<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED SEPTEMBER 30, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
KEMPER HIGH YIELD FUND
KEMPER HIGH YIELD OPPORTUNITY FUND
KEMPER HIGH YIELD SERIES
"... The high yield market has been driven down to a
point where we see good values in many of the
companies on which we do extensive fundamental
research ... We anticipate staying fully invested in order
to fully participate in a turnaround. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
9
PORTFOLIO STATISTICS
12
PORTFOLIO OF INVESTMENTS
26
REPORT OF INDEPENDENT AUDITORS
27
FINANCIAL STATEMENTS
29
NOTES TO FINANCIAL STATEMENTS
34
FINANCIAL HIGHLIGHTS
At A GLANCE
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1998
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A -0.95
CLASS B -1.82
CLASS C -1.89
LIPPER HIGH CURRENT YIELD FUNDS CATEGORY AVERAGE* -1.77
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD OPPORTUNITY FUND
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE ONE-YEAR PERIOD ENDED SEPTEMBER 30, 1998
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 0.59
CLASS B -0.18
CLASS C 0.13
LIPPER HIGH CURRENT YIELD FUNDS CATEGORY AVERAGE* -1.77
- --------------------------------------------------------------------------------
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
* LIPPER ANALYTICAL SERVICES, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES
IN NET ASSET VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT
OF SALES CHARGES AND, IF THEY HAD, RESULTS MAY HAVE BEEN LESS FAVORABLE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
9/30/98 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER HIGH YIELD FUND
CLASS A $7.68 $8.50
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND
CLASS B $7.67 $8.49
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND
CLASS C $7.69 $8.52
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE (CONTINUED)
- --------------------------------------------------------------------------------
AS OF AS OF
9/30/98 10/1/97
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER HIGH YIELD OPPOR-
TUNITY FUND CLASS A $8.89 $9.50
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD OPPOR-
TUNITY FUND CLASS B $8.89 $9.50
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD OPPOR-
TUNITY FUND CLASS C $8.89 $9.50
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND RANKINGS
AS OF 9/30/98
- --------------------------------------------------------------------------------
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 #113 of #137 of #141 of
233 funds 233 funds 233 funds
- --------------------------------------------------------------------------------
5-YEAR #24 of N/A N/A
82 funds
- --------------------------------------------------------------------------------
10-YEAR #15 of N/A N/A
53 funds
- --------------------------------------------------------------------------------
15-YEAR #2 of N/A N/A
24 funds
- --------------------------------------------------------------------------------
20-YEAR #2 of N/A N/A
15 funds
- --------------------------------------------------------------------------------
</TABLE>
THERE IS NO RANKING INFORMATION AVAILABLE FOR KEMPER HIGH YIELD OPPORTUNITY
FUND.
- --------------------------------------------------------------------------------
DIVIDEND AND YIELD REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE
FUNDS AS OF SEPTEMBER 30, 1998.
<TABLE>
<CAPTION>
KEMPER HIGH
YIELD FUND CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $.7715 $.6975 $.7014
- --------------------------------------------------------------------------------
SEPTEMBER DIVIDEND: $.0635 $.0573 $.0578
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 9.92% 8.96% 9.02%
- --------------------------------------------------------------------------------
SEC YIELD+: 9.91% 9.49% 9.51%
- --------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD
OPPORTUNITY FUND CLASS A CLASS B CLASS C
<S> <C> <C> <C>
ONE-YEAR INCOME: $.6650 $.5903 $.5909
- --------------------------------------------------------------------------------
SHORT-TERM CAPITAL
GAIN: $.0350 $.0350 $.0350
- --------------------------------------------------------------------------------
SEPTEMBER DIVIDEND: $.0640 $.0581 $.0580
- --------------------------------------------------------------------------------
ANNUALIZED
DISTRIBUTION RATE+: 8.64% 7.84% 7.83%
- --------------------------------------------------------------------------------
SEC YIELD+: 9.65% 9.33% 9.33%
- --------------------------------------------------------------------------------
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON SEPTEMBER 30, 1998. 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 SEPTEMBER 30, 1998, 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, HE WAS WITH THE HARRIS
BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT MANAGER FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $245 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES, AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS.
DEAR SHAREHOLDERS,
If you're like most investors, you may be wondering if you should allow yourself
to breathe a sigh of relief as 1998 comes to a close. After several months of
generally declining stock prices and extreme volatility, the U.S. stock market
seems to have rediscovered its resiliency. In the fourth quarter, the Standard &
Poor's 500, an unmanaged index generally representative of the U.S. stock
market, bounced back into the 1100-point range, up nearly 20 percent from its
third-quarter low of 957. The blue chip Dow Jones Industrial Average enjoyed a
comparable rise. Investor confidence suddenly overtook the investor uncertainty
that had plagued the markets at summer's end.
To what can we attribute the change? Simply this -- the cumulative effect of
some good news, not the least of which was a long-awaited reduction in interest
rates by the Federal Reserve Board. In September, the Fed reduced the federal
funds rate a modest 1/4 of a percentage point, however, the cut disappointed
some investors who were expecting a more dramatic gesture. In October, the Fed
reduced the rate an additional 1/4 of a percentage point. This was an unexpected
cut that seemed to have a positive effect on Wall Street. Investors were also
pleasantly surprised by better-than-expected corporate earnings reports early in
the fourth quarter. (Other contributors to the good vibrations included Mark
McGwire, Sammy Sosa and John Glenn. While they don't have the market clout of
Alan Greenspan, they may have played a role in elevating the national mood.)
Although there was no good news to be garnered from the sensationalized
presidential scandal, as the shock of Kenneth Starr's report wore off, the
nation seemed to refocus its attention on other matters. In this sense, another
veil of despair was lifted.
In many ways, 1998's market activity provides a study in how investor
perceptions can upstage economic realities. Certainly, the tumultuous lessons of
Russia and Southeast Asia renewed investors' awareness of risk in 1998, which
was an important wake-up call. At all times, investors must understand and
consider risk. But over the course of 1998, U.S. economic fundamentals have
essentially remained strong. In fact, inflation has remained low for the entire
year. Economic growth has been solid. Our consumer confidence has remained
fairly high, although not quite as high as last year.
Other signs of strength this year have included better-than-expected regional
retail sales, as well as robust housing starts and home sales. The nation's
budget surplus for 1998 came in at $60 billion, with another budget surplus
expected for fiscal 1999.
Growth in the nation's gross domestic product (GDP), which represents the
total value of all goods and services produced within the U.S. economy, has
remained remarkably steady. GDP is expected to have grown at an annualized rate
of between 2 and 3 percent for the second half of 1998 and is anticipated to
hover around 2 percent for the first half of 1999. The consumer price index
(CPI) remains at about 1.5 percent to 2 percent.
While employment growth has slowed a bit, the slowdown in wage gains may
provide the Fed with an incentive to reduce interest rates even further. U.S.
corporate profits have generally been flat, so we may see a decrease in capital
spending. Banks appear to be only a little less willing to lend, so the threat
of a general credit crunch is minimal.
Investors may take comfort in the fact that the U.S. markets and economy have
withstood the test of 1998's tumultuous third quarter. Similarly, while certain
countries, such as Malaysia, Indonesia, Brazil and Russia, are still suffering
from economic crises, others, including the Philippines, South Korea, Thailand
and China, appear to have survived. As long as the Fed and the Group of Seven
leading industrial nations (G7) are committed to avoiding recession on national
and global levels respectively, investors have a good chance of experiencing a
more stable economic environment.
At home, there has been somewhat of a slowdown in manufacturing, as reduced
U.S. exports reflect foreign economic turmoil. But the global impact of the
Asian crisis still has not hit the U.S. as hard as was expected. Indeed, Asian
turmoil has not affected U.S. trade as much as it has lowered import prices and
helped reduce global interest rates.
3
<PAGE> 4
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND SHAREHOLDER
DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR DEFLATION, CREDIT
EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR INVESTMENT
RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE 10-YEAR TREASURY
RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES. THE OTHER DATA REPORT
YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
OCTOBER 31, 1998 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 4.53 5.64 6.03 6.53
PRIME RATE(2) 8.12 8.50 8.50 8.25
INFLATION RATE(3)* 1.43 1.38 2.22 3.00
THE U.S. DOLLAR(4)* 0.89 3.92 7.62 4.74
CAPITAL GOODS ORDERS(5)* 10.21 10.47 15.67 4.79
INDUSTRIAL PRODUCTION(5)* 2.45 2.57 2.60 3.18
EMPLOYMENT GROWTH(6)* 2.34 2.57 2.65 2.22
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE
VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE VALUE OF U.S. FIRMS'
FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
* DATA AS OF SEPTEMBER 30, 1998.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
In Europe, the much anticipated Economic and Monetary Union (EMU) is on the
move, with a focus on more flexibility and growth potential for the region.
European equities may be the beneficiaries of increased spending, as governments
seek to foster growth and reduce unemployment.
If you're a long-term investor in today's short-term world, go ahead and
breathe that sigh of relief as 1998 comes to an end -- but get ready for 1999.
It's going to be an interesting year as the EMU emerges, the race for the next
presidency heats up and the year 2000 approaches. And, remember: Investors don't
like uncertainty, be it economic or political. A threat of impeachment, new acts
of terrorism or any other hints of crisis could help drag our markets downward
again.
I would like to take this opportunity to thank you for choosing to invest with
Kemper Funds. We appreciate the opportunity to serve your investment needs.
Sincerely,
/S/ John E. Silvia
JOHN E. SILVIA
November 9, 1998
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 NOVEMBER 9, 1998, AND
MAY NOT ACTUALLY COME TO PASS. THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF
THIS MATERIAL IS INTENDED AS AN INVESTMENT RECOMMENDATION.
4
<PAGE> 5
PERFORMANCE UPDATE
[RESIS PHOTO]
HARRY RESIS JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1988 AND IS A MANAGING
DIRECTOR. HE IS ALSO CO-LEAD PORTFOLIO MANAGER OF KEMPER HIGH YIELD FUND AND
KEMPER HIGH YIELD OPPORTUNITY FUND AND HANDLES ALL OF THE TRADING ACTIVITY FOR
THE FUNDS. RESIS HOLDS A BACHELOR'S DEGREE IN FINANCE FROM MICHIGAN STATE
UNIVERSITY.
[MCNAMARA PHOTO]
MICHAEL MCNAMARA JOINED THE ORGANIZATION IN 1972, AND IS A MANAGING DIRECTOR. HE
IS ALSO CO-LEAD PORTFOLIO MANAGER OF KEMPER HIGH YIELD FUND AND KEMPER HIGH
YIELD OPPORTUNITY FUND AND DIRECTS ALL FIXED- INCOME RESEARCH AT SCUDDER KEMPER
INVESTMENTS. HE EARNED AN MBA FROM LOYOLA UNIVERSITY.
[DOYLE PHOTO]
DAN DOYLE IS A PORTFOLIO MANAGER OF KEMPER HIGH YIELD OPPORTUNITY FUND. HE HAS
BEEN INVOLVED WITH KEMPER HIGH YIELD FUND IN BOTH RESEARCH AND TRADING SINCE
1986 AND IS A SENIOR TRADER FOR THE FUND. DOYLE RECEIVED HIS M.B.A. FROM THE
UNIVERSITY OF CHICAGO.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
THE HIGH YIELD MARKET BENEFITED FROM A BENIGN ECONOMIC ENVIRONMENT FOR ALMOST
THREE QUARTERS OF KEMPER'S HIGH YIELD FUNDS' FISCAL YEAR, OCTOBER 1, 1997
THROUGH SEPTEMBER 30, 1998. THE LAST FEW MONTHS OF THE REPORTING PERIOD,
HOWEVER, WERE CHALLENGING FOR ALL MARKETS, INCLUDING HIGH YIELD BONDS. CO-LEAD
PORTFOLIO MANAGERS HARRY RESIS AND MICHAEL MCNAMARA DISCUSS CIRCUMSTANCES
AFFECTING THE PERFORMANCE OF HIGH YIELD BONDS AND EXPLAIN THE DECISIONS THEY
MADE IN STRIVING TO MEET SHAREHOLDERS' EXPECTATIONS OF KEMPER HIGH YIELD FUND
AND KEMPER HIGH YIELD OPPORTUNITY FUND.
