<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MARCH 31, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
KEMPER HIGH YIELD OPPORTUNITY FUND
KEMPER HIGH YIELD FUND II
"... Our largest sector weighting, media and
telecommunications, did very well in the rally. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
Contents
3
Economic Overview
5
Performance Update
7
Terms To Know
8
Portfolio Statistics
10
Portfolio of Investments
21
Financial Statements
23
Notes to Financial Statements
28
Financial Highlights
31
Shareholders' Meeting
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD OPPORTUNITY
FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 1999
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CLASS A 7.87
CLASS B 7.32
CLASS C 7.43
LIPPER HIGH CURRENT YIELD FUNDS CATEGORY AVERAGE* 5.74
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND II
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE FOUR-MONTH PERIOD ENDED MARCH 31, 1999
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CLASS A 2.28
CLASS B 2.03
CLASS C 2.03
LIPPER HIGH CURRENT YIELD FUNDS CATEGORY AVERAGE* 5.74
- --------------------------------------------------------------------------------
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE PERFORMANCE.
INVESTMENT RETURNS AND PRINCIPAL VALUES FLUCTUATE SO THAT SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
*LIPPER ANALYTICAL SERVICES, INC. RANKINGS ARE BASED UPON CHANGES IN NET ASSET
VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF SALES
CHARGES AND, IF THEY HAD, RESULTS MAY HAVE BEEN LESS FAVORABLE. RANKINGS DO NOT
INCLUDE KEMPER HIGH YIELD FUND II.
THE FUNDS MAY INVEST IN LOWER-RATED AND NON-RATED SECURITIES WHICH PRESENT
GREATER RISK OF LOSS TO PRINCIPAL AND INTEREST THAN HIGHER-RATED SECURITIES.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
3/31/99 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER HIGH YIELD OPPORTUNITY
FUND CLASS A $9.12 $8.89
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD OPPORTUNITY
FUND CLASS B $9.11 $8.89
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD OPPORTUNITY
FUND CLASS C $9.12 $8.89
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
3/31/99 11/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER HIGH YIELD FUND II
CLASS A $9.42 $9.50
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND II
CLASS B $9.42 $9.50
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND II
CLASS C $9.42 $9.50
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD OPPORTUNITY
FUND RANKINGS AS 3/31/99*
- --------------------------------------------------------------------------------
COMPARED TO ALL OTHER FUNDS IN THE LIPPER CURRENT HIGH YIELD FUNDS CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1-YEAR #100 of #135 of #130 of
266 funds 266 funds 266 funds
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF MARCH 31, 1999.
<TABLE>
<CAPTION>
KEMPER HIGH YIELD
OPPORTUNITY FUND CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTH INCOME: $.4075 $.3713 $.3704
- --------------------------------------------------------------------------------
SHORT-TERM CAPITAL
GAIN $.0450 $.0450 $.0450
- --------------------------------------------------------------------------------
MARCH DIVIDEND: $.0690 $.0628 $.0630
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 9.08% 8.27% 8.29%
- --------------------------------------------------------------------------------
SEC YIELD+: 9.14% 8.72% 8.75%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD
FUND II CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SIX-MONTH INCOME: $.2925 $.2696 $.2696
- --------------------------------------------------------------------------------
MARCH DIVIDEND: $.0800 $.0746 $.0746
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 10.19% 9.50% 9.50%
- --------------------------------------------------------------------------------
SEC YIELD+: 8.37% 8.03% 8.03%
- --------------------------------------------------------------------------------
</TABLE>
CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON MARCH 31, 1999. 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 MARCH 31, 1999, 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.
<PAGE> 3
ECONOMIC OVERVIEW
[SILVIA PHOTO]
DR. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS.
SILVIA HOLDS A BACHELOR'S DEGREE AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND A MASTER'S DEGREE IN ECONOMICS FROM BROWN UNIVERSITY IN
PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER INVESTMENTS, HE WAS WITH
THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
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 $280 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:
Throughout April, investor enthusiasm drove the market to its second milestone
in a year -- the Dow Jones Industrial Average rose to 11,000 just a month after
it broke 10,000 for the first time. But those gains don't tell the whole story
- -- investors in the first four months of the year have endured significant
volatility. What drove the climb to 11,000 and what, at the same time, has led
to investor anxiety?
Driving the market, in part, was consumer confidence. In the first quarter of
1999, consumer spending surged 6.7 percent -- the largest rise in 11 years. The
market's rise seems to have buoyed consumer confidence, which rose for the sixth
consecutive month in April. And, the resilience of the economy has bolstered
more optimistic expectations for the next six months.
Inspiring consumer confidence also were the lowest levels of inflation in a
generation. As measured by the consumer price index (CPI), inflation has been
between 1 1/2 and 2 percent, compared to approximately 4 percent in the
beginning of the 1990s and 10-12 percent in the beginning of the 1980s. Still,
inflation worries have been seeping into the market. The growing conviction that
Asian and Latin American economies are recovering is raising commodity prices,
particularly oil. The price of West Texas Intermediate oil surged from less than
$12 in February to almost $19 in early May. That alone almost guarantees a rise
in the "headline" inflation rate this year, which is the rate of inflation as
measured by the entire CPI. But it's important to note that the Federal Reserve
Board looks primarily at the core inflation rate, which is the CPI minus food
and energy -- and the core inflation rate looks as if it will remain low at
about 2 percent this year.
Also contributing to consumer confidence, short-term and long-term interest
rates remained low over the first quarter, and can be expected to remain so.
Today's Fed policy is reactive, not proactive, which means that the Fed tends to
respond to inflation only when it picks up. Consequently, we expect no changes
in short-term interest rates during May and June, and there's only a small
chance that the Fed will raise interest rates in the second half of the year.
Moreover, the federal budget surplus continues to benefit from good revenue
gains (which are based on good income gains, especially from households), good
capital gains and continued restraint in federal spending. The surplus this year
is expected to approach $100 billion.
Such a positive environment is exactly what poses risk for investors, and is
key to understanding recent volatility in the market. A stronger economy has the
potential to feed inflation fears and drive up interest rates. Events on April
30 illustrated the domino effect of investors reacting to positive economic
news, which they consider troubling at this point, more than eight years into
the economic expansion. The steady stream of positive economy's news prompted a
sell-off in the markets based on fears that the strong pace of economic growth
will eventually lead to higher inflation. The benchmark 30-year Treasury bond
fell nearly 2 points (close to $20 for a bond with a $1,000 face amount) as the
yield shot up to 5.657 percent. It was the biggest one-day plunge in bonds in
two months. Bonds, in turn, pulled stocks lower.
Where can we expect to go from here? The fundamentals by which we judge the
health of the economy suggested continued growth as we moved into the second
quarter of 1999. For example, the gross domestic product (GDP), the value of all
goods and services produced in the U.S., rose at an annual rate of 4.5 percent
in the first quarter, following a tremendous fourth-quarter surge of 6 percent.
This is very much in line with what we've grown accustomed to over the past year
- -- over the four quarters of 1998, the U.S. economy expanded by 4.3 percent.
Some people aren't surprised at all by strong GDP growth that once would have
alarmed them. That's partially because we've grown accustomed to a strong
economy in the past three or four years. But it's also because we've been able
to absorb growth without driving up inflation. That's important for investors.
If prices were rising as the economy was growing, the Fed would most likely
raise short-term interest rates, which would change the financial market
outlook. But again, that isn't happening right now.
However, we do see some vulnerability. Trade is a weak spot in the economy
right now. Exports of U.S. goods and services dropped in the first quarter while
imports soared. This reflects the fact that the U.S. is one of the few countries
financially fit enough to buy goods produced elsewhere in the world. But for as
long as less vibrant international economies are unable to buy U.S. goods, the
profitability of U.S. companies trying to export will be challenged.
When you think about it, vulnerability in regard to the international economy
is nothing new. Globally, the outlook is slightly more positive than it was a
few months ago. For example, the European markets are slowing down, which will
most likely lead to the central bank lowering interest rates in order to boost
domestic spending. In many countries in Europe, there are no fixed-rate
mortgages, only adjustable-rate mortgages. When interest rates go down,
mortgages are reduced and homeowners
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]
(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 MARCH 31, 1999.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
spend money elsewhere. This has a huge impact on consumer spending, and will
help European equities in the long term. Additionally, the situation in Japan
remains unchanged. And, problems in the emerging markets haven't had the
negative impact many people expected -- both the Mexican and Brazilian stock
markets have actually risen in the past two months.
But don't forget that international crises have the potential to affect the
U.S. markets drastically. An increase in military spending on Kosovo by the 11
European Monetary Union (EMU) countries could force them to spend less in other
areas, which could have economic implications, including higher interest rates.
That's because many European countries have small economies and little leeway in
their budgets. Consequently, those countries finance unplanned military
expenditures by selling government bonds -- which, in Europe's small bond
market, typically raises interest rates.
The international situation alone, however, is by no means an indicator of a
U.S. slowdown -- and without any such indications, complacency may be our
greatest concern. It's easy to look at the current economic situation and behave
as if no risk exists. But when you see the market soaring and are tempted to
jump in, note that the bull market grew to records on the strength of just a few
dozen stocks, while most other stock prices were flat or actually declined.
