<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED OCTOBER 31, 2000
The fund seeks a high current return
KEMPER STRATEGIC
INCOME FUND
"... Severe weakness in the euro and U.S. high-yield markets more than offset
strength in emerging market bonds during fiscal year 2000. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
7
PERFORMANCE UPDATE
9
TERMS TO KNOW
10
PORTFOLIO STATISTICS
12
PORTFOLIO OF INVESTMENTS
21
FINANCIAL STATEMENTS
24
FINANCIAL HIGHLIGHTS
26
NOTES TO FINANCIAL STATEMENTS
31
REPORT OF INDEPENDENT AUDITORS
AT A GLANCE
KEMPER STRATEGIC INCOME FUND TOTAL RETURNS
FOR THE YEAR ENDED OCTOBER 31, 2000 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<S> <C>
Kemper Strategic Income Fund Class A -4.91
Kemper Strategic Income Fund Class B -5.85
Kemper Strategic Income Fund Class C -5.51
Lipper Multi-Sector Funds Category Average* 0.62
</TABLE>
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
10/31/00 10/31/99
.........................................................
<S> <C> <C> <C> <C>
KEMPER STRATEGIC INCOME FUND
CLASS A $4.57 $5.26
.........................................................
KEMPER STRATEGIC INCOME FUND
CLASS B $4.57 $5.26
.........................................................
KEMPER STRATEGIC INCOME FUND
CLASS C $4.60 $5.29
.........................................................
</TABLE>
PERFORMANCE IS HISTORICAL AND INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL
GAINS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH CHANGING MARKET
CONDITIONS, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THEIR
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 MAY HAVE BEEN LESS FAVORABLE.
KEMPER STRATEGIC INCOME
FUND RANKINGS*
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER MULTI-SECTOR FUNDS CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
.........................................................................................
<S> <C> <C> <C> <C> <C>
1-YEAR #109 of 120 funds #114 of 120 funds #113 of 120 funds
.........................................................................................
5-YEAR #51 of 56 funds #54 of 56 funds #53 of 56 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 OCTOBER 31, 2000.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
...............................................................................................
<S> <C> <C> <C> <C> <C>
ONE-YEAR INCOME: $0.4525 $0.4024 $0.4190
...............................................................................................
OCTOBER DIVIDEND: $0.0365 $0.0325 $0.0339
...............................................................................................
ANNUALIZED
DISTRIBUTION RATE+: 9.58% 8.53% 8.84%
...............................................................................................
SEC YIELD+: 11.04% 10.51% 10.89%
...............................................................................................
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE WHICH DOES NOT INCLUDE SALES CHARGE
ADJUSTMENT ON OCTOBER 31, 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 OCTOBER 31, 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 NONRATED 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 THE VOLATILITY OF YOUR
INVESTMENT.
YOUR FUND'S STYLE
MORNINGSTAR INCOME STYLE BOX
<TABLE>
<S> <C>
MORNINGSTAR INCOME STYLE Source: Data provided by Morningstar, Inc.,
BOX Chicago, IL, (312) 696-6000. The Income Style
Box(TM) placement is based on a fund's average
effective maturity or duration and the average
credit rating of the bond portfolio.
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 BOND
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:
Times have been good. During the first half of 2000, the global economy grew
faster than it has in over a decade. All regions participated. The United
States, of course, was still powering ahead. The growth rate in Europe was
nearly 4 percent. Asia fed off an electronics boom and a revitalized China.
South America got a boost from an improved credit rating. New money pumped up
energy producers from Mexico to the Middle East.
Now for the bad news, which is that the best news is probably behind us.
Global growth peaked in the spring, and in the United States, at least, the
slowdown was abrupt. After 6 percent growth in the year ending June 30, the
economy grew at a rate of just 2.43 percent during the summer. It seems that
expensive energy, currency volatility and more widespread profit problems are
bringing the exuberant global economy, including the United States, to heel.
Let's explore these factors in more detail.
OIL, OIL, TOIL AND TROUBLE
Although oil prices have receded somewhat, everyone's still jittery, and with
good reason: Of the seven recessions since World War II, six were preceded by a
spike in crude oil prices.
Oil prices have already been strong enough for long enough to crimp growth,
and they're biting the rest of the world even harder than the United States. But
there are two factors working to our advantage. First, oil prices are still
historically low. Oil is slightly more than $30 per barrel today, but it peaked
at over $75 per barrel back in 1980 (stated in today's dollars). Second, our
dependence on oil has decreased: The United States uses only roughly half as
much oil to produce a unit of GDP as it did thirty years ago. This gives us hope
that the economy can escape recession this time around.
What would make us worry more? Outright energy shortages or a political
crisis. If either happens, the odds of a recession occurring would rise steeply.
People panic or become excessively cautious when they have to fret. Can I fill
up my oil tank? Will there be a war? Their loss of confidence can be much more
devastating than price increases alone.
CURRENCY CONCERNS
Currency turmoil is a second danger to the economy. Central bankers have
intervened to halt the euro's decline, and they're right that the euro is
fundamentally undervalued. But intervention is a hazardous game. Let's hope they
don't convince the markets that the euro should rise a lot very quickly. A
suddenly weak dollar might make Europeans think about selling all those American
stocks and bonds they've been buying, and would greatly complicate the Fed's
inflation fight.
BUSINESS: BIG PLANS BUT PROFIT DISAPPOINTMENTS
Profit warnings escalated late this summer, and we believe there's fire amid
that smoke.
Sure, businesses have had a voracious appetite for money -- and until very
recently, corporate treasurers were finding it easily: Banks increased business
lending by 10.8 percent in the past year. Bond markets have suddenly become a
lot more picky, especially for low-quality credits, but money is still available
for investment grade borrowers. Capital goods orders reflect executives'
enthusiasm -- while volatile month-to-month, they have been up an average of 15
to 20 percent compared to a year ago for the past six months.
Still, we expect total capital spending to slow, from this year's estimated 14
percent to 12.5 percent in 2001. The reason? A profit squeeze is about to take
some of the edge off executives' animal spirits.
We've always been more cautious than Wall Street about 2001 profits, and our
forecast hasn't changed. Profits are likely to be flat to down next year for
several reasons. First, the growth slowdown will make it harder to keep up the
productivity gains that have kept labor costs under control. We saw the first
evidence of how productivity slows along with economic growth in the third
quarter: Productivity gains dipped to just 3.3 percent from the second quarter's
remarkable 6.1 percent. Second, interest expense will surge (thanks to higher
rates and all that new debt. Third, depreciation costs are escalating. And
finally, the excessively weak euro and higher oil costs will sap earnings.
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 (11/30/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
-------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 5.70 6.40 6.00 4.80
Prime rate (2) 9.50 9.25 8.50 8.00
Inflation rate (3)* 3.50 3.10 2.60 1.40
The U.S. dollar (4) 11.10 4.30 -0.70 1.20
Capital goods orders (5)* 7.00 17.10 12.30 -0.60
Industrial production (5)* 5.20 6.50 4.40 4.00
Employment growth (6)* 1.80 2.50 2.30 2.50
</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 10/31/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
SAVING GRACES: FISCAL POLICY AND CONSUMER SPENDING
While growth has peaked and is now slowing, we can be thankful that growth
probably won't slow too much, thanks in part to a more stimulative fiscal policy
and consumer spending.
Fiscal policy is likely to be more stimulative. Of course, most economists
agree that the last thing this pumped-up economy needs is another shot of
stimulants -- too much stimulus, after all, is widely believed to cause
inflation. But economists weren't running for office; politicians were. And
inflation risk was about the last thing on the mind of either candidate in the
heat of election campaigning. They wanted to win votes, and the time-tested way
to do so was to make promises. Although we didn't have the name of the winner as
of press time, neither candidate seems to be planning a lot of fiscal
restraint -- but the good news is that neither candidate's plan is likely to be
enacted until 2002 at the earliest.
Second, consumers continue to spend, spend, spend. The personal savings rate
keeps falling, from an already low 2.2 percent last year to a nearly invisible
0.1 percent this year. Critics of this admittedly squishy statistic claim it
doesn't adequately capture households' growing wealth. As it turns out, however,
the average American not only doesn't save much, but he's not getting wealthier
in leaps and bounds, either.
