<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED SEPTEMBER 30, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
KEMPER HIGH YIELD OPPORTUNITY FUND
KEMPER HIGH YIELD FUND II
Kemper High Yield Funds
"... We don't have a lot of emerging market debt, nor do we have a lot of paper
rated below "single B." That can hurt us when the market rallies strongly, but
it helps protect us when the market is punishing particularly suspect credits.
..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
TERMS TO KNOW
9
PORTFOLIO STATISTICS
12
PORTFOLIO OF INVESTMENTS
26
FINANCIAL STATEMENTS
29
NOTES TO FINANCIAL
STATEMENTS
35
FINANCIAL HIGHLIGHTS
38
REPORT OF
INDEPENDENT AUDITORS
At A GLANCE
KEMPER HIGH YIELD FUND II TOTAL RETURNS
FOR THE TEN-MONTH PERIOD ENDED SEPTEMBER 30, 1999 (UNADJUSTED FOR ANY SALES
CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
<S> <C>
KEMPER HIGH YIELD FUND II CLASS A 0.19
- ---------------------------------
KEMPER HIGH YIELD FUND II CLASS B -0.43
- ---------------------------------
KEMPER HIGH YIELD FUND II CLASS C -0.43
- ---------------------------------
LIPPER HIGH CURRENT YIELD FUNDS
CATEGORY AVERAGE* 1.64
- ---------------------------------
</TABLE>
KEMPER HIGH YIELD OPPORTUNITY FUND TOTAL RETURNS
FOR THE ONE-YEAR PERIOD ENDED SEPTEMBER 30, 1999 (UNADJUSTED FOR ANY SALES
CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
<S> <C>
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS A 3.55
- ------------------------------------------
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS B 2.73
- ------------------------------------------
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS C 2.84
- ------------------------------------------
LIPPER HIGH CURRENT YIELD FUNDS
CATEGORY AVERAGE* 4.84
- ------------------------------------------
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE PERFORMANCE.
INVESTMENT RETURNS AND PRINCIPAL VALUE 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; IF SALES CHARGES HAD BEEN INCLUDED, RESULTS MAY HAVE BEEN LESS
FAVORABLE.
HIGH YIELD BONDS INVOLVE A GREATER RISK TO PRINCIPAL AND INCOME THAN HIGHER
QUALITY BONDS, AND THAT IS WHY THIS FUND IS DESIGNED FOR AGGRESSIVE LONG TERM
INVESTING.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
9/30/99 11/30/98
.........................................................
<S> <C> <C>
KEMPER HIGH YIELD FUND II
CLASS A $8.76 $9.50
.........................................................
KEMPER HIGH YIELD FUND II
CLASS B $8.77 $9.50
.........................................................
KEMPER HIGH YIELD FUND II
CLASS C $8.77 $9.50
.........................................................
</TABLE>
NET ASSET VALUE (CONTINUED)
<TABLE>
<CAPTION>
AS OF AS OF
9/30/99 9/30/98
.........................................................
<S> <C> <C>
KEMPER HIGH YIELD OPPORTUNITY
FUND CLASS A $8.33 $8.89
.........................................................
KEMPER HIGH YIELD OPPORTUNITY
FUND CLASS B $8.33 $8.89
.........................................................
KEMPER HIGH YIELD OPPORTUNITY
FUND CLASS C $8.34 $8.89
.........................................................
</TABLE>
KEMPER HIGH YIELD OPPORTUNITY FUND RANKINGS AS OF 9/30/99
COMPARED WITH 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
#159 of #192 of #189 of
302 funds 302 funds 302 funds
............................................................
</TABLE>
DIVIDEND AND YIELD REVIEW
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
KEMPER HIGH
YIELD FUND II CLASS A CLASS B CLASS C
...........................................................
<S> <C> <C> <C>
10-MONTH INCOME: $0.7575 $0.6999 $0.7000
...........................................................
SEPTEMBER DIVIDEND: $0.0770 $0.0713 $0.0713
...........................................................
ANNUALIZED
DISTRIBUTION RATE+: 10.54% 9.76% 9.76%
...........................................................
SEC YIELD+: 10.68% 10.42% 10.41%
...........................................................
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD
OPPORTUNITY FUND CLASS A CLASS B CLASS C
...........................................................
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.8465 $0.7745 $0.7747
...........................................................
SEPTEMBER DIVIDEND: $0.0760 $0.0702 $0.0703
...........................................................
ANNUALIZED
DISTRIBUTION RATE+: 10.95% 10.11% 10.12%
...........................................................
SEC YIELD+: 10.72% 9.70% 9.57%
...........................................................
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE (WHICH DOES NOT INCLUDE SALES CHARGE
ADJUSTMENTS) ON SEPTEMBER 30, 1999. DISTRIBUTION RATE SIMPLY MEASURES THE LEVEL
OF DIVIDENDS AND IS NOT A COMPLETE MEASURE OF PERFORMANCE. THE SEC YIELD IS NET
INVESTMENT INCOME PER SHARE EARNED OVER THE MONTH ENDED SEPTEMBER 30, 1999,
SHOWN AS AN ANNUALIZED PERCENTAGE OF THE MAXIMUM OFFERING PRICE ON THAT DATE.
THE SEC YIELD IS COMPUTED IN ACCORDANCE WITH THE STANDARDIZED METHOD PRESCRIBED
BY THE SECURITIES AND EXCHANGE COMMISSION. YIELDS AND DISTRIBUTION RATES ARE
HISTORICAL AND WILL FLUCTUATE.
<PAGE> 3
ECONOMIC OVERVIEW
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER:
Markets have been aquiver about inflation risks. Growth in the United States
continues to exceed most expectations. Labor markets are visibly tight. These
are the precursors to inflation -- everybody knows it.
Everybody except us, that is. We don't buy it in principle, and reality is
proving our theory correct.
First, let's look at growth. The traditional economic view is that growth
causes inflation. Today, we're seeing exactly the opposite: Low inflation is
causing growth. Low inflation keeps interest rates down, and low interest rates
spur investment by making borrowing money cheap. Investment allows companies to
add capacity, keeping competition fierce. As a result, companies aren't raising
prices; they're competing for business by keeping goods attractive and prices
low. That's true for the old economy, in which consumers are buying t-shirts,
and the new economy, in which consumers are buying Internet services. Everywhere
they look, consumers see bargains -- in the malls, in the auto showrooms, at the
mortgage companies.
As for tight labor markets, the traditional economic view is that tight labor
markets -- i.e., many "help-wanted" signs -- forces companies to pay a premium
for talent. That, in turn, forces companies to raise their prices in order to
protect their profits. And raising prices results in inflation. In contrast, we
believe that tight labor markets won't cause wages to surge. Why?
To start with, temporary agencies have proliferated, accounting for 2.2
percent of jobs, up from 0.5 percent in the early 1980s. They get just the right
amount and type of labor to the right spot at the right time to get the job
done.
Immigration also keeps a lid on wage rates, since it replenishes the work
force much faster than births. Immigration is at its highest level ever; an
amazing 10 percent of the population is foreign-born. Nearly 1 million people
enter the United States legally each year, and another 300,000 just show up.
When they get here, they look for jobs. And often, they're willing to accept
lower-paying jobs than the average citizen.
Finally, and perhaps most importantly, wage rates are kept in check by
executives' intense profit focus. Payroll is a company's biggest expense. When
payroll skyrockets, profits decline -- and that would be bad for a CEO who
promised Wall Street double-digit earnings growth from now to the end of time.
If investors are disappointed in earnings growth, they sell their stock. And
when they sell their stock, the stock options that are an essential part of many
executives' compensation are as valuable as scrap paper.
Supporting our theory are two distinct and important sets of data which were
released in late October: The Bureau of Economic Analysis (BEA) released its
third-quarter estimate of gross domestic product (GDP), the value of all goods
and services produced in the United States, and the Bureau of Labor Statistics
(BLS) released its employment cost index (ECI), which measures what employers
pay for their workers' wages, salaries and benefits.
GDP grew at a 4.8 percent rate in the third quarter, up sharply from the
revised 1.9 percent second-quarter pace and just slightly above the consensus
estimate of 4.7 percent.
At the same time, however, the ECI rose by 0.8 percent in the July-September
period, down from a 1.1 percent increase in the second quarter. The
third-quarter gain also was lower than the 0.9 percent increase forecast by
economists in a Reuters poll. (The report, by the way, is said to be one of the
favorites of Federal Reserve Chairman Alan Greenspan, who uses it as a key
indicator of inflation pressures in the world's largest economy.)
In essence, then, the U.S. economy posted its strongest growth so far this
year in the third quarter, while wage costs remained tame. The combination of
strong consumer demand and the lowest unemployment in a generation just isn't
igniting wage-driven inflation.
These figures tell us that the Fed won't have inflation as an excuse to raise
interest rates for a third time this year when it meets on Nov. 16 to decide
whether to raise key interest rates for the third time this year.
But more importantly, if these numbers prove anything, it's that conventional
wisdom that growth causes inflation should be turned on its head. The Fed, in
deciding to
3
<PAGE> 4
ECONOMIC OVERVIEW
ECONOMIC GUIDEPOSTS
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND
SHAREHOLDER DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR
DEFLATION, CREDIT EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON
MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR
INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE
10-YEAR TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES.
THE OTHER DATA REPORT YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (10/31/99) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
-------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate 1 6.1 5.2 4.5 6.0
Prime rate 2 8.25 7.75 8.25 8.5
Inflation rate 3* 2.6 1.8 1.4 2.2
The U.S. dollar 4 -0.9 -0.5 1.1 7.6
Capital goods orders 5* 5.25 5.5 8.6 4.6
Industrial production 5* 2.4 2.0 2.65 6.1
Employment growth 6 2.2 2.3 2.4 2.7
</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 9/30/99.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
target growth itself, wants the country to slow down to prevent an inflation
outbreak. This is a dangerous game. If it succeeds in slowing growth, inflation
could easily disappear or turn into deflation. Real rates that are already high
would turn punitive. Credit quality would deteriorate rudely. Only rapid growth
can ensure that companies and consumers can continue to pay their bills.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
Scudder Kemper Investments Economics Group
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF SCUDDER KEMPER
INVESTMENTS, INC. AS OF OCTOBER 28, 1999, AND MAY NOT ACTUALLY COME TO PASS.
THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF THIS MATERIAL IS INTENDED AS
AN INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
PERFORMANCE UPDATE
[RESIS PHOTO]
HARRY RESIS JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1988 AND IS A MANAGING
DIRECTOR. HE IS ALSO CO-LEAD PORTFOLIO MANAGER OF KEMPER HIGH YIELD FUND II 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 II AND KEMPER HIGH
YIELD OPPORTUNITY FUND AND DIRECTS ALL FIXED-INCOME RESEARCH AT SCUDDER KEMPER
INVESTMENTS. HE EARNED AN M.B.A. 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 II IN BOTH RESEARCH AND TRADING SINCE
1986 AND IS A SENIOR TRADER FOR THE FUND. HE 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.
INTEREST RATES ROSE NEARLY UNABATED THROUGHOUT THE FISCAL YEAR, MAKING IT
DIFFICULT FOR BOND INVESTORS TO ACHIEVE POSITIVE TOTAL RETURNS. DESPITE THIS
DIFFICULT CLIMATE, HIGH-YIELD BONDS PERFORMED RELATIVELY WELL. IN THIS REPORT,
KEMPER'S HIGH- YIELD MANAGEMENT TEAM DISCUSSES THE MARKET AND HOW THEY
POSITIONED THE FUNDS IN LIGHT OF THE CHALLENGING INVESTMENT ENVIRONMENT.
Q WHAT KIND OF YEAR DID THE BOND MARKETS HAVE OVERALL?
A It was a difficult 12-month period for bond investors, because they had to
fight the headwind of continuously rising interest rates. The bond market as a
whole, as measured by the Lehman Aggregate Bond Index*, had a negative return of
0.37 percent for the 12-month period ended September 30, 1999. If you break out
the performance of different types of bonds, the returns varied widely.
Corporate bonds taken as a group eked out a 0.3 percent gain, according to the
Lehman Corporate Bond Index. Long-term government bonds fared worse, with the
Lehman Long-Term Government Bond Index down 7.64 percent.
* THE LEHMAN AGGREGATE BOND INDEX IS AN UNMANAGED INDEX GENERALLY REPRESENTATIVE
OF INTERMEDIATE-TERM GOVERNMENT BONDS, INVESTMENT GRADE CORPORATE DEBT
SECURITIES AND MORTGAGE BACKED SECURITIES. THE LEHMAN CORPORATE BOND INDEX IS
A TOTAL RETURN INDEX CONSIDERED GENERALLY REPRESENTATIVE OF THE MARKET FOR
INVESTMENT GRADE AND NON-INVESTMENT GRADE CORPORATE BONDS IN A WIDE RANGE OF
MATURITIES. THE LEHMAN LONG-TERM GOVERNMENT BOND INDEX IS A TOTAL RETURN INDEX
CONSIDERED GENERALLY REPRESENTATIVE OF THE MARKET FOR U.S. TREASURIES WITH
MATURITIES OF 10 YEARS OR MORE. SOURCE IS LIPPER ANALYTICAL SERVICES, INC.
Q HOW DID HIGH-YIELD BONDS PERFORM?
A High-yield bonds were one of the few places that bond investors achieved
positive returns. The Lehman High Yield Bond Index+ returned 2.89 percent.
Kemper High Yield Opportunity Fund outperformed that benchmark, gaining 3.55
percent (Class A shares unadjusted for a sales charge). That certainly isn't a
jaw-dropping return for a 12-month period, but it was far better than some other
areas of the bond market. Kemper High Yield II hasn't been around for a full
year, but for the ten-month period, its return was 0.19 percent (Class A shares
unadjusted for any sales charge) versus the Lehman High Yield Bond Index's+
return of 0.86 percent.
+ THE LEHMAN HIGH YIELD BOND INDEX IS A TOTAL RETURN INDEX CONSIDERED GENERALLY
REPRESENTATIVE OF THE MARKET FOR BONDS RATED BELOW INVESTMENT GRADE. SOURCE IS
LIPPER ANALYTICAL SERVICES, INC.
Q WHAT WAS RESPONSIBLE FOR THE BOND MARKET'S DIFFICULTIES?
A In short, rising interest rates. Last October, when the fiscal year began,
U.S. Treasury yields were extremely low. That was because investors worldwide
were pouring money into the U.S. Treasury market. At that time, there was grave
uncertainty as to the health of Russian and Latin American economies, and the
viability of a recovery in Asia. At the same time, Europe was preparing to
convert to a single currency, the euro. So, for investors seeking a safe harbor,
U.S. Treasuries were about the only compelling choice. The resulting demand
drove Treasury prices up and yields down.
5
<PAGE> 6
PERFORMANCE UPDATE
In October 1998, the 30-year Treasury yielded just 4.87 percent.
That's when the Federal Reserve decided to step in. Concerned that faltering
worldwide economies could lead to a recession at home, the Fed cut interest
rates three times in the last quarter of 1998. It was a particularly
uncharacteristic move because the Fed normally cuts rates only when the U.S.
economy is slowing, which it wasn't. But rather than risk a worldwide recession,
the Fed decided to go ahead and lower rates. The idea was to use the engine of
the U.S. economy to power global growth and bolster confidence that Asian and
Latin American economies would rebound.
All this happened in October and November last year. Since then, Asian
economies have shown signs of recovery, prompting assets to exit the U.S.
Treasury market. More important, economic growth in the U.S. began to trigger
concerns about inflation. When investors fear inflation, they demand higher
yields to help offset the erosion of their income. Thus, throughout 1999,
interest rates have staged an unflagging ascent. The 30-year Treasury rose from
4.87 percent on October 1, 1998 to 6.05 percent a year later. That's a
monumental move for a T-bond, and the price decline Treasuries suffered was
indicative of the difficulties the bond market experienced as a whole.
Q WERE RISING RATES RESPONSIBLE FOR THE MEAGER RETURNS IN THE HIGH YIELD
BOND MARKET?
A Eventually, they were one of the culprits. During the first half of the
fiscal year, the high yield bond market was able to shrug off the effects of
rising rates. For the six-month period ended March 31, 1999, the Lehman High
Yield Bond Index was up four percent. Thereafter, however, higher rates began to
affect the high-yield market's liquidity. Last year, the sub-5 percent yield on
a T-bond made the 8-9 percent yield on high-yield bonds really attractive. But
as the T-bond yield rose, a lot of investors decided that a six percent yield on
a AAA-rated bond was pretty good given the uncertainty. So, demand for
high-yield bonds began to dwindle. Unfortunately, this coincided with a heavy
level of new issuance, which put still more pressure on high yield bond prices.
As a result, high-yield bonds struggled through the last half of the fiscal
year, with the Lehman High Yield Bond Index down 1.08 percent for the last six
months.
Q YOU SAID THAT HIGHER INTEREST RATES WERE "ONE OF THE CULPRITS" BEHIND THE
HIGH YIELD MARKET'S DIFFICULTIES. WHAT WERE THE OTHERS?
A One other significant factor affecting the market's liquidity was an
increase in defaults. That was a bit of a surprise, given that the economy was
growing so strongly. However, during the heady days of 1996 and 1997, a lot of
deals came to market that had poor business plans. The relatively weak economy
in 1998 and the volatility in 1999 started to take a toll on some of these
bonds, and the default rate began to climb as 1999 wore on.
Q WAS KEMPER HIGH YIELD FUND AFFECTED BY THESE DEFAULTS?
A We've always been fairly cautious compared with some other funds. We don't
have a lot of emerging market debt, nor do we have a lot of paper rated below
"single B." That can hurt us when the market rallies strongly, but it helps
protect us when the market is punishing particularly suspect credits.
While the fund had relatively few defaults with minimal impact, the defaults
also affected us indirectly because they cast a cloud over the market as a whole
and unnerved potential buyers. So, even though most of the defaults haven't been
a problem for the fund specifically, they've kept pressure on prices in the
market.
Q WHAT WERE YOUR STRATEGIES FOR MANAGING THE FUNDS DURING THE PERIOD?
A Given the volatility of the market, we just tried to look for the best
values. Earlier in the year, that meant emphasizing media and telecommunications
companies. Merger and acquisition activity among these companies spurred the
performance of this sector. Another sector that did well was cyclicals, in which
the funds have an overweight position. Cyclical industries are those whose
earnings tend to rise quickly when the economy strengthens and fall quickly when
the economy weakens. Examples include housing, automobiles and paper companies.
Also, we began to cut back our holdings in health care companies because of a
negative outlook for Medicare and price declines among nursing home issuers.
We are typically cautious investors. That was a good thing at the beginning of
the fiscal year, when investors were concerned about the U.S. economy and
emerging markets were being hit hard. However, during the last half of the
fiscal year, funds that took more risk by investing in lower rated bonds tended
to outperform. As a result, Kemper High Yield Opportunity Fund's
6
<PAGE> 7
PERFORMANCE UPDATE
12-month return ended in the middle of the pack. Our 3.55 (Class A shares
unadjusted for sales charge) percent return for the 12-month period trailed the
Lipper High Yield Fund Average return of 4.84 percent. Kemper High Yield Fund
II, which because of its slightly later inception didn't benefit from the
defensive strategy that helped us in late 1998, returned 0.79 (Class A shares
unadjusted for sales charge) percent year-to-date versus the Lipper Average
return of 1.96 percent.
Q DID YOU TAKE ADVANTAGE OF KEMPER HIGH YIELD OPPORTUNITY FUND'S ABILITY TO
INVEST IN EQUITIES?
A Not fully. We kept the equity component of the fund less than five percent
for most of the year. The reason is that the stock market's returns have been
narrowly concentrated in just a few big companies. We weren't confident that the
stock offered by high-yield issuers would add much to performance. In fact,
we've believed that increasing the stock component would boost potential
volatility rather than potential returns. That may change in the future if the
outlook for interest rates and corporate profits becomes clearer. But for now,
we anticipate maintaining a minimal stock exposure.
Q THE AVERAGE COUPON FOR A HIGH-YIELD BOND RIGHT NOW IS AROUND 9 PERCENT.
SO, IT LOOKS AS IF THE HIGH-YIELD MARKET'S TOTAL RETURN WILL BE LESS THAN THE
COUPON. DO YOU EXPECT THIS TO CONTINUE?
A No, and there are several reasons why. First is historical. In 1998, the
high-yield market returned 0.97 percent, and so far in 1999, it's returned 1.23
percent, according to the Chase Securities Global High Yield Index*.
Historically, when the high-yield market has gone through the doldrums, it has
typically come back strong. For example, in 1994, the Chase Index returned -1.57
percent. The next year, it returned 19.56 percent. Certainly, there are no
guarantees that this could happen again, but from this level, we think it's fair
to say that there's more upside potential than downside.
Second is liquidity. The market's liquidity has been constrained by a number
of one-time factors, such as the Russian debt crisis and Y2K concerns. These
events won't hinder the market forever.
Third is an outsized number of defaults. As I mentioned, several deals that
probably weren't a good idea in the first place are now being weeded out of the
market. The economy is growing well, and when this current cloud of defaults is
lifted, we believe investors will realize the attractive value offered by
high-yield bonds, and demand will increase.
When that might happen, no one can say. Currently, Y2K concerns and
uncertainty about what the Federal Reserve may do in the next couple of months
may act to keep a lid on prices.