Q HARRY AND MICHAEL, AT THE FUNDS' SEMIANNUAL REPORTING PERIOD, THE MARKET
LOOKED ROSY AND BOTH FUNDS WERE SHOWING POSITIVE GAINS. BUT AS OF SEPTEMBER 30,
1998, KEMPER HIGH YIELD FUND HAD A NEGATIVE RETURN, OF 0.95 PERCENT (CLASS A
SHARES, UNADJUSTED FOR ANY SALES CHARGE) AND KEMPER HIGH YIELD OPPORTUNITY FUND
WAS UP 0.59 PERCENT SINCE INCEPTION (CLASS A SHARES, UNADJUSTED FOR ANY SALES
CHARGE). WHAT HAPPENED IN THE MARKET?
A The first part of the funds' fiscal year was a continuation of the past
three years' healthy economic environment. With stable economic growth, benign
inflation, rising corporate earnings and a strong equity market and low interest
rates, it was an ideal environment for high yield bonds. There was even the
feeling that the Asian problems that surfaced in October 1997 would be short
lived.
That all changed in July. It became clear the Asian situation was not
getting any better. On top of the Asian situation, financial problems in Russia
put pressure on the dealer and banking communities in the United States,
creating a serious liquidity problem in the market.
Q THE HIGH YIELD MARKET EXPERIENCED ONE OF ITS WORST MONTHS EVER IN AUGUST
1998. WAS THAT BECAUSE OF THESE FACTORS YOU JUST MENTIONED, OR SOMETHING ELSE?
A The problems that were an issue in July led to a liquidity crisis in the
high yield market in August. This problem was exacerbated by Russia defaulting
on its debts and causing Wall Street and banks to take losses on their
investments in Russia. Of course, there was also the fallout of the Long Term
Capital management hedge fund debacle in August.
We've been stressing during this period that the problems that led to the
market's poor performance were technical, not fundamental. That means the
fundamentals of the high yield market -- default rates, for instance, continue
to be tame. The Federal Reserve Board's (the Fed) decision to ease rates last
September, and the thought that further easing is in the works, is likely to
keep us out of a recession. This should help cure the liquidity crisis and get
the market back on track.
5
<PAGE> 6
PERFORMANCE UPDATE
Q KEMPER HIGH YIELD FUND OUTPERFORMED ITS LIPPER HIGH CURRENT YIELD FUNDS
CATEGORY AVERAGE FOR THE ONE-YEAR PERIOD ENDED SEPTEMBER 30, 1998, WITH A -0.95
PERCENT RETURN (CLASS A SHARES, UNADJUSTED FOR ANY SALES CHARGE) COMPARED WITH
THE PEER GROUP'S AVERAGE OF -1.77 PERCENT. IN SUCH A VOLATILE YEAR, WHAT SORTS
OF CHANGES DID YOU MAKE TO THE FUND'S PORTFOLIO COMPOSITION TO ACHIEVE THIS
PERFORMANCE?
A We were able to avoid defaults for the most part in the fiscal year,
having only one default. The fact that in September 1998, the fund had an
unadjusted return of 0.44 percent (Class A shares, unadjusted for any sales
charge), compared with the Lipper High Yield category average of -0.80 percent,
speaks to the fundamental conservative nature of the fund, at least for a high
yield fund. Good credit selection and the absence of any stocks in the portfolio
helped performance in the last few months of the fiscal year.
Q KEMPER HIGH YIELD OPPORTUNITY'S 0.59 PERCENT RETURN (CLASS A SHARES,
UNADJUSTED FOR ANY SALES CHARGE) ALSO BEAT ITS LIPPER HIGH CURRENT YIELD FUNDS
CATEGORY AVERAGE OF -1.77 PERCENT, ON AN ANNUAL BASIS. HOW WERE YOU ABLE TO
ACHIEVE TOTAL RETURN, AND INCOME, FOR KEMPER HIGH YIELD OPPORTUNITY FUND
SHAREHOLDERS?
A With the now-one-year-old Kemper High Yield Opportunity Fund, we can, and
want to be, more aggressive than Kemper High Yield Fund to achieve a greater
total return than we were able to with the older fund. Still, because we had
seen indications of a probable market correction in '98, we ran it less
aggressively than we could have. We took our 10% leverage off the fund in
February, and kept it at zero for most of the year to better weather the
changing market environment. We also kept our stock allocation to about 4
percent. Now with a more constructive outlook on the market, we'll likely ramp
that up to about 10 percent and increase our leverage as well.
Q WHAT IS YOUR OUTLOOK FOR THE HIGH YIELD MARKET?
A As we've mentioned, the recent downturn was largely a technical reaction
to events external to the high yield market. The fundamentals of the market
remain relatively strong. Pessimism and fear regarding the future, rather than
the fundamentals of high yield companies, are behind this correction. Defaults,
while increased from last year, are still below the historical average. While a
recession is a possibility and some firms are already calling for one in 1999,
at its current level, the high yield market seems to have already factored in a
recession and a resulting increase in defaults. The Federal Reserve Board's
recent rate cut, and the possibility of further cuts, could help stave off any
possible recession.
Recession or not, historically the high yield market has bounced back
smartly from terrible months such as August 1998. We've seen data that has shown
that of the five individually worst performing months in the high yield market,
the average return for the following 12 months is 21.2 percent (of course past
performance does not guarantee future results).
- --------------------------------------------------------------------------------
CUMULATIVE ONE-YEAR RETURNS
- --------------------------------------------------------------------------------
FOLLOWING THE FIVE WORST PERFORMING MONTHS FOR THE HIGH YIELD MARKET*
<TABLE>
<CAPTION>
1-YEAR RETURN,
FOLLOWING
THE WORST
1-MONTH PERFORMING
MONTH RETURN MONTHS
- --------------------------------------------------------------------------------
<S> <C> <C>
OCTOBER 1979 -8.39% 8.15%
- --------------------------------------------------------------------------------
FEBRUARY 1980 -8.25 12.67
- --------------------------------------------------------------------------------
SEPTEMBER 1990 -7.62 36.93
- --------------------------------------------------------------------------------
MAY 1984 -5.32 24.56
- --------------------------------------------------------------------------------
AUGUST 1990 -4.62 23.68
- --------------------------------------------------------------------------------
AVERAGE -6.84 21.20
- --------------------------------------------------------------------------------
AUG-1998 -6.79 14.46
- --------------------------------------------------------------------------------
</TABLE>
SOURCE: DLJ, IBBOTSON ASSOCIATES
* HIGH YIELD MARKET REPRESENTED BY DLJ HIGH YIELD INDEX
The high yield market has been driven down to a point where we see good values
in many of the companies on which we do extensive fundamental research. As a
result, we are carrying a very low cash position in Kemper High Yield Fund, and
anticipate staying fully invested in order to fully participate in a turnaround.
Q WHAT OTHER FACTORS DO YOU LOOK AT WHEN FORMULATING YOUR OUTLOOK ON THE
HIGH YIELD MARKET?
A The high yield market is really a small cap bond market. High yield bonds
are issued by companies with small capitalizations (see Terms to Know). The
small cap equity market was one of the harder hit markets during this recent
period, but we're seeing a rally already. And bonds of small cap issuers are
always senior in the right of payment to stockholders. So a small cap bond
market rebound is likely after the stock rebound.
6
<PAGE> 7
PERFORMANCE UPDATE
Q SO, IS THIS A GOOD TIME TO BE IN HIGH YIELD FUNDS?
A The market's already showing signs of a bounce back. As the liquidity in
the market improves, we'll have more and more opportunities to take advantage of
good values in the market. Whether an investor is total return-oriented or
looking for income, high yield investing may make sense.
TERMS TO KNOW
EASE Occurs when the Federal Reserve Board of Governors changes monetary policy
by decreasing the federal funds rate.
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.
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.
RECESSION A downturn in economic activity, defined by many economists as at
least two consecutive quarters of decline in a country's Gross Domestic Product
(GDP).
7
<PAGE> 8
PERFORMANCE UPDATE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- ------------------------------------------------------------------------------------------------------
FOR PERIODS ENDED SEPTEMBER 30, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
1 YEAR 5 YEAR 10 YEAR LIFE OF CLASS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER HIGH YIELD FUND CLASS A -5.40% 7.74% 9.49% 11.17% (since 1/26/78)
- ------------------------------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND CLASS B -4.53 N/A N/A 7.76 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND CLASS C -1.89 N/A N/A 8.21 (since 5/31/94)
- ------------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
KEMPER HIGH YIELD FUND CLASS A
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SALOMON BROTHERS
KEMPER HIGH YIELD LONG-TERM HIGH
FUND CLASS A(1) YIELD BOND INDEX+ CONSUMER PRICE INDEX++
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1/1/80 1000 10000 10000
3/31/80 8738 8842 10443
6/30/80 9983 10171 10782
9/30/80 9526 9438 10952
12/31/80 9458 8458 11252
3/31/81 9740 9702 11538
6/30/81 9991 9781 11812
9/30/81 9205 8738 12151
12/31/81 10279 8848 12256
3/31/82 10673 9929 12321
6/30/82 11057 10293 12647
9/30/82 12961 12247 12764
12/31/82 14340 13221 12725
3/31/83 15849 15406 12764
6/30/83 16103 15513 12973
9/30/83 16460 15995 13129
12/31/83 16872 18289 13207
3/31/84 17158 16311 13377
6/30/84 16775 15697 13520
9/30/84 17794 17245 13690
12/31/84 18592 17745 13729
3/31/85 19488 18916 13872
6/30/85 21119 20004 14029
9/30/85 21654 20574 14120
12/31/85 22880 21765 14250
3/31/86 24415 23578 14185
6/30/86 25614 24587 14276
9/30/86 25789 24740 14368
12/31/86 27058 25270 14407
3/31/87 29238 28995 14615
6/30/87 29064 26777 14798
9/30/87 28891 26208 14993
12/31/87 29498 26428 15046
3/31/88 31640 28359 15189
6/30/88 32510 29420 15385
9/30/88 33000 30100 15619
12/31/88 33750 30086 15711
3/31/89 34394 31474 15945
6/30/89 35494 32619 16180
9/30/89 34951 31550 16297
12/31/89 33364 30352 16441
3/31/90 32069 28801 16780
6/30/90 34137 30221 16936
9/30/90 30119 27388 17301
12/31/90 29034 27749 17445
3/31/91 35828 33833 17601
6/30/91 38146 35590 17731
9/30/91 41206 37774 17888
12/31/91 42634 39729 17979
3/31/92 46977 42861 18162
6/30/92 48218 44577 18279
9/30/92 49431 46671 18422
12/31/92 49917 47348 18501
3/31/93 53011 50546 18722
6/30/93 55645 53229 18827
9/30/93 56313 54731 18918
12/31/93 60046 56841 19009
3/31/94 58794 54744 19192
6/30/94 58469 53525 19296
9/30/94 58929 54148 19478
12/31/94 59012 54498 19518
3/31/95 62016 58887 19739
6/30/95 65004 64087 19883
9/30/95 67236 68636 19974
12/31/95 69313 70490 20013
3/31/96 71101 70048 20300
6/30/96 72262 70020 20430
9/30/96 75978 72252 20574
12/31/96 78656 76032 20678
3/31/97 78565 76153 20860
6/30/97 82770 81217 20900
9/30/97 86373 85854 21017
12/31/97 87707 88510 21030
3/31/98 90958 93097 21147
6/30/98 91607 95273 21252
9/30/98 85550 92762 21304
</TABLE>
[LINE GRAPH]
KEMPER HIGH YIELD FUND CLASS B
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SALOMON BROTHERS
KEMPER HIGH YIELD LONG-TERM HIGH
FUND CLASS B(1) YIELD BOND INDEX+ CONSUMER PRICE INDEX++
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00
6/30/94 10107.60 9978.00 10034.00
10/3/94 10026.00 10084.00 10129.00
12/31/94 10064.60 10160.00 10148.00
3/31/95 10450.30 10880.00 10264.00
6/30/95 10899.20 11947.00 10339.00
9/29/95 11295.60 12422.00 10386.00
12/31/95 11640.00 13141.00 10407.00
3/29/96 11836.20 13058.00 10556.00
6/28/96 12001.10 13053.00 10624.00
9/30/96 12530.90 13469.00 10698.00
12/31/96 13094.50 14174.00 10753.00
2/28/97 13224.10 14196.00 10847.00
6/30/97 13730.10 15140.00 10868.00
9/24/97 14212.60 16005.00 10929.00
12/31/97 14468.70 16698.00 10936.00
3/25/98 14873.60 17355.00 10997.00
6/24/98 15012.50 17761.00 11051.00
9/30/98 13827 17293.00 11078.00
</TABLE>
[LINE GRAPH]
KEMPER HIGH YIELD FUND CLASS C
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SALOMON BROTHERS
KEMPER HIGH YIELD LONG-TERM HIGH
FUND CLASS C(1) YIELD BOND INDEX+ CONSUMER PRICE INDEX++
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
5/31/94 10000 10000 10000
9971 9978 10034
10027 10084 10129
10032 10160 10149
10506 10880 10264
10989 11947 10339
11343 12422 10386
11677 13141 10407
11947 13058 10556
12131 13053 10624
12711 13469 10698
12/31/96 13139 14174 10753
13106 14196 10847
13762 15140 10868
14347 16005 10929
12/31/97 14522 16698 10936
15046 17355 10997
15122 17761 11051
9/30/98 14076 17293 11078
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURNS AND
PRINCIPAL VALUES WILL FLUCTUATE. SHARES ARE REDEEMABLE AT CURRENT NET ASSET
VALUE, WHICH MAY BE MORE OR LESS THAN ORIGINAL COST.