Net worth for the median family where the head of the household is over 45
(and where thoughts are presumably beginning to turn to retirement), rose less
than $13,000 between 1995 and 1998. That's less than a 12 percent gain during
the same three years the stock market nearly doubled and the market value of
owner-occupied homes jumped 21 percent. Why didn't the average family get richer
in that time? Because they were borrowing and spending like crazy. House values
were up 21 percent -- but mortgage debt rose even faster, by 25 percent!
Consumers' profligacy worries many financial professionals. Some people aren't
saving enough for retirement because they have inflated expectations of future
investment returns. Other people aren't saving enough for retirement because
they don't realize just how much money they'll need. Either way, people aren't
saving.
Still, no one wants consumers to change their profligate ways too fast. After
all, hearty consumer spending is a prime reason America's growth has stayed on a
fast track so far. Most economists would like to see shoppers be a bit more
moderate -- but only a bit. If Americans suddenly turned thrifty, the economy
would lurch into reverse.
4
<PAGE> 5
ECONOMIC OVERVIEW
Luckily, there's little chance of that happening, unless lenders get cold
feet. So far, they're hot to trot. In the past year, mortgage lending by banks
rocketed nearly 17 percent while loans to consumers jumped 10 percent. Brokers
are selling the loans banks don't want on their balance sheets to mortgage pools
and the asset-backed securities market, where eager non-bank lenders are
snapping them up. In the past year, these markets provided $625 billion of new
credit, a leap of more than 12 percent.
With so much money at their disposal, consumers didn't stay out of the
shopping centers and restaurants for long. Consumer spending growth jumped up to
4.5 percent in the summer, and we expect it to stay well above 3 percent through
2001.
OMINOUS SIGNS?
Decelerations are always tricky, to be sure. But barring some unexpected
shock, overall economic growth should to pop back into the 3.5 percent to 4
percent range in 2001. Why? Borrowing costs a little more than it did last year,
but money is still freely available for good quality borrowers. Capital goods
orders are strong, so there's a lot of life left in business spending. Shoppers
are a little pickier, but they're still more interested in visiting the mall
than in filling their piggy banks. And after the election, no matter who wins,
fiscal policy is likely to be more stimulative than it has been for years. The
price to pay will likely be a rise in core inflation (inflation excluding food
and energy). We expect it to hit 3 percent next year, up from its recent rate of
2.5 percent. We believe we'll make it safely through 2001, but investors should
keep their hands on the wheel and their eyes peeled.
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 DECEMBER 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.
Sincerely,
Scudder Kemper Investments, Economics Group
5
<PAGE> 6
ECONOMIC OVERVIEW
[THIS PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE> 7
PERFORMANCE UPDATE
[BIEMFORD PHOTO]
J. PATRICK BEIMFORD JR. JOINED SCUDDER KEMPER INVESTMENTS, INC. AS A PORTFOLIO
MANAGER IN 1976. HE IS A MANAGING DIRECTOR AND CO-LEAD PORTFOLIO MANAGER OF
KEMPER STRATEGIC INCOME FUND. HE IS A CHARTERED FINANCIAL ANALYST.
[FALLER PHOTO]
JAN C. FALLER JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1999 AND HAS FIVE YEARS
OF PROFESSIONAL INVESTMENT EXPERIENCE. HE IS CO-LEAD MANAGER OF KEMPER STRATEGIC
INCOME FUND AND A CHARTERED FINANCIAL ANALYST.
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.
THE EURO FELL SHARPLY IN VALUE DURING THE PAST YEAR AMID A LACK OF CONFIDENCE
IN THE EUROPEAN CENTRAL BANK. IN THE UNITED STATES, INVESTOR CONFIDENCE IN THE
FEDERAL RESERVE WAS HIGH, BUT THE HIGH-YIELD BOND MARKET SUFFERED AMID
DETERIORATING CREDIT CONDITIONS, ANEMIC INVESTOR DEMAND AND EARNINGS SHORTFALLS
IN TELECOM BONDS.
Q HOW DID GLOBAL FIXED-INCOME MARKETS BEHAVE AND KEMPER STRATEGIC INCOME
FUND PERFORM DURING FISCAL YEAR 2000?
A The 12-month period ended October 31, 2000, was difficult for domestic
high-yield bonds, the largest component of the fund's portfolio. Credit quality
deteriorated, high-yield defaults rose, and investor demand was weak. Bonds in
established overseas markets also declined during fiscal year 2000 as the euro's
value fell sharply. Still, there were two bright spots within the global bond
market: emerging market bonds and long-term U.S. government securities.
Emerging markets in Latin American countries such as Mexico and Venezuela
benefited from a sharp increase in energy prices this past year. During the
second half of the fiscal year, U.S. Treasuries rallied as the Treasury
Department began repurchasing debt and the government posted a record $237
billion budget surplus. For the fund, preserving capital was challenging as the
Federal Reserve tightened monetary policy and global economic growth slowed.
Severe weakness in the euro and U.S. high-yield markets more than offset
strength in emerging market bonds during fiscal year 2000.
Kemper Strategic Income Fund's total return was down 4.91 percent (Class A
shares, unadjusted for a sales charge) for fiscal year 2000. This was less than
that of the average 0.62 percent return of the fund's Lipper peers (multisector
income funds) and less than the 7.13 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
Declining value of the euro since its debut 22 months ago
[BAR GRAPH]
<TABLE>
<CAPTION>
THEORETICAL EURO
----------------
<S> <C>
12/98 1.1667
1.1362
1.1028
3/99 1.0762
1.0570
1.0420
6/99 1.0351
1.0711
1.0566
9/99 1.0684
1.0549
1.0093
12/99 1.0062
0.9707
0.9642
3/00 0.9553
0.9119
0.9380
6/00 0.9525
0.9266
0.8878
0.8827
10/00 0.8489
</TABLE>
THIS CHART SHOWS WHAT A EURO WAS WORTH IN U.S. DOLLARS BETWEEN 12/31/98 AND
10/31/00. IT IS NOT INTENDED TO REPRESENT THE PAST OR FUTURE PERFORMANCE OF ANY
KEMPER FUND.
SOURCE: BLOOMBERG BUSINESS NEWS
7
<PAGE> 8
PERFORMANCE UPDATE
reduced the fund's position in euro securities between October 1999 and October
2000. While we would have liked to liquidate our entire position, a gradual
approach was necessary to stabilize the fund's income potential. As
opportunities arise in the coming year, we may further reduce the fund's
weighting in euro-denominated bonds (14 percent as of October 31, 2000).
Q WHY HAS THE EURO FALLEN, AND HOW MUCH DID THE DECLINE AFFECT THE FUND?
A At the start of fiscal year 2000, it took more than $1.05 to buy a euro.
By October 31, 2000, a euro was worth 85 cents. We think this decline resulted
from several reasons. First, the European Central Bank faced a severe
credibility problem with investors. Second, European corporations acquired many
U.S. companies during the period and financed deals with U.S. dollars,
increasing demand for U.S. currency at the expense of the euro. Also, U.S.
economic growth has been stronger than in Europe, prompting investors to keep a
greater share of their investment portfolios in U.S. dollars rather than euros.
Finally, higher domestic interest rates made U.S. dollar deposits more
attractive.
Q HIGH-YIELD BONDS WERE THE LARGEST COMPONENT OF THE PORTFOLIO DURING FISCAL
YEAR 2000. WILL YOU ELABORATE ON WHY MARKET CONDITIONS WERE SO BAD?
A The returns from high-yield bonds were negative for the 12 months ended
October 31, 2000. The total return of the unmanaged Merrill Lynch High Yield
Master index, a group of lower-rated bonds that vary in quality, was down 1.68
percent for the period. The price component of the index fell 10.17 percent. For
many high-yield investors, preserving capital was a challenge, as income did not
offset losses in principal value.
Overall, the default picture continued to loom large in the minds of
high-yield investors, especially with respect to telecom, retail and
small-company bonds. Credit conditions deteriorated as downgrades outnumbered
upgrades. Recovery rates for distressed bonds also remain low, and, from what we
can see, about one bond in four appears in distress. We believe the default rate
for calendar year 2000 will close at around 5.5 percent to 6.0 percent, up from
4.0 percent at the end of 1999, according to Chase Securities.
Within the high-yield bond market, the higher the quality, the better the
return in fiscal year 2000. Bonds rated BB held up better than single B and
CCCs, as shown in the table below. The interest-rate spread -- the difference
between high-yield bonds and 10-year Treasury bonds -- rose to 826 basis points,
the highest level in several years.