In summary, there are concerns that the current economy is unsustainable and
we soon could see an abrupt end. In many cases, however, people are looking for
a slowdown because they are fearful growth will drive up inflation -- these are
particularly older investors who are accustomed to inflation accompanying
growth. But we currently just don't see the pressure toward inflation at all, so
there's no reason to want a slowdown. The best approach now, as in any market,
is to diversify and invest for the long term.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ JOHN E. SILVIA
John E. Silvia
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 DR. JOHN SILVIA AS OF MAY 5, 1999, AND MAY
NOT ACTUALLY COME TO PASS. THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF
THIS MATERIAL IS INTENDED AS AN INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
PERFORMANCE Update
[RESIS PHOTO]
HARRY RESIS JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1988 AND IS A MANAGING
DIRECTOR. HE IS CO-LEAD PORTFOLIO MANAGER OF KEMPER HIGH YIELD OPPORTUNITY FUND
AND KEMPER HIGH YIELD FUND II AND IS RESPONSIBLE FOR THE TRADING ACTIVITY FOR
KEMPER'S HIGH-YIELD FUNDS.
[MCNAMARA PHOTO]
MICHAEL MCNAMARA JOINED THE ORGANIZATION IN 1972 AND IS A MANAGING DIRECTOR. HE
IS CO-LEAD PORTFOLIO MANAGER OF KEMPER HIGH YIELD OPPORTUNITY FUND AND KEMPER
HIGH YIELD FUND II AND DIRECTS ALL FIXED-INCOME RESEARCH AT SCUDDER KEMPER.
[DOYLE PHOTO]
DAN DOYLE IS A PORTFOLIO MANAGER OF KEMPER HIGH YIELD OPPORTUNITY FUND AND
KEMPER HIGH YIELD FUND II. HE HAS BEEN INVOLVED WITH KEMPER HIGH YIELD FUND IN
BOTH RESEARCH AND TRADING SINCE 1986 AND IS A SENIOR TRADER FOR THE FUND.
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.
ONE OF KEMPER'S NEWEST HIGH-YIELD OFFERINGS, KEMPER HIGH YIELD OPPORTUNITY FUND,
HAD AN EXCEPTIONAL SIX-MONTH PERIOD FROM OCTOBER 1, 1998 THROUGH MARCH 31, 1999.
AND SINCE ITS INCEPTION ON NOVEMBER 30, 1998, KEMPER HIGH YIELD FUND II HAS MADE
STRONG STRIDES TO PROVE ITSELF IN A CROWDED FIELD OF HIGH-YIELD FUNDS. BOTH
FUNDS BENEFITED FROM THE PERIOD'S BENIGN INFLATION, BUT MORE IMPORTANTLY, FROM
THE CONFIDENCE THAT RESULTED FROM A SERIES OF FEDERAL RESERVE BOARD RATE CUTS IN
THE FALL OF 1998. PORTFOLIO MANAGERS HARRY RESIS, MICHAEL MCNAMARA AND DAN DOYLE
TAKE THIS OPPORTUNITY TO GIVE THEIR INSIGHT TO THE HIGH-YIELD MARKET OCTOBER 1,
1998, THROUGH MARCH 31, 1999, AND EXPLAIN HOW THEY MANAGED THE FUNDS DURING THIS
PERIOD.
Q
PLEASE PUT THE SIX-MONTH PERIOD IN CONTEXT OF THE GENERAL ECONOMY FOR OUR
SHAREHOLDERS.
A
There's a rather clear picture to paint for these six months because of
certain events that defined its beginning. We're talking about the Federal
Reserve Board (the Fed) cutting rates three times in the second half of
1998 -- September 29, October 15 and November 17. The high-yield market bottomed
out with the October 15 easing (see Terms to Know), and has rallied ever since.
Q
WHY WOULD THE FED'S RATE CUTS SPUR A RALLY?
A
When the Fed lowers the Federal Fund's rate (see Terms to Know), it is
making money less expensive to borrow. This affects business and consumers
similarly. For instance, a cut in the Fed funds rate typically trickles down to
lower mortgage rates, so more people are likely to purchase homes because
borrowing the money to do so is not as expensive. Similarly, corporations are
more likely to borrow money to expand their businesses.
Both of these actions have far-reaching effects on the economy. When you buy a
new house, that helps the housing business, which positively affects many other
industries. A corporation that expands its business employs more people or
invests in new buildings, technology and so forth, helping to boost those
industries. The bottom line is the simple act of cutting the borrowing rate, the
Fed funds rate, creates confidence in the markets.
Q
BUT HOW DOES THAT AFFECT THE HIGH-YIELD MARKET?
A
A stronger economy, one in which consumers have confidence, is a signal
for investors. It signals that the risk they are taking in investing in a
high-yield issue as opposed to a government bond, may be less than it would be
if the economy were on shaky ground. The rally validated the belief that the
economy was not going into a recession. Investors tend to be willing to take on
more risk in such an environment.
The strength of the economy also hurt the Treasury market, which in turn,
generally means an improvement in the other areas of the bond market, both
high-yield bonds and investment-grade corporate bonds. Back in August 1998, it
looked like
5
<PAGE> 6
PERFORMANCE UPDATE
we'd seen the worst of the Asian financial crisis, which began in July 1997, but
we were facing a new and unexpected financial crisis in Russia. Throughout those
two events, the high-yield market struggled while the U.S. Treasury market
soared as investors worldwide sought safety in government bonds. This phenomenon
is called a "flight to quality." For the past six months, we've been witnessing
the unwinding of the flight to quality as our domestic economy has survived the
global crises. Treasury prices, therefore, have dropped and their yields have
risen. In such an environment, high-yield bonds are attractive.
Q THE HIGH-YIELD MARKET WAS CHALLENGED DURING THE ASIAN AND RUSSIAN CRISES.
WHY DID IT NOT REACT THE SAME TO THE BRAZILIAN FINANCIAL CRISES THAT HIT IN
MID-JANUARY?
A Crisis can be good if you learn from it. We learned, the market learned,
particularly from Russia. The market reacted rationally in January to the
Brazilian problems.
Q WHAT AFFECT HAS THE CONTINUING CONFLICT IN KOSOVO HAD ON
THE MARKETS?
A What hurts the markets are the unknowns. What is known is usually a
non-event. The conflict in Kosovo has been brewing for a long time, and we don't
expect it to have much effect on the markets.
Q MOVING ON TO THE STRONG PERFORMANCE OF KEMPER HIGH YIELD OPPORTUNITY FUND
FOR THE REPORTING PERIOD OCTOBER 1, 1998 THROUGH MARCH 31, 1999, THE FUND
RETURNED 7.87 PERCENT (CLASS A SHARES, UNADJUSTED FOR ANY SALES CHARGE) AGAINST
ITS LIPPER PEER GROUP AVERAGE OF 5.74 PERCENT. TO WHAT DO YOU ATTRIBUTE THE
OUTPERFORMANCE?
A Our largest sector weighting, media and telecommunications, did very well
in the rally. Merger and acquisition activity among these companies spurred the
performance of this sector.
Another sector that did well was cyclicals, in which the fund has a heavy
weighting. Cyclical bonds are those within industries whose earnings tend to
rise quickly when the economy strengthens and fall quickly when the economy
weakens. Examples of cyclical industries are housing, automobiles and paper
companies. The performance of noncyclical industries such as food, insurance and
drugs is normally not as directly affected by economic changes.
Q BECAUSE KEMPER HIGH YIELD OPPORTUNITY FUND'S INVESTMENT OBJECTIVE IS TOTAL
RETURN THROUGH HIGH CURRENT INCOME AND CAPITAL APPRECIATION, YOU HAVE THE
FLEXIBILITY TO INVEST IN EQUITY SECURITIES AND TO USE LEVERAGE (SEE TERMS TO
KNOW) TO ENHANCE TOTAL RETURN. HAVE YOU TAKEN ADVANTAGE OF THESE ADDITIONAL
TOOLS?
A During this past six-month period, and really during the life of the fund,
we have not taken full advantage of the fund's ability to invest in stocks of
high-yield issuers. These stocks tend to be small-cap (see "market
capitalization" in Terms to Know), an area that has been out-of-favor and not
experiencing the same growth as the stocks of large-cap companies. We haven't
seen the buying opportunities for stocks that we had hoped for, but that
certainly has not hampered the fund's total return. It's our experience that
sometimes in our investigation of a high-yield bond, our research team
determines that while the bond is not the right fit for our fund, the stock in
the issuer might be. We're very selective about the equities we add to the fund,
and we're not going to soften that stance just to give the fund a short-term
performance boost. We think long-term in our choices for all our funds.
Leverage is another total return-enhancing tool, and one that we have used
carefully in order to aid long-term total return.
We anticipate both these tools -- stocks and leverage -- to be of more use
in the coming months.
Q KEMPER HIGH YIELD FUND II WAS ADDED TO KEMPER'S HIGH-YIELD OFFERINGS
NOVEMBER 30, 1998 AND HAS RETURNED 2.28 PERCENT (CLASS A SHARES, CUMULATIVE,
UNADJUSTED FOR ANY SALES CHARGE) IN THAT FOUR-MONTH PERIOD. HOW HAVE YOU MANAGED
THE FUND THUS FAR?
A While we're pleased with the performance of the first few months of Kemper
High Yield Fund II's life, we have a lot planned for the fund. We've attracted
many shareholders to this new fund, and we are busy looking for the best
possible high-yield bonds to add to its portfolio to pursue the fund's
objective, which is to achieve a high level of current income consistent with
reasonable risk.
We're enjoying the challenge of building a fund from scratch. It gives us
a chance to take a fresh approach to our investments, and build a long-term,
well-structured fund. In doing so, we will be building a fund that is managed in
a similar fashion and has the same philosophy as the larger Kemper High Yield
Fund.