*AVERAGE ANNUAL TOTAL RETURN MEASURES NET INVESTMENT INCOME AND CAPITAL GAIN
OR LOSS FROM PORTFOLIO INVESTMENTS OVER THE PERIODS SPECIFIED, ASSUMING
REINVESTMENT OF DIVIDENDS AND, WHERE INDICATED, ADJUSTMENT FOR THE MAXIMUM
SALES CHARGE. THE MAXIMUM SALES CHARGE FOR CLASS A SHARES IS 4.5%. FOR CLASS
B SHARES, THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE IS 4%. CLASS C SHARES
HAVE NO SALES CHARGE ADJUSTMENT, BUT REDEMPTIONS WITHIN ONE YEAR OF PURCHASE
MAY BE SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE OF 1%. SHARE CLASSES
INVEST IN THE SAME UNDERLYING PORTFOLIO. AVERAGE ANNUAL RETURN REFLECTS
ANNUALIZED CHANGE WHILE TOTAL RETURN REFLECTS AGGREGATE CHANGE. DURING THE
PERIODS NOTED, SECURITIES PRICES FLUCTUATED. FOR ADDITIONAL INFORMATION, SEE
THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION AND THE FINANCIAL
HIGHLIGHTS AT THE END OF THIS REPORT.
(1)PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS AND ADJUSTMENT FOR THE MAXIMUM
SALES CHARGE FOR CLASS A SHARES AND THE CONTINGENT DEFERRED SALES CHARGE IN
EFFECT AT THE END OF THE PERIOD FOR CLASS B SHARES. WHEN REVIEWING THE
PERFORMANCE CHART, PLEASE NOTE THAT THE INCEPTION DATE FOR THE SALOMON
BROTHERS LONG-TERM HIGH YIELD BOND INDEX IS JANUARY 1, 1980. AS A RESULT, WE
ARE NOT ABLE TO ILLUSTRATE THE LIFE OF CLASS PERFORMANCE (SINCE JANUARY 1,
1978) FOR THE KEMPER HIGH YIELD FUND CLASS A SHARES. IN COMPARING THE
PERFORMANCE OF THE FUND TO THAT OF THE SALOMON BROTHERS LONG-TERM HIGH YIELD
BOND INDEX AND THE CONSUMER PRICE INDEX, YOU SHOULD ALSO NOTE THAT THE FUND'S
PERFORMANCE REFLECTS THE MAXIMUM SALES CHARGE, WHILE NO SUCH CHARGES ARE
REFLECTED IN THE PERFORMANCE OF THE INDICES.
THE FUND MAY INVEST IN LOWER-RATED AND NON-RATED SECURITIES WHICH PRESENT
GREATER RISK OF LOSS TO PRINCIPAL AND INTEREST THAN HIGH-RATED SECURITIES.
+THE SALOMON BROTHERS LONG-TERM HIGH YIELD BOND INDEX IS ON A TOTAL RETURN
BASIS WITH ALL DIVIDENDS REINVESTED AND IS COMPRISED OF HIGH YIELD BONDS WITH
A PAR VALUE OF $50 MILLION OR HIGHER AND A REMAINING MATURITY OF TEN YEARS OR
LONGER RATED BB+ OR LOWER BY STANDARD & POOR'S CORPORATION OR BA1 OR LOWER BY
MOODY'S INVESTORS SERVICE, INC. THIS INDEX IS UNMANAGED. SOURCE IS SALOMON
BROTHERS INC.
++THE CONSUMER PRICE INDEX IS A STATISTICAL MEASURE OF CHANGE, OVER TIME, IN
THE PRICES OF GOODS AND SERVICES IN MAJOR EXPENDITURE GROUPS FOR ALL URBAN
CONSUMERS. IT IS GENERALLY CONSIDERED TO BE A MEASURE OF INFLATION. SOURCE IS
TOWERSDATA.
8
<PAGE> 9
PORTFOLIO STATISTICS
KEMPER HIGH YIELD FUND
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION* ON 9/30/98 ON 9/30/97
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS 93% 93%
- ------------------------------------------------------------------------------------------------------
CASH EQUIVALENTS 3 3
- ------------------------------------------------------------------------------------------------------
PREFERRED AND COMMON STOCK 2 2
- ------------------------------------------------------------------------------------------------------
U.S. TREASURIES 2 2
- ------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/98 ON 9/30/97
YEARS TO MATURITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ON 9/30/98 ON 9/30/97
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH EQUIVALENTS 3% 3%
- ------------------------------------------------------------------------------------------------------
1-10 YEARS 90 87
- ------------------------------------------------------------------------------------------------------
11-20 YEARS 5 8
- ------------------------------------------------------------------------------------------------------
OVER 21 YEARS 2 2
- ------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/98 ON 9/30/97
QUALITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ON 9/30/98 ON 9/30/97
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
AAA 2% 2%
- ------------------------------------------------------------------------------------------------------
BBB -- 2
- ------------------------------------------------------------------------------------------------------
BB 11 15
- ------------------------------------------------------------------------------------------------------
B 74 75
- ------------------------------------------------------------------------------------------------------
OTHER 11 6
- ------------------------------------------------------------------------------------------------------
NOT RATED 2 --
- ------------------------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/98 ON 9/30/97
* PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
9
<PAGE> 10
PERFORMANCE UPDATE
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
FOR THE PERIODS ENDED SEPTEMBER 30, 1998 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF CLASS
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS A -3.96% (since 10/01/97)
- --------------------------------------------------------------------------------------------------
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS B -3.93% (since 10/01/97)
- --------------------------------------------------------------------------------------------------
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS C -1.11% (since 10/01/97)
- --------------------------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALOMON
BROTHERS
KEMPER LONG-TERM
HIGH YIELD HIGH-YIELD CONSUMER
FUND CLASS BOND PRICE
A(1) INDEX+ INDEX++
<S> <C> <C> <C>
10/1/97 10000 10000 10000
12/31/97 9758 10694 10006
6/30/98 10393 11381 10112
9/30/98 9574 11081 10136
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS B
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALOMON
BROTHERS
KEMPER LONG-TERM
HIGH YIELD HIGH-YIELD CONSUMER
FUND CLASS BOND PRICE
A(1) INDEX+ INDEX++
<S> <C> <C> <C>
10/1/97 10000 10000 10000
12/31/97 10240 10694 10006
6/30/98 10825 11381 10112
9/30/98 9607 11081 10136
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS C
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALOMON
BROTHERS
KEMPER LONG-TERM
HIGH YIELD HIGH-YIELD CONSUMER
FUND CLASS BOND PRICE
A(1) INDEX+ INDEX++
<S> <C> <C> <C>
10/1/97 10000 10000 10000
12/31/97 10241 10694 10006
6/30/98 10859 11381 10112
9/30/98 9982 11081 10136
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURNS AND
PRINCIPAL VALUES WILL FLUCTUATE. SHARES ARE REDEEMABLE AT CURRENT NET ASSET
VALUE, WHICH MAY BE MORE OR LESS THAN ORIGINAL COST.
* AVERAGE ANNUAL TOTAL RETURN MEASURES NET INVESTMENT INCOME AND CAPITAL GAIN
OR LOSS FROM PORTFOLIO INVESTMENTS OVER THE PERIODS SPECIFIED, ASSUMING
REINVESTMENT OF DIVIDENDS AND, WHERE INDICATED, ADJUSTMENT FOR THE MAXIMUM
SALES CHARGE. THE MAXIMUM SALES CHARGE FOR CLASS A SHARES IS 4.5%. FOR CLASS
B SHARES, THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE IS 4%. CLASS C SHARES
HAVE NO SALES CHARGE ADJUSTMENT, BUT REDEMPTIONS WITHIN ONE YEAR OF PURCHASE
MAY BE SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE OF 1%. SHARE CLASSES
INVEST IN THE SAME UNDERLYING PORTFOLIO. AVERAGE ANNUAL RETURN REFLECTS
ANNUALIZED CHANGE WHILE TOTAL RETURN REFLECTS AGGREGATE CHANGE. DURING THE
PERIODS NOTED, SECURITIES PRICES FLUCTUATED. FOR ADDITIONAL INFORMATION, SEE
THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION AND THE FINANCIAL
HIGHLIGHTS AT THE END OF THIS REPORT.
(1)PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS AND ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE FOR CLASS A SHARES AND THE CONTINGENT DEFERRED SALES
CHARGE IN EFFECT AT THE END OF THE PERIOD FOR CLASS B SHARES. IN COMPARING
THE PERFORMANCE OF THE FUND TO THAT OF THE SALOMON BROTHERS LONG-TERM HIGH
YIELD BOND INDEX AND THE CONSUMER PRICE INDEX, YOU SHOULD ALSO NOTE THAT THE
FUND'S PERFORMANCE REFLECTS THE MAXIMUM SALES CHARGE, WHILE NO SUCH CHARGES
ARE REFLECTED IN THE PERFORMANCE OF THE INDICES.
THE FUND MAY INVEST IN LOWER-RATED AND NON-RATED SECURITIES WHICH PRESENT
GREATER RISK OF LOSS TO PRINCIPAL AND INTEREST THAN HIGH-RATED SECURITIES.
+ THE SALOMON BROTHERS LONG-TERM HIGH YIELD BOND INDEX IS ON A TOTAL RETURN
BASIS WITH ALL DIVIDENDS REINVESTED AND IS COMPRISED OF HIGH YIELD BONDS WITH
A PAR VALUE OF $50 MILLION OR HIGHER AND A REMAINING MATURITY OF TEN YEARS OR
LONGER RATED BB+ OR LOWER BY STANDARD & POOR'S CORPORATION OR BA1 OR LOWER BY
MOODY'S INVESTORS SERVICE, INC. THIS INDEX IS UNMANAGED. SOURCE IS SALOMON
BROTHERS INC.
++ THE CONSUMER PRICE INDEX IS A STATISTICAL MEASURE OF CHANGE, OVER TIME, IN
THE PRICES OF GOODS AND SERVICES IN MAJOR EXPENDITURE GROUPS FOR ALL URBAN
CONSUMERS. IT IS GENERALLY CONSIDERED TO BE A MEASURE OF INFLATION. SOURCE IS
TOWERSDATA.
10
<PAGE> 11
PORTFOLIO STATISTICS
KEMPER HIGH YIELD OPPORTUNITY FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 9/30/98
- --------------------------------------------------------------------------------
<S> <C>
BONDS 96%
- --------------------------------------------------------------------------------
CASH EQUIVALENTS 4
- --------------------------------------------------------------------------------
100%
</TABLE>
[PIE CHART]
ON 9/30/98
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS TO MATURITY ON 9/30/98
<S> <C>
1-10 YEARS 91%
- --------------------------------------------------------------------------------
11-20 YEARS 7
- --------------------------------------------------------------------------------
OVER 21 YEARS 2
- --------------------------------------------------------------------------------
100%
</TABLE>
[PIE CHART]
ON 9/30/98
QUALITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 9/30/98
- --------------------------------------------------------------------------------
<S> <C>
BB 9%
- --------------------------------------------------------------------------------
B 74
- --------------------------------------------------------------------------------
OTHER 16
- --------------------------------------------------------------------------------
NOT RATED 1
- --------------------------------------------------------------------------------
100%
</TABLE>
[PIE CHART]
ON 9/30/98
* PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
KEMPER HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS--1.7% PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT U.S. Treasury bonds, 15.75%, 2001
OBLIGATIONS (Cost: $79,205) $ 60,000 $ 79,67%
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--93.3%
- -------------------------------------------------------------------------------------------------------------------------
AEROSPACE--.4% DeCrane Aircraft Holdings, Inc., 12.00%,
2008 12,030 12,090
L-3 Communication Corp., 10.375%, 2007 7,220 7,906
------------------------------------------------------------------------------
19,996
- -------------------------------------------------------------------------------------------------------------------------
BROADCASTING, CABLESYSTEMS Affinity Group, Inc., 11.50%, 2003 23,411 24,230
AND PUBLISHING--15.4% American Banknote Corp.,
11.25%, with warrants, 2007 16,850 13,185
(b)American Lawyer, 12.25%, 2008 2,940 1,793
American Radio Systems, 9.00%, 2006 18,490 19,784
(a)(b)Australis Holdings, 15.00%, with
warrants, 2002 49,213 3,445
Australis Media, Ltd., 14.00%, 2000 4,779 3,345
Big Flower Press, Inc., 8.875%, 2007 33,580 32,908
Busse Broadcasting, 11.625%, 2000 13,580 14,531
CCA Holdings, 13.00%, 1999 17,500 27,825
CSC Holdings, Inc.