Q HOW WERE THE FUND'S HIGH-YIELD BONDS POSITIONED DURING THE PERIOD?
A During the period, we focused on larger, more liquid bond issues and on
companies with relatively solid cash flow and proven management. Given that
10-year Treasury bonds yielded 5.75 percent at the end of October 2000, most
high-yield bonds rated single B 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 and within the single-B rating
category.
HIGH-YIELD MARKET PERFORMANCE
TOTAL RETURN
<TABLE>
<CAPTION>
RATING CALENDAR 2000
CATEGORY THROUGH OCT. 31 CALENDAR YEAR 1999
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
BB BONDS 3.95% 2.80%
......................................................................
B BONDS -5.13% 2.84%
......................................................................
CCC BONDS -13.82% 8.79%
......................................................................
</TABLE>
SOURCE: CHASE SECURITIES, 10/31/00. THE ABOVE RETURNS ARE NOT INTENDED TO
REPRESENT THE RETURN OR RISK PROFILE OF ANY KEMPER FUND.
HIGH-YIELD BOND
SPREADS TO TREASURIES IN THE HIGH-YIELD MARKET
<TABLE>
<CAPTION>
1996 1997 1998 1999 OCTOBER 2000
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
B 382 371 615 483 778
.................................................................
BB 214 251 375 301 423
.................................................................
DIFFERENCE 168 120 240 182 355
.................................................................
</TABLE>
SPREADS ARE THE DIFFERENCE IN INTEREST RATES BETWEEN A CATEGORY OF HIGH-YIELD
BONDS AND 10-YEAR TREASURIES. UNLIKE TREASURIES, INTEREST AND PRINCIPAL OF
HIGH-YIELD BONDS ARE NOT GUARANTEED.
SOURCE: CHASE SECURITIES.
8
<PAGE> 9
PERFORMANCE UPDATE
Given the prospects for continued modest U.S. economic growth, we think the
high-yield market's risk-reward profile is getting more compelling every day. We
feel that the key to unlocking this value will be careful attention to credit
quality. We believe that the high-yield market rewards effective screening of
individual issues. Now more than ever, we are committed to broad, deep and
careful analytical research.
Q YOU SAID THAT EMERGING MARKET BONDS WERE A BRIGHT SPOT. HOW WELL HAVE THEY
DONE AND WHY?
A Growth has picked up steam in certain emerging markets, notably in Latin
America and certain emerging European markets, where economic restructuring
seems to be taking hold. Bonds in some countries such as Mexico have rallied
since October 1999 as rating services have upgraded certain government debt to
investment grade. The fund benefited from this trend because we made Mexico one
of the fund's largest emerging market holdings during the year. We also have had
significant holdings in Bulgaria, and these bonds have also done well. However,
we remain wary of emerging markets in Asia because many are highly dependent on
energy imports, and higher energy prices may negatively affect Asian economic
growth in the coming months.
Q FINALLY, HOW ARE YOU POSITIONING THE PORTFOLIO FOR THE ROAD AHEAD?
A Many economists believe the U.S. Federal Reserve can reduce its short-term
interest-rate target in the spring, especially since it now appears that there
will be too much gridlock in Washington for anyone to spend the federal budget
surplus. Retail investors, perhaps due to misperceptions, appear to lack
sufficient confidence in bonds as an asset class and have continued to withdraw
money from the market. However, when liquidity returns, we think many bond
markets will be well positioned to stage a lasting recovery. At this juncture,
we do not believe the high-yield bond market will deteriorate much further since
it appears that the Fed's economic rebalancing act is working.
We have taken steps to increase the fund's competitive results, and we think
the portfolio repositioning we have done this past year will prove effective in
the long run. While fiscal year 2000's results were disappointing, over the long
term the fund's investment approach has delivered positive results. We remain
committed to an investment strategy that has helped the fund outdistance all of
its peers for the 10-year period ended October 31, 2000 (see Lipper rankings, on
page 2). We cannot guarantee what will happen in the months ahead, but we
believe that many of the performance obstacles that the fund has faced during
the past two years are now history.
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 that
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.
9
<PAGE> 10
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 10/31/00 ON 10/31/99
<S> <C> <C> <C> <C>
HIGH-YIELD CORPORATE BONDS 42% 52.0%
................................................................................
EMERGING MARKET BONDS 28 --
................................................................................
FOREIGN CURRENCY BONDS 16 43.0
................................................................................
OTHER 11 4.5
................................................................................
CASH EQUIVALENTS 3 0.5
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
QUALITY
<TABLE>
<CAPTION>
ON 10/31/00 ON 10/31/99
<S> <C> <C> <C> <C>
AAA 17.7% 15.7%
................................................................................
AA AND A 4.7 8.1
................................................................................
BBB 13.1 4.6
................................................................................
BB 7.3 10.4
................................................................................
B 52.1 51.1
................................................................................
CCC 3.7 5.4
................................................................................
NONRATED 1.4 4.7
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
ON 10/31/00 ON 10/31/99
<S> <C> <C> <C> <C>
AVERAGE MATURITY 7.4 years 8.6 years
................................................................................
DURATION 3.5 years 5.5 years
--------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
10
<PAGE> 11
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED OCTOBER 31, 2000 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
KEMPER STRATEGIC INCOME FUND CLASS A -9.23% 2.36% 10.57 8.94% (since 6/23/77)
.................................................................................................
KEMPER STRATEGIC INCOME FUND CLASS B -8.46 2.16 n/a 3.64 (since 5/31/94)
.................................................................................................
KEMPER STRATEGIC INCOME FUND CLASS C -5.51 2.52 n/a 3.85 (since 5/31/94)
.................................................................................................
</TABLE>
KEMPER STRATEGIC INCOME FUND CLASS A
Growth of an assumed $10,000 investment in Class A
shares from 6/30/77 to 10/31/00
[LINE GRAPH]
<TABLE>
<CAPTION>
LEHMAN BROTHERS
KEMPER STRATEGIC INCOME GOVERNMENT/CREDIT U.S. CONSUMER PRICE
FUND CLASS A1 INDEX+ INDEX++
----------------------- ----------------- -------------------
<S> <C> <C> <C>
6/30/77 9550 10000 10000
9564 10077 10231
10092 10196 11153
11833 10431 12636
14806 10751 14217
15208 11531 15486
17570 15116 16079
20471 16325 16689
12/31/84 21646 18776 17348
24960 22776 18007
25640 26334 18204
23588 26938 19012
27755 28980 19852
29954 33106 20774
26166 35848 22043
39676 41629 22718
46792 44785 23377
12/31/93 56568 49725 24020
54369 47980 24662
65068 57213 25288
70649 58874 26129
76504 64619 26573
79402 70750 27002
78776 69220 27727
10/31/00 73815 74642 28639
</TABLE>
KEMPER STRATEGIC INCOME FUND CLASS B
Growth of an assumed $10,000 investment in Class B
shares from 5/31/94 to 10/31/00
[LINE GRAPH]
<TABLE>
<CAPTION>
LEHMAN BROTHERS
KEMPER STRATEGIC INCOME GOVERNMENT/CREDIT U.S. CONSUMER PRICE
FUND CLASS B1 INDEX+ INDEX++
----------------------- ----------------- -------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9965 9977 10034
9794 10063 10149
10935 11250 10339
11613 11999 10407
6/30/96 11663 11774 10624
12493 12347 10753
12779 12685 10868
13389 13552 10936
13793 14109 11051
12/31/98 13763 14838 11112
13469 14501 11268
13512 14517 11410
13289 15122 11688
10/31/00 12580 15654 11786
</TABLE>
KEMPER STRATEGIC INCOME FUND CLASS C
Growth of an assumed $10,000 investment in Class C
shares from 5/31/94 to 10/31/00
[LINE GRAPH]
<TABLE>
<CAPTION>
LEHMAN BROTHERS
KEMPER STRATEGIC INCOME GOVERNMENT/CREDIT U.S. CONSUMER PRICE
FUND CLASS C1 INDEX+ INDEX++
----------------------- ----------------- -------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9966 9977 10034
9815 10063 10149
10960 11250 10339
11649 11999 10407
6/30/96 11702 11774 10624
12560 12347 10753
12852 12685 10868
13492 13552 10936
13905 14109 11051
12/31/98 13865 14838 11112
13584 14501 11268
13647 14517 11410
13445 15122 11688
10/31/00 12747 15654 11786
</TABLE>
PERFORMANCE IS HISTORICAL AND INCLUDES
REINVESTMENT OF DIVIDENDS AND CAPITAL
GAINS. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE WITH CHANGING
MARKET CONDITIONS, SO THAT WHEN
REDEEMED, SHARES MAY BE WORTH MORE OR
LESS THAN ORIGINAL COST.