But longer-term, we're encouraged by the environment created by a worldwide
economic expansion, inflation that remains low from a historical standpoint, and
a slackening supply of Treasury bonds. All these factors indicate to us that
high yield bonds currently offer a terrific value. We believe that the smart
investors are the ones who are content to wait for liquidity to return to the
market and collect a hefty coupon in the process.
* CHASE SECURITIES GLOBAL HIGH YIELD INDEX IS A TOTAL RETURN INDEX CONSIDERED
GENERALLY REPRESENTATIVE OF THE MARKET FOR U.S. AND DOLLAR DENOMINATED FOREIGN
HIGH YIELD DEBT. SOURCE IS CHASE SECURITIES INC.
TERMS TO KNOW
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 Bonds that are issued by companies often without long track
records of sales and earnings or with questionable credit strength and that pay
a higher yield to investors to help compensate for their greater risk of loss of
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.
U.S. TREASURIES Debt securities are issued by the U.S. Treasury, including
Treasury bills, Treasury bonds and Treasury notes. They are considered the
safest of all securities. Their safety rests in the power of the U.S. government
to obtain tax revenues to repay its obligations, and in its historical record of
always having done so.
7
<PAGE> 8
PERFORMANCE UPDATE
KEMPER HIGH YIELD FUND II
TOTAL RETURNS*
For the period ended September 30, 1999 (adjusted for the maximum sales charge)
<TABLE>
<CAPTION>
LIFE OF CLASS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
KEMPER HIGH YIELD FUND II CLASS A - 4.34% (since 11/30/98)
.....................................................................................................
KEMPER HIGH YIELD FUND II CLASS B - 4.13 (since 11/30/98)
.....................................................................................................
KEMPER HIGH YIELD FUND II CLASS C - 1.36 (since 11/30/98)
.....................................................................................................
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD II FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class A shares from 11/30/98 to
09/30/99
<TABLE>
<CAPTION>
SALOMON BROTHERS LONG-
KEMPER HIGH YIELD II TERM HIGH YIELD BOND
FUND CLASS A(1) INDEX(+) CONSUMER PRICE INDEX(++)
-------------------- ---------------------- ----------------------
<S> <C> <C> <C>
11/30/98 9548 10000 10000
9490 10071 9994
9642 10222 10018
9652 10105 10030
9766 10215 10061
4/30/99 9921 10401 10134
9719 10230 10134
9716 10108 10134
9691 10063 10165
9612 9918 10189
9/30/99 9566 9933 10213
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD II FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class B shares from 11/30/98 to
09/30/99
<TABLE>
<CAPTION>
SALOMON BROTHERS LONG-
KEMPER HIGH YIELD II TERM HIGH YIELD BOND
FUND CLASS B(1) INDEX(+) CONSUMER PRICE INDEX(++)
-------------------- ---------------------- ------------------------
<S> <C> <C> <C>
11/30/98 10000 10000 10000
9944 10071 9994
10086 10222 10018
10101 10105 10030
10203 10215 10061
4/30/99 10360 10401 10134
10142 10230 10134
10133 10108 10134
10100 10063 10165
10012 9918 10189
9/30/99 9602 9933 10213
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD II FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class C shares from 11/30/98 to
09/30/99
<TABLE>
<CAPTION>
SALOMON BROTHERS LONG-
KEMPER HIGH YIELD II TERM HIGH YIELD BOND
FUND CLASS C(1) INDEX(+) CONSUMER PRICE INDEX(++)
-------------------- ---------------------- ----------------------
<S> <C> <C> <C>
11/30/98 10000 10000 10000
9944 10071 9994
10086 10222 10018
10101 10105 10030
10203 10215 10061
4/30/99 10360 10401 10134
10142 10230 10134
10133 10108 10134
10100 10063 10165
10012 9918 10189
9/30/99 9865 9933 10213
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURNS
AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE
MORE OR LESS THAN ORIGINAL COST.
* 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 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 COMPRISES 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. SOURCE IS CDA WIESENBERGER.
8
<PAGE> 9
PORTFOLIO STATISTICS
KEMPER HIGH YIELD FUND II
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 9/30/99
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS 95%
...............................................................................
CASH EQUIVALENTS 5
- -------------------------------------------------------------------------------
100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
On 09/30/99
- -------------------------------------------------------------------------------
YEARS TO MATURITY ON 9/30/99
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1-10 YEARS 97%
...............................................................................
11-20 YEARS 3
- -------------------------------------------------------------------------------
100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
On 09/30/99
- -------------------------------------------------------------------------------
QUALITY ON 9/30/99
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
BBB 1%
...............................................................................
BB 17
...............................................................................
B 70
...............................................................................
OTHER 12
- -------------------------------------------------------------------------------
100%
</TABLE>
[PIE CHART]
On 09/30/99
- --------------------------------------------------------------------------------
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
9
<PAGE> 10
PERFORMANCE UPDATE
KEMPER HIGH YIELD OPPORTUNITY FUND
AVERAGE ANNUAL TOTAL RETURNS*
For periods ended September 30, 1999 (adjusted for the maximum sales charge)
<TABLE>
<CAPTION>
1-YEAR LIFE OF CLASS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS A -1.12% -0.28% (since 10/1/97)
.............................................................................................................................
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS B -0.09 -0.05 (since 10/1/97)
.............................................................................................................................
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS C 2.84 1.32 (since 10/1/97)
..............................................................................................................................
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class A shares from 10/31/97 to
09/30/99
<TABLE>
<CAPTION>
KEMPER HIGH YIELD SALOMON BROTHERS LONG-
OPPORTUNITY FUND CLASS TERM HIGH YIELD BOND
A(1) INDEX+ CONSUMER PRICE INDEX++
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
10/31/97 9546 10000 10000
12/31/97 9818 10288 9981
12/31/98 10090 11240 10142
9/30/99 9975 11086 10365
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class B shares from 10/31/97 to
09/30/99
<TABLE>
<CAPTION>
KEMPER HIGH YIELD SALOMON BROTHERS LONG-
OPPORTUNITY FUND CLASS TERM HIGH YIELD BOND
B(1) INDEX+ CONSUMER PRICE INDEX++
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
10/31/97 9546 10000 10000
12/31/97 10273 10288 9981
12/31/98 10469 11240 10142
9/30/99 10030 11086 10365
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class C shares from 10/31/97 to
09/30/99
<TABLE>
<CAPTION>
KEMPER HIGH YIELD SALOMON BROTHERS LONG-
OPPORTUNITY FUND CLASS TERM HIGH YIELD BOND
C(1) INDEX+ CONSUMER PRICE INDEX++
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
10/31/97 9546 10000 10000
12/31/97 10273 10288 9981
12/31/98 10467 11240 10142
9/30/99 10298 11086 10365
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURNS AND
PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE MORE OR
LESS THAN ORIGINAL COST.
* AVERAGE ANNUAL TOTAL RETURN AND TOTAL RETURN MEASURE 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 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 COMPRISES 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. SOURCE IS CDA WIESENBERGER.
10
<PAGE> 11
PORTFOLIO STATISTICS
KEMPER HIGH YIELD OPPORTUNITY FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION* ON 9/30/99 ON 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
BONDS 96% 96%
................................................................................
CASH EQUIVALENTS -- 4
................................................................................
PREFERRED AND COMMON STOCK 4 --
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/99 ON 9/30/98
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS TO MATURITY ON 9/30/99 ON 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
1-10 YEARS 95% 91%
................................................................................
11-20 YEARS 5 7
................................................................................
OVER 21 YEARS -- 2
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/99 ON 9/30/99
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
QUALITY ON 9/30/99 ON 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
BB 12% 9%
................................................................................
B 71 74
................................................................................
OTHER 10 16
................................................................................
NOT RATED 7 1
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/99 ON 9/30/99
- --------------------------------------------------------------------------------
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
KEMPER HIGH YIELD OPPORTUNITY FUND
Portfolio of Investments at September 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONSUMER DISCRETIONARY--20.4%
AFC Enterprises, 10.250%, 5/15/2007 $ 510 $ 498
AMF Bowling Worldwide, Inc., Step-up Coupon, 0%
to 3/15/2001, 12.250% to 3/15/2006 645 379
Advantica Restaurant Co., 11.250%, 1/15/2008 690 600
Avondale Mills, 10.250%, 5/1/2006 274 238
Boca Resorts Inc., 9.875%, 4/15/2009 150 139
Cinemark USA, Inc., 8.500%, 8/1/2008 100 78
Cinemark USA, Inc., Series D, 9.625%, 8/1/2008 100 86
Cole National Group Inc., 9.875%, 12/31/2006 230 197
Cole National Group Inc., 8.625%, 8/15/2007 230 189
Finlay Fine Jewelry Co., 8.375%, 5/1/2008 740 683
Galey & Lord, Inc., 9.125%, 3/1/2008 170 43
Guitar Center Management, 11.000%, 7/1/2006 300 297
Harvey's Casino Resorts, 10.625%, 6/1/2006 300 312
Hines Horticulture, Inc., 11.750%, 10/15/2005 450 481
Hollywood Entertainment Corp., 10.630%, 8/15/2004 100 92
