade and settlement dates on
securities transactions, the disposition of forward
foreign currency exchange contracts and foreign
currencies, and the difference between the amount
of net investment income accrued and the U.S.
dollar amount actually received. That portion of
both realized and unrealized gains and losses on
investments that results from fluctuations in
foreign currency exchange rates is not separately
disclosed but is included with net realized and
unrealized gains and losses on investment
securities.
REPURCHASE AGREEMENTS. The Fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A
forward foreign currency exchange contract (forward
contract) is a commitment to purchase or sell a
foreign currency at the settlement date at a
negotiated rate. During the period, the Fund
utilized forward contracts as a hedge against
changes in the exchange rates relating to foreign
currency denominated assets.
Forward contracts are valued at the prevailing
forward exchange rate of the underlying currencies
and unrealized gain/loss is recorded daily. Sales
and purchases of forward contracts having the same
settlement date and broker are offset and gain
(loss) is realized on the date of offset;
otherwise, gain (loss) is realized on settlement
date. Realized and unrealized gains and losses
which represent the difference between the value of
a forward contract to buy and a forward contract to
sell are included in net realized and unrealized
gain (loss) from foreign currency related
transactions.
Certain risks may arise upon entering into forward
contracts from the potential inability of
counterparties to meet the terms of their
contracts. Additionally, when utilizing forward
contracts to hedge, the Fund gives up the
opportunity to profit from favorable exchange rate
movements during the term of the contract.
TAXES. The Fund's policy is to comply with the
requirements of the Internal Revenue Code, as
amended, which are applicable to regulated
investment companies and to distribute all of its
taxable income to its shareholders. Accordingly,
the Fund paid no federal income taxes and no
federal income tax provision was required. At
October 31, 1999 the Fund had a tax basis net loss
carryforward of approximately $73,810,000, which
may be applied against any
26
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
realized net taxable gains of each succeeding year
until fully utilized or until October 31, 2002
($46,845,000), October 31, 2003 ($5,576,000),
October 31, 2006 ($2,523,000), and October 31, 2007
($18,866,000), the respective expiration dates,
whichever occurs first.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made monthly.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the Fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital
accounts without impacting the net asset value of
the Fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Dividend income is recorded on
the ex-dividend date. Realized gains and losses
from investment transactions are recorded on an
identified cost basis.
All discounts are accreted for both tax and
financial reporting purposes.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other
Trust expenses are allocated between the Funds in
proportion to their relative net assets.
--------------------------------------------------------------------------------
2 PURCHASES AND
SALES OF SECURITIES For the six months ended April 30, 2000, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $118,057,254
Proceeds from sales 225,964,198
The aggregate face value of futures contracts
opened and closed during the six months ended April
30, 2000 was $293,697,105 and $234,055,585,
respectively.
--------------------------------------------------------------------------------
3 TRANSACTIONS
WITH AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a monthly investment
management fee of 1/12 of the annual rate of .58%
of the first $250 million of average daily net
assets declining to .42% of average daily net
assets in excess of $12.5 billion. The Fund
incurred a management fee of $1,842,428 for the six
months ended April 30, 2000 which was equivalent to
an annualized effective rate of .56%.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the six months ended April
30, 2000 are $20,735.
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares pursuant to separate Rule 12b-1 plans for
Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms
27
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS
at various rates for sales of Class B and Class C
shares. In addition, KDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees and
CDSC received by KDI for the six months ended April
30, 2000 are $1,156,982, of which $121,984 is
unpaid at April 30, 2000.
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, the Fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. KDI in turn has various
agreements with financial services firms that
provide these services and pays these firms based
on assets of fund accounts the firms service.
Administrative services fees (ASF) paid by the Fund
to KDI for the six months ended April 30, 2000 are
$824,098, of which $245,876 is unpaid at April 30,
2000. In addition, $1,789 was paid by KDI to
affiliates.
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 $768,539
for the six months ended April 30, 2000, of which
$554,756 is unpaid at April 30, 2000.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the six months ended April 30,
2000, the Fund made no payments to its officers and
incurred trustees' fees of $15,470 to independent
trustees.