*THE MAXIMUM SALES CHARGE FOR CLASS A
SHARES IS 4.5%. FOR CLASS B SHARES,
THE MAXIMUM CONTINGENT DEFERRED SALES
CHARGE IS 4%. CLASS C SHARES HAVE NO
SALES ADJUSTMENT, BUT REDEMPTIONS
WITHIN ONE YEAR OF PURCHASE MAY BE
SUBJECT TO A CONTINGENT DEFERRED SALES
CHARGE OF 1%. SHARE CLASSES INVEST IN
THE SAME UNDERLYING PORTFOLIO. DURING
THE PERIODS NOTED, SECURITIES PRICES
FLUCTUATED. FOR ADDITIONAL
INFORMATION, SEE THE PROSPECTUS,
STATEMENT OF ADDITIONAL INFORMATION
AND THE FINANCIAL HIGHLIGHTS AT THE
END OF THIS REPORT.
(1)PERFORMANCE INCLUDES REINVESTMENT OF
DIVIDENDS AND ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE FOR CLASS A
SHARES AND THE CONTINGENT DEFERRED
SALES CHARGE IN EFFECT AT THE END OF
THE PERIOD FOR CLASS B SHARES. IN
COMPARING THE PERFORMANCE OF KEMPER
STRATEGIC INCOME FUND CLASS A SHARES
WITH THAT OF THE LEHMAN BROTHERS
GOVERNMENT/CORPORATE BOND INDEX AND
THE CONSUMER PRICE INDEX, YOU SHOULD
ALSO NOTE THAT THE FUND'S
PERFORMANCE REFLECTS THE MAXIMUM
SALES CHARGE, WHILE NO SUCH CHARGES
ARE REFLECTED IN THE PERFORMANCE OF
THE INDICES.
+THE LEHMAN BROTHERS GOVERNMENT/CREDIT
BOND INDEX IS AN UNMANAGED INDEX OF
INTERMEDIATE- AND LONG-TERM GOVERNMENT
AND INVESTMENT-GRADE CORPORATE DEBT
SECURITIES. SOURCE: WIESENBERGER(R).
++THE U.S. CONSUMER PRICE INDEX IS A
STATISTICAL MEASURE OF CHANGE, OVER
TIME, IN THE PRICES OF GOODS AND
SERVICES IN MAJOR EXPENDITURE GROUPS
FOR ALL URBAN CONSUMERS. SOURCE:
WIESENBERGER(R).
THE FUND MAY INVEST IN LOWER-RATED AND
NONRATED SECURITIES, WHICH PRESENT
GREATER RISK OF LOSS TO PRINCIPAL AND
INTEREST THAN HIGHER-RATED SECURITIES.
THE FUND MAY ALSO INVEST A SIGNIFICANT
PORTION OF ASSETS IN FOREIGN SECURITIES,
WHICH PRESENT SPECIAL RISKS INCLUDING
FLUCTUATING EXCHANGE RATES, GOVERNMENT
REGULATION AND DIFFERENCES IN LIQUIDITY
THAT MAY AFFECT YOUR INVESTMENT.
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
KEMPER STRATEGIC INCOME FUND
Portfolio of Investments as of 10/31/2000
<TABLE>
<CAPTION>
REPURCHASE AGREEMENTS--0.0% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
State Street Bank and Trust Company,
6.55% to be repurchased at
$212,038 on 11/01/2000
(Cost $212,000) ** $ 212,000 $ 212,000
---------------------------------------------------------------------------
SHORT-TERM NOTES--2.5%
Federal Home Loan Bank, 6.350%,
11/01/2000
(Cost $12,000,000) 12,000,000 12,000,000
---------------------------------------------------------------------------
U.S. TREASURY OBLIGATION--5.5%
U.S. Treasury Bond, 6.50%, 2/15/2010
(Cost $26,680,820) 25,500,000 26,691,360
---------------------------------------------------------------------------
FOREIGN BONDS--39.2%
U.S.$ DENOMINATED--24.5%
AES Corporation, 11.500%, 08/30/2010 650,000 685,750
Euramax International, PLC, 11.250%,
10/01/06 3,695,000 3,066,850
Federative Republic of Brazil,
11.625%, 04/15/2004 2,875,000 2,903,750
Kappa Beheer BV, 10.625%, 07/15/2009 70,000 70,000
Kingdom of Morocco, Restructuring
and Consolidation Agreement,
Tranche A, Floating Rate Bond,
LIBOR plus .8125%, (7.750%),
01/01/2009 5,211,560 4,547,086
Republic of Bulgaria, Floating Rate
Bond, LIBOR plus .8125%, (7.750%),
07/28/2011 36,500,000 27,192,500
Republic of Columbia, 8.625%,
04/01/2008 2,150,000 1,636,688
Republic of Panama, Past Due
Interest Bond, LIBOR plus .8125%,
(7.75%; 4.0% with 3.75% Interest
Capitalization), 07/17/2016 4,119,174 3,192,360
Republic of Turkey, 12.000%,
12/15/2008 840,000 869,400
Republic of Turkey, 12.375%,
06/15/2009 14,700,000 14,700,000
Republic of Venezuela, Debt
Conversion Bond, Floating Rate
Bond, Series DL, LIBOR plus .875%,
(7.875%), 12/18/2007 19,464,130 16,252,549
Russian Ministry of Finance,
10.000%, 06/26/2007 7,400,000 5,540,750
TFM, S.A. de C.V., 10.250%,
06/15/2007 2,820,000 2,481,600
United Mexican States, 10.375%,
02/17/2009 3,550,000 3,771,875
United Mexican States Global,
9.875%, 01/15/2007 7,950,000 8,238,188
United Mexican States Global,
11.375%, 09/15/2016 10,000,000 11,325,000
</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>
United Mexican States, 11.500%,
05/15/2026 $10,000,000 $ 11,787,500
---------------------------------------------------------------------------
118,261,846
-------------------------------------------------------------------------------------------------------------------------
NON U.S.$ DENOMINATED--14.7%
Federal Republic of Germany, 6.000%,
01/04/2007 EUR 9,166,220 8,111,183
Federal Republic of Germany, 6.000%,
07/04/2007 EUR 44,998,662 39,880,426
Kingdom of Spain, 6.000%, 01/31/2008 EUR 26,000,000 22,753,488
---------------------------------------------------------------------------
70,745,097
---------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $220,489,131) 189,006,943
---------------------------------------------------------------------------
CORPORATE BONDS--51.8%
CONSUMER DISCRETIONARY--6.0%
AFC Enterprises, 10.250%, 05/15/2007 $ 3,240,000 3,078,000
AMF Bowling, Inc, 10.875%,
03/15/2006* 3,950,000 869,000
AMF Bowling, Inc., Step-up Coupon,
0% to 03/15/2001, 12.250% to
03/15/2006* 995,000 199,000
Advantica Restaurant Co., 11.250%,
01/15/2008 485,216 232,903
Avondale Mills, 10.250%, 05/01/2006 170,000 161,500
Boca Resorts, Inc., 9.875%,
04/15/2009 3,330,000 3,146,850
Cinemark USA, Inc., Series D,
9.625%, 08/01/2008 2,000,000 900,000
Eldorado Resorts, 10.500%,
08/15/2006 1,120,000 1,120,000
Finlay Enterprises, Inc., 9.000%,
05/01/2008 1,290,000 1,167,450
Finlay Fine Jewelry Co., 8.375%,
05/01/2008 710,000 646,100
Galey & Lord, Inc., 9.125%,
03/01/2008 670,000 361,800
Guitar Center Management, 11.000%,
07/01/2006 3,297,000 3,181,605
Hines Horticulture, Inc., 11.750%,
10/15/2005 1,748,000 1,311,000
Imperial Home Decor Group, Inc.,
11.000%, 03/15/2008* 720,000 7,200
Krystal Inc., 10.250%, 10/01/2007 2,450,000 1,837,500
MGM Grand Inc., 9.750%, 06/01/2007 1,770,000 1,834,163
MGM Mirage, Inc., 8.500%, 09/15/2010 2,440,000 2,391,200
Mandalay Resort Group, 6.450%,