Hollywood Entertainment Corp., Series B, 10.625%,
8/15/2004 300 276
International Game Technology, 8.375%, 5/15/2009 120 114
Iron Age Holdings Corp., Step-up Coupon, 0% to
5/1/2003, 12.125% to 5/1/2009 100 30
Iron Age Holdings Corp., 9.875%, 5/1/2008 90 69
J. Crew Group, Step-up Coupon, 0% to 10/15/2002,
13.125% to 10/15/2008 120 63
J. Crew Group, 10.375%, 10/15/2007 390 357
Mohegan Tribal Gaming Authority, 8.750%, 1/1/2009 20 20
Perkins Finance, L.P., 10.125%, 12/15/2007 510 506
Phillips-Van Heusen Corp., 9.500%, 5/1/2008 40 37
Pillowtex Corp., 10.000%, 11/15/2006 300 204
Pillowtex Corp., 9.000%, 12/15/2007 260 169
Players International, 10.875%, 4/15/2005 220 230
Regal Cinemas Inc., 9.500%, 6/1/2008 400 272
Restaurant Co., Step-up Coupon, 0% to 5/15/2003,
11.250% to 5/15/2008 180 103
Sealy Mattress Co., Step-up Coupon, 0% to
12/15/2002, 10.875% to 12/15/2007 670 444
Specialty Retailers, Inc., 8.500%, 7/15/2005 60 44
Specialty Retailers, Inc., 9.000%, 7/15/2007 200 122
Station Casinos, Inc., 10.125%, 3/15/2006 30 31
---------------------------------------------------------------------------------
7,403
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--.5%
Dyersburg Corp., 9.750%, 9/1/2007 200 74
Jafra Cosmetics International, Inc., 11.750%,
5/1/2008 140 120
---------------------------------------------------------------------------------
194
- ------------------------------------------------------------------------------------------------------------------------
HEALTH--.1%
Mariner Post-Acute Network, Inc., Step-up Coupon,
0% to 11/7/2002, 10.500% to 11/1/2007 510 10
(a)Vencor, Inc., 9.875%, 5/1/2005 75 17
---------------------------------------------------------------------------------
27
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMUNICATIONS--22.5%
21st Century Telecom Group, Inc., Step-up Coupon,
0% to 2/15/2003, 12.250% to 2/15/2008 $ 180 $ 72
Allegiance Telecom, Inc., Step-up Coupon, 0% to
2/15/2003, 11.750% to 2/15/2008 710 451
Allegiance Telecom, Inc., 12.875%, 5/15/2008 140 153
American Cellular Corp., 10.500%, 5/15/2008 300 307
Bresnan Communications Co., Step-up Coupon, 0% to
2/1/2004, 9.250% to 2/1/2009 100 65
Bresnan Communications Co., 8.000%, 2/1/2009 100 98
Comunicacion Cellular, S.A., Step-up Coupon, 0%
to 9/29/2000, 14.125% to 3/1/2005 100 55
Crown Castle International Corp., Step-up Coupon,
0% to 11/15/2002, 10.625% to 11/15/2007 375 259
Crown Castle International Corp., 9.500%,
8/1/2011 100 95
Esprit Telecom Group, PLC, 11.500%, 12/15/2007 330 338
Esprit Telecom Group, PLC, 10.875%, 6/15/2008 110 111
Global Telesystems Group, 9.875%, 2/15/2005 270 243
ICG Holdings, Inc., Step-up Coupon, 0% to
9/15/2000, 13.500% to 9/15/2005 560 482
Impsat Corp., 12.375%, 6/15/2008 155 115
KMC Telecom Holdings, Inc., Step-up Coupon, 0% to
2/15/2003, 12.500% to 2/15/2008 440 229
KMC Telecom Holdings, Inc., 13.500%, 5/15/2009 110 108
Long Distance Direct Holdings, Inc., 12.250%,
4/15/2008 100 52
MGC Communications, 13.000%, 10/1/2004 310 263
Millicom International Cellular, S.A., Step-up
Coupon, 0% to 6/1/2001, 13.500% to 6/1/2006 160 114
Nextel Communications Inc., Step-up Coupon, 0% to
2/15/2003, 9.750% 2/15/2008 470 328
Nextel Communications, Inc., Step-up Coupon, 0%
to 10/31/2002, 9.750% to 10/31/2007 120 85
Nextel Communications, Inc., Step-up Coupon, 0%
to 2/15/99, 9.750% to 8/15/2004 135 136
Nextlink Communications, Inc., Step-up Coupon, 0%
to 4/15/2003, 9.450% to 4/15/2008 40 24
Nextlink Communications, Inc., Step-up Coupon, 0%
to 6/1/2004, 12.250% to 6/1/2009 200 114
Nextlink Communications, Inc., 12.500%, 4/15/2006 80 85
Nextlink Communications, Inc., 10.750%,
11/15/2008 130 130
PTC International Finance, Step-up Coupon, 0% to
7/1/2002, 10.750% to 7/1/2007 120 83
Primus Telecommunications Group, 11.750%,
8/1/2004 540 529
Primus Telecommunications Group, 9.875%,
5/15/2008 10 9
Primus Telecommunications Group, 11.250%,
1/15/2009 70 66
RCN Corp., Step-up Coupon, 0% to 7/1/2003,
11.000% to 7/1/2008 100 60
RCN Corp., 10.000%, 10/15/2007 120 116
Rogers Cantel, 9.750%, 6/1/2016 170 193
SBA Communications Corp., Step-up Coupon, 0% to
3/1/2003, 12.000% to 3/1/2008 110 61
Tele1 Europe BV, 13.000%, 5/15/2009 100 98
Telecorp PCS, Inc., Step-up Coupon, 0% to
4/1/2004, 11.625% to 4/15/2009 550 319
Teligent, Inc., Step-up Coupon, 0% to 3/1/2003,
11.500% to 3/1/2008 200 103
Teligent, Inc., 11.500%, 12/1/2007 280 255
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TriTel Pcs, Inc., Step-up Coupon, 0% to
5/15/2004, 12.750% to 5/15/2009 $ 200 $ 112
Triton Communications, L.L.C., Step-up Coupon, 0%
to 5/1/2003, 11.000% to 5/1/2008 1,460 982
U.S. Xchange, L.L.C., 15.000%, 7/1/2008 110 111
USA Mobile Communications Holdings, Inc.,
14.000%, 11/1/2004 110 89
Versatel Telecom, 13.250%, 5/15/2008 250 246
Versatel Telecom, 11.875%, 7/15/2009 40 37
Viatel, Inc., Step-up Coupon, 0% to 4/15/2003,
12.500% to 4/15/2008 130 76
Viatel, Inc., 11.250%, 4/15/2008 125 120
---------------------------------------------------------------------------------
8,177
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL--2.0%
Kappa Beheer BV, 10.625%, 7/15/2009 70 72
Ono Finance, PLC, 13.000%, 5/1/2009 360 378
Spectrasite Holdings, Inc., Step-up Coupon, 0% to
4/1/2004, 11.250% to 4/15/2009 110 55
Spectrasite Holdings, Inc., Step-up Coupon, 0% to
7/15/2003, 12.000% to 7/15/2008 430 237
---------------------------------------------------------------------------------
742
- ------------------------------------------------------------------------------------------------------------------------
MEDIA--16.5%
AMFM, Inc., Step-up Coupon, 0% to 2/1/2002,
12.750% to 2/1/2009 110 95
AMFM, Inc., 9.000%, 10/1/2008 100 100
AMFM, Inc., 8.000%, 11/1/2008 330 316
Avalon Cable Holdings, Step-up Coupon, 0% to
12/1/2003, 11.875% to 12/1/2008 200 125
Avalon Cable of Michigan, 9.375%, 12/1/2008 100 100
Big Flower Press, 8.875%, 7/1/2007 400 390
CSC Holdings, Inc., 9.250%, 11/1/2005 100 101
CSC Holdings, Inc., 8.125%, 8/15/2009 54 55
CSC Holdings, Inc., 10.500%, 5/15/2016 60 65
Charter Communication Holdings LLC, Step-up
Coupon, 0% to 4/1/2004, 9.920% to 4/1/2011 230 136
Charter Communication Holdings LLC, 8.250%,
4/1/2007 440 411
Diamond Cable Communications, PLC, Step-up
Coupon, 0% to 2/15/2002, 10.750% to 2/15/2007 200 156
Diamond Cable Communications, PLC, Step-up
Coupon, 0% to 12/15/2000, 11.750% to 12/15/2005 50 45
Diamond Cable Communications, PLC, 13.250%,
9/30/2004 230 246
Echostar DBS Corp., 9.250%, 2/1/2006 500 491
Frontiervision, 11.000%, 10/15/2006 100 106
Frontiervision Holdings, LP, Step-up Coupon, 0%
to 9/15/2001, 11.875% to 9/15/2007 100 84
Metromedia Fiber Network, Inc., 10.000%,
11/15/2008 810 782
NTL Communications Corp., Step-up Coupon 0% to
10/1/2003, 12.375% to 10/1/2008 50 34
NTL, Inc., Step-up Coupon, 0% to 2/1/2001,
10.500% to 2/1/2006 40 35
NTL, Inc., 11.500%, 10/1/2008 255 274
Outdoor Systems, Inc., 9.375%, 10/15/2006 140 147
Panavision, Inc., Step-up Coupon, 0% to 2/1/2002,
9.625% to 2/1/2006 370 192
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Renaissance Media Group, Step-up Coupon, 0% to
4/15/2003, 10.000% to 4/15/2008 $ 130 $ 91
Star Choice Communications, Inc., 13.000%,
12/15/2005 50 49
TeleWest Communications, PLC, Step-up Coupon, 0%
to 4/15/2004, 9.250% to 4/15/2009 500 301
TeleWest Communications, PLC, Step-up Coupon, 0%
to 10/1/2000, 11.000% to 10/1/2007 95 85
TeleWest Communications, PLC, 9.625%, 10/1/2006 60 60
TeleWest Communications, PLC, 11.250%, 11/1/2008 140 150
Transwestern Publishing, Step-up Coupon, 0% to
11/15/2002, 11.875% to 11/15/2008 310 217
Transwestern Publishing, 9.625%, 11/15/2007 340 332
United Artists Theatre Circuit, Inc., 9.750%,
4/15/2008 190 44
United International Holdings, Step-up Coupon, 0%
to 2/15/2003, 10.750% to 2/15/2008 300 182
---------------------------------------------------------------------------------
5,997
- ------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--2.7%
Coinmach Corp., 11.750%, 11/15/2005 120 126
Doskocil Manufacturing Co., 10.125%, 9/15/2007 60 27
Integrated Electrical Services, Inc., 9.375%,
2/1/2009 410 399
Kindercare Learning Centers Inc., 9.500%,
2/15/2009 410 387
Spincycle, Inc., Step-up Coupon, 0% to 5/1/2001,
12.750% to 5/1/2005 350 53
---------------------------------------------------------------------------------
992
- ------------------------------------------------------------------------------------------------------------------------
DURABLES--4.4%
BE Aerospace, Inc., 9.500%, 11/1/2008 400 394
DeCrane Aircraft Holdings, Inc., 12.000%,
9/30/2008 230 230
Fairchild Corp., 10.750%, 4/15/2009 120 102
United Rentals, Inc., 9.250%, 1/15/2009 900 862
---------------------------------------------------------------------------------
1,588
- ------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--13.8%
Consumers International, 10.250%, 4/1/2005 200 191
Doman Industries, Ltd., 8.750%, 3/15/2004 390 283
Doman Industries, Ltd., 9.250%, 11/15/2007 100 67
Fonda Group, 9.500%, 3/1/2007 200 174
GS Technologies, 12.000%, 9/1/2004 210 147
GS Technologies, 12.250%, 10/1/2005 370 255
Gaylord Container Corp., 9.750%, 6/15/2007 230 218
Gaylord Container Corp., 9.875%, 2/15/2008 340 295
Graham Packaging Co., Step-up Coupon, 0% to
1/15/2003, 10.750% to 1/15/2009 260 166
Grove Holdings LLC, Step-up Coupon, 0% to
5/1/2003, 11.625% to 5/1/2009 100 18
Grove Investors, PIK, 14.500%, 5/1/2010 119 30
Huntsman Package, 11.750%, 12/1/2004 200 206
Millar Western Forest Products, Ltd., 9.875%,
5/15/2008 200 193
NL Industries, Inc., Senior Note, 11.750%,
10/15/2003 710 731
Plainwell, Inc., 11.000%, 3/1/2008 320 247
Riverwood International Corp., 10.250%, 4/1/2006 50 49
Riverwood International Corp., 10.625%, 8/1/2007 10 10
Riverwood International Corp., 10.875%, 4/1/2008 400 376
SF Holdings Group, Inc., Step-up Coupon, 0% to
03/15/2003, 12.750% to 3/15/2008 430 185
Spinnaker Industries, 10.750%, 10/15/2006 120 100
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stone Container Corp., 12.250%, 4/1/2002 $ 100 $ 101
Stone Container Corp., 11.500%, 8/15/2006 350 369
Terra Ind., 10.750%, 9/30/2003 90 45
Terex Corp., 8.875%, 4/1/2008 170 160
Texas Petrochemicals, 11.125%, 7/1/2006 500 415
---------------------------------------------------------------------------------
5,031
- ------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--1.3%
Cherokee International Corp., 10.500%, 5/1/2009 100 92
PSINet, Inc., 10.000%, 2/15/2005 40 38
PSINet, Inc., 11.500%, 11/1/2008 150 152
PSINet, Inc., 11.000%, 8/1/2009 200 196
