<PAGE> 1
KEMPER
INTERNATIONAL
BOND FUND
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1996
Seeking total return, a combination of income and capital appreciation,
principally through a portfolio of investment grade foreign debt securities
" . . . We stuck with our long-term
approach and remained committed to . . .
bonds with very high credit quality."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
Economic Overview
5
Performance Update
Country Concentrations
Market Performance
8
Portfolio of Investments
9
Report of Independent Auditors
10
Financial Statements
12
Notes to Financial Statements
15
Financial Highlights
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER INTERNATIONAL BOND FUND
TOTAL RETURN*
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
KEMPER INTERNATIONAL BOND FUND 6.13%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Returns are historical and do not represent future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
*Total return measures net investment income and capital gain or loss from
portfolio investments, assuming reinvestment of all dividends. During the
periods noted, securities prices fluctuated. For additional information, see the
Prospectus and Statement of Additional Information and the Financial Highlights
at the end of this report.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
- ----------------------------------------------------------------------------------------------------------------
AS OF AS OF
12/31/96 12/31/95
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
KEMPER
INTERNATIONAL BOND FUND $9.14 $9.03
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND INFORMATION FOR THE FUND AS OF
DECEMBER 31, 1996.
<TABLE>
<CAPTION>
KEMPER INTERNATIONAL BOND FUND
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
ONE-YEAR INCOME: $0.40
- ----------------------------------------------------------------------------------------------------------------
SHORT-TERM CAPITAL
GAIN $0.04
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER INTERNATIONAL BOND FUND
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
LIFE OF
1-YEAR FUND
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER INTERNATIONAL BOND FUND 6.13% 6.60% (since 2/1/95)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
GROWTH OF AN ASSUMED $10,000 INVESTMENT IN KEMPER INTERNATIONAL BOND FUND
FROM 2/1/95 THROUGH 12/31/96
[LINE GRAPH]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
AS OF AS OF AS OF
02/01/95 12/31/95 12/31/96
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
/ / Kemper International Bond Fund(1) 10000 10656 11305
- ----------------------------------------------------------------------------------------------------------------
/ / The J.P. Morgan Global Government non-U.S. Bond Index+ 10000 11846 12367
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Average annual total returns measure net investment income and capital
gain or loss from portfolio investments, assuming reinvestment of all
dividends.
(1) Performance includes reinvestment of dividends.
The special risk considerations associated with an investment in the fund,
including risks related to foreign investments and to a non-diversified
investment company, are discussed in the prospectus. Risks associated with
foreign securities, including fluctuating exchange rates, government
regulations and differences in liquidity, may affect your investment. As a
non-diversified investment company, the fund may invest more than 5% of its
assets in the securities of a particular foreign issuer.
+ The J.P. Morgan Global Government non-U.S. Bond Index is an unmanaged
index on a U.S. dollar total return basis and is comprised of domestic
government bonds from 15 countries. Source is Bloomberg.
<PAGE> 3
ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $79 BILLION IN ASSETS, INCLUDING $44 BILLION IN RETAIL MUTUAL
FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM HARVARD
UNIVERSITY.
DEAR SHAREHOLDER:
As we progress through the first quarter of 1997, the fundamentals of the
economy are remarkably similar to what they were one year ago. Long-term
interest rates are in the same 6.5% to 7% range they were in during the first
half of 1996. We believe the economy is growing at a rate of approximately 2.5%.
Inflation continues to be well under control, at about 3.0%.
One significant difference between today and last year is that prices of
the stocks are on average up 20%. While price movements were more volatile in
1996 than in the past few years, the patient investor was amply rewarded. The
prime element sending the stock market higher was strong positive cash flows.
This liquidity in an environment of modestly increasing corporate profits and
relatively stable interest rates pushed stocks higher for most of the year.
This higher stock market has caused many market observers to worry. While
we cannot ignore what has happened, we find no reason to be bearish over the
long term. The environment is benign to favorable for financial assets. Given
steady interest rates, moderate economic growth and continued moderate corporate
earnings growth, there are few excesses in the system. In fact, real interest
rates are probably too high considering our outlook for inflation, and we may
see them decline over time.