9.25%, 2005 10,220 10,782
7.875%, 2007 4,100 4,218
8.125%, 2009 15,156 15,649
10.50%, 2016 27,375 31,755
Capstar Broadcasting
9.25%, 2007 10,170 10,221
(b) 12.75%, 2009 16,980 12,905
Century Communications Corp.
9.50%, 2005 3,630 3,948
8.375%, 2007 8,100 8,282
(b)Charter Communications, 14.00%, 2007 28,040 24,114
Charter Communications, L.P., 11.25%, 2006 8,395 9,193
Comcast Corp., 9.125%, 2006 34,485 36,813
(b)Comcast UK Cable Partners, Ltd., 11.20%,
2007 10,225 8,282
(b)DIVA Systems Corp., 12.625%, 2008 10,810 3,676
(b)Diamond Cable Communications, PLC,
13.25%, 2004 29,130 27,965
EZ Communications, 9.75%, 2005 8,760 9,373
Falcon Holding Group, L.P.
8.375%, 2010 33,545 33,545
(b) 9.285%, 2010 2,485 1,702
Frontiervision
11.00%, 2006 14,450 16,003
(b) 11.875%, 2007 16,839 13,724
Interep National Radio Sales, Inc., 10.00%,
2008 12,110 11,807
Intermedia Capital Partners, 11.25%, 2006 20,880 22,968
(b)International Cabletel, Inc., 12.75%,
2005 48,940 43,067
Mediacom LLC, 8.50%, 2008 17,350 17,393
NTL, 10.00%, 2007 20,821 20,925
(b)PX Escrow Corp., 9.625%, 2006 19,840 11,309
Price Communications Corp., 9.125%, 2006 26,770 26,369
(b)Radio Unica Corp., 11.75%, 2006 17,880 9,655
Rogers Communications, 8.875%, 2007 8,120 7,998
SFX Entertainment, Inc., 9.125%, 2008 16,220 15,166
Salem Communications Corp., 9.50%, 2007 12,490 12,865
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sinclair Broadcasting Group, Inc., 8.75%,
2007 $ 12,970 $ 12,743
Star Choice, 13.00%, with warrants, 2005 3,850 4,079
TeleWest Communications, PLC
9.625%, 2006 15,435 15,512
(b) 11.00%, 2007 41,443 33,776
(b)Transwestern Holdings, 11.875%, 2008 5,885 3,678
Transwestern Publishing, 9.625%, 2007 13,220 13,484
(b)21st Century Telecom Group, Inc.,
12.25%, with warrants, 2008 14,900 7,309
(b)UIH Australia Pacific, Inc.,
14.00%, with warrants, 2006 14,150 5,731
(b)United International Holdings, 10.75%,
2008 32,500 15,438
------------------------------------------------------------------------------
734,468
- ---------------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES--2.0% Allied Waste Industries
10.25%, 2006 12,970 14,105
(b) 11.30%, 2007 26,805 19,769
Intertek Finance, 10.25%, 2006 13,190 12,464
Outdoor Systems, Inc.
9.375%, 2006 32,270 33,884
8.875%, 2007 15,520 16,063
------------------------------------------------------------------------------
96,285
- ---------------------------------------------------------------------------------------------------------------------------
CHEMICALS AND Agriculture, Mining and Chemicals, Inc.,
AGRICULTURE--4.1% 10.75%, 2003 19,230 19,807
Atlantis Group, Inc., 11.00%, 2003 25,355 25,799
Hines Horticulture, 11.75%, 2005 9,392 9,674
Huntsman Package, 11.75%, 2004 31,845 33,517
NL Industries, Inc.
11.75%, 2003 38,877 41,598
(b) 13.00%, 2005 21,370 22,492
Terra Industries, Inc., 10.50%, 2005 12,520 12,833
Texas Petrochemicals, 11.125%, 2006 19,610 18,237
UCC Investors Holdings, Inc., 10.50%, 2002 10,480 11,895
------------------------------------------------------------------------------
195,852
- ---------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--17.8% Allegiance Telecom, Inc.
(b) 11.75%, 2008 16,310 7,503
12.875%, 2008 12,110 11,505
American Cellular Corp., 10.50%, 2008 18,100 17,467
Birch Telecom, 14.00%, 2008 8,000 7,040
(b)Call-Net Enterprises, Inc.
13.25%, 2004 7,240 6,878
9.27%, 2007 10,990 7,116
8.94%, 2008 16,230 9,413
Comcast Cellular Holdings, Inc., 9.50%,
2007 3,950 4,049
(b)Communications Cellular,
13.125%, with warrants, 2003 33,190 23,926
(b)Crown Castle International Corp.,
10.625%, 2007 31,730 19,673
Dobson Communication Corp., 11.75%, 2007 24,500 24,500
Econophone, Inc.
13.50%, with warrants, 2007 26,655 28,462
(b) 11.00%, 2008 7,880 3,940
Esprit Telecom
11.50%, 2007 21,190 19,760
10.875%, 2008 10,060 9,054
(b)Focal Communications Corp., 12.125%,
2008 4,110 2,055
GCI General Communication, 9.75%, 2007 15,970 14,692
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(b)ICG Holdings, 13.50%, 2005 $ 76,685 $ 59,814
(b)IPC Information Systems, 10.875%, 2008 23,140 14,636
Impsat, S.A., 12.375%, 2008 28,490 18,803
Intermedia Communications of Florida, Inc.
(b) 12.50%, 2006 21,350 17,187
8.875%, with warrants, 2007 8,115 9,827
(b) 11.25%, 2007 27,170 19,427
(b)KMC Telecom Holdings, Inc.,
12.50%, with warrants, 2008 23,900 11,305
Level 3 Communications, 9.125%, 2008 16,800 15,708
Long Distance International, 12.25%, 2008 16,300 14,344
MGC Communications,
13.00%, with warrants, 2004 18,116 14,846
McLeod, Inc.
9.25%, 2007 16,065 16,426
(b) 10.50%, 2007 31,530 22,623
Metronet Communications
(b) 10.75%, 2007 8,460 5,034
12.00%, with warrants, 2007 8,280 8,967
(b) 9.95%, 2008 28,850 15,868
(b)Millicom International Cellular, S.A.,
13.50%, 2006 35,740 22,427
Netia Holdings
10.25%, 2007 3,220 2,447
(b) 11.25%, 2007 10,805 4,430
(b)Nextel Communications
9.75%, 2007 4,810 2,910
10.65%, 2007 16,835 10,606
9.95%, 2008 14,890 8,822
Nextlink Communications
12.50%, 2006 27,230 29,272
9.00%, 2008 19,630 19,041
(b)PTC International Finance, B.V., 10.75%,
2007 21,080 12,121
(b)Pinnacle Holdings, 10.00%, 2008 24,700 12,906
Primus Telecommunications Group,
11.75%, with warrants, 2004 15,370 14,884
PSINet, Inc., 10.00%, 2005 13,900 13,900
RCN Corp.
10.00%, 2007 10,390 9,715
(b) 11.00%, 2008 10,980 5,600
Rogers Cantel
9.375%, 2008 6,660 6,793
9.75%, 2016 28,795 28,867
(b)SBA Communication, 12.00%, 2008 32,000 16,000
Satelites Mexicanos, S.A. de C.V.,
10.125%, 2004 2,500 1,700
(b)Spectrasite Holdings, Inc., 12.00%, 2008 21,650 10,392
Teligent, Inc.
11.50%, 2007 12,100 9,347
(b) 11.50%, 2008 14,650 5,567
(b)Triton Communications, 11.00%, 2008 27,440 12,348
USA Mobile Communications, Inc. II,
14.00%, 2004 15,635 16,573
US Xchange, LLC., 15.00%, 2008 13,830 13,830
Vanguard Cellular Systems, 9.375%, 2006 18,630 18,630
Versatel Telecom, 13.25%, with warrants,
2008 11,330 10,877
Viatel, Inc.
11.25%, 2008 11,410 10,725
(b) 12.50%, 2008 23,300 11,883
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Winstar Communication, 15.00%, 2007 $ 8,760 $ 8,585
Winstar Equipment, 12.50%, 2004 20,840 18,964
-----------------------------------------------------------------------------
852,010
- ------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION Airxcel, 11.00%, 2007 16,090 14,964
MATERIALS--3.7% American Standard, Inc., 9.25%, 2016 15,517 15,866
(b)Building Materials Corporation of
America, 11.75%, 2004 27,880 27,880
Congoleum Corp., 8.625%, 2008 13,010 12,457
Desa International, 9.875%, 2007 16,490 14,016
Falcon Building Products, Inc., 9.50%, 2007 12,570 11,439
Kevco, 10.375%, 2007 20,480 19,456
Nortek, Inc.
9.875%, 2004 4,855 4,843
9.125%, 2007 15,600 15,366
8.875%, 2008 6,430 6,205
Terex Corp., 8.875%, 2008 19,540 18,123
(b)Waxman Industries, Inc.,
12.75%, with warrants, 2004 6,510 5,123
Werner Holdings, 10.00%, 2007 11,430 10,858
-----------------------------------------------------------------------------
176,596
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS AND AMF Bowling World
SERVICES--10.7% 10.875%, 2006 35,217 30,551
(b) 12.25%, 2006 16,911 10,273
Avondale Mills, 10.25%, 2006 24,151 24,996
CEX Holdings, Inc., 9.625%, 2008 8,880 8,436
Cinemark USA, Inc.
8.50%, 2008 18,860 18,106
9.625%, 2008 15,450 15,759
Clearview Cinema Group, Inc., 10.875%, 2008 12,180 12,850
Coinmach Corp., 11.75%, 2005 57,281 59,286
Doskocil Manufacturing Co., 10.125%, 2007 14,680 13,652
Dyersburg Corp., 9.75%, 2007 18,155 14,887
Grupo Azucarero Mexico, S.A. de C.V.,
11.50%, 2005 9,010 2,523
HMH Properties, 7.875%, 2008 35,170 34,730
Hedstrom Corp., 10.00%, 2007 11,280 10,716
Herff Jones, Inc., 11.00%, 2005 20,810 22,371
Imperial Home Decor Group, Inc.,
11.00%, 2008 24,570 22,113
Kinder-Care Learning Centers, 9.50%, 2009 36,550 34,997
La Petite Academy, Inc., 10.00%, 2008 7,990 7,730
Loews Cineplex Entertainment Corp., 8.875%,
2008 9,720 9,574
Mastellone Hermonos, 11.75%, 2008 17,440 11,336
NBTY Inc., 8.625%, 2007 10,380 10,043
Nine West Group, 9.00%, 2007 8,300 7,055
Perkins Finance, L.P., 10.125%, 2007 8,820 8,820
Pillowtex Corp., 9.00%, 2007 6,450 6,321
Purina Mills, Inc., 9.00%, 2010 17,500 17,150
(b)Restaurant Co., 11.25%, 2008 17,460 8,032
(b)Sealy Mattress, 10.875%, 2007 13,020 8,138
Six Flags Theme Park, 12.25%, 2005 40,465 43,702
(b)Spin Cycle, 12.75%, 2005 26,295 13,673
United Artists Theatre Co., 9.75%, 2008 24,785 23,050
-----------------------------------------------------------------------------
510,870
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DRUGS AND HEALTH CARE--3.4% Abbey Healthcare Group, Inc., 9.50%, 2002 $ 18,190 $ 16,917
(b)ALARIS Medical Systems, Inc., 11.25%,
2008 13,730 5,904
Dade International, Inc., 11.125%, 2006 27,400 29,318
Magellan Health Services, 9.00%, 2008 40,640 34,747
(b)Mariner Post-Acute Network, Inc.,
10.50%, 2007 58,210 32,306
Mediq, Inc., 11.00%, 2008 12,140 11,412
Paracelsus Healthcare, 10.00%, 2006 11,860 10,970
Vencor, 9.875%, 2005 23,660 18,455
--------------------------------------------------------------------------------
160,029
- ---------------------------------------------------------------------------------------------------------------------------
ENERGY AND RELATED Bellweather Exploration Co., 10.875%, 2007 16,310 15,658
SERVICES--5.4% Benton Oil & Gas Co.