---------------------------------------------------------------------------------
478
- ------------------------------------------------------------------------------------------------------------------------
ENERGY--2.4%
Continental Resources, Inc., 10.250%, 8/1/2008 20 16
Key Energy Services, Inc., 14.000%, 1/15/2009 100 107
Ocean Energy, Inc., 10.375%, 10/15/2005 330 347
Ocean Energy, Inc., 9.750%, 10/1/2006 350 360
RAM Energy, 11.500%, 2/15/2008 100 48
---------------------------------------------------------------------------------
878
- ------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--4.8%
Euramax International, PLC, 11.250%, 10/1/2006 300 300
MMI Products, Inc., 11.250%, 4/15/2007 500 505
Metal Management, Inc., 10.000%, 5/15/2008 500 350
Metals USA Inc., 8.625%, 2/15/2008 135 125
Renco Steel Holdings Co., Series B, 10.875%,
2/1/2005 300 248
Republic Tech International, 13.750%, 7/15/2009 230 218
---------------------------------------------------------------------------------
1,746
- ------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--2.1%
Del Webb Corp., 9.750%, 1/15/2008 200 181
Dimac Corp., 12.500%, 10/1/2008 120 60
Hovnanian Enterprises, Inc., 9.750%, 6/1/2005 30 27
Kevco, Inc., 10.375%, 12/1/2007 265 146
Nortek, Inc., 9.875%, 3/1/2004 250 245
Nortek, Inc., 8.875%, 8/1/2008 100 95
---------------------------------------------------------------------------------
754
- ------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.9%
Petro Stopping Centers, 10.500%, 2/1/2007 200 198
Travelcenters America, 10.250%, 4/1/2007 500 493
---------------------------------------------------------------------------------
691
---------------------------------------------------------------------------------
CORPORATE BONDS TOTAL--95.4%
(Cost $37,911) 34,698
---------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER
DISCRETIONARY--.8%
MISCELLANEOUS
Corporate Express, Inc., 4.500%, 7/1/2000 $ 320 $ 315
---------------------------------------------------------------------------------
CONVERTIBLE BONDS TOTAL--.8%
(Cost $309) 315
---------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF
PREFERRED STOCKS SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--.9%
CELLULAR TELEPHONE--.4%
Dobson Communications, PIK 161 145
---------------------------------------------------------------------------------
TELEPHONE/
COMMUNICATIONS--.5%
21st Century Telecom Group, Inc. 58 29
Nextel Communications, Inc., PIK 162 157
---------------------------------------------------------------------------------
186
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL--.3%
REAL ESTATE
Crown American Realty Trust 2,210 91
---------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--.3%
CONTAINERS & PAPER--.1%
SF Holdings Group, Inc., PIK 11 32
---------------------------------------------------------------------------------
MACHINERY/COMPONENTS/
CONTROLS--0.2%
Eagle-Picher Holdings, Inc., 20 92
---------------------------------------------------------------------------------
PREFERRED STOCKS TOTAL--1.5%
(Cost $702) 546
---------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF
COMMON STOCKS SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--.7%
RECREATIONAL PRODUCTS--.4%
International Game Technology 8,000 144
---------------------------------------------------------------------------------
SPECIALTY RETAIL--.3%
(a)Guitar Center Management 8,000 75
(a)Hollywood Entertainment Corp. 2,000 30
---------------------------------------------------------------------------------
105
- ------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--.2%
TELEPHONE/
COMMUNICATIONS
(a)21st Century Telecom Group, Inc., Warrants 50 10
(a)KMC Telecom Holdings, Inc., Warrants 160 1
(a)Tele1 Europe BV 100 7
(a)Versatel Telecom, Warrants 250 31
Viatel, Inc. 219 6
---------------------------------------------------------------------------------
55
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL--.6%
MISCELLANEOUS
S & P Mid-Cap 400 Depository Receipts 3,000 215
---------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
MEDIA--0.0%
CABLE TELEVISION
(a)Star Choice Communications, Inc., Warrants
(expire 12/15/2005) 1,158 3
---------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--0.1%
MISCELLANEOUS COMMERCIAL
SERVICES--0.1%
(a)United Rentals, Inc. 1,000 22
---------------------------------------------------------------------------------
AEROSPACE--0.0%
(a)Decrane Holdings Co., Warrants 230 0
---------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANUFACTURING--.7%
CONTAINERS & PAPER
(a)Gaylord Container Corp. $22,500 $ 160
Smufit-Stone Container Corp. 5,000 108
------------------------------------------------------------------------------
268
- ------------------------------------------------------------------------------------------------------------------------
ENERGY--0.00%
OILFIELD SERVICES/
EQUIPMENT--0.0%
(a)Key Energy Services, Inc., Warrants 100 2
------------------------------------------------------------------------------
BUILDING PRODUCTS--0.0%
(a)Waxman Industries, Inc. 18,000 11
------------------------------------------------------------------------------
COMMON STOCKS TOTAL--2.3%
(Cost $929) 825
------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost $39,851) $36,384
------------------------------------------------------------------------------
</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.
PIK denotes that interest or dividend is paid in kind.
Based on the cost of investments of $39,882 for federal income tax purposes at
September 30, 1999, the gross unrealized appreciation was $496, the gross
unrealized depreciation was $3,994 and the net unrealized depreciation on
investments was $3,498.
See accompanying Notes to Financial Statements.
18
<PAGE> 19
PORTFOLIO OF INVESTMENTS
KEMPER HIGH YIELD FUND II
Portfolio of Investments at September 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER DISCRETIONARY--17.0%
AFC Enterprises, 10.250%, 5/15/2007 $1,070 $ 1,046
AMF Bowling Worldwide, Inc., Step-up Coupon, 0%
to 3/15/2001, 12.250% to 3/15/2006 1,000 587
Advantica Restaurant Co., 11.250%, 1/15/2008 950 826
Avis Rent A Car, 11.000%, 5/1/2009 1,490 1,527
Avondale Mills, 10.250%, 5/1/2006 1,060 922
Boca Resorts Inc., 9.880%, 4/15/2009 1,730 1,600
Carrols Corporation, 9.500%, 12/1/2008 405 344
Circus Circus Enterprises, Inc., 9.250%,
12/1/2005 1,160 1,160
Cole National Group Inc., 9.875%, 12/31/2006 630 539
Cole National Group Inc., 8.625%, 8/15/2007 400 328
Eldorado Resorts, 10.500%, 8/15/2006 1,000 1,025
Finlay Enterprises, Inc., 9.000%, 5/1/2008 435 397
Finlay Fine Jewelry Co., 8.375%, 5/1/2008 170 157
Galey & Lord, Inc., 9.125%, 3/1/2008 1,170 292
Guitar Center Management, 11.000%, 7/1/2006 1,572 1,556
Harvey's Casino Resorts, 10.625%, 6/1/2006 400 416
Hines Horticulture, Inc., 11.750%, 10/15/2005 1,355 1,450
Hollywood Entertainment Corp., 10.625%,
8/15/2004 330 304
Hollywood Entertainment Corp., Series B,
10.625%, 8/15/2004 1,000 920
Horseshoe Gaming Holdings, 8.625%, 5/15/2009 1,000 945
Imax Corp., Senior Note, 7.875%, 12/1/2005 550 511
International Game Technology, 8.375%, 5/15/2009 440 419
Iron Age Holdings Corp., 9.875%, 5/1/2008 30 23
J. Crew Group, Step-up Coupon, 0% to 10/15/2002,
13.125% to 10/15/2008 1,560 819
J. Crew Group, 10.375%, 10/15/2007 460 421
Krystal Inc., 10.250%, 10/1/2007 1,000 1,005
Mohegan Tribal Gaming Authority, 8.125%,
1/1/2006 250 242
Mohegan Tribal Gaming Authority, 8.750%,
1/1/2009 1,520 1,490
National Vision Association, Ltd., 12.750%,
10/15/2005 370 311
Perkins Finance, L.P., 10.125%, 12/15/2007 1,390 1,380
Phillips-Van Heusen Corp., 9.500%, 5/1/2008 150 139
Pillowtex Corp., 10.000%, 11/15/2006 300 204
Pillowtex Corp., 9.000%, 12/15/2007 300 195
Regal Cinemas Inc., 9.500%, 6/1/2008 540 367
Regal Cinemas, Inc., 8.75%, 12/15/2010 70 45
Sealy Mattress Co., Step-up Coupon, 0% to
12/15/2002, 10.875% to 12/15/2007 925 613
Specialty Retailers, Inc., 8.500%, 7/15/2005 430 314
Specialty Retailers, Inc., 9.000%, 7/15/2007 750 458
Station Casinos, Inc., 10.125%, 3/15/2006 530 545
---------------------------------------------------------------------------------
25,842
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--.4%
Agrilink Foods, Inc., 11.875%, 11/1/2008 720 641
---------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HEALTH--.4%
ALARIS Medical Systems, Inc., Step-up Coupon, 0%
to 8/1/2003, 11.125% to 8/1/2008 $ 400 $ 206
Abbey Healthcare Group, Inc., 9.500%, 11/1/2002 420 407
Mariner Post-Acute Network, Inc., Step-up
Coupon, 0% to 11/7/2002, 10.500% to 11/1/2007 800 16
---------------------------------------------------------------------------------
629
- ------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--22.4
21st Century Telecom Group, Inc., Step-up
Coupon, 0% to 2/15/2003, 12.250% to 2/15/2008 120 48
Allegiance Telecom, Inc., Step-up Coupon, 0% to
2/15/2003, 11.750% to 2/15/2008 1,000 635
Allegiance Telecom, Inc., 12.875%, 5/15/2008 700 763
American Cellular Corp., 10.500%, 5/15/2008 810 830
Bresnan Communications Co., Step-up Coupon, 0%
to 2/1/2004, 9.250% to 2/1/2009 600 390
Bresnan Communications Co., 8.000%, 2/1/2009 100 98
Call-Net Enterprises, Inc., Step-up Coupon, 0%
to 5/15/2004, 10.800% to 5/15/2009 200 100
Call-Net Enterprises, Inc., 9.375%, 5/15/2009 170 149
Crown Castle International Corp., Step-up
Coupon, 0% to 11/15/2002, 10.625% to
11/15/2007 700 483
Crown Castle International Corp., 9.000%,
5/12/2011 60 56
Crown Castle International Corp., 9.500%,
8/1/2011 1,000 952
Dobson Communication Corp., 11.750%, 4/15/2007 500 525
Dolphin Telecom, PLC, Step-up Coupon, 0% to
5/15/2004, 14.000% to 5/15/2009 2,000 810
Esprit Telecom Group, PLC, 11.500%, 12/15/2007 450 461
Global Crossing, Ltd., 9.625%, 5/15/2008 1,040 1,069
Global Telesystems Group, 9.875%, 2/15/2005 1,190 1,071
ICG Holdings, Inc., Step-up Coupon, 0% to
9/15/2000, 13.500% to 9/15/2005 2,300 1,978
IPC Communications Inc., Step-up Coupon, 0% to
11/1/2001, 10.875% to 5/1/2008 970 718
Intermedia Communications of Florida, Inc.,
Step-up Coupon, 0% to 5/15/2001, 12.500% to
5/15/2006 670 533
KMC Telecom Holdings, Inc., Step-up Coupon, 0%
to 2/15/2003, 12.500% to 2/15/2008 1,210 629
KMC Telecom Holdings, Inc., 13.500%, 5/15/2009 840 823
Level 3 Communications, Inc., Step-up Coupon, 0%
to 12/1/2003, 10.500% to 12/1/2008 250 141
Level 3 Communications, Inc., 9.125%, 5/1/2008 2,220 2,003
MGC Communications, 13.000%, 10/1/2004 749 637
McLeod USA Inc., 9.250%, 7/15/2007 900 898
MetroNet Communications Corp., Step-up Coupon,