Naturally, we cannot rule out the possibility of a market correction. But,
in our belief, the downside would appear to be limited to 5% to 8%, which is the
size of a typical correction based on historical data. As we have said in
previous outlooks, three elements tend to move the market:
- EARNINGS. We forecast corporate earnings to range between 0% and 5% on
average for the Standard & Poor's 500* in 1997 -- not as high as in
recent years but positive nonetheless.
- INTEREST RATES. Rates should remain stable, and short-term interest rates
may even decline.
- LIQUIDITY. Investors, through mutual funds, 401(k)s and qualified
contribution plans in particular, will continue to create strong demand
for securities.
In order to move the market more than would be expected in a typical
decline, one or more of these elements will have to turn negative in 1997, and,
while future market conditions cannot be predicted with certainty, we fail to
see what would materially change our outlook. Our outlook going forward is that
1997 should be a lot like 1996.
While the economy continued along a relatively consistent path, the United
States took some politically significant steps in 1996. First, of course,
President Bill Clinton and a Republican Congress were re-elected by the voters.
In the first few days after the general election, especially, investors
demonstrated their support for such a balance in our leadership. But of much
greater long-term significance is the expressed commitment by both parties to
balance the federal budget and address certain entitlement programs. The first
year after an election can be a fertile time to accomplish major initiatives,
and we are hopeful that progress can be made.
The future of the Social Security system, which many experts believe will
run out of money about 20 years from now, will be a subject in which you can
expect Zurich Kemper Investments, Inc. to play a leadership role. The possible
solutions for "fixing Social Security" are finite: raise Social Security taxes,
reduce benefits, raise the retirement age, change inflation assumptions or
pursue a higher rate of return on assets contributed by workers. We believe that
a bipartisan solution will be worked out, which will include giving individuals
the option of investing a portion of their Social Security contributions in an
account earmarked for them. This change is needed to return credibility to the
system, which many Americans have lost faith in.
What to do with Social Security is a debate that spans generations and
promises to occupy much attention in the coming years. As we hope to help
advance constructive debate, we'll be advocating partial privatization for this
federal program while maintaining a safety net for many low-wage earners and
providing a seamless transition for seniors near or in retirement.
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 (1/31/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 6.58 6.64 5.81 7.47
PRIME RATE(2) 8.25 8.25 8.25 9.00
INFLATION RATE(3)* 3.24 2.95 2.72 2.87
THE U.S. DOLLAR(4) 4.59 4.26 0.82 (5.54)
CAPTIAL GOODS ORDERS(5)* 0.58 15.00 4.72 21.53
INDUSTRIAL PRODUCTION(5)* 4.32 3.38 0.39 5.60
EMPLOYMENT GROWTH(6) 2.50 2.17 1.78 3.49
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6%. The low, moderate inflation of the last
few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of December 31, 1996.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
With this letter as an economic backdrop, we encourage you to read the
following detailed report of your fund, including an interview with your fund's
portfolio management. Thank you for your continued support. We appreciate the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
February 5, 1997
*THE STANDARD & POOR'S 500 STOCK INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF THE U.S. STOCK MARKET.
4
<PAGE> 5
PERFORMANCE UPDATE
[J. PATRICK PHOTO]
J. PATRICK BEIMFORD, JR. JOINED ZURICH KEMPER INVESTMENTS, INC. IN 1976 AND IS
CHIEF INVESTMENT OFFICER FOR FIXED-INCOME INVESTMENTS AND PORTFOLIO CO-MANAGER
OF KEMPER INTERNATIONAL BOND FUND. BEIMFORD RECEIVED A BACHELOR OF SCIENCE AND
INDUSTRIAL MANAGEMENT DEGREE FROM PURDUE UNIVERSITY AND RECEIVED HIS M.B.A. FROM
THE UNIVERSITY OF CHICAGO.
[JOHNS PHOTO]
GORDON JOHNS JOINED ZURICH INVESTMENT MANAGEMENT LIMITED, A LONDON-BASED
AFFILIATE OF ZURICH KEMPER INVESTMENTS, INC., IN 1988 AND IS PORTFOLIO
CO-MANAGER OF KEMPER INTERNATIONAL BOND FUND. JOHNS GRADUATED WITH A B.A. IN LAW
FROM BALLIOL COLLEGE, OXFORD, ENGLAND.
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.