11.625%, 2003 22,385 19,475
9.375%, 2007 1,850 1,332
Chesapeake Energy Corp., 9.125%, 2006 300 255
Clark Refining, 8.875%, 2007 1,160 1,003
Continental Resources, Inc., 10.25%, 2008 16,320 13,546
Dailey International, 9.50%, 2008 2,280 1,482
Denbury Management, 9.00%, 2008 15,110 12,541
Flores & Rucks, Inc., 9.75%, 2006 13,725 14,240
Forcenergy Gas Exploration
9.50%, 2006 17,480 13,023
8.50%, 2007 7,170 5,162
GulfMark Offshore, Inc., 8.75%, 2008 9,100 8,372
Mariner Energy, 10.50%, 2006 16,720 15,466
Michael Petroleum Corp., 11.50%, 2005 2,040 1,754
Ocean Energy, 10.375%, 2005 21,825 22,971
Pacalta Resources, Ltd., 10.75%, 2004 26,305 23,675
Parker Drilling Corp., 9.75%, 2006 24,050 22,066
Pen Holdings, Inc., 9.875%, 2008 14,980 14,231
Prestolite Electric, 9.625%, 2008 12,360 11,618
RAM Energy, 11.50%, 2008 8,250 6,847
Rutherford-Moran Oil Corp., 10.75%, 2004 9,120 8,208
Seven Seas Petroleum, Inc., 12.50%, 2005 8,000 6,520
Stone Energy Corp., 8.75%, 2007 18,880 18,125
--------------------------------------------------------------------------------
257,570
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES, Beazer Homes, 8.875%, 2008 9,800 9,065
HOME BUILDERS AND Corporate Express, Inc., 4.50%, 2000 18,820 17,079
REAL ESTATE--2.8% Del Webb Corp.
9.75%, 2008 20,870 20,453
9.375%, 2009 10,060 9,658
Forecast Group, L.P., 11.375%, 2000 14,620 14,108
Fortress Group, 13.75%, 2003 14,080 14,502
Hovnanian Enterprises, 11.25%, 2002 30,257 30,181
Ryland Group, Inc., 8.25%, 2008 22,030 20,653
--------------------------------------------------------------------------------
135,699
- ---------------------------------------------------------------------------------------------------------------------------
HOTELS AND GAMING--2.0% Eldorado Resorts, 10.50%, 2006 17,981 18,700
Empress River Casino, 10.75%, 2002 21,493 23,105
Hard Rock Hotel, 9.25%, 2005 6,120 6,059
Harvey's Casino Resorts, 10.625%, 2006 14,770 15,656
Players International, 10.875%, 2005 14,105 14,881
Rio Hotel & Casino, Inc., 9.50%, 2007 7,290 7,946
</TABLE>
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Station Casinos, Inc., 9.625%, 2003 $ 3,750 $ 3,675
Trump Atlantic City, 11.25%, 2006 5,690 4,694
--------------------------------------------------------------------------------
94,716
- ---------------------------------------------------------------------------------------------------------------------------
MANUFACTURING, METALS Accuride, 9.25%, 2008 15,845 15,053
AND MINING--10.8% Aftermarket Technology, 12.00%, 2004 16,624 17,663
Alvey Systems, 11.375%, 2003 8,105 8,267
Bar Technologies, 13.50%, with warrants,
2001 16,335 17,994
Collins & Aikman Corp., 11.50%, 2006 15,030 15,744
Day International Group, Inc., 11.125%,
2005 22,045 23,478
Delco Remy International, 10.625%, 2006 26,115 26,833
E-P Acquisition, Inc., 9.375%, 2008 3,200 2,912
Earle M. Jorgensen Co., 9.50%, 2005 5,700 5,301
Euramax International, PLC, 11.25%, 2006 23,595 23,359
Foamex, L.P.
13.50%, with warrants, 2005 19,500 22,757
9.875%, 2007 2,900 3,117
GS Technologies
12.00%, 2004 5,875 5,067
12.25%, 2005 8,970 7,602
(b)Grove Holdings LLC, 11.625%, 2009 4,070 1,628
Grove Investors, PIK, 14.50%, 2010 8,296 7,052
Grove Worldwide LLC, 9.25%, 2008 4,080 3,550
Hayes Wheels International, Inc., 11.00%,
2006 23,070 25,262
JPS Automotive Products Corp., 11.125%,
2001 27,270 29,452
Jackson Products, Inc., 9.50%, 2005 10,130 9,624
Knoll, Inc., 10.875%, 2006 21,384 23,309
MMI Products, Inc., 11.25%, 2007 15,240 16,688
Metal Management, Inc., 10.00%, 2008 12,070 7,845
Metal USA, 8.625%, 2008 18,160 15,799
Motors and Gears, Inc., 10.75%, 2006 17,250 16,905
NSM Steel
12.00%, 2006 19,840 10,850
12.25%, with warrants, 2008 21,550 8,620
Neenah Corp., 11.125%, 2007 18,840 19,075
Park-Ohio Industries, 9.25%, 2007 8,600 8,557
Renco Metals, 11.50%, 2003 14,945 14,795
Renco Steel Holdings, 10.875%, 2005 21,130 17,855
Scovill Fasteners, 11.25%, 2007 11,020 9,918
Spinnaker Industries, 10.75%, 2006 23,070 20,071
Venture Holdings, 9.50%, 2005 18,100 17,557
Wells Aluminum Corp., 10.125%, 2005 20,506 19,686
Wheeling-Pittsburgh Corp., 9.25%, 2007 19,740 18,457
--------------------------------------------------------------------------------
517,702
- ---------------------------------------------------------------------------------------------------------------------------
PAPER, FOREST PRODUCTS AEP Industries, Inc., 9.875%, 2007 7,180 6,893
AND CONTAINERS--6.8% BPC Holding Corp., 12.50%, 2006 12,240 12,485
Berry Plastics Corp., 12.25%, 2004 20,499 21,114
Doman Industry
8.75%, 2004 3,210 2,247
9.25%, 2007 15,860 10,943
Fonda Group, 9.50%, 2007 11,730 10,557
Gaylord Container Corp.
9.75%, 2007 11,280 9,137
9.875%, 2008 32,950 16,475
Graham Packaging Co.
8.75%, 2008 8,730 8,381
(b) 10.75%, 2009 7,840 4,665
</TABLE>
17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IMPAC Group, Inc., 10.125%, 2008 $ 15,890 $ 15,215
Millar Western Forest Products Ltd.,
9.875%, 2008 17,280 11,232
National Fiberstock Corp., 11.625%, 2002 12,960 13,349
Norampac, 9.50%, 2008 21,320 20,947
Pindo Deli Finance Mauritius, Ltd., 10.75%,
2007 810 324
Plainwell, Inc., 11.00%, 2008 18,120 16,127
Printpack, Inc.
9.875%, 2004 8,440 8,440
10.625%, 2006 22,640 22,640
Repap Enterprises, Inc., 9.00%, 2004 8,080 7,312
Riverwood International
10.25%, 2006 21,430 19,662
10.625%, 2007 21,821 20,239
10.875%, 2008 24,670 20,229
(b)SF Holdings Group, Inc., 12.75%, 2008 13,450 5,918
Stone Container Corp., 11.50%, 2006 10,130 9,218
Tjiwi Kimia Finance Mauritius, Ltd.,
10.00%, 2004 890 383
U.S. Can Corp., 10.125%, 2006 31,079 31,467
--------------------------------------------------------------------------------
325,599
- ---------------------------------------------------------------------------------------------------------------------------
RETAILING--6.1% AFC Enterprises, Inc., 10.25%, 2007 18,950 19,187
Advantica Restaurant Co., 11.25%, 2008 37,725 35,838
Ameriking, 10.75%, 2006 15,635 15,635
Cole National Group
9.875%, 2006 5,240 5,476
8.625%, 2007 18,890 18,512
(a)Color Tile, Inc., 10.75%, 2001 20,480 205
Finlay Enterprises, Inc., 9.00%, 2008 6,450 5,773
Finlay Fine Jewelry Corp., 8.375%, 2008 13,100 11,986
Galey & Lord, 9.125% 2008 14,210 12,398
Guitar Center Management, 11.00%, 2006 15,050 15,803
Iron Age Holdings, Corp.
9.875%, 2008 8,160 7,099
(b) 12.125%, 2009 7,350 3,602
J. Crew Group
10.375%, 2007 16,450 13,160
(b) 13.125%, 2008 27,633 10,777
Jafra Cosmetics International, Inc.,
11.75%, 2008 19,830 17,649
Krystal Co., 10.25%, 2007 10,740 10,633
NE Restaurant Co., Inc., 10.75%, 2008 8,820 8,599
Pamida Holdings, 11.75%, 2003 12,995 12,605
Petro Stopping Centers, 10.50%, 2007 25,150 24,395
Phillips-Van Heusen Corp., 9.50%, 2008 12,180 11,601
Riddell Sports, Inc., 10.50%, 2007 15,606 14,670
TravelCenters of America, Inc., 10.25%,
2007 16,830 16,325
--------------------------------------------------------------------------------
291,928
- ---------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--.9% Axiohm Transaction Solutions, Inc.,
9.75%, 2007 12,460 11,463
Communication and Power Industry, Inc.,
12.00%, 2005 7,975 8,693
MTS Systems Corp., 9.375%, 2005 8,900 8,055
Viasystems, Inc., 9.75%, 2007 19,670 16,719
--------------------------------------------------------------------------------
44,930
</TABLE>
18
<PAGE> 19
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TRANSPORTATION--1.0% Canadian Airlines Corp., 10.00%, 2005 $ 11,850 $ 10,547
TFM, S.A. de C.V., 10.25%, 2007 23,470 19,245
Trans World Airlines, Inc., 11.375%, 2006 12,140 10,440
(b)Transtar Holdings, L.P., 13.375%, 2003 10,100 9,141
--------------------------------------------------------------------------------
49,373
--------------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(Cost: $4,811,798) 4,463,623
--------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
COMMON AND PREFERRED Benedek Communications Corp., warrants 90,000shs. 180
STOCK--1.9% (a)Capital Pacific Holdings 54,431 54
Clark USA, Inc., PIK, preferred 43,781 3,667
Crown American Realty Trust, preferred 354,060 17,504
Dobson Communication, PIK, preferred 10,675 9,928
(a)EchoStar Communications Corp. 108,723 2,609
(a)Eagle-Picher Holdings, Inc., preferred 1,750 8,050
(a)Empire Gas Corp., warrants 31,795 16
(a)Gaylord Container Corp. 1,805,934 5,869
(a)Gulf States Steel, warrants 29,670 15
(a)Intelcom Group, Inc. 67,617 811
Nextel, PIK, preferred 14,860 13,746
(a)SF Holdings Group, Inc. 42,440 85
(a)SF Holdings Group, Inc., PIK, preferred 420 3,378
Sinclair Capital, preferred 210,400 21,882
21st Century Telecom Group, Inc., preferred 2,955 2,465
Viatel, Inc., preferred 17,384 869
--------------------------------------------------------------------------------
TOTAL COMMON AND PREFERRED STOCK--1.9%
(Cost: $92,262) 91,128
--------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yields--5.57% - 6.00%
INSTRUMENTS--1.6% Due--October and November 1998
(Cost: $77,320) $ 77,500 77,320
--------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.5%
(Cost: $5,060,585) 4,711,749
--------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.5% 72,513
--------------------------------------------------------------------------------
NET ASSETS--100% $4,784,262
--------------------------------------------------------------------------------
</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 $5,060,585,000 for federal income tax
purposes at September 30, 1998, the gross unrealized appreciation was
$67,917,000, the gross unrealized depreciation was $416,753,000 and the net
unrealized depreciation on investments was $348,836,000.
See accompanying Notes to Financial Statements.
19
<PAGE> 20
PORTFOLIO OF INVESTMENTS
KEMPER HIGH YIELD OPPORTUNITY FUND
Portfolio of Investments at September 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS--.1% PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United Mexican States, 8.625%, 2008
(Cost: $35) $ 35 $ 30
------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--98.4%
- ---------------------------------------------------------------------------------------------------------------------------
AEROSPACE--.4%
DeCrane Aircraft Holdings, Inc., 12.00%, 2008 100 100
------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
BROADCASTING, CABLESYSTEMS American Banknote Corp.,
AND PUBLISHING--13.4% 11.25%, with warrants, 2007 100 78
Busse Broadcasting, 11.625%, 2000 100 107
CSC Holding, Inc.