0% to 6/15/2003, 9.950% to 6/15/2008 1,610 1,252
MetroNet Communications Corp., Step-up Coupon,
0% to 11/1/2002, 10.750% to 11/1/2007 100 82
Millicom International Cellular, S.A., Step-up
Coupon, 0% to 6/1/2001, 13.500% to 6/1/2006 1,560 1,108
Netia Holdings, Step-up Coupon, 0% to 11/1/2001,
11.250% to 11/1/2007 1,550 973
Netia Holdings, 10.250%, 11/1/2007 700 597
Nextel Communications, Inc., Step-up Coupon, 0%
to 2/15/99, 9.750% to 8/15/2004 1,420 1,431
Nextel Communications Inc., 9.750% 2/15/2008 490 342
Nextel Communications, Inc., 9/15/2007 1,120 829
Nextlink Communications, Inc., 10.750%,
11/15/2008 1,000 1,000
</TABLE>
20
<PAGE> 21
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nextlink Communications, Inc., Step-up Coupon,
0% to 6/1/2004, 12.250% to 6/1/2009 $1,000 $ 572
PTC International Finance, Step-up Coupon, 0% to
7/1/2002, 10.750% to 7/1/2007 500 345
Price Communications Wireless, 9.125%,
12/15/2006 800 812
Primus Telecommunications Group, 11.750%,
8/1/2004 770 755
Primus Telecommunications Group, 11.250%,
1/15/2009 280 266
Rogers Cantel Inc., 8.800%, 10/1/2007 500 510
SBA Communications Corp., Step-up Coupon, 0% to
3/1/2003, 12.000% to 3/1/2008 520 287
Tele1 Europe BV, 13.000%, 5/15/2009 870 852
Telecorp PCS, Inc., Step-up Coupon, 0% to
4/1/2004, 11.625% to 4/15/2009 1,640 951
Teligent, Inc., Step-up Coupon, 0% to 3/1/2003,
11.500% to 3/1/2008 625 322
Teligent, Inc., 11.500%, 12/1/2007 610 555
TriTel Pcs, Inc., Step-up Coupon, 0% to
5/15/2004, 12.750% to 5/15/2009 1,270 714
Triton Communications, L.L.C., Step-up Coupon,
0% to 5/1/2003, 11.000% to 5/1/2008 2,760 1,856
Versatel Telecom, 13.250%, 5/15/2008 250 246
Versatel Telecom, 11.875%, 7/15/2009 140 129
Viatel, Inc., Step-up Coupon, 0% to 4/15/2003,
12.500% to 4/15/2008 1,000 585
---------------------------------------------------------------------------------
34,171
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL--4.6%
Carlyle High Yield Partners, 12.240%, 5/31/2007 1,000 992
HMH Properties, 7.875%, 8/1/2008 1,600 1,424
Intertek Finance, PLC, 10.250%, 11/1/2006 1,000 950
Kappa Beheer BV, 10.625%, 7/15/2009 1,280 1,318
Ono Finance, PLC, 13.000%, 5/1/2009 650 683
Spectrasite Holdings, Inc., Step-up Coupon, 0%
to 4/1/2004, 11.250% to 4/15/2009 1,240 620
Spectrasite Holdings, Inc., Step-up Coupon, 0%
to 7/15/2003, 12.000% to 7/15/2008 1,950 1,073
---------------------------------------------------------------------------------
7,060
- ------------------------------------------------------------------------------------------------------------------------
MEDIA--15.7%
AMFM, Inc., Step-up Coupon, 0% to 2/1/2002,
12.750% to 2/1/2009 300 258
AMFM, Inc., 8.000%, 11/1/2008 900 862
Adelphia Communications Corp., 7.875%, 5/1/2009 540 490
American Lawyer Media, Inc., Step-up Coupon, 0%
to 12/15/2002, 12.25% to 12/15/2008 2,150 1,354
Avalon Cable Holdings, Step-up Coupon, 0% to
12/1/2003, 11.875% to 12/1/2008 600 375
Avalon Cable of Michigan, 9.375%, 12/1/2008 120 120
Big Flower Press, 8.875%, 7/1/2007 500 487
CSC Holdings, Inc., 9.250%, 11/1/2005 1,300 1,320
CSC Holdings, Inc., 8.125%, 7/15/2009 1,600 1,609
Chancellor Media Corp., 8.125%, 12/15/2007 250 237
Charter Communication Holdings LLC, 8.250%,
4/1/2007 1,540 1,440
Charter Communication Holdings LLC, Step-up
Coupon, 0% to 4/1/2004, 9.920% to 4/1/2011 980 581
Diamond Cable Communications, PLC, 13.250%,
9/30/2004 450 480
</TABLE>
21
<PAGE> 22
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Diva Systems Corp., Step-up Coupon, 0% to
3/1/2003, 12.625% to 3/1/2008 $ 290 $ 82
Echostar DBS Corp., 9.250%, 2/1/2006 820 806
Echostar DBS Corp., 9.380%, 2/1/2009 720 709
Falcon Holding Group, Step-up Coupon, 0% to
4/15/2003, 9.285% to 4/15/2010 1,150 814
Falcon Holding Group LP, 8.375%, 4/15/2010 370 364
Interep National Radio Sales, Inc., 10.000%,
7/1/2008 1,500 1,500
Metromedia Fiber Network, Inc., 10.000%,
11/15/2008 1,560 1,505
NTL Communications Corp., Step-up Coupon 0% to
10/1/2003, 12.375% to 10/1/2008 2,300 1,541
Outdoor Systems, Inc., 8.875%, 6/15/2007 900 925
Renaissance Media Group, Step-up Coupon, 0% to
4/15/2003, 10.000% to 4/15/2008 1,600 1,116
Rogers Cablesystems Ltd., 10.000%, 3/15/2005 500 536
SFX Entertainment, Inc., 9.125%, 12/1/2008 1,000 940
TeleWest Communications, PLC, Step-up Coupon, 0%
to 10/1/2000, 11.000% to 10/1/2007 600 534
TeleWest Communications, PLC, 11.250%, 11/1/2008 750 803
TeleWest Communications, PLC, Step-up Coupon, 0%
to 4/15/2004, 9.250% to 4/15/2009 800 482
Transwestern Publishing, 9.625%, 11/15/2007 1,000 975
United International Holdings, Step-up Coupon,
0% to 2/15/2003, 10.750% to 2/15/2008 1,000 605
---------------------------------------------------------------------------------
23,850
- ------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--4.3%
Allied Waste Industries, 7.625%, 1/1/2006 360 320
Coinmach Corp., 11.750%, 11/15/2005 720 757
ImPac Group, Inc., 10.125%, 3/15/2008 500 446
Integrated Electrical Services, Inc., 9.375%,
2/1/2009 1,710 1,663
Kindercare Learning Centers Inc., 9.500%,
2/15/2009 1,620 1,531
La Petite Academy, Inc., 10.000%, 5/15/2008 770 647
Spincycle, Inc., Step-up Coupon, 0% to 5/1/2001,
12.750% to 5/1/2005 500 75
Verio, Inc., 11.250%, 12/1/2008 1,020 1,048
---------------------------------------------------------------------------------
6,487
- ------------------------------------------------------------------------------------------------------------------------
DURABLES--3.5%
Airxcel, 11.000%, 11/15/2007 500 495
BE Aerospace, Inc., 9.500%, 11/1/2008 1,400 1,379
DeCrane Aircraft Holdings, Inc., 12.000%,
9/30/2008 260 260
Fairchild Corp., 10.750%, 4/15/2009 1,180 1,003
Transdigm, Inc., 10.375%, 12/1/2008 1,150 1,104
United Rentals, Inc., 9.250%, 1/15/2009 1,200 1,149
---------------------------------------------------------------------------------
5,390
- ------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--12.8%
Agriculture, Mining and Chemicals, Inc.,
10.750%, 9/30/2003 440 220
BPC Holdings Corp., 12.500%, 6/15/2006 125 117
Berry Plastics Corp., 12.250%, 4/15/2004 1,500 1,515
Consolidated Container Capital, Inc., 10.125%,
7/15/2009 1,650 1,650
Consumers International, 10.250%, 4/1/2005 1,400 1,337
Delco Remy International, 10.625%, 8/1/2006 455 448
</TABLE>
22
<PAGE> 23
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Doman Industries, Ltd., 8.750%, 3/15/2004 $ 110 $ 80
Eagle-Picher Holdings, Inc., 9.375%, 3/1/2008 600 537
Fonda Group, 9.500%, 3/1/2007 650 565
GS Technologies, 12.000%, 9/1/2004 1,030 721
GS Technologies, 12.250%, 10/1/2005 1,170 807
Gaylord Container Corp., 9.750%, 6/15/2007 1,210 1,150
Gaylord Container Corp., 9.875%, 2/15/2008 910 789
Golden Northwest Aluminum, Inc., 12.000%,
12/15/2006 530 547
Graham Packaging Co., Step-up Coupon, 0% to
1/15/2003, 10.750% to 1/15/2009 700 448
Huntsman Package, 11.750%, 12/1/2004 350 360
Millar Western Forest Products, Ltd., 9.875%,
5/15/2008 1,500 1,444
NL Industries, Inc., Senior Note, 11.750%,
10/15/2003 200 206
Plainwell, Inc., 11.000%, 3/1/2008 400 309
Printpack, Inc., 9.875%, 8/15/2004 1,210 1,183
Printpack, Inc., 10.625%, 8/15/2006 250 229
Riverwood International Corp., 10.250%, 4/1/2006 30 30
Riverwood International Corp., 10.625%, 8/1/2007 50 50
Riverwood International Corp., 10.875%, 4/1/2008 2,070 1,946
SF Holdings Group, Inc., Step-up Coupon, 0% to
3/15/2003, 12.750% to 3/15/2008 320 138
Spinnaker Industries, 10.750%, 10/15/2006 170 141
Stone Container Corp., 10.750%, 10/1/2002 500 515
Stone Container Corp., 11.500%, 8/15/2006 440 464
Terex Corp., 8.875%, 4/1/2008 500 470
Terex Corp., 8.880%, 4/1/2008 500 470
Texas Petrochemicals, 11.125%, 7/1/2006 500 415
U.S. Can Corp., 10.125%, 10/15/2006 100 101
---------------------------------------------------------------------------------
19,402
- ------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--1.1%
Cherokee International Corp., 10.500%, 5/1/2009 80 74
PSINet, Inc., 10.000%, 2/15/2005 40 38
PSINet, Inc., 11.500%, 11/1/2008 830 838
PSINet, Inc., 11.000%, 8/1/2009 810 794
---------------------------------------------------------------------------------
1,744
- ------------------------------------------------------------------------------------------------------------------------
ENERGY--3.0%
Continental Resources, Inc., 10.250%, 8/1/2008 70 58
Key Energy Services, Inc., 14.000%, 1/15/2009 170 181
Ocean Energy, Inc., 10.375%, 10/15/2005 490 516
Ocean Energy, Inc., 9.750%, 10/1/2006 2,050 2,112
Pen Holdings, Inc., 9.875%, 6/15/2008 560 532
Pride International, Inc., 10.000%, 6/1/2009 190 194
R&B Falcon Corp., 11.000%, 3/15/2006 120 126
R&B Falcon Corp., 9.500%, 12/15/2008 820 783
---------------------------------------------------------------------------------
4,502
- ------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--4.5%
Euramax International, PLC, 11.250%, 10/1/2006 1,000 1,000
MMI Products, Inc., 11.250%, 4/15/2007 1,400 1,414
Metal Management, Inc., 10.000%, 5/15/2008 1,500 1,050
Renco Steel Holdings Co., Series B, 10.875%,
2/1/2005 1,250 1,031
Republic Tech International, 13.750%, 7/15/2009 1,000 950
Wells Aluminum Corp., 10.125%, 6/1/2005 1,400 1,390
---------------------------------------------------------------------------------
6,835
</TABLE>
23
<PAGE> 24
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSTRUCTION--3.3%
Building Materials Corp., 8.000%, 12/1/2008 $1,300 $ 1,190
Congoleum Corp., 8.625%, 8/1/2008 950 779
Dimac Corp., 12.500%, 10/1/2008 600 300
Forecast Group, L.P., 11.375%, 12/15/2000 100 99
Hovnanian Enterprises, Inc., 9.750%, 6/1/2005 1,200 1,104
Kevco, Inc., 10.375%, 12/1/2007 435 239
Nortek, Inc., 9.875%, 3/1/2004 470 461
Nortek, Inc., 8.875%, 8/1/2008 900 855
---------------------------------------------------------------------------------
5,027
- ------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.0%
Transtar Holdings, Inc., Step-up Coupon, 0% to
12/15/99, 13.375% to 12/15/2003 450 441
Travelcenters America, 10.250%, 4/1/2007 970 955
---------------------------------------------------------------------------------
1,396
---------------------------------------------------------------------------------
CORPORATE BONDS TOTAL--94.0%
(Cost $152,405) 142,976
---------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY--.5%
Corporate Express, Inc., 4.500%, 7/1/2000 670 660
---------------------------------------------------------------------------------
CONVERTIBLE BONDS TOTAL--.5%
(Cost $628) 660
---------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS
- ------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--.1%