STRATEGIC POSITIONING IN SOLID MARKETS AND CAREFUL ATTENTION TO CURRENCY
EXPOSURE HELPED KEMPER INTERNATIONAL BOND FUND OUTPERFORM THE J.P. MORGAN
GLOBAL GOVERNMENT NON-U.S. BOND INDEX. HOWEVER, THE FUND'S PERFORMANCE RELATIVE
TO ITS PEERS SUFFERED IN 1996*, DUE, IN PART, TO A CAUTIOUS APPROACH TO
COUNTRIES EXPECTED TO JOIN THE EUROPEAN MONETARY 1999.
Q HOW DID THE GLOBAL BOND MARKETS PERFORM IN 1996?
A In general, it was a good year for international bond markets. We saw
interest rates fall in most markets with Europe as a whole and Canada leading
performance. Japanese bond markets lagged during the period, suffering from the
weakness in the financial sector. This weakness led to declining short-term
interest rates throughout the year. Although the Japanese economy was not in
recession, it wasn't growing particularly fast.
On the currency side, it was a mixed picture. The United Kingdom sterling
was very strong throughout the year and did outperform the U.S. dollar, but the
major European currencies (French franc, German mark) were weak. For the U.S.
based investor, the strength of the dollar hurt most foreign bond investments by
somewhat diminishing strong local currency returns in the conversion to the U.S.
dollar. The dollar-bloc currencies--the Canadian, Australian and New Zealand
dollar--did perform better than some of the weaker international currencies
because they were positively affected by the U.S. dollar strength. The Japanese
yen was the weakest currency during the period, suffering from low levels of
activity and low interest rates.
Q HOW DID KEMPER INTERNATIONAL BOND FUND PERFORM IN THIS MARKET RELATIVE TO
ITS BENCHMARK INDEX AND IN RELATION TO ITS PEERS?
A Diversification outside the U.S. helped the fund's performance. The average
return from the U.S. bond market was somewhat lower than foreign issues which
was an obvious benefit to the globally diversified investor. However, as we
mentioned, the strength of the U.S. dollar against a number of the international
currencies worked against the global bond strength.
While we did outperform the J.P. Morgan Global Government non-U.S. Bond
Index**, our performance lagged behind our peer group. Strategic positioning of
the fund in solid markets and careful attention to currency exposure helped us
relative to the index. We were right to be positive about the dollar-bloc
currencies. We were also right to have a lesser exposure to Japan and the
Japanese yen. These decisions combined with a focus on the core markets of
Europe helped us beat our benchmark.
*For the year ended December 31, 1996, the fund's return of 6.13% logged the
8.75% return of the Lipper International Income Funds category.
5
<PAGE> 6
PERFORMANCE UPDATE
However, one area that hurt us was in convergence plays, that is being
invested in those markets and currencies that may be members of the European
Monetary Union (EMU) in 1999. These markets (Spain, Italy and Portugal) offered
significantly higher yields than they might have if they were simply recognized
by the market as another individual European country. We were not heavily
exposed to these countries or currencies because we are not convinced they can,
in fact, succeed in meeting the 1999 goal. However, the market clearly took a
different view and, therefore, those markets did quite well. Going forward, we
believe it is going to be very difficult for them to repeat that performance.
Between now and 1999, a lot can happen so we continue to be reluctant to place a
significant emphasis on these markets based on the POSSIBILITY they will be
early EMU participants.
**J.P. Morgan Global Government non-U.S. Bond Index is an unmanaged index on a
U.S. dollar total return basis and is comprised of domestic government bonds
from 15 countries.
Q WE HAVE DISCUSSED THE MARKETS YOU STAYED AWAY FROM DURING THE YEAR BUT
WHICH DID YOU FAVOR?
A With the exception of those mentioned, we were biased toward the European
markets because they offered good value in a low short-term interest rate
environment. We were also heavily committed throughout the year to the
dollar-bloc countries of Australia, New Zealand and Canada where the markets
were somewhat undervalued. At the end of the period, over half of the fund's
currency positions were in dollar-bloc currencies.
Q WHAT PROCESS DID YOU AND YOUR TEAM USE IN MAKING YOUR INVESTMENT DECISIONS
AND WHAT WAS THE AVERAGE DURATION OF HOLDINGS IN THE FUND?
A We stuck with our long-term approach and remained committed to government
and supranational bonds with very high credit quality. Over 80% of the fund
throughout the year has been committed to government bonds and typically 90% or
more of the fund has been AAA rated so our investments were very high quality.