6
<PAGE> 7
PERFORMANCE UPDATE
Q WHAT IS YOUR OUTLOOK FOR THE HIGH-YIELD SECTOR AND FOR KEMPER HIGH YIELD
FUND II AND KEMPER HIGH YIELD OPPORTUNITY FUND?
A Our strategy remains the same. We continue to concentrate the fund in the
"B" rated issues, which for the first quarter of 1999, the second half of the
fund's reporting period, returned 9.64 percent versus the higher-tier sector,
the "BB" quality issues, which returned 5.37 percent, according to Donaldson,
Lufkin & Jenrette (footnote or endnote: page 54, LEVERAGED FINANCE RESEARCH
dated: week ending April 8, 1999).
We'll continue to increase our paper and forest product holdings and
consumer durables as the outlook for these sectors is good considering the
strength of the economy. Meanwhile, we expect to keep our homebuilders weighting
equal to that of the high-yield industry. We also began to limit the funds'
holdings in health-care companies because of a negative outlook for Medicare and
price declines among nursing home issuers.
In general, we're optimistic about the high-yield market. Inflation
continues to be benign, first quarter 1999 corporate earnings were strong, and
we expect that to continue.
TERMS TO KNOW
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN A fund's total return expressed as an annualized
average, adjusted for the maximum sales charge for Class A shares or the
applicable contingent deferred sales charge in effect at the end of the period
for Class B and C shares.
BOND RALLY A sharp, short-lived rise in bond values after a period of either
little movement or falling values.
CYCLICAL ISSUES Bonds within industries whose earnings tend to rise quickly when
the economy strengthens and fall quickly when the economy weakens. Examples are
housing, automobiles and paper companies. The performance of noncyclical
industries such as food, insurance and drugs is normally not as directly
affected by economic changes.
EASE Occurs when the Federal Reserve Board of Governors changes monetary policy
by decreasing the federal funds rate.
FEDERAL FUNDS (Fed funds) Commercial banks are required to keep these funds on
deposit at the Federal Reserve Bank in their district. In order to meet these
reserve requirements, occasionally commercial banks need to borrow funds. These
funds are borrowed from banks that have an excess of the required amount on hand
in what is called the "Fed funds market." The interest rate on these loans is
called the "Fed funds rate" and is the key money market rate that influences all
other short-term rates.
FEDERAL FUNDS RATE The interest rate banks charge each other for overnight loans
that are needed to meet reserve requirements. Often considered the most
sensitive indicator of the direction of interest rates.
HIGH-YIELD BONDS Issued by companies, often without long track records of sales
and earnings, or by those with questionable credit strength and pay a higher
yield to investors to help compensate for their greater risk of loss to
principal and interest. High-yield bonds carry a credit rating of BB or lower
from either Moody's or Standard & Poor's bond rating services and are considered
to be "below investment grade" by these rating agencies. Such bonds may also be
unrated. The bonds present greater risk to principal and income than higher
quality bonds.
LEVERAGE The use of borrowed assets by a business to enhance the return of the
owner's equity. The expectation is that the interest rate charged will be lower
than the earnings made on the money. However, leveraging may also increase
fund's volatility.
MARKET CAPITALIZATION A measure of the size of a publicly traded company, as
determined by multiplying the current price by the number of shares outstanding.
The market capitalization of a company has bearing on its perceived earnings
potential and risk. Small cap companies (less than $1 billion) may present the
potential for greater growth than larger, more established companies. On the
other hand, the stock of small cap companies may be expected to be more volatile
and therefore greater risk to capital.
U.S. TREASURIES These debt securities are issued by the U.S. Treasury and
include Treasury bills, Treasury bonds and Treasury notes. They are considered
the safest of all securities. Their safety rests in the power of the U.S.
government to obtain tax revenues to repay its obligations, and in its
historical record of always having done so.
7
<PAGE> 8
PORTFOLIO STATISTICS
KEMPER HIGH YIELD OPPORTUNITY FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 3/31/99 ON 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
BONDS 96% 96%
- --------------------------------------------------------------------------------
PREFERRED AND COMMON STOCK 4 --
- --------------------------------------------------------------------------------
CASH EQUIVALENTS -- 4
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/99 ON 9/30/98
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
QUALITY ON 3/31/99 ON 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
BB 14% 9%
- --------------------------------------------------------------------------------
B 71 74
- --------------------------------------------------------------------------------
OTHER 14 16
- --------------------------------------------------------------------------------
NOT RATED 1 1
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/99 ON 9/30/98
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS TO MATURITY ON 3/31/99 ON 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 93% 91%
- --------------------------------------------------------------------------------
11-20 3 7
- --------------------------------------------------------------------------------
21+ YEARS -- 2
- --------------------------------------------------------------------------------
CASH EQUIVALENTS 4 --
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/99 ON 9/30/98
* PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
8
<PAGE> 9
PORTFOLIO STATISTICS
KEMPER HIGH YIELD FUND II
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 3/31/99 On 9/30/98
- -------------------------------------------------------------------------------
<S> <C>
BONDS 78%
- -------------------------------------------------------------------------------
U.S. TREASURIES 22
- -------------------------------------------------------------------------------
100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/99
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
QUALITY ON 3/31/99 On 9/30/98
- -------------------------------------------------------------------------------
<S> <C>
AAA 21%
- -------------------------------------------------------------------------------
BB 14
- -------------------------------------------------------------------------------
B 55
- -------------------------------------------------------------------------------
OTHER 6
- -------------------------------------------------------------------------------
NOT RATED 4
- -------------------------------------------------------------------------------
100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/99
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
YEARS TO MATURITY ON 3/31/99 On 9/30/98
- -------------------------------------------------------------------------------
<S> <C>
1-10 99%
- -------------------------------------------------------------------------------
11-20 1
- -------------------------------------------------------------------------------
21+ YEARS --
- -------------------------------------------------------------------------------
100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 3/31/99
* PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER HIGH YIELD OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS AT MARCH 31, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--96.2% PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC INDUSTRY--15.0% California Steel, Corp., 8.50%, 2009 $ 100 $ 101
Dimac Corp., 12.50%, 2008 120 102
Doman Industries, Ltd.
8.75%, 2004 130 84
9.25%, 2007 110 66
Gaylord Container Corp.
9.75%, 2007 190 185
9.875%, 2008 370 326
Hines Horticulture, Inc., 11.75%, 2005 200 217
Huntsman Polymer Corp., 11.75%, 2004 200 213
MMI Products, Inc., 11.25%, 2007 300 319
Metal Management, Inc., 10.00%, 2008 100 65
Metals USA, Inc., 8.625%, 2008 135 131
Millar Western Forest Products, Ltd., 9.875%, 2008 200 178
NL Industries, Inc., 11.75%, 2003 210 223
Norampac, Inc., 9.50%, 2008 250 259
Packaging Corporation of America, 9.625%, 2009 100 100
Plainwell, Inc. 11.00%, 2008 320 249
Renco Steel Holdings Co., 10.875%, 2005 300 261
Riverwood International Corp.
10.25%, 2006 40 41
10.625%, 2007 440 464
10.875%, 2008 320 310
Stone Container Corp.
12.25%, 2002 100 100
11.50%, 2006 500 540
Tembec Industries, 8.625%, 2009 100 102
Terra Industries, Inc.
10.75%, 2003 140 140
10.50%, 2005 100 97
Texas Petrochemicals Corp., 11.125%, 2006 600 564
United Rentals, Inc., 9.25%, 2009 900 909
Wells Aluminum Corp., 10.125%, 2005 100 98
-------------------------------------------------------------------------------
6,444
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--11.1% Allied Waste Industries, 7.625%, 2006 350 340
Axiohm Transaction Solutions, Inc., 9.75%, 2007 200 182
BE Aerospace, Inc., 9.50%, 2008 400 425
Congoleum Corp., 8.625%, 2008 310 301
Consumers International, 10.25%, 2005 200 210
DeCrane Aircraft Holdings, Inc., 12.00%, 2008 230 232
Falcon Buildings Products, Inc., 9.50%, 2007 300 276
Graham Packaging Co.
8.75%, 2008 240 238
(b) 10.75%, 2009 260 182
(b) Grove Holdings, L.L.C., 11.625%, 2009 100 36
Grove Investors, PIK, 14.50%, 2010 111 73
Impac Group, Inc., 10.125%, 2008 260 257
Integrated Electrical Services, Inc., 9.375%, 2009 410 419
Kevco, Inc., 10.375%, 2007 265 140
Nortek, Inc.
9.875%, 2004 90 94
8.875%, 2008 100 103
Printpack, Inc., 10.625%, 2006 100 93
(b) SF Holdings Group, Inc., 12.75%, 2008 200 48
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Terex Corp., 8.875%, 2008 $ 400 $ 388
Transdigm, Inc., 10.375%, 2008 420 418
Werner Holdings, Inc., 10.00%, 2007 300 300
-------------------------------------------------------------------------------
4,755
- --------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--23.1% Allegiance Telecom, Inc.