TELEPHONE/COMMUNICATIONS
(a)Tele1 Europe BV, Warrants (expire 5/15/2009) 870 57
(a)Versatel Telecom, Warrants 250 31
---------------------------------------------------------------------------------
88
- ------------------------------------------------------------------------------------------------------------------------
MEDIA--0.00%
CABLE TELEVISION
(a)Diva Systems Corp., Warrants (expire
3/1/2008) 870 7
---------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
ENERGY--0.00%
OILFIELD SERVICES/
EQUIPMENT
(a)Key Energy Services, Inc., Warrants 170 3
---------------------------------------------------------------------------------
COMMON STOCKS TOTAL--.1%
(Cost $1) 98
---------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
REPURCHASE
AGREEMENT:
(b)Repurchase Agreement with State Street Bank
and Trust Company dated 9/30/99, 5.26% due
10/1/1999 $5,212 5,212
(b)Repurchase Agreement with DLJ dated 9/30/99,
5.30% due 10/1/1999 3,000 3,000
---------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT--5.4%
(Cost $8,212) 8,212
---------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost $161,246) $151,944
---------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security
(b) Repurchase Agreements are fully collateralized by U.S. Treasury or
Government Securities.
PIK denotes that interest or dividend is paid in kind.
Based on the cost of investments of $161,333 for federal income tax purposes at
September 30, 1999, the gross unrealized appreciation was $585 the gross
unrealized depreciation was $9,974 and the net unrealized depreciation on
investments was $9,389.
See accompanying Notes to Financial Statements.
25
<PAGE> 26
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH YIELD
OPPORTUNITY HIGH YIELD
FUND FUND II
<S> <C> <C>
- --------------------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------------------
Investment securities, at value, (cost $39,851 and 161,246
respectively) $36,384 151,946
- --------------------------------------------------------------------------------------------
Receivable for investments sold 1,172 481
- --------------------------------------------------------------------------------------------
Interest 962 3,829
- --------------------------------------------------------------------------------------------
Fund shares sold 168 432
- --------------------------------------------------------------------------------------------
TOTAL ASSETS 38,686 156,688
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------------------
Due to custodian bank 934 638
- --------------------------------------------------------------------------------------------
Payable for
Investments purchased 407 643
- --------------------------------------------------------------------------------------------
Fund shares redeemed 9 961
- --------------------------------------------------------------------------------------------
Accrued management fee 22 --
- --------------------------------------------------------------------------------------------
Other accrued expenses 61 436
- --------------------------------------------------------------------------------------------
Total liabilities 1,433 2,678
- --------------------------------------------------------------------------------------------
NET ASSETS, AT VALUE $37,253 154,010
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------
Net assets consist of: Undistributed net investment income $ 145 --
- --------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on Investment
securities (3,467) (9,300)
- --------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) (1,847) (1,231)
- --------------------------------------------------------------------------------------------
Paid-in capital 42,422 164,541
- --------------------------------------------------------------------------------------------
NET ASSETS, AT VALUE $37,253 154,010
- --------------------------------------------------------------------------------------------
NET ASSETS VALUE
CLASS A SHARES
Net assets applicable to shares outstanding $17,223 57,029
- --------------------------------------------------------------------------------------------
Shares outstanding 2,068 6,509
- --------------------------------------------------------------------------------------------
Net asset value and redemption price per share (net assets
/ shares outstanding) $8.33 8.76
- --------------------------------------------------------------------------------------------
Maximum offering price per share (net asset value, plus
4.71% of net asset value or 4.50% of offering price) $8.72 9.17
- --------------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $16,646 70,802
- --------------------------------------------------------------------------------------------
Shares outstanding 1,998 8,074
- --------------------------------------------------------------------------------------------
Net asset value and redemption price (subject to
contingent deferred sales charge) per share (net assets /
shares outstanding) $8.33 8.77
- --------------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $ 3,384 26,179
- --------------------------------------------------------------------------------------------
Shares outstanding 406 2,986
- --------------------------------------------------------------------------------------------
Net asset value and redemption price (subject to
contingent deferred sales charge) per share (net assets /
shares outstanding) $8.34 8.77
- --------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE> 27
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Period ended September 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH YIELD
OPPORTUNITY HIGH YIELD
FUND FUND II
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
INVESTMENT INCOME
- --------------------------------------------------------------------------------------------------
Income:
Dividends $ 51 --
- --------------------------------------------------------------------------------------------------
Interest 4,185 8,818
- --------------------------------------------------------------------------------------------------
4,236 8,818
- --------------------------------------------------------------------------------------------------
Expenses:
Management fee 245 539
- --------------------------------------------------------------------------------------------------
Services to shareholders 83 207
- --------------------------------------------------------------------------------------------------
Custodian and transfer agent and related expense 98 324
- --------------------------------------------------------------------------------------------------
Trustees' fees 4 19
- --------------------------------------------------------------------------------------------------
Reports to shareholders 16 50
- --------------------------------------------------------------------------------------------------
Auditing 15 14
- --------------------------------------------------------------------------------------------------
Legal 11 4
- --------------------------------------------------------------------------------------------------
Registration fees 15 65
- --------------------------------------------------------------------------------------------------
Interest expense 115 --
- --------------------------------------------------------------------------------------------------
Distribution fees 149 383
- --------------------------------------------------------------------------------------------------
Other 2 28
- --------------------------------------------------------------------------------------------------
Total expenses before waiver 753 1,633
- --------------------------------------------------------------------------------------------------
Less expenses waived and absorbed by investment manager -- 998
- --------------------------------------------------------------------------------------------------
Total expenses after expense waiver 753 635
- --------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,483 8,183
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investment securities (1,847) (1,513)
- --------------------------------------------------------------------------------------------------
Futures -- 282
- --------------------------------------------------------------------------------------------------
Total realized gain (loss) (1,847) (1,231)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the
period on:
Investment securities (681) (9,300)
- --------------------------------------------------------------------------------------------------
Net income (loss) on investment transactions (2,528) (10,531)
- --------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 955 (2,348)
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE> 28
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH YIELD
OPPORTUNITY FUND
YEAR ENDED HIGH YIELD
SEPTEMBER 30, FUND II(A)
----------------- ----------
1999 1998 1999
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
- ---------------------------------------------------------------------------------------------
Operations:
Net investment income $ 3,483 1,215 8,183
- ---------------------------------------------------------------------------------------------
Net realized gain (loss) (1,847) 191 (1,231)
- ---------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) (681) (2,785) (9,300)
- ---------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 955 (1,379) (2,348)
- ---------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investments income (3,392) (1,151) (8,334)
- ---------------------------------------------------------------------------------------------
From net realized gains (176) (32) --
- ---------------------------------------------------------------------------------------------
Fund share transactions:
Net increase in net assets from Fund share transactions 13,175 29,153 164,592
- ---------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 10,562 26,591 153,910
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------
Net assets at beginning of period 26,691 100 100
- ---------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $37,253 26,691 154,010
- ---------------------------------------------------------------------------------------------
Undistributed net investment income 145 64 --
- ---------------------------------------------------------------------------------------------
</TABLE>
(a) The High Yield Fund II commenced operations on November 30, 1998.