9.25%, 2005 10 11
7.875%, 2007 10 10
8.125%, 2009 54 56
10.50%, 2016 60 70
Capstar Broadcasting
9.25%, 2007 70 70
(b)12.75%, 2009 60 46
(b)Charter Communications, 14.00%, 2007 130 112
Charter Communications, L.P., 11.25%, 2006 200 219
Comcast Corp., 9.125%, 2006 100 107
(b)DIVA Systems Corp., 12.625%, 2008 100 34
(b)Diamond Cable Communications, PLC, 10.75%,
2007 200 137
Falcon Holding Group, L.P.
8.375%, 2010 220 220
(b)9.285%, 2010 15 10
Frontiervision
11.00%, 2006 100 111
(b)11.875%, 2007 100 81
Interep National Radio Sales, Inc., 10.00%,
2008 100 97
Mediacom LLC, 8.50%, 2008 315 316
NTL, 10.00%, 2007 114 115
(b)PX Escrow Corp., 9.625%, 2006 370 211
Price Communications Corp., 9.125%, 2006 180 177
(b)Radio Unica Corp., 11.75%, 2006 160 86
SFX Entertainment, Inc., 9.125%, 2008 250 234
Sinclair Broadcasting Group, Inc., 8.75%, 2007 100 98
Star Choice, 13.00%, with warrants, 2005 50 50
TeleWest Communications, PLC
9.625%, 2006 70 70
(b)11.00%, 2007 125 102
(b)Transwestern Holdings, 11.875%, 2008 560 350
Transwestern Publishing, 9.625%, 2007 60 61
(b)21st Century Telecom Group, Inc., 100 51
12.25%, with warrants, 2008
(b)United International Holdings, 10.75%, 2008 200 95
------------------------------------------------------------------------------
3,592
</TABLE>
20
<PAGE> 21
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BUSINESS SERVICES--1.0% Intertek Finance, 10.25%, 2006 $ 100 $ 94
Outdoor Systems, Inc.
9.375%, 2006 70 74
8.875%, 2007 130 135
------------------------------------------------------------------------------
303
- ---------------------------------------------------------------------------------------------------------------------------
CHEMICALS AND NL Industries, Inc., 11.75%, 2003 210 225
AGRICULTURE--1.6% Terra Industries, Inc., 10.50%, 2005 100 103
Texas Petrochemicals, 11.125%, 2006 100 93
------------------------------------------------------------------------------
421
- ---------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--22.7% Allegiance Telecom, Inc.
(b)11.75%, 2008 200 92
12.875%, 2008 100 95
American Cellular Corp., 10.50%, 2008 300 289
Birch Telecom, 14.00%, 2008 200 176
(b)Call-Net Enterprises, Inc., 8.94%, 2008 150 87
Comcast Cellular Holdings, Inc., 9.50%, 2007 110 113
(b)Communications Cellular, 13.125%, 2003 100 65
(b)Crown Castle International Corp., 10.625%,
2007 375 232
Econophone, Inc.
13.50%, 2007 70 72
(b)11.00%, 2008 200 100
Esprit Telecom
11.50%, 2007 320 298
10.875%, 2008 110 99
(b)Focal Communications Corp., 12.125%, 2008 520 260
GCI General Communication, 9.75%, 2007 30 28
(b)ICG Holdings, 13.50%, 2005 430 335
(b)IPC Information Systems, 10.875%, 2008 140 89
Impsat, S.A., 12.375%, 2008 205 135
Intermedia Communications of Florida, Inc.
(b) 12.50%, 2006 10 8
8.875%, 2007 175 175
(b)KMC Telecom Holdings, Inc.,
12.50%, with warrants, 2008 160 76
Level 3 Communications, 9.125%, 2008 180 168
Long Distance International, 12.25%, 2008 100 88
McLeod, Inc.
9.25%, 2007 80 82
(b) 10.50%, 2007 30 22
(b)Metronet Communications
10.75%, 2007 150 89
9.95%, 2008 115 63
Netia Holdings
10.25%, 2007 50 38
(b) 11.25%, 2007 75 31
(b)Nextel Communications
9.75%, 2004 15 14
9.75%, 2007 120 73
10.65%, 2007 75 47
9.95%, 2008 85 50
Nextlink Communications
12.50%, 2006 80 86
9.00%, 2008 200 194
(b) 9.45%, 2008 40 23
(b)PTC International Finance, B.V., 10.75%,
2007 120 69
(b)Pinnacle Holdings, 10.00%, 2008 200 105
Primus Telecommunications Group, 11.75%, 2004 100 97
</TABLE>
21
<PAGE> 22
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PSINet, Inc., 10.00%, 2005 $ 100 $ 100
RCN Corp.
10.00%, 2007 120 112
(b)11.00%, 2008 100 51
Rogers Cantel
9.375%, 2008 100 102
9.75%, 2016 170 170
(b)SBA Communication, 12.00%, 2008 200 100
Satelites Mexicanos, S.A. de C.V., 10.125%,
2004 110 75
(b)Spectrasite Holdings, Inc., 12.00%, 2008 200 96
Teligent, Inc.
11.50%, 2007 50 39
(b)11.50%, 2008 200 76
(b)Triton Communications, 11.00%, 2008 400 180
USA Mobile Communications, Inc. II, 14.00%,
2004 110 117
US Xchange, LLC., 15.00%, 2008 110 110
Versatel Telecom, 13.25%, with warrants, 2008 200 192
Viatel, Inc.
11.25%, 2008 250 235
(b)12.50%, 2008 130 66
Winstar Communications, 15.00%, 2007 10 10
Winstar Equipment, 12.50%, 2004 60 54
------------------------------------------------------------------------------
6,048
- ---------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS--6.4% Airxcel, 11.00%, 2007 200 186
American Standard, Inc., 9.25%, 2016 110 112
Congoleum Corp., 8.625%, 2008 300 287
Desa International, 9.875%, 2007 100 85
Falcon Building Products, Inc., 9.50%, 2007 300 273
Kevco, 10.375%, 2007 225 214
Nortek, Inc.
9.875%, 2004 80 80
8.875%, 2008 100 97
Terex Corp., 8.875%, 2008 100 93
Werner Holdings, 10.00%, 2007 300 285
------------------------------------------------------------------------------
1,712
- ---------------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS AND AFC Enterprises, Inc., 10.25%, 2007 100 101
SERVICES--11.6% (b)AMF Bowling World, 12.25%, 2006 145 88
Avondale Mills, 10.25%, 2006 84 87
CEX Holdings, Inc., 9.625%, 2008 100 95
Cinemark USA, Inc.
8.50%, 2008 100 96
9.625%, 2008 100 102
Clearview Cinema Group, Inc., 10.875%, 2008 100 106
Doskocil Manufacturing Co., 10.125%, 2007 200 186
Dyersburg Corp., 9.75%, 2007 100 82
Grupo Azucarero Mexico, S.A. de C.V.,
11.50%, 2005 70 20
HMH Properties, 7.875%, 2008 110 109
Hedstrom Corp., 10.00%, 2007 100 95
Imperial Home Decor Group, Inc., 11.00%, 2008 300 270
La Petite Academy, Inc., 10.00%, 2008 200 194
Loews Cineplex Entertainment Corp., 8.875%,
2008 100 98
Mastellone Hermonos, 11.75%, 2008 110 71
Perkins Finance, L.P., 10.125%, 2007 150 150
Pillowtex Corp., 9.00%, 2007 100 98
Purina Mills, Inc., 9.00%, 2010 200 196
</TABLE>
22
<PAGE> 23
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(b)Restaurant Co., 11.25%, 2008 $ 180 $ 83
(b)Sealy Mattress, 10.875%, 2007 470 294
(b)Spin Cycle, 12.75%, 2005 350 182
United Artists Theatre Co., 9.75%, 2008 330 307
------------------------------------------------------------------------------
3,110
- ---------------------------------------------------------------------------------------------------------------------------
DRUGS AND HEALTH CARE--3.8% Abbey Healthcare Group, Inc., 9.50%, 2002 240 223
(b)ALARIS Medical Systems, Inc., 11.25%, 2008 370 159
Magellan Health Services, 9.00%, 2008 200 171
(b)Mariner Post-Acute Network, Inc., 10.50%,
2007 260 144
Mediq, Inc., 11.00%, 2008 100 94
Paracelsus Healthcare, 10.00%, 2006 130 120
Vencor, 9.875%, 2005 130 101
------------------------------------------------------------------------------
1,012
- ---------------------------------------------------------------------------------------------------------------------------
ENERGY AND RELATED Bellweather Exploration Co., 10.875%, 2007 130 125
SERVICES--6.7% Chesapeake Energy Corp., 9.125%, 2006 100 85
Continental Resources, Inc., 10.25%, 2008 100 83
Dailey International, 9.50%, 2008 10 6
Denbury Management, 9.00%, 2008 200 166
Flores & Rucks, Inc., 9.75%, 2006 100 104
Forcenergy Gas Exploration, 8.50%, 2007 80 58
GulfMark Offshore, Inc., 8.75%, 2008 60 55
Mariner Energy, 10.50%, 2006 160 148
Michael Petroleum Corp., 11.50%, 2005 30 26
Ocean Energy, 10.375%, 2005 100 105
Pacalta Resources, Ltd., 10.75%, 2004 100 90
Parker Drilling Corp., 9.75%, 2006 100 92
Pen Holdings, Inc., 9.875%, 2008 100 95
Prestolite Electric, 9.625%, 2008 310 291
RAM Energy, 11.50%, 2008 100 83
Seven Seas Petroleum, Inc., 12.50%, 2005 100 82
Stone Energy Corp., 8.75%, 2007 100 96
------------------------------------------------------------------------------
1,790
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES, Corporate Express, Inc., 4.50%, 2000 260 236
HOME BUILDERS AND Del Webb Corp.
REAL ESTATE--2.2% 9.75%, 2008 80 78
9.375%, 2009 100 96
Forecast Group, L.P., 11.375%, 2000 100 96
Ryland Group, Inc., 8.25%, 2008 100 94
------------------------------------------------------------------------------
600
- ---------------------------------------------------------------------------------------------------------------------------
HOTELS AND GAMING--2.8% Empress River Casino, 10.75%, 2002 100 108
Hard Rock Hotel, 9.25%, 2005 200 198
Harvey's Casino Resorts, 10.625%, 2006 100 106
Players International, 10.875%, 2005 210 222
Rio Hotel & Casino, Inc., 9.50%, 2007 100 109
------------------------------------------------------------------------------
743
- ---------------------------------------------------------------------------------------------------------------------------
MANUFACTURING, METALS Accuride, 9.25%, 2008 145 138
AND MINING--8.1% Alvey Systems, 11.375%, 2003 200 204
Day International Group, Inc., 11.125%, 2005 15 16
E-P Acquisition, Inc., 9.375%, 2008 50 45
Earle M. Jorgensen Co., 9.50%, 2005 70 65
Euramax International, PLC, 11.25%, 2006 100 99
(b)Grove Holdings LLC, 11.625%, 2009 100 40
Grove Investors, PIK, 14.50%, 2010 104 88
Grove Worldwide LLC, 9.25%, 2008 20 17
JPS Automotive Products Corp., 11.125%, 2001 40 43
</TABLE>
23
<PAGE> 24
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jackson Products, Inc., 9.50%, 2005 $ 100 $ 95
Knoll, Inc., 10.875%, 2006 30 33
MMI Products, Inc., 11.25%, 2007 100 109
Metal Management, Inc., 10.00%, 2008 100 65
Metal USA, 8.625%, 2008 135 117
NSM Steel
12.00%, 2006 90 49
12.25%, with warrants, 2008 90 37
Neenah Corp., 11.125%, 2007 315 319
Park-Ohio Industries, 9.25%, 2007 200 199
Renco Steel Holdings, 10.875%, 2005 170 144
Scovill Fasteners, 11.25%, 2007 50 45
Venture Holdings, 9.50%, 2005 20 19
Wells Aluminum Corp., 10.125%, 2005 100 96
Wheeling-Pittsburgh Corp., 9.25%, 2007 80 75
------------------------------------------------------------------------------
2,157
- -------------------------------------------------------------------------------------------------------------------------
PAPER, FOREST PRODUCTS
AND CONTAINERS--8.7%
AEP Industries, Inc., 9.875%, 2007 100 96
BPC Holding Corp., 12.50%, 2006 125 127
Doman Industry
8.75%, 2004 20 14
9.25%, 2007 200 138
Gaylord Container Corp.