(b) 11.75%, 2008 710 447
12.875%, 2008 140 155
American Cellular Corp., 10.50%, 2008 300 314
Birch Telecom, Inc., 14.00%, with warrants, 2008 200 182
(b) Call-Net Enterprises
13.25%, 2004 40 40
8.94%, 2008 150 99
Centennial Cellular, 10.75%, 2008 70 74
(b) Comunicacion Celular, zero coupon, 2005 100 66
(b) Crown Castle International, Corp., 10.625%, 2007 375 259
Esprit Telecom Group, PLC
11.50%, 2007 330 350
10.875%, 2008 110 114
Global Crossing Holdings, Ltd., 9.625%, 2008 390 434
Global Telesystems Group, 9.875%, 2005 230 229
(b) ICG Holdings, Inc., 13.50%, 2005 410 359
Impsat Corp., 12.375%, 2008 155 139
Intermedia Communications of Florida, Inc.
(b) 12.50%, 2006 30 26
8.875%, 2007 175 178
(b) KMC Telecom Holdings, Inc., 12.50%, with warrants, 2008 360 196
Level 3 Communications, Inc., 9.125%, 2008 300 303
Long Distance International, Inc., 12.25%, with
warrants, 2008 100 65
McLeod USA, Inc., 9.25%, 2007 280 293
Metronet Communications
(b) 10.75%, 2007 150 121
(b) 9.95%, 2008 125 97
10.625%, 2008 100 116
(b) Millicom International Cellular, S.A., 13.50%, 2006 160 118
Netia Holdings
10.25%, 2007 50 47
(b) 11.25%, 2007 475 323
(b) Nextel Communications, Inc.
9.75%, 2004 135 140
9.75%, 2007 120 86
10.65%, 2007 655 481
Nextlink Communications, Inc.
12.50%, 2006 80 88
9.45%, 2008 40 26
10.75%, 2008 130 140
(b) Pinnacle Holdings, Inc., 10.00%, 2008 150 90
Price Communications Wireless, Inc., 9.125%, 2006 180 187
Primus Telecommunications Group, Inc.
11.75%, 2004 510 527
9.875%, 2008 10 10
11.25%, 2009 100 103
(b) PTC International Finance, 10.75%, 2007 120 86
RCN Corp.
10.00%, 2007 120 123
(b) 11.00%, 2008 100 61
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rogers Cantel Mobile Communications, Inc.
9.375%, 2008 $ 100 $ 109
9.75%, 2016 170 195
Satelites Mexicanos, S.A. de C.V., 10.125%, 2004 110 90
(b) SBA Communications Corp., 12.00%, 2008 110 68
(b) Spectrasite Holdings, Inc., 12.00%, 2008 430 267
Teligent, Inc.
11.50%, 2007 50 48
(b) 11.50%, 2008 200 106
(b) Triton Communications, L.L.C., 11.00%, 2008 1,460 861
US Xchange, L.L.C., 15.00%, 2008 110 116
USA Mobile Communications Holdings, Inc., 14.00%, 2004 110 114
Versatel Telecom, 13.25%, with warrants, 2008 250 281
Viatel, Inc.
11.25%, 2008 250 255
(b) 12.50%, 2008 130 80
Winstar Communications, 15.00%, 2007 10 9
Winstar Equipment II, 12.50%, 2004 20 20
-------------------------------------------------------------------------------
9,911
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICAL--14.4% (b) AMF Bowling Worldwide, Inc., 12.25%, 2006 145 84
Avondale Mills, Inc., 10.25%, 2006 154 160
Cinemark USA, Inc.
8.50%, 2008 100 98
9.625%, 2008 100 103
Circus Circus Enterprises, Inc., 9.25%, 2005 160 167
Cole National Group, Inc.
9.875%, 2006 130 135
8.625%, 2007 230 227
Corporate Express, Inc., 4.50%, 2000 300 266
Dyersburg Corp., 9.75%, 2007 200 140
Finlay Enterprises, Inc., 9.00%, 2008 60 56
Finlay Fine Jewelry Corp., 8.375%, 2008 740 725
Fruit of the Loom, Inc., 8.875%, 2006 200 201
Galey & Lord, Inc., 9.125%, 2008 160 124
IMAX Corp., 7.875%, 2005 200 197
Imperial Home Decor Group, Inc., 11.00%, 2008 180 146
Iron Age Corp.
9.875%, 2008 80 58
(b) 12.125%, 2009 100 29
J. Crew Group, Inc.
10.375%, 2007 100 95
(b) 13.50%, 2008 120 60
Kindercare Learning Centers, Inc., 9.50%, 2009 400 403
La Petite Academy, Inc., 10.00%, 2008 300 294
Mohegan Tribal Gaming Authority, 8.75%, 2009 200 208
MTS, Inc., 9.375%, 2005 140 133
National Vision Association, Ltd., 12.75%, 2005 320 333
Pamida Holdings Corp., 11.75%, 2003 300 272
Phillips-Van Heusen Corp., 9.50%, 2008 200 200
Players International, Inc., 10.875%, 2005 220 233
Protection One, Inc., 8.125%, 2009 100 101
Regal Cinemas, Inc.
9.50%, 2008 270 275
8.875%, 2010 70 68
Speciality Retailers, Inc.
8.50%, 2005 60 53
9.00%, 2007 180 140
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(b) Spincycle, Inc., 12.75%, 2005 $ 350 $ 147
United Artists Theatre Circuit, Inc., 9.75%, 2008 290 238
-------------------------------------------------------------------------------
6,169
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER NON-CYCLICAL--10.2%
Abbey Healthcare Group, Inc., 9.50%, 2002 470 465
Advantica Restaurant Group, Inc., 11.25%, 2008 760 777
AFC Enterprises, Inc., 10.25%, 2007 510 543
Agrilink Foods, Inc., 11.875%, 2008 200 215
(b) ALARIS Medical Systems, Inc., 11.125%, 2008 370 222
Doskocil Manufacturing Co., 10.125%, 2007 140 108
Grupo Azucarero Mexico, S.A. de C.V., 11.50%, 2005 70 24
Hedstrom Corp., 10.00%, 2007 210 174
Jafra Cosmetics International, Inc., 11.75%, 2008 140 125
Magellan Health Services, Inc., 9.00%, 2008 170 147
(b) Mariner Post-Acute Network, Inc., 10.50%, 2007 510 82
Mastellone Hermanos, S.A., 11.75%, 2008 90 78
Paracelsus Healthcare Corp., 10.00%, 2006 90 61
Perkins Family Restaurants, L.P., 10.125%, 2007 510 548
(b) Restaurant Co., 11.25%, 2008 180 113
Scovill Fasteners, Inc., 11.25%, 2007 50 37
Sealy Mattress Co.
9.875%, 2007 110 109
(b) 10.875%, 2007 670 429
Simmons Co., 10.25%, 2009 100 103
Vencor, Inc., 9.875%, 2005 120 20
-------------------------------------------------------------------------------
4,380
- --------------------------------------------------------------------------------------------------------------------------
ENERGY--2.3% Forest Oil Corp., 10.50%, 2006 100 103
Gulfmark Offshore, Inc., 8.75%, 2008 160 148
Mariner Energy, Inc., 10.50%, 2006 270 227
Ocean Energy, Inc., 10.375%, 2005 50 52
Pacalta Resources, Ltd., 10.75%, 2004 190 192
Ram Energy, 11.50%, 2008 100 60
RBF Falcon Finance Corp.
11.00%, 2006 100 105
11.375%, 2009 100 106
-------------------------------------------------------------------------------
993
- --------------------------------------------------------------------------------------------------------------------------
FINANCE--1.2% American Banknote Corp., 11.25%, with warrants, 2007 100 30
HMH Properties, Inc., 7.875%, 2008 310 298
Intertek Finance, PLC, 10.25, 2006 200 196
-------------------------------------------------------------------------------
524
- --------------------------------------------------------------------------------------------------------------------------
MEDIA--16.4% Avalon Cable Holdings, Inc.
9.375%, 2008 100 105
(b) 11.875%, 2008 200 131
Bresnan Communications Co., L.P.
8.00%, 2009 100 103
(b) 9.25%, 2009 100 68
(b) Capstar Broadcasting Corp., 12.75%, 2009 110 94
Chancellor Media Corp.
8.125%, 2007 70 71
8.00%, 2008 130 135
9.00%, 2008 100 106
Charter Communications Holdings, L.L.C.
8.25%, 2007 360 368
(b) 9.92%, 2011 410 264
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CSC Holdings, Inc.
9.25%, 2005 $ 100 $ 107
8.125%, 2009 54 58
10.50%, 2016 60 71
(b) Diamond Cable Communications, PLC
13.25%, 2004 230 238
11.75%, 2005 50 44
10.75%, 2007 200 156
(b) Diva Systems Corp., 12.625%, with warrants, 2008 500 167
EchoStar DBS Corp.
9.25%, 2006 250 259
9.375%, 2009 200 208
Falcon Holdings Group, L.P.
8.375%, 2010 270 271
(b) 9.285%, 2010 70 48
Frontiervision Capital Corp.
11.00%, 2006 100 112
(b) 11.875% 2007 100 86
Interep National Radio Sales, Inc., 10.00%, 2008 200 210
Metromedia Fiber Network, Inc., 10.00%, 2008 810 871
Mediacom, L.L.C., 8.50%, 2008 315 320
NTL, Inc.
11.50%, 2008 295 332
(b) 12.375%, 2008 50 34
Outdoor Systems, Inc.