We have had a neutral view on duration. This means we didn't have either a
really positive or really negative view of the direction of rates. Therefore,
our average duration was intermediate at just under five years.
Q WHAT IS YOUR OUTLOOK FOR THE COMING MONTHS?
A In general, we believe the bond markets are fairly valued. We don't expect
1997 to be a particularly exciting year--there appears to be no reason for a big
sell off and no reason for a big bull market. Diversification out of the U.S.
market remains a strong investment decision for shareholders. The U.S. market is
still worried about growth in the U.S. economy and the possibility of increases
in short-term interest rates. That contrasts with the situation in Europe where
the pressures are still more on short-term interest rates falling. So in much of
the rest of the world, but particularly in Europe, the general atmosphere for
bond markets seems to be more favorable than it is in the U.S.
As far as currencies are concerned, we still have a modestly positive
view of the dollar-bloc currencies because we suspect the dollar-bloc dollar
will do better than the U.S. dollar. In Europe there are one or two currencies
we consider attractive such as the UK sterling and the Norwegian krone. The
Japanese yen has been significantly overvalued against the dollar and we don't
expect that to change early in the new year.
Q WHAT ARE THE RISKS TO THIS OUTLOOK?
A Well I think there are two big risks for the markets. One is growth turning
out to be stronger than expected. This is a particular risk in the U.S. and in
some of the dollar-bloc countries. If growth is surprisingly strong, short-term
interest rates in the U.S. would increase and that could have a ripple effect on
all global markets. A second risk to the markets is problems with the
convergence towards EMU. If some incident affects these efforts in the next
year, that could weaken the European markets that have benefited from this
process. Further convergence of higher yielding markets toward the yield level
of German bonds will lead to assertions that countries outside the core European
markets will join EMU in January 1999. This looks less likely to happen with
Germany continuing to have doubts as to the early admissibility of some
countries. Accordingly, our asset allocation reflects this view.
6
<PAGE> 7
MARKET PERFORMANCE
WORLD BOND MARKET PERFORMANCE
The table below presents the one-year returns of 20 government bond markets
tracked by Salomon Brothers for the period ending December 31, 1996 expressed in
U.S. dollar terms. This information is historical and does not reflect future
returns of these markets.
[PERFORMANCE BAR GRAPH]
<TABLE>
<S> <C>
ITALY 27.19%
AUSTRALIA 19.32%
UNITED KINGDOM 18.39%
NEW ZEALAND 17.86%
IRELAND 17.64%
PORTUGAL 15.15%
SWEDEN 14.78%
SPAIN 13.88%
CANADA 11.28%
NORWAY 7.31%
FINLAND 6.16%
FRANCE 5.31%
DENMARK 3.80%
UNITED STATES 2.73%
BELGIUM 2.64%
AUSTRIA 1.09%
NETHERLANDS 0.16%
GERMANY -0.35%
JAPAN -6.45%
SWITZERLAND -9.98%
</TABLE>
COUNTRY CONCENTRATIONS
GEOGRAPHIC COMPOSITION OF KEMPER INTERNATIONAL BOND FUND
Based on total net assets and the home currency of the issuer on December 31,
1996.