9.75%, 2007 40 32
9.875%, 2008 210 105
Graham Packaging Co.
8.75%, 2008 240 230
(b) 10.75%, 2009 260 155
IMPAC Group, Inc., 10.125%, 2008 220 211
Millar Western Forest Products, Ltd., 9.875%,
2008 200 130
National Fiberstock Corp., 11.625%, 2002 100 103
Norampac, 9.50%, 2008 100 98
Plainwell, Inc., 11.00%, 2008 220 196
Printpack, Inc., 10.625%, 2006 100 100
Repap Enterprises, Inc., 9.00%, 2004 100 91
Riverwood International
10.25%, 2006 160 147
10.625%, 2007 20 19
10.875%, 2008 130 107
(b)SF Holdings Group, Inc., 12.75%, 2008 200 88
Stone Container Corp., 11.50%, 2006 40 36
U.S. Can Corp., 10.125%, 2006 100 101
------------------------------------------------------------------------------
2,324
- -------------------------------------------------------------------------------------------------------------------------
RETAILING--5.9%
Advantica Restaurant Co., 11.25%, 2008 260 247
Cole National Group
9.875%, 2006 50 52
8.625%, 2007 50 49
Finlay Enterprises, Inc., 9.00%, 2008 50 45
Finlay Fine Jewelry Corp., 8.375%, 2008 70 64
Galey & Lord, 9.125%, 2008 200 174
Iron Age Holdings, Corp.
9.875%, 2008 50 43
(b) 12.125%, 2009 100 49
J. Crew Group
10.375%, 2007 50 40
(b) 13.125%, 2008 120 47
Jafra Cosmetics International, Inc., 11.75%,
2008 140 125
NE Restaurant Co., Inc., 10.75%, 2008 300 293
Pathmark Stores, 9.625%, 2003 60 58
</TABLE>
24
<PAGE> 25
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT OR
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Phillips-Van Heusen Corp., 9.50%, 2008 $ 100 $ 95
Riddell Sports, Inc., 10.50%, 2007 100 94
TravelCenters of America, Inc., 10.25%, 2007 100 97
------------------------------------------------------------------------------
1,572
- ---------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--2.0%
Axiohm Transaction Solutions, Inc., 9.75%,
2007 200 184
MTS Systems Corp., 9.375%, 2005 290 262
Viasystems, Inc., 9.75%, 2007 100 85
------------------------------------------------------------------------------
531
- ---------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.0%
Canadian Airlines Corp., 10.00%, 2005 100 89
TFM, S.A. de C.V., 10.25%, 2007 100 82
Trans World Airlines, Inc., 11.375%, 2006 100 86
------------------------------------------------------------------------------
257
------------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(Cost: $28,812) 26,272
------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
COMMON AND PREFERRED
STOCK--3.9%
Crown American Realty Trust, preferred 2,210 shs. 109
Dobson Communication, PIK, preferred 145 135
(a)Eagle-Picher Holdings, preferred 20 92
(a)Finlay Enterprises, Inc. 5,000 42
(a)Gaylord Container Corp. 20,000 65
Harvey's Casinos, Inc. 4,000 96
Nextel, PIK, preferred 146 135
(a)SF Holdings Group, Inc. 770 2
(a)SF Holdings Group, Inc., PIK, preferred 10 80
Standard & Poor's Depository Receipt 2,000 203
21st Century Telecom Group, Inc., preferred 52 43
Viatel, Inc., preferred 90 5
Waxman Industries, Inc. 18,000 20
------------------------------------------------------------------------------
TOTAL COMMON AND PREFERRED STOCK--3.9%
(Cost: $1,267) 1,027
------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
MONEY MARKET
INSTRUMENTS--3.7%
Yield--5.30%
Due--October 1998
(Cost: $998) $ 1,000 998
------------------------------------------------------------------------------
TOTAL INVESTMENTS--106.1%
(Cost: $31,112) 28,327
------------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(6.1)% (1,636)
------------------------------------------------------------------------------
NET ASSETS--100% $26,691
------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) Non-income producing security.
(b) Deferred interest obligation; currently zero coupon under terms of the
initial offering.
PIK denotes that dividend is paid in kind.
Based on the cost of investments of $31,112,000 for federal income tax purposes
at September 30, 1998, the gross unrealized appreciation was $60,000, the gross
unrealized depreciation was $2,845,000 and the net unrealized depreciation on
investments was $2,785,000.
See accompanying Notes to Financial Statements.
25
<PAGE> 26
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER HIGH YIELD SERIES
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper High Yield Fund and Kemper
High Yield Opportunity Fund comprising the Kemper High Yield Series, as of
September 30, 1998, the related statements of operations and changes in net
assets, and the financial highlights for each of the fiscal periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
September 30, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the above mentioned Funds of the Kemper High Yield Series at September 30,
1998, the results of their operations for the year then ended, the changes in
their net assets and the financial highlights for each of the fiscal periods
indicated therein, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 13, 1998
26
<PAGE> 27
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH YIELD
HIGH YIELD OPPORTUNITY
FUND FUND
<S> <C> <C>
- -----------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------
Investments, at value (Cost: $5,060,585 and $31,112,
respectively) $4,711,749 28,327
- -----------------------------------------------------------------------------------------
Cash 10,395 370
- -----------------------------------------------------------------------------------------
Receivable for:
Investments sold 170,780 1,058
- -----------------------------------------------------------------------------------------
Fund shares sold 16,391 631
- -----------------------------------------------------------------------------------------
Interest 122,845 688
- -----------------------------------------------------------------------------------------
TOTAL ASSETS 5,032,160 31,074
- -----------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ----------------------------------------------------------------------------------------
Note payable -- 1,001
- -----------------------------------------------------------------------------------------
Payable for:
Investments purchased 234,812 3,290
- -----------------------------------------------------------------------------------------
Fund shares redeemed 8,184 46
- -----------------------------------------------------------------------------------------
Management fee 2,034 14
- -----------------------------------------------------------------------------------------
Administrative services fee 842 5
- -----------------------------------------------------------------------------------------
Distribution services fee 881 9
- -----------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 1,011 17
- -----------------------------------------------------------------------------------------
Trustees' fees and other 134 1
- -----------------------------------------------------------------------------------------
Total liabilities 247,898 4,383
- -----------------------------------------------------------------------------------------
NET ASSETS $4,784,262 26,691
- -----------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -----------------------------------------------------------------------------------------
Paid-in capital $5,180,524 29,253
- -----------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (52,329) 159
- -----------------------------------------------------------------------------------------
Net unrealized depreciation on investments (348,836) (2,785)
- -----------------------------------------------------------------------------------------
Undistributed net investment income 4,903 64
- -----------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $4,784,262 26,691
- -----------------------------------------------------------------------------------------
THE PRICING OF SHARES
- -----------------------------------------------------------------------------------------
CLASS A SHARES
Net assets applicable to shares outstanding $3,304,083 12,249
- -----------------------------------------------------------------------------------------
Shares outstanding 430,259 1,378
- -----------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets / shares outstanding) $7.68 8.89
- -----------------------------------------------------------------------------------------
Maximum offering price per share (net asset value, plus
4.71%
of net asset value or 4.50% of offering price) $8.04 9.31
- -----------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $1,291,704 12,222
- -----------------------------------------------------------------------------------------
Shares outstanding 168,357 1,375
- -----------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets / shares outstanding) $7.67 8.89
- -----------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $171,495 2,220
- -----------------------------------------------------------------------------------------
Shares outstanding 22,290 249
- -----------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets / shares outstanding) $7.69 8.89
- -----------------------------------------------------------------------------------------
CLASS I SHARES
Net assets applicable to shares outstanding $16,980 --
- -----------------------------------------------------------------------------------------
Shares outstanding 2,211 --
- -----------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets / shares outstanding) $7.68 --
- -----------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 28
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended September 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH YIELD
HIGH YIELD OPPORTUNITY
FUND FUND
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------
Interest income $ 526,227 1,491
- -------------------------------------------------------------------------------------------------
Dividends 7,057 14
- -------------------------------------------------------------------------------------------------
Total investment income 533,284 1,505
- -------------------------------------------------------------------------------------------------
Expenses:
Management fee 27,887 102
- -------------------------------------------------------------------------------------------------
Administrative services fee 11,945 34
- -------------------------------------------------------------------------------------------------
Distribution services fee 12,102 61
- -------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 8,376 46
- -------------------------------------------------------------------------------------------------
Interest expense -- 28
- -------------------------------------------------------------------------------------------------
Professional fees 86 17
- -------------------------------------------------------------------------------------------------
Reports to shareholders 785 --
- -------------------------------------------------------------------------------------------------
Trustees' fees and other 390 2
- -------------------------------------------------------------------------------------------------
Total expenses 61,571 290
- -------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 471,713 1,215
- -------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------------
Net realized gain on sales of investments 100,385 191
- -------------------------------------------------------------------------------------------------
Net realized loss from futures transactions (1,001) --
- -------------------------------------------------------------------------------------------------
Net realized gain 99,384 191
- -------------------------------------------------------------------------------------------------
Change in net unrealized depreciation on investments (603,298) (2,785)
- -------------------------------------------------------------------------------------------------
Net loss on investments (503,914) (2,594)
- -------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (32,201) (1,379)
- -------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the years ended September 30, 1998 and 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH YIELD
HIGH YIELD FUND OPPORTUNITY FUND(A)
------------------------------ -------------------
1998 1997 1998
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ------------------------------------------------------------------------------------------------------------------
Net investment income $ 471,713 396,225 1,215
- ------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) 99,384 (1,945) 191
- ------------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) (603,298) 178,138 (2,785)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (32,201) 572,418 (1,379)
- ------------------------------------------------------------------------------------------------------------------
Net equalization credits -- 12,110 --
- ------------------------------------------------------------------------------------------------------------------
Distribution from net investment income (477,479) (416,460) (1,151)
- ------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- (32)
- ------------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (477,479) (416,460) (1,183)
- ------------------------------------------------------------------------------------------------------------------
Net increase from capital share transactions 354,640 674,295 29,153
- ------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (155,040) 842,363 26,591
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of year 4,939,302 4,096,939 100
- ------------------------------------------------------------------------------------------------------------------
END OF YEAR $4,784,262 4,939,302 26,691
- ------------------------------------------------------------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT INCOME AT END OF YEAR $ 4,903 90,899 64
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The High Yield Opportunity Fund commenced operations on October 1, 1997.
See accompanying Notes to Financial Statements.
28
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND The Kemper High Yield Series (the Trust) is an
open-end diversified management investment company
comprised of Kemper High Yield Fund (High Yield
Fund) and Kemper High Yield Opportunity Fund (High
Yield Opportunity Fund). The Trust is organized as
a business trust under the laws of Massachusetts.
The High Yield Opportunity Fund commenced
operations on October 1, 1997.
Each Fund offers four 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
September 30, 1998 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 have lower
ongoing expenses than other classes. 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, which 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. Financial futures are valued at the
most recent settlement price. Forward foreign
currency contracts are valued at the prevailing
forward exchange rate of the underlying currencies
on that day. All other securities are valued at
their fair market 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 (date the order to buy or sell is
executed). Dividend income is recorded on the
ex-dividend date, and interest income is recorded
on the accrual basis. Interest income includes
discount amortization on fixed income securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(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
29
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
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.
At September 30, 1998, High Yield Fund had a tax
basis net loss carryforward of approximately
$45,015,000 which may be applied against any
realized net taxable gains of each succeeding year
until fully utilized or it will expire during the
period 1999 through 2004.
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.
EQUALIZATION ACCOUNTING. Prior to October 1, 1997,
the Kemper High Yield Fund used equalization
accounting to keep a continuing shareholder's per
share interest in undistributed net investment
income unaffected by shareholder activity. This was
accomplished by allocating a portion of the
proceeds from sales and the cost of redemptions of
fund shares to undistributed net investment income.
As of October 1, 1997, the Fund discontinued using
equalization. This change has no effect on the
Fund's net assets, net asset value per share or
distributions to shareholders. Discontinuing the
use of equalization accounting will result in
simpler financial statements. The cumulative effect
of the discontinuance of equalization accounting
was to decrease undistributed net investment income
and increase paid-in-capital previously reported
through September 30, 1997 by $80,230,000.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. Each Fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper). The High Yield Fund pays a
monthly investment management fee of 1/12 of the
annual rate of .58% of the first $250 million of
average daily net assets declining to .42% of
average daily net assets in excess of $12.5
billion. The High Yield Fund incurred a management
fee of $27,887,000 for the year ended September 30,
1998.