9.375%, 2006 70 76
8.875%, 2007 130 139
(b) PX Escrow, 9.625%, 2006 370 215
(b) Radio Unica Corp., 11.75%, 2006 160 90
SFX Entertainment, Inc., 9.125%, 2008 200 203
Sinclair Broadcasting Group, Inc., 8.75%, 2007 100 101
Star Choice, 13.00%, with warrants, 2005 50 53
TeleWest Communications, PLC
9.625%, 2005 60 64
(b) 11.00%, 2007 95 84
11.25%, 2008 140 163
Transwestern Publishing Co., L.L.C
9.625%, 2007 340 355
(b) 11.875%, 2008 310 217
(b) 21st Century Telecommunications, Inc., 12.25%,
with warrants, 2008 220 78
(b) United International Holdings, Inc., 10.75%, 2008 200 136
-------------------------------------------------------------------------------
7,011
- --------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--.8% PSINet, Inc.
10.00%, 2005 120 127
11.50%, 2008 180 203
-------------------------------------------------------------------------------
330
- --------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.7% Petro Stopping Centers, 10.50%, 2007 200 215
Travelcenters America, 10.25%, 2007 500 522
-------------------------------------------------------------------------------
737
-------------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--96.2%
(Cost: $42,385) 41,254
-------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
COMMON AND PREFERRED STOCK--3.8% NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Crown American Realty Trust, preferred 2,210 $ 106
Dobson Communications, PIK, preferred 153 144
(a) Eagle-Picher Holdings, Inc., preferred 20 104
Federal Mogul Corp. 3,000 129
(a) Gaylord Container Corp. 22,500 169
Global Crossing Holdings, PIK, preferred 1,000 115
(a) Guitar Center, Inc. 4,000 82
(a) Hollywood Entertainment Corp. 2,000 37
Nextel Communications, PIK, preferred 154 157
S&P 400 Mid-Cap Depository Receipts 3,000 207
(a) SF Holdings Group, Inc. 770 2
(a) SF Holdings Group, Inc., PIK, preferred 11 40
(a) SFX Entertainment, Inc. 3,000 194
(a) Smurfit-Stone Container Corp 4,000 77
21st Century Telecommunications Group, Inc.,
preferred 56 25
(a) United Rentals, Inc. 1,000 28
Viatel, Inc., PIK, preferred 93 17
(a) Waxman Industries, Inc. 18,000 7
-------------------------------------------------------------------------------
TOTAL COMMON AND PREFERRED STOCK--3.8%
(Cost: $1,799) 1,640
-------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $44,184) $42,894
-------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security. In the case of a bond, generally denotes that
issuer has defaulted on the payment of principal or interest or has filed
for bankruptcy.
(b) Deferred interest obligation; currently zero coupon under terms of the
initial offering.
PIK denotes that interest or dividend is paid in kind.
Based on the cost of investments of $44,184,000 for federal income tax purposes
at March 31, 1999, the gross unrealized appreciation was $1,265,000, the gross
unrealized depreciation was $2,555,000 and the net unrealized depreciation on
investments was $1,290,000.
See accompanying Notes to Financial Statements.
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
KEMPER HIGH YIELD FUND II
PORTFOLIO OF INVESTMENTS AT MARCH 31, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS--21.7% PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS U.S. Treasury bonds, 15.75%, 2001 $16,000 $20,112
(Cost: $20,341)
--------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--76.9%
- ------------------------------------------------------------------------------------------------------------------------
BASIC INDUSTRIES--9.3% Allied Waste Industries, 7.625%, 2006 520 504
California Steel Corp., 8.50%, 2009 100 101
Dimac Corp., 12.50%, 2008 600 510
Doman Industries, Ltd., 8.75%, 2004 100 65
Gaylord Container Corp.
9.75%, 2007 360 350
9.875%, 2008 500 440
Golden Northeast Aluminum, Inc., 12.00%, 420 422
2006
Hines Horticulture, Inc., 11.75%, 2005 550 597
Huntsman Polymer Corp., 11.75%, 2004 350 373
MMI Products, Inc., 11.25%, 2007 400 425
Packaging Corporation of America, 9.625%,
2009 200 200
Plainwell, Inc., 11.00%, 2008 400 312
Renco Steel Holdings Co., 10.875%, 2005 250 217
Riverwood International Corp., 10.875%, 2008 1,110 1,074
Stone Container Corp., 11.50%, 2006 630 680
Tembec Industries, Inc., 8.625%, 2009 320 325
Terra Industries, Inc., 10.75%, 2003 680 680
Texas Petrochemicals Corp., 11.125%, 2006 500 470
United Rentals, Inc., 9.25% 2009 850 858
-------------------------------------------------------------------------
8,603
-----------------------------------------------------------------------------
- ------------------------------------------
CAPITAL GOODS--9.8% AEP Industries, Inc., 9.875%, 2007 650 666
BE Aerospace, Inc., 9.50%, 2008 400 425
BPC Holdings Corp., 12.50%, 2006 125 131
Building Materials Corp., 8.00%, 2008 500 492
Consumers International, 10.25%, 2005 500 526
DeCrane Aircraft Holdings, Inc., 12.00%,
2008 260 263
Falcon Building Products, Inc., 9.50%, 2007 500 460
Eagle-Picher Holdings, Inc., 9.375%, 2008 600 582
(b) Graham Packaging Co., 10.75%, 2009 700 490
IMPAC Group, Inc., 10.125%, 2008 500 495
Integrated Electrical Services, Inc.,
9.375%, 2009 510 521
Kevco, Inc., 10.375%, 2007 435 231
L-3 Communications Corp., 10.375%, 2007
Nortek, Inc., 8.875%, 2008 900 929
Printpack, Inc., 10.625%, 2006 250 231
Terex Corp., 8.875%, 2008 600 582
Transdigm, Inc., 10.375%, 2008 950 945
U.S. Can Corp., 10.125%, 2006 100 105
Werner Holdings, Inc., 10.00%, 2007 1,000 1,001
-------------------------------------------------------------------------
9,075
</TABLE>
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS--19.2%
Allegiance Telecom, Inc.
(b) 11.75%, 2008 $ 1,000 $ 630
12.875%, 2008 400 444
American Cellular Corp., 10.50%, 2008 810 848
Centennial Cellular, 10.75%, 2008 140 148
(b) Crown Castle International Corp., 10.625%, 2007 700 483
Dobson Communication Corp., 11.75%, 2007 500 534
Esprit Telecom Group, PLC, 11.50%, 2007 450 477
Global Crossing Holdings, Ltd., 9.625%, 2008 530 590
Global Telesystems Group, 9.875%, 2005 240 239
(b) ICG Holdings, Inc., 13.50%, 2005 300 263
Intermedia Communications of Florida, Inc.
(b) 12.50%, 2006 520 447
8.875%, 2007 500 508
(b) KMC Telecom Holdings, Inc., 12.50%, 2008 1,000 543
Level 3 Communications, Inc.
9.125%, 2008 2,220 2,239
(b) 10.50%, 2008 250 157
McLeod USA, Inc., 9.25%, 2007 900 941
(b) Millicom International Cellular, S.A.,
13.50%, 2006 560 412
(b) Netia Holdings, 11.25%, 2007 850 578
(b) Nextel Communications, Inc.
9.750%, 2004 170 177
9.75%, 2007 1,120 823
9.95%, 2008 100 71
Nextlink Communications, Inc., 10.75%, 2008 1,000 1,075
Price Communications Wireless, Inc., 9.125%, 2006 1,000 1,040
Primus Telecommunications Group, Inc.
11.75%, 2004 650 671
11.25%, 2009 400 412
Rogers Cantel Mobile Communications, Inc.,
8.80%, 2007 500 523
(b) SBA Communications Corp., 12.00%, 2008 520 322
(b) Spectrasite Holdings, Inc., 12.00%, 2008 450 279
Teligent, Inc., 11.50%, 2007 500 475
(b) Triton Communications, L.L.C., 11.00%, 2008 960 566
Versatel Telecom, 13.25%, with warrants, 2008 250 281
(b) Viatel, Inc., 12.50%, 2008 1,000 617
---------------------------------------------------------------------------
17,813
- -------------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS--15.5%
Cinemark USA, Inc., 9.625%, 2008 300 310
Circus Circus Enterprises, Inc., 9.25%, 2005 660 691
Coinmach Corp., 11.75%, 2005 500 550
Cole National Group, Inc., 8.625%, 2007 400 394
Corporate Express, Inc., 4.50%, 2000 600 531
Delco Remy International, 10.625%, 2006 425 457
Finlay Enterprises, Inc., 9.00%, 2008 435 409
Finlay Fine Jewelry Corp., 8.375%, 2008 170 167
Forecast Group, L.P., 11.375%, 2000 100 99
Fruit of the Loom, Inc., 8.875%, 2006 1,000 1,003
Galey & Lord, Inc., 9.125%, 2008 250 194
Guitar Center Management, 11.00%, 2006 122 129
Harvey's Casino Resorts, 10.625%, 2006 100 106
Imax Corp., 7.875%, 2005 550 542
J. Crew Group, Inc.
10.375%, 2007 540 513
(b) 13.50%, 2008 1,000 500
</TABLE>
17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kindercare Learning Centers, Inc., 9.50%, 2009 $ 590 $ 594
La Petite Academy, Inc., 10.00%, 2008 800 784
Lennar Corp., 7.625%, 2009 100 98
Mohegan Tribal Gaming Authority, 8.75%, 2009 1,000 1,041
MTS, Inc., 9.375%, 2005 320 304
National Vision Association, Ltd., 12.75%, 2005 400 416
Pamida Holdings Corp., 11.75%, 2003 1,020 923
Phillips-Van Heusen Corp., 9.50%, 2008 250 249
Pillowtex Corp., 9.00%, 2007 400 404
Protection One, Inc., 8.125%, 2009 600 606
Regal Cinemas, Inc.