02/01/2006 330,000 291,954
Mandalay Resort Group, 9.500%,
08/01/2008 500,000 512,500
National Vision Association, Ltd.,
12.750%, 10/15/2005* 5,450,000 2,071,000
Park Place Entertainment, Inc.,
9.375%, 02/15/2007 1,520,000 1,531,400
Restaurant Co., Step-up Coupon, 0%
to 05/15/2003, 11.250% to
05/15/2008 1,480,000 621,600
</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>
Sealy Mattress Co., Step-up Coupon,
0% to 12/15/2002, 10.875% to
12/15/2007 $ 1,595,000 $ 1,220,175
Specialty Retailers, Inc., 8.500%,
07/15/2005* 360,000 18,000
Specialty Retailers, Inc., 9.000%,
07/15/2007* 1,760,000 17,600
---------------------------------------------------------------------------
28,729,500
-------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--0.3%
Grove Worldwide LLC, 9.250%,
05/01/2008 1,060,000 159,000
Jafra Cosmetics International, Inc.,
11.750%, 05/01/2008 1,435,000 1,377,600
---------------------------------------------------------------------------
1,536,600
-------------------------------------------------------------------------------------------------------------------------
HEALTH--1.4%
Dade International, Inc., 11.125%,
05/01/2006 950,000 66,500
MEDIQ, Inc., 11.000%, 06/01/2008* 1,350,000 67,500
Magellan Health Services, Inc.,
9.000%, 02/15/2008 2,170,000 1,432,200
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 3,203,200
Tenet Healthcare Corp., 9.250%,
09/01/2010 1,860,000 1,948,350
Vencor, Inc., 9.875%, 05/01/2005* 800,000 144,000
---------------------------------------------------------------------------
6,886,850
-------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--11.1%
Allegiance Telecom, Inc., 12.875%,
05/15/2008 2,020,000 2,020,000
Call-Net Enterprises, Inc., Step-up
Coupon, 0% to 05/15/2004, 10.800%
to 05/15/2009 310,000 83,700
Call-Net Enterprises, Inc., Step-up
Coupon, 0% to 08/15/2003, 8.940%
to 08/15/2008 170,000 49,300
Call-Net Enterprises, Inc., 9.375%,
05/15/2009 670,000 288,100
Comunicacion Cellular, S.A., Step-up
Coupon, 0% to 09/29/2000, 14.125%
to 03/01/2005 160,000 121,600
Crown Castle International Corp.,
Step-up Coupon, 0% to 11/15/2002,
10.625% to 11/15/2007 1,190,000 922,250
Crown Castle International Corp.,
10.750%, 08/01/2011 730,000 744,600
Crown Castle International Corp.,
Step-up Coupon, 0% to 08/01/2004,
11.25% to 08/01/2011 890,000 578,500
Dobson Communications Corp.,
10.875%, 07/01/2010 480,000 463,200
Esprit Telecom Group, PLC, 10.875%,
06/15/2008 800,000 160,000
Esprit Telecom Group, PLC, 11.500%,
12/15/2007 2,345,000 469,000
FairPoint Communications, 12.500%,
05/01/2010 1,400,000 1,232,000
Global Crossing Holdings Ltd.
9.500%, 11/15/2009, 2,540,000 2,432,050
</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>
Global Telesystems Group, 9.875%,
02/15/2005 $ 390,000 $ 120,900
Hermes Europe Railtel BV, 11.500%,
08/15/2007 180,000 91,800
ICG Holdings, Inc., Step-up Coupon,
0% to 09/15/2000, 13.500% to
09/15/2005 4,765,000 810,050
Impsat Corp., 12.375%, 06/15/2008 1,765,000 1,288,450
Intermedia Communications of
Florida, Inc., Step-up Coupon, 0%
to 05/15/2001, 12.500% to
05/15/2006 1,800,000 1,656,000
Intermedia Communications of
Florida, Inc., Step-up Coupon, 0%
to 07/15/2002, 11.250% to
07/15/2007 1,980,000 1,623,600
KMC Telecom Holdings, Inc., Step-up
Coupon, 0% to 02/15/2003,
12.500% to 02/15/2008 3,830,000 459,600
KMC Telecom Holdings, Inc., 13.500%,
05/15/2009 380,000 121,600
Level 3 Communications Inc., 9.125%,
05/01/2008 1,640,000 1,328,400
Level 3 Communications Inc.,
11.250%, 03/15/2010 500,000 450,000
MGC Communications, 13.000%,
10/01/2004 2,250,000 1,687,500
McLeod USA, Inc., 9.250%, 07/15/2007 550,000 506,000
MetroNet Communications Corp.,
Step-up Coupon, 0% to 11/01/2002,
10.750% to 11/01/2007 850,000 752,250
MetroNet Communications Corp.,
Step-up Coupon, 0% to 06/15/2003,
9.950%, 06/15/2008 2,035,000 1,630,544
Metromedia Fiber Network, Inc.,
10.000%, 11/15/2008 910,000 819,000
Millicom International Cellular,
S.A., Step-up Coupon, 0% to
06/01/2001, 13.500% to 06/01/2006 3,130,000 2,535,300
Nextel Communications, Inc. 9.375%,
11/15/2009 3,885,000 3,729,600
Nextel Communications, Inc., Step-up
Coupon, 0% to 09/15/2002,
10.650% to 09/15/2007 1,825,000 1,487,375
Nextlink Communications, Inc., Step-
up Coupon, 0% to 04/15/2003,
9.450% to 04/15/2008 930,000 525,450
Nextlink Communications, Inc., Step-
up Coupon, 0% to 06/01/2004,
12.250% to 06/01/2009 1,070,000 561,750
Nextlink Communications, Inc.,
12.500%, 04/15/2006 2,545,000 2,341,400
PTC International Finance, Step-up
Coupon, 0% to 07/01/2002, 10.750%
to 07/01/2007 6,670,000 4,435,550
PTC International Finance II,
11.250%, 12/01/2009 270,000 245,700
Primus Telecommunications Group,
11.250%, 01/15/2009 320,000 160,000
Primus Telecommunications Group,
11.750%, 08/01/2004 2,710,000 1,355,000
Primus Telecommunications Group,
12.750%, 10/15/2009 1,620,000 810,000
</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>
SBA Communications Corp., Step-up
Coupon, 0% to 03/01/2003,
12.000% to 03/01/2008 $ 1,610,000 $ 1,207,500
Spectrasite Holdings, Inc., Step-up
Coupon, 0% to 04/15/2004, 11.250%
to 04/15/2009 1,500,000 780,000
Spectrasite Holdings, Inc., Step-up
Coupon, 0% to 7/15/2003, 12.000%
to 07/15/2008 2,580,000 1,599,600
Spectrasite Holdings, Inc., 10.750%,
03/15/2010 190,000 172,900
Telecorp PCS Inc, 10.625%,
07/15/2010 920,000 913,100
Telecorp PCS, Inc., Step-up-Coupon,
0% to 04/15/2004, 11.625% to
04/15/2009 1,190,000 764,575
Teligent, Inc., Step-up Coupon, 0%
to 03/01/2003, 11.500% to
03/01/2008 740,000 185,000
Teligent, Inc., 11.500%, 12/01/2007 2,190,000 876,000
Tritel PCS Inc., Step-up Coupon, 0%
to 05/01/2004, 12.75% to
05/15/2009 1,540,000 993,300
Triton Communications, L.L.C.,
Step-up Coupon, 0% to 05/01/2003,
11.000% to 05/01/2008 4,500,000 3,386,250
Versatel Telecom, 11.875%,
07/15/2009 390,000 286,650
Versatel Telecom, 13.250%,
05/15/2008 930,000 711,450
Versatel Telecom, 13.250%,