The High Yield Opportunity Fund 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. The High
Yield Opportunity Fund incurred a management fee of
$102,000 for the year ended September 30, 1998.
ZURICH/B.A.T MERGER. On September 7, 1998, Zurich
Insurance Company (Zurich), majority owner of
Scudder Kemper, entered into an agreement with
B.A.T Industries p.l.c. (B.A.T) pursuant to which
the financial services businesses of B.A.T were
combined with Zurich's businesses to form a new
global insurance and financial services company
known as Zurich Financial Services. Upon
consummation of the transaction, the Funds'
investment management agreements with Scudder
Kemper were deemed to have been assigned and,
therefore, terminated. The Board of Trustees of the
Funds' has approved new investment management
agreements with Scudder Kemper, which are
substantially identical to the former investment
management agreements, except for the dates of
execution and termination. The Board of Trustees of
the Funds' will seek shareholder approval of the
new investment management agreements
30
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
through a proxy solicitation that is currently
scheduled to conclude in mid-December.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
Each Fund has an underwriting and distribution
services agreement with Kemper Distributions, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares for the
year ended September 30, 1998 are as follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS ----------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
High Yield Fund $1,521,000 12,060,000 174,000
High Yield Opportunity Fund 187,000 26,000 --
</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 Class B
and Class C shares. Pursuant to the agreement, KDI
enters into related selling group agreements with
various firms at various rates for sales of Class B
and Class C shares. In addition, KDI receives any
contingent deferred sales charges (CDSC) from
redemptions of Class B and Class C shares.
Distribution fees, CDSC and commissions related to
Class B and Class C shares for the year ended
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES PAID
RECEIVED BY KDI BY KDI TO FIRMS
------------------ ----------------------
<S> <C> <C>
High Yield Fund $14,388,000 19,454,000
High Yield Opportunity Fund 68,000 506,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. Each Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C 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 year ended September 30, 1998 are as
follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY THE ----------------------------
FUND TO KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
High Yield Fund $11,945,000 12,147,000 54,000
High Yield Opportunity Fund 34,000 57,000 --
</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 year ended September 30, 1998, KSvC
received shareholder services fees as follows:
High Yield Fund $5,963,000
High Yield Opportunity Fund 19,000
31
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of
Scudder Kemper. For the year ended September 30,
1998, the Funds made no payments to their officers
and incurred trustees' fees of $46,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended September 30, 1998, investment
transactions (excluding short term instruments) are
as follows (in thousands):
<TABLE>
<CAPTION>
HIGH YIELD HIGH YIELD
FUND OPPORTUNITY FUND
---------- -----------------
<S> <C> <C>
Purchases $7,459,793 64,732
Proceeds from sales 7,102,145 34,809
</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 September 30, 1998.
The note bears interest at the Eurodollar Rate plus
.275% (5.863% at September 30, 1998) which is
payable quarterly. The loan amount and rate are
reset periodically under a credit facility which is
available until December 18, 2000.
- --------------------------------------------------------------------------------
6 CAPITAL SHARE
TRANSACTIONS The following tables summarize the activity in
capital shares of the Funds (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1998 1997
----------------------- ------------------------
HIGH YIELD FUND SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 175,709 $ 1,448,862 190,692 $ 1,527,552
-------------------------------------------------------------------------------
Class B 96,842 810,635 109,720 900,384
-------------------------------------------------------------------------------
Class C 19,096 163,577 16,667 137,204
-------------------------------------------------------------------------------
Class I 8,956 61,720 12,114 100,487
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 25,177 210,714 22,581 187,057
-------------------------------------------------------------------------------
Class B 8,726 73,008 7,931 65,657
-------------------------------------------------------------------------------
Class C 1,217 10,192 686 5,708
-------------------------------------------------------------------------------
Class I 344 3,282 367 3,044
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES REDEEMED
Class A (201,412) (1,666,803) (175,031) (1,410,231)
-------------------------------------------------------------------------------
Class B (68,856) (573,586) (80,748) (661,407)
-------------------------------------------------------------------------------
Class C (12,712) (106,155) (9,742) (80,133)
-------------------------------------------------------------------------------
Class I (11,152) (80,801) (12,153) (101,027)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 23,396 197,625 15,517 129,053
-------------------------------------------------------------------------------
Class B (23,428) (197,630) (15,533) (129,053)
-------------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS $ 354,640 $ 674,295
-------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1998
--------------------
HIGH YIELD OPPORTUNITY FUND SHARES AMOUNT
<S> <C> <C>
SHARES SOLD
Class A 1,905 $18,384
---------------------------------------------------------------------------
Class B 1,690 16,473
---------------------------------------------------------------------------
Class C 286 2,813
---------------------------------------------------------------------------
---------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 48 462
---------------------------------------------------------------------------
Class B 41 395
---------------------------------------------------------------------------
Class C 7 70
---------------------------------------------------------------------------
---------------------------------------------------------------------------
SHARES REDEEMED
Class A (593) (5,656)
---------------------------------------------------------------------------
Class B (346) (3,322)
---------------------------------------------------------------------------
Class C (48) (466)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 14 140
---------------------------------------------------------------------------
Class B (14) (140)
---------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS $29,153
---------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
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, gain or loss is
recognized and payments are made on a daily basis
between the Fund and its broker as the market value
of the futures contract fluctuates. At September
30, 1998, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $664,000. The Fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures position open
at September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
FACE EXPIRATION
TYPE AMOUNT MONTH LOSS
----------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bond $51,419 December '98 $(310)
----------------------------------------------------------------------
</TABLE>
33
<PAGE> 34
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------------------------
CLASS A
---------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------
HIGH YIELD FUND 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $8.50 8.23 8.01 7.74 8.12
- ----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .76 .76 .76 .83 .73
- ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.81) .31 .23 .20 (.35)
- ----------------------------------------------------------------------------------------------------------------------
Total from investment operations (.05) 1.07 .99 1.03 .38
- ----------------------------------------------------------------------------------------------------------------------
Less distributions from net investment income .77 .80 .77 .76 .76
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $7.68 8.50 8.23 8.01 7.74
- ----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (.95)% 13.69 13.00 14.10 4.64
- ----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
Expenses .89% .88 .88 .90 .86
- ----------------------------------------------------------------------------------------------------------------------
Net investment income 9.09% 9.18 9.45 10.74 9.22
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------
CLASS B
-------------------------------------------------------------
MAY 31 TO
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.49 8.22 8.00 7.73 7.96
- ----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .68 .69 .69 .76 .23
- ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.80) .31 .23 .20 (.23)
- ----------------------------------------------------------------------------------------------------------------------
Total from investment operations (.12) 1.00 .92 .96 --
- ----------------------------------------------------------------------------------------------------------------------
Less distributions from net investment income .70 .73 .70 .69 .23
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.67 8.49 8.22 8.00 7.73
- ----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) (1.82)% 12.72 12.02 13.09 --
- ----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------------------------
Expenses 1.76% 1.76 1.77 1.77 1.80
- ----------------------------------------------------------------------------------------------------------------------
Net investment income 8.22% 8.30 8.56 9.87 8.70
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 35
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------------------------
CLASS C
------------------------------------------------
MAY 31 TO
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.52 8.24 8.02 7.75 7.96
- -------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .69 .70 .69 .77 .25
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.82) .31 .23 .20 (.23)
- -------------------------------------------------------------------------------------------------------
Total from investment operations (.13) 1.01 .92 .97 .02
- -------------------------------------------------------------------------------------------------------
Less distribution from net investment income .70 .73 .70 .70 .23
- -------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.69 8.52 8.24 8.02 7.75
- -------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) (1.89)% 12.88 12.06 13.13 .27
- -------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------------------
Expenses 1.71% 1.71 1.71 1.71 1.74
- -------------------------------------------------------------------------------------------------------
Net investment income 8.27% 8.35 8.62 9.93 8.75
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------
CLASS I
---------------------------------------------
YEAR ENDED SEPTEMBER
30, DECEMBER 29, 1994
--------------------- TO SEPTEMBER 30,
1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.50 8.23 8.01 7.55
- ---------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .76 .78 .78 .66
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.78) .31 .23 .39
- ---------------------------------------------------------------------------------------------------
Total from investment operations (.02) 1.09 1.01 1.05
- ---------------------------------------------------------------------------------------------------
Less distribution from net investment income .80 .82 .79 .59
- ---------------------------------------------------------------------------------------------------
Net asset value, end of period $7.68 8.50 8.23 8.01
- ---------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) (.66)% 13.96 13.32 14.37
- ---------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------------
Expenses .60% .62 .61 .61
- ---------------------------------------------------------------------------------------------------
Net investment income 9.38% 9.44 9.72 10.70
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $4,784,262 4,939,302 4,096,939 3,527,954 3,152,029
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 92% 91 102 99 93
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 36
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
HIGH YIELD OPPORTUNITY FUND YEAR ENDED SEPTEMBER 30, 1998(A)
- ------------------------------------------------ ------------------- ------------------ ------------------
PER SHARE OPERATING PERFORMANCE CLASS A CLASS B CLASS C
- ------------------------------------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C>
Net asset value, beginning of year $ 9.50 9.50 9.50
- ------------------------------------------------ ------------------- ------------------- -------------------
Income from investment operations:
Net investment income .70 .63 .62
- ------------------------------------------------ ------------------- ------------------- -------------------
Net realized and unrealized loss (.60) (.61) (.60)
- ------------------------------------------------ ------------------- ------------------- -------------------
Total from investment operations .10 .02 .02
- ------------------------------------------------ ------------------- ------------------- -------------------
Less dividends:
Distribution from net investment income .67 .59 .59
- ------------------------------------------------ ------------------- ------------------- -------------------
Distribution from net realized gain .04 .04 .04
- ------------------------------------------------ ------------------- ------------------- -------------------
Total dividends .71 .63 .63
- ------------------------------------------------ ------------------- ------------------- -------------------
Net asset value, end of year $8.89 8.89 8.89
- ------------------------------------------------ ------------------ ------------------ ------------------
TOTAL RETURN .59% (.18) (.18)
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------ ------------------ ------------------ ------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C>
Expenses 1.27% 2.03 2.03
- ------------------------------------------------ ------------------ ------------------ ------------------
Net investment income 8.31% 7.55 7.55
- ------------------------------------------------ ------------------ ------------------ ------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1998(A)
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net assets at end of year (in thousands) $26,691
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 169%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Commencement of operations on October 1, 1997.
NOTE FOR BOTH FUNDS: Total return does not reflect the effect of any sales
charges. Per share data was determined based on average shares outstanding
during the year ended September 30, 1998.
TAX INFORMATION
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Kemper Fund account, please call 1-800-621-1048.
36
<PAGE> 37
NOTES
37
<PAGE> 38
NOTES
38
<PAGE> 39
NOTES
39
<PAGE> 40
TRUSTEES & OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
DANIEL PIERCE MARK S. CASADY KATHRYN L. QUIRK
Chairman and Trustee President Vice President
DAVID W. BELIN PHILIP J. COLLORA ROBERT C. PECK, JR.
Trustee Vice President and Vice President
Secretary
LEWIS A. BURNHAM HARRY E. RESIS, JR.
Trustee JOHN R. HEBBLE Vice President
Treasurer
DONALD L. DUNAWAY LINDA J. WONDRACK
Trustee JERARD K. HARTMAN Vice President
Vice President
ROBERT B. HOFFMAN MAUREEN E. KANE
Trustee THOMAS W. LITTAUER Assistant Secretary
Vice President
DONALD R. JONES CAROLINE PEARSON
Trustee ANN M. MCCREARY Assistant Secretary
Vice President
SHIRLEY D. PETERSON ELIZABETH C. WERTH
Trustee MICHAEL A. MCNAMARA Assistant Secretary
Vice President
WILLIAM P. SOMMERS BRENDA LYONS
Trustee Assistant Treasurer
EDMOND D. VILLANI
Trustee
</TABLE>
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- ----------------------------------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- ----------------------------------------------------------------------------------------------------------
CUSTODIAN AND INVESTORS FIDUCIARY TRUST COMPANY
TRANSFER AGENT 801 Pennsylvania Avenue
Kansas City, MO 64105
- ----------------------------------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- ----------------------------------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
</TABLE>
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world(SM)
Printed in the U.S.A. on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Fund prospectus.
KHYFS - 2 (11/98) 1059690