9.50%, 2008 430 439
8.625%, 2010 70 68
Rio Hotel & Casino, Inc., 9.50%, 2007 100 108
Specialty Retailers, Inc.
8.50%, 2005 430 378
9.00%, 2007 680 530
(b) Spincycle, Inc., 12.75%, 2005 500 210
Station Casinos, Inc., 10.125%, 2006 500 532
Toll Corp., 8.125%, 2009 100 100
----------------------------------------------------------------------------
14,379
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER NON-CYCLICALS--6.5% Abbey Healthcare Group, Inc., 9.50%, 2002 510 505
Advantica Restaurant Group, Inc., 11.25%, 2008 1,050 1,074
AFC Enterprises, Inc., 10.25%, 2007 870 927
Agrilink Foods, Inc., 11.875%, 2008 450 484
(b) ALARIS Medical Systems, Inc., 11.125%, 2008 400 240
Ameriking, Inc., 10.75%, 2006 100 106
Carrols Corp., 9.50%, 2008 785 795
Krystal, Inc., 10.25%, 2007
(b) Mariner Post-Acute Network, Inc.,
10.50%, 2007 800 128
Perkins Family Restaurants, L.P., 10.125%, 2007 890 957
Sealy Mattress Co.
9.875%, 2007 100 99
(b) 10.875%, 2007 925 592
Simmons Co., 10.25%, 2009 100 103
----------------------------------------------------------------------------
6,010
- --------------------------------------------------------------------------------------------------------------------------
ENERGY--1.1% Forest Oil Corp., 10.50%, 2006 400 414
HS Resources, Inc., 9.25%, 2006 100 98
Pacalta Resources, Ltd., 10.75%, 2004 100 101
R&B Falcon Finance Corp.
11.00%, 2006 120 126
9.50%, 2008 200 174
11.375%, 2009 120 127
----------------------------------------------------------------------------
1,040
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL--.6% HMH Properties, Inc., 7.875%, 2008 600 578
----------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MEDIA--12.4% Avalon Cable Holdings, Inc.
9.375%, 2008 $ 120 $ 126
(b) 11.875%, 2008 600 392
Big Flower Press Holdings, Inc., 8.875%, 2007 500 504
Bresnan Communications Co., L.P.
8.00%, 2009 100 102
(b) 9.25%, 2009 600 405
(b) Capstar Broadcasting Corp., 12.75%, 2009 300 255
Chancellor Media Corp., 8.125%, 2007 250 255
Charter Communication Holdings, L.L.C.
8.25%, 2007 880 899
(b) 9.92%, 2011 880 568
CSC Holdings, Inc., 9.25%, 2005 400 429
(b) Diamond Cable Communications, PLC,
13.25%, 2004 450 465
(b) Diva Systems Corp., 12.625%, with warrants, 2008 560 187
EchoStar DBS Corp.
9.25%, 2006 420 436
9.375%, 2009 720 749
(b) Falcon Holding Group, L.P., 9.285%, 2010 1,150 793
Interep National Radio Sales, Inc., 10.00%, 2008 400 419
Mediacom, L.L.C., 8.50%, 2008 800 812
Metromedia Fiber Network, Inc., 10.00%, 2008 560 602
Rogers Communications, Inc., 8.875%, 2007 500 523
SFX Entertainment, Inc., 9.125%, 2008 1,000 1,015
Sinclair Broadcasting Group, Inc., 8.75%, 2007 500 505
(b) TeleWest Communications, PLC, 11.00%, 2007 600 530
Transwestern Publishing Co., L.L.C., 9.625%, 2007 500 523
(b) 21st Century Telecommunications, Inc., 12.25%, 2008 140 49
----------------------------------------------------------------------------
11,543
- --------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--.9% (b) IPC Information Systems, 10.875%, 2008 970 626
PSINet, Inc.
10.00%, 2005 120 127
11.50%, 2008 30 34
----------------------------------------------------------------------------
787
- --------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.6% Airxcel, 11.00%, 2007 500 490
Travelcenters America, 10.25%, 2007 970 1,014
----------------------------------------------------------------------------
1,504
----------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--76.9%
(Cost: $71,232) 71,332
----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS--1.4% (a) Repurchase Agreement
State Street Bank and Trust Company,
dated 3/31/99, 4.88%, due 4/1/99
(Cost: $1,340) 1,340 1,340
----------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $92,913) $92,784
----------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
NOTES TO PORTFOLIO OF INVESTMENTS
(a) Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities. The collateral is monitored daily by the fund
so that its market value exceeds the carrying value of the repurchase
agreement.
(b) Deferred interest obligation; currently zero coupon under terms of the
initial offering.
PIK denotes that interest or dividend is paid in kind.
Based on the cost of investments of $92,913,000 for federal income tax purposes
at March 31, 1999, the gross unrealized appreciation was $1,133,000, the gross
unrealized depreciation was $1,262,000 and the net unrealized depreciation on
investments was $129,000.
See accompanying Notes to Financial Statements.
20
<PAGE> 21
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH YIELD
OPPORTUNITY HIGH YIELD
FUND FUND II
<S> <C> <C>
- --------------------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------------------
Investments, at value (Cost: $44,184 and $92,913,
respectively) $42,894 92,784
- --------------------------------------------------------------------------------------------
Cash -- 1
- --------------------------------------------------------------------------------------------
Receivable for:
Investments sold 385 471
- --------------------------------------------------------------------------------------------
Fund shares sold 124 1,335
- --------------------------------------------------------------------------------------------
Interest 1,003 2,617
- --------------------------------------------------------------------------------------------
TOTAL ASSETS 44,406 97,208
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------------------------
Cash overdraft 1,221 --
- --------------------------------------------------------------------------------------------
Note payable 1,000 --
- --------------------------------------------------------------------------------------------
Payable for:
Investments purchased 457 3,412
- --------------------------------------------------------------------------------------------
Fund shares redeemed 35 12
- --------------------------------------------------------------------------------------------
Management fee 43 --
- --------------------------------------------------------------------------------------------
Distribution services fee 25 63
- --------------------------------------------------------------------------------------------
Administrative services fee 13 --
- --------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 18 40
- --------------------------------------------------------------------------------------------
Trustees' fees and other 13 77
- --------------------------------------------------------------------------------------------
Total liabilities 2,825 3,604
- --------------------------------------------------------------------------------------------
NET ASSETS $41,581 93,604
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------------------------
Paid-in capital $43,301 93,768
- --------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (743) 101
- --------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investments (1,290) (129)
- --------------------------------------------------------------------------------------------
Futures -- 21
- --------------------------------------------------------------------------------------------
Undistributed net investment income (loss) 313 (157)
- --------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $41,581 93,604
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------------------------
CLASS A SHARES
Net assets applicable to shares outstanding $19,671 36,448
- --------------------------------------------------------------------------------------------
Shares outstanding 2,157 3,870
- --------------------------------------------------------------------------------------------
Net asset value and redemption price per share (net assets
/ shares outstanding) $9.12 9.42
- --------------------------------------------------------------------------------------------
Maximum offering price per share (net asset value, plus
4.71% of net asset value or 4.50% of offering price) $9.55 9.86
- --------------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $17,706 42,288
- --------------------------------------------------------------------------------------------
Shares outstanding 1,943 4,489
- --------------------------------------------------------------------------------------------
Net asset value and redemption price (subject to
contingent deferred sales charge) per share (net assets /
shares outstanding) $9.11 9.42
- --------------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $4,204 14,868
- --------------------------------------------------------------------------------------------
Shares outstanding 461 1,578
- --------------------------------------------------------------------------------------------
Net asset value and redemption price (subject to
contingent deferred sales charge) per share (net assets /
shares outstanding) $9.12 9.42
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
21
<PAGE> 22
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
PERIOD ENDED MARCH 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH YIELD
OPPORTUNITY HIGH YIELD
FUND FUND II
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------
Dividends $ 25 1,507
- -------------------------------------------------------------------------------------------------
Interest income 2,091 --
- -------------------------------------------------------------------------------------------------
Total investment income 2,116 1,507
- -------------------------------------------------------------------------------------------------
Expenses:
Management fee 113 96
- -------------------------------------------------------------------------------------------------
Distribution services fee 66 65
- -------------------------------------------------------------------------------------------------
Administrative services fee 38 37
- -------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 37 71
- -------------------------------------------------------------------------------------------------
Interest expense 50 --
- -------------------------------------------------------------------------------------------------
Professional fees 13 9
- -------------------------------------------------------------------------------------------------
Reports to shareholders 8 20
- -------------------------------------------------------------------------------------------------
Trustees' fees and other 13 34
- -------------------------------------------------------------------------------------------------
Total expenses before expense waiver 338 332
- -------------------------------------------------------------------------------------------------
Less expenses waived and absorbed by investment manager -- (230)
- -------------------------------------------------------------------------------------------------
Total expenses after expense waiver 338 102
- -------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,778 1,405
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments (726) 45
- -------------------------------------------------------------------------------------------------
Futures -- 56
- -------------------------------------------------------------------------------------------------
(726) 101
- -------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) on:
Investments 1,495 (129)
- -------------------------------------------------------------------------------------------------
Futures -- 21
- -------------------------------------------------------------------------------------------------
1,495 (108)
- -------------------------------------------------------------------------------------------------
Net gain (loss) on investments 769 (7)
- -------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,547 1,398
- -------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED MARCH 31, 1999 (UNAUDITED) AND THE YEAR ENDED
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH YIELD HIGH YIELD
OPPORTUNITY FUND FUND II(A)
---------------------- -----------
1999 1998 1999
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ----------------------------------------------------------------------------------------------------------
Net investment income $ 1,778 1,215 1,405
- ----------------------------------------------------------------------------------------------------------
Net realized gain (loss) (726) 191 101
- ----------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) 1,495 (2,785) (108)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 2,547 (1,379) 1,398
- ----------------------------------------------------------------------------------------------------------
Distribution from net investment income (1,529) (1,151) (1,562)
- ----------------------------------------------------------------------------------------------------------
Distribution from net realized gain (176) (32) --
- ----------------------------------------------------------------------------------------------------------
Total dividends to shareholders (1,705) (1,183) (1,562)
- ----------------------------------------------------------------------------------------------------------
Net increase from capital share transactions 14,048 29,153 93,668
- ----------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 14,890 26,591 93,504
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------------------------------
Beginning of period 26,691 100 100
- ----------------------------------------------------------------------------------------------------------
END OF PERIOD $41,581 26,691 93,604
- ----------------------------------------------------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT INCOME AT END OF PERIOD $ 313 64 --
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a) The High Yield Fund II commenced operations on November 30, 1998.