05/15/2008 360,000 275,400
Viatel, Inc., Step-up Coupon, 0% to
04/15/2003, 12.500% to 04/15/2008 610,000 179,950
---------------------------------------------------------------------------
53,428,794
-------------------------------------------------------------------------------------------------------------------------
FINANCIAL--5.9%
Banco Nacional de Desenvolvimiento
Economico e Social, 10.300%,
06/16/2008 29,525,000 27,310,625
FRD Acquisition, 12.500%, 07/15/2004 230,000 85,100
HMH Properties, 7.875%, 08/01/2008 1,210,000 1,113,200
---------------------------------------------------------------------------
28,508,925
-------------------------------------------------------------------------------------------------------------------------
MEDIA--5.2%
American Lawyer Media, Inc., Step-up
Coupon, 0% to 12/15/2002,
12.250% to 12/15/2008 360,000 223,200
Avalon Cable Holdings LLC, Step-up
coupon, 0% to 12/01/2003,
11.875% to 12/01/2008 1,760,000 1,161,600
Charter Communications Holdings LLC,
8.250%, 04/01/2007 520,000 470,600
Comcast UK Cable Partners, Ltd.,
Step-up Coupon 0% to 11/15/2000,
11.2000% to 11/15/2007 4,200,000 3,801,000
Diamond Cable Communications, PLC,
13.250%, 09/30/2004 2,025,000 2,085,750
Echostar DBS Corp., 9.250%,
02/01/2006 1,090,000 1,068,200
Echostar DBS Corp., 9.375%,
02/01/2009 610,000 597,800
Frontiervision LP, 11.000%,
10/15/2006 1,200,000 1,200,000
</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>
Interep National Radio Sales, Inc.,
10.000%, 07/01/2008 $ 1,070,000 $ 904,150
NTL Communications Corp., 11.875%,
10/01/2010 300,000 276,000
NTL, Inc., 11.500%, 10/01/2008 2,905,000 2,687,125
Renaissance Media Group, Step-up
Coupon, 0% to 04/15/2003, 10.000%
to 04/15/2008 1,000,000 670,000
Sinclair Broadcasting Group, Inc.,
8.750%, 12/15/2007 730,000 642,400
Star Choice Communications, Inc.,
13.000%, 12/15/2005 875,000 953,750
TeleWest Communications, PLC,
Step-up Coupon, 0% to 10/01/2000,
11.000% to 10/01/2007 2,395,000 2,107,600
TeleWest Communications, PLC,
9.625%, 10/01/2006 20,000 16,400
TeleWest Communications, PLC,
11.250%, 11/01/2008 1,250,000 1,125,000
Transwestern Publishing, Step-up
Coupon, 0% to 11/15/2002, 11.875%
to 11/15/2008 3,100,000 2,387,000
Transwestern Publishing, 9.625%,
11/15/2007 1,340,000 1,326,600
United International Holdings,
Step-up Coupon, 0% to 02/15/2003,
10.750% to 02/15/2008 1,710,000 1,060,200
United Pan-Europe Communications,
10.875%, 11/01/2007 610,000 469,700
---------------------------------------------------------------------------
25,234,075
-------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--2.3%
Avis Rent A Car, 11.000%, 05/01/2009 2,210,000 2,381,275
Coinmach Corp., 11.750%, 11/15/2005 4,370,000 4,337,225
Kindercare Learning Centers, Inc.,
9.500%, 02/15/2009 1,925,000 1,751,750
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
---------------------------------------------------------------------------
11,131,250
-------------------------------------------------------------------------------------------------------------------------
DURABLES--0.7%
Airxcel, 11.000%, 11/15/2007 1,570,000 800,700
DeCrane Aircraft Holdings, Inc.,
12.000%, 09/30/2008 2,400,000 2,160,000
Fairchild Corp., 10.750%, 04/15/2009 620,000 502,200
---------------------------------------------------------------------------
3,462,900
-------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--6.7%
Agriculture, Mining and Chemicals,
Inc., 10.750%, 09/30/2003 1,240,000 818,400
Atlantis Group, Inc., 11.000%,
02/15/2003 1,328,000 996,000
BPC Holdings Corp., 12.500%,
06/15/2006 3,194,656 1,597,328
Berry Plastics Corp., 12.250%,
04/15/2004 505,000 459,550
Consumers International, 10.250%,
04/01/2005 1,220,000 366,000
Day International Group, Inc.,
11.125%, 06/01/2005 2,290,000 2,255,650
</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>
Eagle-Picher Holdings, Inc., 9.375%,
03/01/2008 $ 2,240,000 $ 1,612,800
Flowserve Corporation, 12.250%,
08/15/2010 680,000 680,000
Foamex, L.P., 13.500%, 08/15/2005 810,000 607,500
Fonda Group, 9.500%, 03/01/2007 3,270,000 2,681,400
GS Technologies, 12.000%, 09/01/2004 940,000 94,000
GS Technologies, 12.250%, 10/01/2005 1,260,000 126,000
Gaylord Container Corp., 9.750%,
6/15/07 2,000,000 1,300,000
Grove Holdings LLC, Step-up Coupon,
0% to 05/01/2003, 11.625% to
05/01/2009 270,000 2,700
Grove Holdings LLC, 14.500%,
05/01/2010 895,757 8,958
Huntsman Package, 11.750%,
12/01/2004 2,100,000 2,100,000
Knoll, Inc., 10.875%, 03/15/2006 998,000 1,017,960
Motors and Gears, Inc., 10.750%,
11/15/2006 790,000 766,300
Neenah Corp., 11.125%, 05/01/2007 720,000 540,000
Plainwell, Inc., 11.000%, 03/01/2008 2,200,000 440,000
Printpack, Inc., 10.625%, 08/15/2006 1,700,000 1,598,000
Riverwood International Corp.,
10.250%, 04/01/2006 110,000 107,800
Riverwood International Corp.,
10.625%, 08/01/2007 725,000 717,750
Riverwood International Corp.,
10.875%, 04/01/2008 4,285,000 3,877,925
SF Holdings Group, Inc., Step-up
Coupon, 0% to 03/15/2003, 12.750%
to 03/15/2008 1,380,000 710,700
Stone Container Corp., 11.500%,
08/15/2006 670,000 683,400
Stone Container Corp., 12.250%,
04/01/2002 190,000 190,000
Tenneco Automotive, Inc., 11.625%,
10/15/2009 8,440,000 4,895,200
Texas Petrochemicals, 11.125%,
07/01/2006 1,370,000 1,164,500
---------------------------------------------------------------------------
32,415,821
-------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--0.8%
Exodus Communications, Inc.,
11.625%, 07/15/2010 1,060,000 996,400
Flextronics International, 9.875%,
07/01/2010 600,000 606,000
PSINet, Inc., 10.000%, 02/15/2005 890,000 436,100
PSINet, Inc., 11.000%, 08/01/2009 1,850,000 906,500
PSINet, Inc., 11.500%, 11/01/2008 1,420,000 724,200
---------------------------------------------------------------------------
3,669,200
-------------------------------------------------------------------------------------------------------------------------