[GEOGRAPHIC COMPOSITION BAR GRAPH]
<TABLE>
<S> <C>
GERMANY 20%
UNITED KINGDOM 20%
AUSTRALIA 18%
JAPAN 5%
DENMARK 5%
FINLAND 4%
SWEDEN 4%
BELGIUM 4%
ITALY 4%
FRANCE 4%
PORTUGAL 4%
SPAIN 4%
</TABLE>
7
<PAGE> 8
PORTFOLIO OF INVESTMENTS
KEMPER INTERNATIONAL BOND FUND
Portfolio of Investments at December 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
LOCAL CURRENCY U.S. DOLLAR
CURRENCY ISSUER PRINCIPAL VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GOVERNMENT OBLIGATIONS (87.2%) AND CORPORATE OBLIGATIONS (9.6%)
- ----------------------------------------------------------------------------------------------------------------------
GERMAN MARK--28.6% Kingdom of Belgium, 7.00%, 2002 1,560 $ 1,103
Republic of Finland, 8.25%, 2002 1,563 1,160
Federal Republic of Germany
6.75%, 1999 2,385 1,653
6.50%, 2003 1,875 1,291
Kingdom of Sweden, 6.00%, 2000 1,656 1,133
European Investment Bank, 6.00%, 2003 1,790 1,207
-----------------------------------------------------------------------------
7,547
- ----------------------------------------------------------------------------------------------------------------------
FRENCH FRANC--20.7% Kingdom of Denmark, 5.50%, 1999 5,900 1,182
French Treasury, 8.50%, 2002 4,630 1,050
KFW International Finance, 7.00%, 2002 5,500 1,162
Republic of Portugal, 7.70%, 2005 4,820 1,047
Kingdom of Spain, 6.50%, 2001 5,000 1,033
-----------------------------------------------------------------------------
5,474
- ----------------------------------------------------------------------------------------------------------------------
BRITISH POUND--20.0% United Kingdom
10.00%, 2003 1,250 2,421
6.75%, 2004 1,750 2,877
-----------------------------------------------------------------------------
5,298
- ----------------------------------------------------------------------------------------------------------------------
AUSTRALIAN Commonwealth of Australia
DOLLAR--18.4%
7.00%, 2000 1,270 1,019
9.75%, 2002 1,750 1,552
New South Wales Treasury Corp., 8.00%, 2001 1,300 1,072
Treasury Corporation of Victoria, 8.25%,
2003 1,450 1,210
-----------------------------------------------------------------------------
4,853
- ----------------------------------------------------------------------------------------------------------------------
JAPANESE YEN--9.1% Italian Treasury, 5.125%, 2003 106,000 1,066
European Bank for Recon. and Dev., 4.50%,
1997 31,000 276
Int'l. Bank for Recon. and Dev., 4.75%,
2004 106,000 1,062
-----------------------------------------------------------------------------
2,404
-----------------------------------------------------------------------------
TOTAL INVESTMENTS--96.8%
(Cost: $25,649) 25,576
-----------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--3.2% 854
-----------------------------------------------------------------------------
NET ASSETS--100% $26,430
-----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
The Fund is a non-diversified investment company and may invest a relatively
high percentage of its assets in the obligations of a limited number of issuers.
Based on the cost of investments of $25,649,000 for federal income tax purposes
at December 31, 1996, the gross unrealized appreciation was $165,000, the gross
unrealized depreciation was $238,000 and the net unrealized depreciation was
$73,000.
See accompanying Notes to Financial Statements.
8
<PAGE> 9
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER INTERNATIONAL BOND FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper International Bond Fund as of
December 31, 1996, the related statements of operations for the year then ended
and changes in net assets and the financial highlights for the year then ended
and the period from February 1, 1995 to December 31, 1995. 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 generally accepted auditing
standards. Those 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
December 31, 1996, by correspondence with the custodian and brokers. 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
International Bond Fund at December 31, 1996, the results of its operations, the
changes in its net assets and the financial highlights for the periods referred
to above in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 18, 1997
9
<PAGE> 10
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
(in thousands)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------
Investments, at value
(Cost: $25,649) $25,576
- -----------------------------------------------------------------------
Cash 569
- -----------------------------------------------------------------------
Interest receivable 502
- -----------------------------------------------------------------------
TOTAL ASSETS 26,647
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -----------------------------------------------------------------------
Payable for:
Investments purchased 153
- -----------------------------------------------------------------------
Management fee 16
- -----------------------------------------------------------------------
Trustees' fees and other 48
- -----------------------------------------------------------------------
Total liabilities 217
- -----------------------------------------------------------------------
NET ASSETS $26,430
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -----------------------------------------------------------------------
Paid-in capital $25,216
- -----------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (45)
- -----------------------------------------------------------------------
Net unrealized depreciation on investments and assets and
liabilities in foreign currencies (228)
- -----------------------------------------------------------------------
Undistributed net investment income 1,487
- -----------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $26,430
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
THE PRICING OF SHARES
- -----------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
($26,430 / 2,892 SHARES OUTSTANDING) $9.14
- -----------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
10
<PAGE> 11
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended December 31, 1996
(in thousands)
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- ---------------------------------------------------------------------------------------------------------
Interest income $ 840