See accompanying Notes to Financial Statements.
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1
DESCRIPTION OF THE
FUND Kemper High Yield Opportunity Fund, a series of
Kemper High Yield Series, and Kemper High Yield
Fund II, a series of Kemper Income Trust, are
open-end diversified management investment
companies. Kemper High Yield Series and Kemper
Income Trust are each organized as a business trust
under the laws of Massachusetts. The High Yield
Opportunity Fund and High Yield Fund II commenced
operations on October 1, 1997 and November 30,
1998, respectively.
Each fund offers separate classes of shares. Class
A shares are sold to investors subject to an
initial sales charge. Class B shares are sold
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 sold 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 (none sold through
March 31, 1999 for Kemper High Yield Opportunity
Fund) shares 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. Kemper High
Yield Fund II does not currently offer I shares.
Differences in class expenses will result in the
payment of different per share income dividends by
class. All shares of each fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2
SIGNIFICANT
ACCOUNTING POLICIES SECURITY VALUATION. Investments are stated at
value. Portfolio debt securities with remaining
maturities greater than sixty days are valued by
pricing agents approved by the officers of the
fund, whose quotations reflect broker/dealer-
supplied valuations and electronic data processing
techniques. If the pricing agents are unable to
provide such quotations, the most recent bid
quotation supplied by a bona fide market maker
shall be used. Money market instruments purchased
with an original maturity of sixty days or less are
valued at amortized cost. An exchange-traded
options contract on securities, futures and other
financial instruments is valued at its most recent
sale price on such exchange. Lacking any sales, the
options contract is valued at the calculated mean.
Lacking any calculated mean, the options contract
is valued at the most recent bid quotation in the
case of a purchased options contract, or the most
recent asked quotation in the case of a written
options contract. An options contract on securities
and other financial instruments traded
over-the-counter is valued at the most recent bid
quotation in the case of a purchased options
contract and at the most recent asked quotation in
the case of a written options contract. Futures
contracts are valued at the most recent settlement
price. All other securities are valued at their
fair value as determined in good faith by the
Valuation Committee of the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Dividend income is recorded on
the ex-dividend date, and interest income is
recorded on the accrual basis. Interest income
includes discount amortization on all fixed income
securities. Realized
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
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
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share for
each fund is determined as of the close of the
Exchange. The net asset value per share is
determined separately for each class by dividing
each fund's net assets attributable to that class
by the number of shares of the class outstanding.
FEDERAL INCOME TAXES. Each 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, each fund paid no federal income taxes
and no federal income tax provision was required.
DIVIDENDS TO SHAREHOLDERS. Each fund declares and
pays dividends of net investment income monthly and
any net realized capital gains annually, which are
recorded on the ex-dividend date. Dividends are
determined in accordance with income tax principles
which may treat certain transactions differently
from generally accepted accounting principles.
- --------------------------------------------------------------------------------
3
TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. Each fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper). The funds pays a monthly
investment management fee of 1/12 of the annual
rate of .65% of the first $250 million of average
daily net assets declining to .49% of average daily
net assets in excess of $12.5 billion. Management
fees incurred for the period ended March 31, 1999
are as follows:
High Yield Opportunity Fund $113,000
High Yield Fund II (no fee after expense
waiver) --
In addition, Scudder Kemper temporarily agreed to
absorb certain operating expenses of the High Yield
Fund II. Under these arrangements, Scudder Kemper
waived and absorbed expenses of $230,000 for the
period ended March 31, 1999.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. Each fund has an underwriting and
distribution services agreement with Kemper
Distributions, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the six months ended March
31, 1999 are as follows:
<TABLE>
<CAPTION>
COMMISSIONS
RETAINED BY KDI
---------------
<S> <C>
High Yield Opportunity Fund $17,000
High Yield Fund II 5,000
</TABLE>
For services under the distribution services
agreement, each fund pays KDI a fee of .75% of
average daily net assets of Class B and Class C
shares pursuant to separate 12b-1 plans for the
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
24
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
Class B and Class C shares. Distribution fees and
CDSC received by KDI for the six months ended March
31, 1999 are as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES
AND CDSC
RECEIVED BY KDI
-----------------
<S> <C>
High Yield Opportunity Fund $80,000
High Yield Fund II (after distribution expense waiver) 70,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. Each fund has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, each 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 for the six
months ended March 31, 1999 are as follows:
<TABLE>
<CAPTION>
ASF PAID BY THE
FUND TO KDI
---------------
<S> <C>
High Yield Opportunity Fund $38,000
High Yield Fund II (no fee after expense waiver) --
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the funds' transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of each fund. Under the agreement,
for the six months ended March 31, 1999, KSvC
received shareholder services fees as follows:
<TABLE>
<S> <C>
High Yield Opportunity Fund $23,000
High Yield Fund II --
</TABLE>
OFFICERS AND TRUSTEES. Certain officers or trustees
of the funds are also officers or directors of
Scudder Kemper. For the six months ended March 31,
1999, the funds made no payments to their officers
and incurred trustees' fees to independent
trustees.
<TABLE>
<S> <C>
High Yield Opportunity Fund $1,000
High Yield Fund II 9,000
</TABLE>
- --------------------------------------------------------------------------------
4
INVESTMENT
TRANSACTIONS For the six months ended March 31, 1999, investment
transactions (excluding short term instruments) are
as follows (in thousands):
<TABLE>
<CAPTION>
HIGH YIELD HIGH YIELD
OPPORTUNITY FUND FUND II
---------------- ----------
<S> <C> <C>
Purchases $37,075 101,982
Proceeds from sales 22,279 10,454
</TABLE>
- --------------------------------------------------------------------------------
5
NOTE PAYABLE The High Yield Opportunity Fund may borrow money
for leverage purposes up to a maximum of 20% of the
total assets of the fund, including the amount
borrowed. The note payable represents a $1,000,000
loan from Bank of America at March 31, 1999. The
note bears interest at the Eurodollar Rate plus
.275% (5.23% at March 31, 1999) which is payable
quarterly. The loan amount and rate are reset
periodically under a credit facility which is
available until December 18, 2000.
25
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6
CAPITAL SHARE
TRANSACTIONS The following tables summarize the activity in
capital shares of the funds: (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, 1999 AUGUST 31, 1998
HIGH YIELD -------------------- --------------------
OPPORTUNITY SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------
SHARES SOLD
-----------------------------------------------------------------------------
Class A 1,284 $11,521 1,905 $18,384
-----------------------------------------------------------------------------
Class B 813 7,342 1,690 16,473
-----------------------------------------------------------------------------
Class C 263 2,384 286 2,813
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-----------------------------------------------------------------------------
Class A 79 715 48 462
-----------------------------------------------------------------------------
Class B 61 548 41 395
-----------------------------------------------------------------------------
Class C 12 110 7 70
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
SHARES REDEEMED
-----------------------------------------------------------------------------
Class A (597) (5,336) (593) (5,656)
-----------------------------------------------------------------------------
Class B (293) (2,658) (346) (3,322)
-----------------------------------------------------------------------------
Class C (63) (578) (48) (466)
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
CONVERSION OF SHARES
-----------------------------------------------------------------------------
Class A 13 116 14 140
-----------------------------------------------------------------------------
Class B (13) (116) (14) (140)
-----------------------------------------------------------------------------
INCREASE FROM
CAPITAL SHARE TRANSACTIONS $14,048 $29,153
-----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, 1998
TO MARCH 31, 1999
--------------------
HIGH YIELD FUND II SHARES AMOUNT
<S> <C> <C>
---------------------------------------------------------------------------
SHARES SOLD
---------------------------------------------------------------------------
Class A 4,147 $39,132
---------------------------------------------------------------------------
Class B 4,632 43,709
---------------------------------------------------------------------------
Class C 1,601 15,090
---------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
---------------------------------------------------------------------------
Class A 38 359
---------------------------------------------------------------------------
Class B 41 389
---------------------------------------------------------------------------
Class C 15 143
---------------------------------------------------------------------------
SHARES REDEEMED
---------------------------------------------------------------------------
Class A (322) (3,041)
---------------------------------------------------------------------------
Class B (183) (1,724)
---------------------------------------------------------------------------
Class C (41) (389)
---------------------------------------------------------------------------
CONVERSION OF SHARES
---------------------------------------------------------------------------
Class A 4 34
---------------------------------------------------------------------------
Class B (4) (34)
---------------------------------------------------------------------------
INCREASE FROM CAPITAL
SHARE TRANSACTIONS $93,668
---------------------------------------------------------------------------
</TABLE>
26
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7
FINANCIAL FUTURES
CONTRACTS Kemper High Yield Fund has entered into exchange
traded financial futures contracts in order to help
protect itself from anticipated market conditions
and, as such, bears the risk that arises from
entering into these contracts.