ENERGY--2.1%
AES Corp., 9.375%, 09/15/2010 2,100,000 2,110,500
Chesapeake Energy Corp., 9.625%,
05/01/2005 3,900,000 3,900,000
Continental Resources, Inc.,
10.250%, 08/01/2008 2,420,000 2,165,900
Key Energy Services, Inc., 14.000%,
01/15/2009 590,000 666,700
</TABLE>
18 The accompanying notes are an integral part of the financial statements.
<PAGE> 19
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
Nuevo Energy, 9.375%, 10/01/2010 $ 340,000 $ 338,300
Pen Holdings, Inc., 9.875%,
06/15/2008 625,000 456,250
R&B Falcon Corp., 9.500%, 12/15/2008 250,000 270,000
R&B Falcon Corp., 11.000%,
03/15/2006 30,000 34,500
---------------------------------------------------------------------------
9,942,150
-------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--0.6%
MMI Products, Inc., 11.250%,
04/15/2007 1,250,000 1,218,750
Metal Management, Inc., 10.000%,
05/15/2008* 1,830,000 183,000
Renco Steel Holdings Co., Series B,
10.875%, 02/01/2005 1,930,000 1,061,500
Republic Technologies International,
13.750%, 07/15/2009* 2,780,000 417,000
---------------------------------------------------------------------------
2,880,250
-------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--1.9%
Congoleum Corp., 8.625%, 08/01/2008 2,000,000 1,200,000
Del Webb Corp., 9.750%, 01/15/2008 70,000 65,800
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 1,280,000
Hovnanian Enterprises, Inc., 9.125%,
05/01/2009 920,000 791,200
Hovnanian Enterprises, Inc., 9.750%,
06/01/2005 490,000 441,000
Lennar Corp., 9.950%, 05/01/2010 1,650,000 1,658,250
Nortek, Inc., 9.125%, 09/01/2007 2,390,000 2,127,100
Nortek, Inc., 9.875%, 03/01/2004 130,000 117,000
Nortek, Inc., Series A, 8.875%,
08/01/2008 420,000 365,400
---------------------------------------------------------------------------
9,190,550
-------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.0%
Petro Stopping Centers, 10.500%,
02/01/2007 2,200,000 1,870,000
Transtar Holdings, Inc., Step-up
Coupon, 0% to 12/15/1999, 13.375%
to 12/15/2003 670,000 676,700
Travelcenters America, 10.250%,
04/01/2007 2,180,000 2,289,000
---------------------------------------------------------------------------
4,835,700
-------------------------------------------------------------------------------------------------------------------------
UTILITIES--0.8%
Azurix Corp, 10.750%, 02/15/2010 2,140,000 1,947,400
Azurix Corp., 10.375%, 02/15/2007 710,000 646,100
Calpine Corp, 7.750%, 04/15/2009 850,000 799,264
Calpine Corp, 8.625%, 08/15/2010 670,000 657,384
---------------------------------------------------------------------------
4,050,148
-------------------------------------------------------------------------------------------------------------------------
OTHER--5.0%
Riverside Loan Trust II, 7.437%,
07/16/2008 (b) 30,000,000 23,965,080
---------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $321,562,323) 249,867,793
---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 19
<PAGE> 20
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PREFERRED STOCKS--0.9% NUMBER OF SHARES VALUE
<S> <C> <C> <C>
Dobson Communications, PIK 1,101 $ 974,385
World Access, Inc. 933 653,030
Crown American Realty Trust 20,720 792,540
Sinclair Capital 13,500 1,215,000
SF Holdings Group, Inc. 40 160,000
Eagle-Picher Holdings, Inc. 180 405,000
---------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost $6,254,440) 4,199,955
---------------------------------------------------------------------------
WARRANTS--0.1%
AT&T Canada Inc.* 1,920 59,400
Econophone Inc., Warrants* 1,425 92,625
ICG Communications, Inc.* 4,026 1,761
Intermedia Communications Inc.* 3,959 87,593
KMC Telecom Holdings, Inc.,
Warrants* 2,100 6,300
Primus Telecommunications Group,
Warrants* 1,000 750
Star Choice Communications,
Warrants* 20,265 157,054
Ono Finance PLC, Warrants* 550 38,500
Spincycle, Inc., Warrants* 4,010 40
American Banknote Corp., Warrants* 1,300 13
Decrane Holdings Co., Warrants* 2,740 --
SF Holdings Group, Inc.* 387 1,935
Empire Gas Corp., Warrants* 2,208 221
Republic Technologies International,
Warrants* 2,780 28
Waxman Industries, Inc., Warrants* 222,607 2,226
Capital Pacific Holdings, Warrants* 4,345 2,173
---------------------------------------------------------------------------
TOTAL WARRANTS
(Cost $647,087) 450,619
---------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost $587,845,801) (a) $482,428,670
---------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
* Non-income producing security. In the case of a bond, generally denotes that
issuer has defaulted on the payment of interest or has filed for bankruptcy.
** Repurchase agreements are fully collateralized by U.S. Treasury or Government
agency securities.
(a) The cost for federal income tax purposes was $588,451,532. At October 31,
2000, the net unrealized depreciation for all securities based on tax cost
was $106,022,862. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess market value over tax cost
of $12,640,062, and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$118,662,924.
(b) The Riverside Loan Trust II portfolio is also managed by Scudder Kemper
Investments, Inc. The Riverside Loan Trust II does not charge the Fund a
management fee on the Fund's investment.
Currency Abbreviation:
EUR -- Euro
20 The accompanying notes are an integral part of the financial statements.
<PAGE> 21
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
As of October 31, 2000
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $587,845,801) $ 482,428,670
-----------------------------------------------------------------------------
Cash 252
-----------------------------------------------------------------------------
Foreign currency, at value (cost $2,353,655) 2,292,637
-----------------------------------------------------------------------------
Receivable for investments sold 158,772
-----------------------------------------------------------------------------
Interest receivable 14,055,496
-----------------------------------------------------------------------------
Receivable for Fund shares sold 72,668
-----------------------------------------------------------------------------
TOTAL ASSETS 499,008,495
-----------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased 65,537
-----------------------------------------------------------------------------
Payable for Fund shares redeemed 1,352,560
-----------------------------------------------------------------------------
Accrued management fee 243,634
-----------------------------------------------------------------------------
Other accrued expenses and payables 532,360
-----------------------------------------------------------------------------
Total liabilities 2,194,091
-----------------------------------------------------------------------------
NET ASSETS, AT VALUE $ 496,814,404
-----------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income $ 81,351
-----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on
-----------------------------------------------------------------------------
Investments (105,427,171)
-----------------------------------------------------------------------------
Foreign currency related transactions (225,529)
-----------------------------------------------------------------------------
Accumulated net realized gain (loss) (100,084,181)
-----------------------------------------------------------------------------
Paid-in capital 702,469,934
-----------------------------------------------------------------------------
NET ASSETS, AT VALUE $ 496,814,404
-----------------------------------------------------------------------------
NET ASSET VALUE AND OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($358,899,205 / 78,515,787 outstanding shares of
beneficial interest, $.01 par value, unlimited number of
shares authorized) $4.57
-----------------------------------------------------------------------------
Maximum offering price per share (100 / 95.50 of $4.57) $4.79
-----------------------------------------------------------------------------
CLASS B SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share
($119,032,942 / 26,061,396 outstanding shares of
beneficial interest, $.01 par value, unlimited number of
shares authorized) $4.57
-----------------------------------------------------------------------------
CLASS C SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share
($18,882,257 / 4,107,854 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $4.60
-----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 21
<PAGE> 22
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended October 31, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 483,226
----------------------------------------------------------------------------
Interest (net of foreign taxes withheld of $93,239) 64,171,163
----------------------------------------------------------------------------
Total income 64,654,389
----------------------------------------------------------------------------
Expenses:
Management fee 3,399,508
----------------------------------------------------------------------------
Services to shareholders 1,551,755
----------------------------------------------------------------------------
Custodian fees 77,090
----------------------------------------------------------------------------
Distribution services fees 1,350,317
----------------------------------------------------------------------------
Administrative services fees 1,520,015
----------------------------------------------------------------------------
Auditing 67,115
----------------------------------------------------------------------------
Legal 96,599
----------------------------------------------------------------------------
Trustees' fees and expenses 38,143
----------------------------------------------------------------------------
Reports to shareholders 236,997
----------------------------------------------------------------------------
Registration fees 63,625
----------------------------------------------------------------------------
Other 31,838
----------------------------------------------------------------------------
Total expenses, before expense reductions 8,433,002
----------------------------------------------------------------------------
Expense reductions (56,057)
----------------------------------------------------------------------------
Total expenses, after expense reductions 8,376,945
----------------------------------------------------------------------------
NET INVESTMENT INCOME 56,277,444
----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments (42,565,090)
----------------------------------------------------------------------------
Futures (3,412,723)
----------------------------------------------------------------------------
Foreign currency related transactions (639,691)
----------------------------------------------------------------------------
(46,617,504)
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on:
Investments (36,332,171)
----------------------------------------------------------------------------
Foreign currency related transactions (172,529)
----------------------------------------------------------------------------
(36,504,700)
----------------------------------------------------------------------------
Net gain (loss) on investment transactions (83,122,204)
----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $(26,844,760)