- ---------------------------------------------------------------------------------------------------------
Expenses:
Management fee 94
- ---------------------------------------------------------------------------------------------------------
Professional fees 48
- ---------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 11
- ---------------------------------------------------------------------------------------------------------
Reports to shareholders 18
- ---------------------------------------------------------------------------------------------------------
Registration fees and expenses 6
- ---------------------------------------------------------------------------------------------------------
Trustees' fees and other 16
- ---------------------------------------------------------------------------------------------------------
Total expenses 193
- ---------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 647
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ---------------------------------------------------------------------------------------------------------
Net realized gain on sales of investments and foreign
currency transactions 467
- ---------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments and
assets and liabilities in foreign currencies (267)
- ---------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 847
- ---------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 1, 1995
DECEMBER 31, TO
1996 DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 647 346
- ---------------------------------------------------------------------------------------------------------
Net realized gain 467 54
- ---------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (267) 39
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 847 439
- ---------------------------------------------------------------------------------------------------------
Net equalization credits 1,199 525
- ---------------------------------------------------------------------------------------------------------
Distribution from net investment income (1,103) (427)
- ---------------------------------------------------------------------------------------------------------
Distribution from net realized gain (110) (156)
- ---------------------------------------------------------------------------------------------------------
Total dividends to shareholders (1,213) (583)
- ---------------------------------------------------------------------------------------------------------
Net increase from capital share transactions 15,633 9,483
- ---------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 16,466 9,864
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------
Beginning of period 9,964 100
- ---------------------------------------------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment
income of $1,487 and $362, respectively) $26,430 9,964
- ---------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF
THE FUND Kemper International Bond Fund is an open-end
management investment company organized as a
business trust under the laws of Massachusetts.
Shares of the Fund are offered primarily for
investment by institutions and high net worth
individuals. Shares are offered at net asset value
and the minimum initial investment is $1 million.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Portfolio securities that are
traded on a domestic securities exchange are valued
at the last sale price on the exchange where
primarily traded or, if there is no recent sale, at
the last current bid quotation. Portfolio
securities that are primarily traded on foreign
securities exchanges are generally valued at the
preceding closing values of such securities on
their respective exchanges where primarily traded.
Securities not so traded are valued at the last
current bid quotation if market quotations are
available. Financial futures and exchange traded
options are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Over-the-counter
traded options are valued based upon prices
provided by market makers. Forward foreign currency
contracts and foreign currencies are valued at the
forward and current exchange rates, respectively,
prevailing on the day of valuation. Other
securities and assets are valued at fair value as
determined in good faith by the Board of Trustees.
CURRENCY TRANSLATION. The books and records of the
Fund are maintained in U.S. dollars. All assets and
liabilities initially expressed in foreign currency
values are converted into U.S. dollar values at the
mean between the bid and offered quotations of such
currencies against U.S. dollars as last quoted by a
recognized dealer. If such quotations are not
readily available, the rate of exchange is
determined in good faith by the Board of Trustees.
Income and expenses and purchases and sales of
investments are translated into U.S. dollars at the
rate of exchange prevailing on the respective dates
of such transactions. The Fund includes that
portion of the results of operations resulting from
changes in foreign exchange rates with net realized
and unrealized gain or loss from investments and
foreign currency transactions.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes discount amortization on
fixed income securities. Realized gains and losses
from investment transactions are reported on an
identified cost basis.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value.
On each day the New York Stock Exchange is open for
trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange by dividing
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
the net assets by the number of outstanding shares.
Because of the need to obtain prices as of the
close of trading on various exchanges throughout
the world, the calculation of net asset value does
not take place contemporaneously with the
determination of the prices of the Fund's foreign
securities.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies and therefore no
federal income tax provision is required.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income and any net
realized capital gains annually, which are recorded
on the ex-dividend date. Dividends are determined
in accordance with income tax principles which may
treat certain transactions differently from
generally accepted accounting principles. These
differences are primarily due to differing
treatments for certain transactions such as foreign
currency transactions.