At the time the fund enters into a futures
contract, it is required to make a margin deposit
with its custodian. Subsequently, payments are made
on a daily basis between the fund and the broker as
the market value of the futures contract fluctuates
and are recorded for financial reporting purposes
as unrealized gains or losses by the fund. At March
31, 1999, the market value of assets pledged by the
fund to cover margin requirements for open futures
positions was $150,000. The fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures position open
at March 31, 1999 (in thousands:)
<TABLE>
<CAPTION>
FACE EXPIRATION UNREALIZED
TYPE AMOUNT MONTH GAIN
------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bond $11,144 June '99 $21
------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 28
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------
CLASS A
--------------------------------
SIX MONTHS YEAR
ENDED ENDED
KEMPER HIGH YIELD MARCH 31, SEPTEMBER 30,
OPPORTUNITY FUND 1999 1998(A)
- ---------------------------------------------------------------------------------
<S> <C> <C>
- ---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------
Net asset value, beginning of period $8.89 9.50
- ---------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .70
- ---------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .23 (.60)
- ---------------------------------------------------------------------------------
Total from investment operations .69 .10
- ---------------------------------------------------------------------------------
Less dividends:
Distributions from net investment income .41 .67
- ---------------------------------------------------------------------------------
Distributions from net realized gain .05 .04
- ---------------------------------------------------------------------------------
Total dividends .46 .71
- ---------------------------------------------------------------------------------
Net asset value, end of period $9.12 8.89
- ---------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.87% .59
- ---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS ANNUALIZED
- ---------------------------------------------------------------------------------
Expenses 1.46% 1.27
- ---------------------------------------------------------------------------------
Net investment income 10.32% 8.31
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------
CLASS B
--------------------------------
SIX MONTHS YEAR
ENDED ENDED
MARCH 31, SEPTEMBER 30,
1999 1998(A)
- ---------------------------------------------------------------------------------
<S> <C> <C>
- ---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------
Net asset value, beginning of period $8.89 9.50
- ---------------------------------------------------------------------------------
Income from investment operations:
Net investment income .42 .63
- ---------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .22 (.61)
- ---------------------------------------------------------------------------------
Total from investment operations .64 .02
- ---------------------------------------------------------------------------------
Less dividends:
Distributions from net investment income .37 .59
- ---------------------------------------------------------------------------------
Distributions from net realized gain .05 .04
- ---------------------------------------------------------------------------------
Total dividends .42 .63
- ---------------------------------------------------------------------------------
Net asset value, end of period $9.11 8.89
- ---------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.32% (.18)
- ---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------
Expenses 2.28% 2.03
- ---------------------------------------------------------------------------------
Net investment income 9.50% 7.55
- ---------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 29
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------
CLASS C
--------------------------------
SIX MONTHS YEAR
ENDED ENDED
MARCH 31, SEPTEMBER 30,
1999 1998(A)
- ---------------------------------------------------------------------------------
<S> <C> <C>
- ---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------
Net asset value, beginning of period $8.89 9.50
- ---------------------------------------------------------------------------------
Income from investment operations:
Net investment income .40 .62
- ---------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .25 (.60)
- ---------------------------------------------------------------------------------
Total from investment operations .65 .02
- ---------------------------------------------------------------------------------
Less dividends:
Distributions from net investment income .37 .59
- ---------------------------------------------------------------------------------
Distributions from net realized gain .05 .04
- ---------------------------------------------------------------------------------
Total dividends .42 .63
- ---------------------------------------------------------------------------------
Net asset value, end of period $9.12 8.89
- ---------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.43% (.18)
- ---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------
Expenses 2.26% 2.03
- ---------------------------------------------------------------------------------
Net investment income 9.52% 7.55
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------
SIX MONTHS YEAR
ENDED ENDED
MARCH 31, SEPTEMBER 30,
1999 1998(A)
- ---------------------------------------------------------------------------------
<S> <C> <C>
Net assets at end of period (in thousands) $41,581 26,691
- ---------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 148% 169
- ---------------------------------------------------------------------------------
</TABLE>
(a) Commencement of operations on October 1, 1997
29
<PAGE> 30
FINANCIAL HIGHLIGHTS
KEMPER HIGH YIELD FUND II SIX MONTHS ENDED MARCH 31, 1999(B)
<TABLE>
<CAPTION>
------------------- ------------------- -------------------
CLASS A CLASS B CLASS C
- ------------------------------------------------ ------------------- ------------------- -------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.50 9.50 9.50
- ------------------------------------------------ ------------------- ------------------- -------------------
Income from investment operations:
Net investment income .28 .25 .25
- ------------------------------------------------ ------------------- ------------------- -------------------
Net realized and unrealized loss (.07) (.06) (.06)
- ------------------------------------------------ ------------------- ------------------- -------------------
Total from investment operations .21 .19 .19
- ------------------------------------------------ ------------------- ------------------- -------------------
Less distributions from net investment income .29 .27 .27
- ------------------------------------------------ ------------------- ------------------- -------------------
Net asset value, end of period $9.42 9.42 9.42
- ------------------------------------------------ ------------------ ------------------ ------------------
TOTAL RETURN (NOT ANNUALIZED) 2.28% 2.03 2.03
- ------------------------------------------------ ------------------- ------------------- -------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------ ------------------- ------------------- -------------------
Expenses .25% 1.00 1.00
- ------------------------------------------------ ------------------- ------------------- -------------------
Net investment income 9.97% 9.22 9.22
- ------------------------------------------------ ------------------- ------------------- -------------------
- ------------------------------------------------ ------------------- ------------------- -------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------ ------------------- ------------------- -------------------
Expenses 1.80% 2.54 2.65
- ------------------------------------------------ ------------------- ------------------- -------------------
Net investment income 8.42% 7.68 7.57
- ------------------------------------------------ ------------------- ------------------- -------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
Net assets at end of period $93,604
- ---------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 76%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(b) Commencement of operations on November 30, 1998. Scudder Kemper Investments,
Inc. has agreed to temporarily waive its management fee and absorb certain
operating expenses of the fund. The other ratios to average net assets are
computed without this expense waiver or absorption.
NOTE FOR BOTH FUNDS: Total return does not reflect the effect of any sales
charges. Data for the period ended March 31, 1999 is unaudited.
30
<PAGE> 31
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 17, 1998, a special shareholders' meeting was held and adjourned to
January 15, 1999. Kemper High Yield Opportunity Fund shareholders were asked to
vote on two separate issues: approval of the new Investment Management Agreement
between the fund and Scudder Kemper Investments, Inc., and to modify or
eliminate certain policies and to eliminate the shareholder approval
requirements as to certain other matters. The following are the results.
1) Approval of the new Investment Management Agreement between the fund and
Scudder Kemper Investments, Inc. This item was approved.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,830,416 17,729 72,206
</TABLE>
2) To modify or eliminate certain policies and to eliminate the shareholder
approval requirements as to certain other matters. These items were approved.
Investment objectives
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,427,638 47,853 145,800
</TABLE>
Investment policies
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,427,432 48,059 145,800
</TABLE>
Diversification
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,426,180 49,310 145,800
</TABLE>
Borrowing
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,426,180 49,310 145,800
</TABLE>
Senior securities
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,427,716 47,774 145,800
</TABLE>
Concentration
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,427,716 47,774 145,800
</TABLE>
Underwriting of securities
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,427,716 47,774 145,800
</TABLE>
Investment in real estate
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,427,716 47,774 145,800
</TABLE>
Purchase of commodities
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,427,716 47,774 145,800
</TABLE>
Lending
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,427,716 47,774 145,800
</TABLE>
Margin purchases and short sales
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
1,420,368 55,122 145,800
</TABLE>
31
<PAGE> 32
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY
Chairman and Trustee President
LEWIS A. BURNHAM PHILIP J. COLLORA
Trustee Vice President and
Secretary
DONALD L. DUNAWAY
Trustee JOHN R. HEBBLE
Treasurer
ROBERT B. HOFFMAN
Trustee ANN M. MCCREARY
Vice President
DONALD R. JONES
Trustee MICHAEL A. MCNAMARA
Vice President
THOMAS W. LITTAUER
Trustee and Vice President KATHRYN L. QUIRK
Vice President
SHIRLEY D. PETERSON
Trustee ROBERT C. PECK, JR.
Vice President
WILLIAM P. SOMMERS
Trustee HARRY E. RESIS, JR.
Vice President
LINDA J. WONDRACK
Vice President
MAUREEN E. KANE
Assistant Secretary
CAROLINE PEARSON
Assistant Secretary
ELIZABETH C. WERTH
Assistant Secretary
BRENDA LYONS
Assistant Treasurer
<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 419557
Kansas City, MO 64141
.............................................................................................
CUSTODIAN AND STATE STREET BANK AND TRUST COMPANY
TRANSFER AGENT 225 Franklin Street
Boston, MA 02109
INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
.............................................................................................
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
</TABLE>
[KEMPER FUNDS LOGO]
Printed on recycled paper.
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Fund prospectus.
KHYFS - 3 (5/24/99) 1074020
Printed in the U.S.A.
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