----------------------------------------------------------------------------
</TABLE>
22 The accompanying notes are an integral part of the financial statements.
<PAGE> 23
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
OCTOBER 31, OCTOBER 31,
2000 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 56,277,444 69,752,839
-------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (46,617,504) (23,451,580)
-------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period (36,504,700) (26,484,088)
-------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (26,844,760) 19,817,171
-------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A (29,035,762) (47,238,474)
-------------------------------------------------------------------------------------------------------
Class B (9,379,901) (18,894,258)
-------------------------------------------------------------------------------------------------------
Class C (1,495,143) (2,504,940)
-------------------------------------------------------------------------------------------------------
From tax return of capital
Class A (9,325,801) --
-------------------------------------------------------------------------------------------------------
Class B (3,012,667) --
-------------------------------------------------------------------------------------------------------
Class C (480,215) --
-------------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 72,842,102 178,375,981
-------------------------------------------------------------------------------------------------------
Reinvestment of distributions 33,227,172 44,034,829
-------------------------------------------------------------------------------------------------------
Cost of shares redeemed (249,745,636) (304,053,368)
-------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions (143,676,362) (81,642,558)
-------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets (223,250,611) (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 $81,351 and $1,783,000, respectively) $ 496,814,404 720,065,015
-------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 23
<PAGE> 24
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
YEAR ENDED OCTOBER 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $5.26 5.60 5.96 5.99 5.98
----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .48(a) .49(a) .44(a) .46 .46
----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.72) (.35) (.35) .01 .12
----------------------------------------------------------------------------------------------------------------------
Total from investment operations (.24) .14 .09 .47 .58
----------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.34) (.48) (.45) (.50) (.57)
----------------------------------------------------------------------------------------------------------------------
Tax return of capital (.11) -- -- -- --
----------------------------------------------------------------------------------------------------------------------
Total distributions (.45) (.48) (.45) (.50) (.57)
----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $4.57 5.26 5.60 5.96 5.99
----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (B) (4.91) 2.43 1.28 8.13 10.27
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) 359 492 550 549 510
----------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.10 1.11 1.04 1.03 1.03
----------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.09 1.10 1.04 1.03 1.03
----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (%) 9.55 8.80 7.36 7.68 7.72
----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 37 92 751 347 310
----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
YEAR ENDED OCTOBER 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $5.26 5.59 5.96 5.99 5.98
----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .43(a) .43(a) .38(a) .40 .41
----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.72) (.34) (.36) .01 .12
----------------------------------------------------------------------------------------------------------------------
Total from investment operations (.29) (.09) .02 .41 .53
----------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.30) (.42) (.39) (.44) (.52)
----------------------------------------------------------------------------------------------------------------------
Tax return of capital (.10) -- -- -- --
----------------------------------------------------------------------------------------------------------------------
Total distributions (.40) (.42) (.39) (.44) (.52)
----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $4.57 5.26 5.59 5.96 5.99
----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (B) (5.85) 1.57 .12 7.13 9.23
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) 119 198 271 297 262
----------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 2.11 2.06 2.01 1.98 1.96
----------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 2.10 2.05 2.01 1.98 1.96
----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (%) 8.50 7.85 6.39 6.73 6.79
----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 37 92 751 347 310
----------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
YEAR ENDED OCTOBER 31,
-------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $5.29 5.62 5.99 6.01 6.00
---------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .45(a) .45(a) .39(a) .42 .41
---------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.72) (.34) (.36) .01 .12
---------------------------------------------------------------------------------------------------------------
Total from investment operations (.27) .11 .03 .43 .53
---------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.32) (.44) (.40) (.45) (.52)
---------------------------------------------------------------------------------------------------------------
Tax return of capital (.10) -- -- -- --
---------------------------------------------------------------------------------------------------------------
Total distributions (.42) (.44) (.40) (.45) (.52)
---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $4.60 5.29 5.62 5.99 6.01
---------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%)(B) (5.51) 1.78 0.28 7.37 9.33
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) 19 30 30 15 7
---------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.76 1.87 1.84 1.85 1.86
---------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.75 1.85 1.84 1.85 1.86
---------------------------------------------------------------------------------------------------------------
Ratio of net investment income (%) 8.87 8.05 6.56 6.86 6.89
---------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 37 92 751 347 310
---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of sales charges.
25
<PAGE> 26
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 October 31, 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 accounting principles generally
accepted in the United States 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.
26
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
Money market 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.
FUTURES CONTRACTS. A futures contract is an
agreement between a buyer or seller and an
established futures exchange or its clearinghouse
in which the buyer or seller agrees to take or make
a delivery of a specific amount of a financial
instrument at a specified price on a specific date
(settlement date). During the period, the Fund
purchased securities index futures as a temporary
substitute for purchasing selected investments. In
addition, the Fund also sold securities index
futures to hedge against declines in the value of
portfolio securities.
Upon entering into a futures contract, the Fund is
required to deposit with a financial Intermediary
an amount (" initial margin") equal to a certain
percentage of the face value indicated in the
futures contract. Subsequent payments ("variation
margin") are made or received by the Fund dependent
upon the daily fluctuations in the value of the
underlying security and are recorded for financial
reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction,
the Fund will realize a gain or loss equal to the
difference between the value of the futures
contract to sell and the futures contract to buy.
Futures contracts are valued at the most recent
settlement price.
Certain risks may arise upon entering into futures
contracts, including the risk that an illiquid
secondary market will limit the Fund's ability to
close out a futures contract prior to the
settlement date and that a change in the value of a
futures contract may not correlate exactly with the
changes in the value of the securities or
currencies hedged. When utilizing futures contracts
to hedge, the Fund gives up the opportunity to
profit from favorable price movements in the hedged
positions during the term of the contract.
27
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS
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.
FEDERAL INCOME 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, 2000 the Fund had a tax basis net
loss carryforward of approximately $99,478,000,
which may be applied against any realized net
taxable gains of each succeeding year until fully
utilized or until October 31, 2002 ($46,845,000),
October 31, 2003 ($5,575,000), October 31, 2006
($2,523,000), October 31, 2007 ($18,866,000) and
October 31, 2008 ($25,669,000), 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. Certain dividends from
foreign securities may be recorded subsequent to
the ex-dividend date as soon as the Fund is
informed of such dividends. 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.
28
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2 PURCHASES AND
SALES OF SECURITIES For the year ended October 31, 2000, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $211,943,848
Proceeds from sales 376,507,348
--------------------------------------------------------------------------------
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 $3,399,508 for the
year ended October 31, 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 year ended October 31,
2000 are $33,823.
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 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 year ended October 31, 2000 are $1,990,999,
of which $90,134 is unpaid at October 31, 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 year ended October 31, 2000 are
$1,520,015, of which $107,809 is unpaid at October
31, 2000. In addition, $3,398 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
$1,467,162 for the year ended October 31, 2000, of
which $233,927 is unpaid at October 31, 2000.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the year ended October 31,
2000, the Fund made no payments to its officers and
incurred trustees' fees of $38,143 to independent
trustees.
29
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 6,603,949 $ 33,375,017 13,013,017 $ 73,178,969
---------------------------------------------------------------------------------------
Class B 3,567,072 17,964,514 9,253,499 51,822,361
---------------------------------------------------------------------------------------
Class C 1,250,827 6,348,252 2,856,523 16,099,983
---------------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 4,739,404 23,713,671 5,305,361 29,406,251
---------------------------------------------------------------------------------------
Class B 1,626,410 8,160,083 2,323,604 12,890,024
---------------------------------------------------------------------------------------
Class C 268,643 1,353,418 312,275 1,738,554
---------------------------------------------------------------------------------------
SHARES REDEEMED
Class A (29,439,344) (149,088,727) (29,530,977) (164,313,732)
---------------------------------------------------------------------------------------
Class B (13,852,667) (70,209,040) (15,690,275) (86,699,356)
---------------------------------------------------------------------------------------
Class C (3,001,413) (15,293,550) (2,824,747) (15,765,612)
---------------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 2,970,300 15,154,319 6,671,202 37,274,668
---------------------------------------------------------------------------------------
Class B (2,973,284) (15,154,319) (6,683,299) (37,274,668)
---------------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $(143,676,362) $(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 $13,732 and
$42,325, respectively, under these arrangements.
--------------------------------------------------------------------------------
6 LINE OF CREDIT The Fund and several Kemper funds (the
"Participants") share in a $750 million revolving
credit facility with Chase Manhattan Bank 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.
30
<PAGE> 31
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER STRATEGIC INCOME FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Strategic Income Fund
(formerly known as "Kemper Diversified Income Fund") as of October 31, 2000, the
related statements of operations for the year then ended and changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the fiscal periods since 1996. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. These standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of October 31, 2000, by correspondence with the custodian or other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Strategic Income Fund at October 31, 2000, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the fiscal periods
since 1996, in conformity with accounting principles generally accepted in the
United States.
ERNST & YOUNG LLP
Chicago, Illinois
December 15, 2000
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 KATHRYN L. QUIRK
Vice President
DONALD R. JONES
Trustee WILLIAM F. TRUSCOTT
Vice President
THOMAS W. LITTAUER
Chairman, Trustee and LINDA J. WONDRACK
Vice President Vice President
SHIRLEY D. PETERSON
Trustee
WILLIAM T. 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
.............................................................................................
CUSTODIAN AND STATE STREET BANK AND TRUST COMPANY
TRANSFER AGENT 225 Franklin Street
Boston, MA 02109
.............................................................................................
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
.............................................................................................
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.
KSIF - 2 (12/22/00) 4795
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