EQUALIZATION ACCOUNTING. A portion of proceeds from
sales and cost of redemptions of Fund shares is
credited or charged to undistributed net investment
income so that income per share available for
distribution is not affected by sales or
redemptions of shares.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI), and pays a management fee at an annual rate
of .75% of the first $250 million of average daily
net assets declining to .62% of average daily net
assets in excess of $12.5 billion. The Fund
incurred a management fee of $94,000 for the year
ended December 31, 1996. Zurich Investment
Management Limited, an affiliate of ZKI, serves as
sub-adviser with respect to foreign securities
investments in the Fund, and is paid by ZKI for its
services.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the year ended December 31, 1996, the Fund
made no direct payments to its officers and
incurred trustees' fees of $13,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended December 31, 1996, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $48,603
Proceeds from sales 32,557
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, 1995
YEAR ENDED TO
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,196 $19,231 2,314 $ 20,425
-------------------------------------------------------------------------------
Shares issued in
reinvestment of dividends 134 1,159 64 582
-------------------------------------------------------------------------------
Shares redeemed (542) (4,757) (1,285) (11,524)
-------------------------------------------------------------------------------
NET INCREASE FROM CAPITAL
SHARE TRANSACTIONS 1,788 $15,633 1,093 $ 9,483
-------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 FORWARD FOREIGN
CURRENCY TRANSACTIONS In order to help protect itself against a decline
in the value of particular foreign currency against
another currency, the Fund has entered into forward
contracts to deliver or receive foreign currency in
exchange for U.S. dollars as described below. The
Fund bears the market risk that arises from changes
in foreign exchange rates, and accordingly, the net
unrealized gain (loss) on these contracts is
reflected in the accompanying financial statements.
The Fund also bears the credit risk if the
counterparty fails to perform under the contract.
At December 31, 1996, the Fund had outstanding
forward foreign currency contracts as follows (in
thousands):
<TABLE>
<CAPTION>
IN
FOREIGN CURRENCY EXCHANGE SETTLEMENT UNREALIZED
TO DELIVER/RECEIVE FOR DATE GAIN (LOSS)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales contracts 6,200 Australian dollars $4,904 October '97 $ (9)
--------------------------------------------------------------------------------------------
958 British pounds 1,545 January '97 (93)
-------------------------------------------------------------------------
28,870 French francs 5,717 October '97 60
-------------------------------------------------------------------------
12,000 German marks 7,752 March '97 (73)
--------------------------------------------------------------------------------------------
Purchase contracts 23,750 Danish kroner 4,085 January '97 (54)
--------------------------------------------------------------------------------------------
1,600 Irish punts 2,656 February '97 51
-------------------------------------------------------------------------
1,960,000 Italian lira 1,277 March '97 7
-------------------------------------------------------------------------
3,500 New Zealand dollars 2,466 January '97 4
-------------------------------------------------------------------------
16,800 Norwegian krone 2,598 January '97 36
-------------------------------------------------------------------------
199,000 Portuguese escudos 1,292 January '97 (11)
-------------------------------------------------------------------------
667,800 Spanish pesetas 5,201 January '97 (71)
-------------------------------------------------------------------------
TOTAL $ (153)
-------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 1, 1995
DECEMBER 31, TO
1996 DECEMBER 31, 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.03 9.00
- -------------------------------------------------------------------------------------------------------
Net investment income .41 .47
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain .14 .12
- -------------------------------------------------------------------------------------------------------
Total from investment operations .55 .59
- -------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .40 .41
- -------------------------------------------------------------------------------------------------------
Distribution from net realized gain .04 .15
- -------------------------------------------------------------------------------------------------------
Total dividends .44 .56
- -------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.14 9.03
- -------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 6.13% 6.56
- -------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------------------------------
Expenses 1.54% 1.34
- -------------------------------------------------------------------------------------------------------
Net investment income 5.19% 5.66
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------------
Net assets at end of period (in thousands) $26,430 9,964
- -------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 260% 332
- -------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Net investment income per share for the period ended December 31, 1995,
was determined based on average shares outstanding.
15
<PAGE> 16
TRUSTEES & OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR.
President and Truste Vice President
JAMES E. AKINS CHARLES R. MANZONI, JR.
Trustee Vice President
ARTHUR R. GOTTSCHALK JOHN E. NEAL
Trustee Vice President
FREDERICK T. KELSEY PHILIP J. COLLORA
Trustee Vice President and
Secretary
DOMINIQUE P. MORAX JEROME L. DUFFY
Trustee Treasurer
FRED B. RENWICK ELIZABETH C. WERTH
Trustee Assistant Secretary
JOHN B. TINGLEFF
Trustee
JOHN G. WEITHERS
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
FOREIGN CUSTODIAN THE CHASE MANHATTAN BANK
Chase Metro Tech Center
Brooklyn, NY 11245
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
http://www.kemper.com
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Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper International Bond Fund prospectus.
KIBF - 2 (2/97) 1028500
Printed in the U.S.A. [KEMPER FUNDS LOGO]