28
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2000 OCTOBER 31, 1999
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 3,453,487 $ 17,988,985 13,013,017 $ 73,178,969
--------------------------------------------------------------------------------------
Class B 1,702,567 8,838,791 9,253,499 51,822,361
--------------------------------------------------------------------------------------
Class C 653,701 3,408,455 2,856,523 16,099,983
--------------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 2,454,044 12,701,763 5,305,361 29,406,251
--------------------------------------------------------------------------------------
Class B 896,567 4,641,668 2,323,604 12,890,024
--------------------------------------------------------------------------------------
Class C 141,653 737,541 312,275 1,738,554
--------------------------------------------------------------------------------------
SHARES REDEEMED
Class A (17,725,780) (92,083,167) (29,530,977) (164,313,732)
--------------------------------------------------------------------------------------
Class B (8,512,574) (44,162,544) (15,690,275) (86,699,356)
--------------------------------------------------------------------------------------
Class C (1,839,814) (9,617,764) (2,824,747) (15,765,612)
--------------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 1,913,793 9,976,119 6,671,202 37,274,668
--------------------------------------------------------------------------------------
Class B (1,915,463) (9,976,119) (6,683,299) (37,274,668)
--------------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $(97,546,272) $(81,642,558)
--------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
5 EXPENSE OFF-SET
ARRANGEMENTS The Fund has entered into an arrangement with its
custodian and transfer agent whereby credits
realized as a result of uninvested cash balances
were used to reduce a portion of the Fund's
expenses. During the period, the Fund's custodian
fees and transfer agent were reduced by $3,076 and
$21,865, respectively, under these arrangements.
--------------------------------------------------------------------------------
6 COMMITMENTS As of April 30, 2000, the Fund had entered into the
following forward currency exchange contracts
resulting in net unrealized appreciation of
$1,131,775.
<TABLE>
<CAPTION>
CONTRACTS TO IN EXCHANGE SETTLEMENT NET UNREALIZED
DELIVERY FOR DATE APPRECIATION
------------------------------------------------------------
<C> <C> <S> <C>
EUR 7,500,000 USD $7,990,875 7/24/2000 $1,131,775
</TABLE>
--------------------------------------------------------------------------------
7 LINE OF CREDIT The Fund and several Kemper funds (the
"Participants") share in a $750 million revolving
credit facility for temporary or emergency
purposes, including the meeting of redemption
requests that otherwise might require the untimely
disposition of securities. The Participants are
charged an annual commitment fee which is allocated
pro rata among each of the Participants. Interest
is calculated based on the market rates at the time
of the borrowing. The Fund may borrow up to a
maximum of 33 percent of its net assets under the
agreement.
29
<PAGE> 30
NOTES
30
<PAGE> 31
NOTES
31
<PAGE> 32
TRUSTEES&OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
JOHN W. BALLANTINE MARK S. CASADY MAUREEN E. KANE
Trustee President Assistant Secretary
LEWIS A. BURNHAM PHILIP J. COLLORA CAROLINE PEARSON
Trustee Vice President and Assistant Secretary
Secretary
LINDA C. COUGHLIN BRENDA LYONS
Trustee JOHN R. HEBBLE Assistant Treasurer
Treasurer
DONALD L. DUNAWAY
Trustee J. PATRICK BEIMFORD, JR.
Vice President
ROBERT B. HOFFMAN
Trustee ANN M. MCCREARY
Vice President
DONALD R. JONES
Trustee KATHRYN L. QUIRK
Vice President
THOMAS W. LITTAUER
Trustee and Vice President LINDA J. WONDRACK
Vice President
SHIRLEY D. PETERSON
Trustee
WILLIAM P. SOMMERS
Trustee
</TABLE>
<TABLE>
<S> <C>
.............................................................................................
LEGAL COUNSEL VEDDER, PRICE KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
.............................................................................................
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 219557
Kansas, City, MO 64121
.............................................................................................
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
.............................................................................................
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
.............................................................................................
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02109
.............................................................................................
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza
Chicago, IL 60606-5808
www.kemper.com
</TABLE>
[KEMPER FUNDS LOGO] Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed unless preceded
or accompanied by a Kemper Income funds prospectus.
KSIF1 - 3 (06/25/00) 1114210
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