The accompanying notes are an integral part of the financial statements.
28
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE FUND
- --------------------------------------------------------------------------------
Kemper High Yield Opportunity Fund is a diversified
series of Kemper High Yield Series, and Kemper High
Yield Fund II, a diversified series of Kemper
Income Trust are registered under the Investment
Company Act of 1940, as amended (the "1940 Act"),
as open end management investment companies
organized as Massachusetts business trusts. The
Kemper High Yield Opportunity Fund commenced
operations on October 1, 1997 and the Kemper High
Yield Fund II commenced operations on November 30,
1998.
Each fund offers multiple classes of shares. Class
A shares are offered to investors subject to an
initial sales charge. Class B shares are offered
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are offered without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I (none as of September
30, 1999) 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.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of each fund have
equal rights with respect to voting subject to
class specific arrangements.
Each fund's financial statements are prepared in
accordance with generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by each fund in the
preparation of its financial statements.
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
SECURITY VALUATION. Investments are stated at
value. Portfolio debt securities purchased with an
original maturity greater than sixty days are
valued by pricing agents approved by the officers
of the Trust, whose quotations reflect
broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents
are unable to provide such quotations, the most
recent bid quotation supplied by a bona fide market
maker shall be used. Money market instruments
purchased with an original maturity of sixty days
or less are valued at amortized cost. All other
securities are valued at their fair value as
determined in good faith by the Valuation Committee
of the Board of Trustees.
FUTURES CONTRACTS. A futures contract is an
agreement between a buyer or seller and an
established futures exchange or its clearinghouse
in which the buyer or seller agrees to take or make
a delivery of a specific amount of a financial
instrument at a specified price on a specific date
(settlement date). During the period, the Kemper
High Yield Fund II purchased interest rate futures
to manage the duration of the portfolio. In
addition, the Kemper High Yield
29
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
Fund II also sold interest rate futures to hedge
against declines in the value of portfolio
securities.
Upon entering into a futures contract, the fund is
required to deposit with a financial intermediary
an amount ("initial margin") equal to a certain
percent age of the face value indicated in the
futures contract. Subsequent payments ("variation
margin") are made or received by the fund dependent
upon the daily fluctuations in the value of the
underlying security and are recorded for financial
reporting purposes as unrealized gains or losses by
the fund. When entering into a closing transaction,
the fund will realize a gain or loss equal to the
difference between the value of the futures
contract to sell and the futures contract to buy.
Futures contracts are valued at the most recent
settlement price.
Certain risks may arise upon entering into futures
contracts, including the risk that an illiquid
secondary market will limit the fund's ability to
close out a futures contract prior to the
settlement date and that a change in the value of a
futures contract may not correlate exactly with the
changes in the value of the securities or
currencies hedged. When utilizing futures contracts
to hedge, the fund gives up the opportunity to
profit from favorable price movements in the hedged
positions during the term of the contract.
FEDERAL INCOME TAXES. Each fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies and to distribute
all of its taxable income to its shareholders.
Accordingly, the fund paid no federal income taxes
and no federal income tax provision was required.
In addition, for the Kemper High Yield Opportunity
fund from November 1, 1998 through September 30,
1999 the fund incurred approximately $1,543,000 of
net realized capital losses. As permitted by tax
regulations, the fund intends to elect to defer
these losses and treat them as arising in the
fiscal year ended September 30, 2000. The Kemper
High Yield II fund incurred approximately
$1,200,000 of net realized capital losses post
October 31, 1998. As permitted by tax regulations,
the Fund intends to elect to defer these losses and
treat them as arising in the fiscal year ended
September 30, 2000.
At September 30, 1999, the Kemper High Yield
Opportunity fund had a net tax basis capital loss
carryforward of approximately $274,000, which may
be applied against any realized net taxable capital
gains of each succeeding year until fully utilized
or until September 30, 2007, the respective
expiration dates, whichever occurs first.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made monthly.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the fund if not distributed
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, each fund may periodically
make reclassifications among certain of its capital
accounts without impacting the net asset value of
the fund.
30
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Dividend income is recorded on
the ex-dividend date. Realized gains and losses
from investment transactions are recorded on an
identified cost basis. All discounts are accreted
for both tax and financial reporting purposes.
EXPENSES. Expenses arising in connection with a
specific fund are allocated to that fund. Other
Trust expenses are allocated between the funds in
proportion to their relative net assets.
- --------------------------------------------------------------------------------
3
TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. Each fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper). The funds pay a monthly
investment management fee of 1/12 of the annual
rate of .65% of the first $250 million of average
daily net assets declining to .49% of average daily
net assets in excess of $12.5 billion. Management
fees incurred for the period ended September 30,
1999 are as follows:
High Yield Opportunity Fund $245,000
High Yield Fund II (no fee after expense
waiver) --
In addition, Scudder Kemper temporarily agreed to
absorb certain operating expenses of the High Yield
Fund II. Under these arrangements, Scudder Kemper
waived and absorbed expenses of $998,000 for the
period ended September 30, 1999.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
Each fund has an underwriting and
distribution services agreement with Kemper
Distributions, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the year ended September 30,
1999 are as follows:
<TABLE>
<CAPTION>
COMMISSIONS
RETAINED BY KDI
---------------
<S> <C>
High Yield Opportunity Fund $19,000
High Yield Fund II 96,000
</TABLE>
For services under the distribution services
agreement, each fund pays KDI a fee of .75% of
average daily net assets of Class B and Class C
shares pursuant to separate 12b-1 plans for the
Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the period ended September 30, 1999 are as
follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES
AND CDSC
RECEIVED BY KDI
-----------------
<S> <C>
High Yield Opportunity Fund $192,000
High Yield Fund II (after distribution expense waiver) 460,000
</TABLE>
31
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
ADMINISTRATIVE SERVICES AGREEMENT. Each fund has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, each fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. KDI in turn has various
agreements with financial services firms that
provide these services and pays these firms based
on assets of fund accounts the firms service.
Administrative services fees (ASF) paid for the
period ended September 30, 1999 are as follows:
<TABLE>
<CAPTION>
ASF PAID BY THE
FUND TO KDI
---------------
<S> <C>
High Yield Opportunity Fund $83,000
High Yield Fund II (no fee after expense waiver) --
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the funds' transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of each fund. Under the agreement,
for the period ended September 30, 1999, KSvC
received shareholder services fees as follows:
High Yield Opportunity Fund $55,000
High Yield Fund II 61,000
FUND ACCOUNTING AGENT. Scudder Fund Accounting
Corporation is responsible for determining the
daily net asset value per share and maintaining the
portfolio and general accounting records of the
fund. The Kemper High Yield Fund II incurred no
accounting fees for the period ended September 30,
1999 after an expense waiver.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the funds are also officers or directors of
Scudder Kemper. For the period ended September 30,
1999, the funds made no payments to their officers
and incurred trustees' fees to independent
trustees.
High Yield Opportunity Fund $4,000
High Yield Fund II 19,000
- --------------------------------------------------------------------------------
4
INVESTMENT
TRANSACTIONS For the year ended September 30, 1999, investment
transactions (excluding short term instruments) are
as follows (in thousands):
<TABLE>
<CAPTION>
HIGH YIELD HIGH YIELD
OPPORTUNITY FUND FUND II
---------------- ----------
<S> <C> <C>
Purchases $52,673 213,468
Proceeds from sales 42,161 60,851
</TABLE>
32
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5
CAPITAL SHARE
TRANSACTIONS The following tables summarize the activity in
capital shares of the funds: (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
HIGH YIELD SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
OPPORTUNITY -------------------- --------------------
FUND SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------
SHARES SOLD
-----------------------------------------------------------------------------
Class A 1,508 $13,484 1,905 $18,384
-----------------------------------------------------------------------------
Class B 1,179 10,553 1,690 16,473
-----------------------------------------------------------------------------
Class C 228 2,055 286 2,813
-----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-----------------------------------------------------------------------------
Class A 183 1,638 48 462
-----------------------------------------------------------------------------
Class B 254 2,289 41 395
-----------------------------------------------------------------------------
Class C 102 930 7 70
-----------------------------------------------------------------------------
SHARES REDEEMED
-----------------------------------------------------------------------------
Class A (1,063) (9,528) (593) (5,656)
-----------------------------------------------------------------------------
Class B (748) (6,701) (346) (3,322)
-----------------------------------------------------------------------------
Class C (173) (1,545) (48) (466)
-----------------------------------------------------------------------------
CONVERSION OF SHARES
-----------------------------------------------------------------------------
Class A 62 531 14 140
-----------------------------------------------------------------------------
Class B (62) (531) (14) (140)
-----------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS $13,175 $29,153
-----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TEN MONTHS ENDED
SEPTEMBER 30, 1999(A)
---------------------
HIGH YIELD FUND II SHARES AMOUNT
<S> <C> <C>
-----------------------------------------------------------------------------
SHARES SOLD
-----------------------------------------------------------------------------
Class A 7,548 $ 70,660
-----------------------------------------------------------------------------
Class B 8,753 81,880
-----------------------------------------------------------------------------
Class C 3,570 33,289
-----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
-----------------------------------------------------------------------------
Class A 196 1,790
-----------------------------------------------------------------------------
Class B 205 1,874
-----------------------------------------------------------------------------
Class C 89 813
-----------------------------------------------------------------------------
SHARES REDEEMED
-----------------------------------------------------------------------------
Class A (1,281) (11,806)
-----------------------------------------------------------------------------
Class B (846) (7,732)
-----------------------------------------------------------------------------
Class C (677) (6,176)
-----------------------------------------------------------------------------
CONVERSION OF SHARES
-----------------------------------------------------------------------------
Class A 42 381
-----------------------------------------------------------------------------
Class B (42) (381)
-----------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS $164,592
-----------------------------------------------------------------------------
</TABLE>
(a) The High Yield Fund II commenced operations on
November 30, 1998.
33
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6
LINE OF CREDIT 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 agreement is with the Bank of America
and is available through December 18, 2000. At
September 30, 1999, there were no loans
outstanding.
The Kemper High Yield Fund II and several Kemper
funds (the "Participants") share in a $750 million
revolving credit facility for temporary or
emergency purposes, including the meeting of
redemption requests that otherwise might require
the untimely disposition of securities. The
Participants are charged an annual commitment fee
which is allocated pro rata among each of the
Participants. Interest is calculated based on the
market rates at the time of the borrowing. The Fund
may borrow up to a maximum of 33 percent of its net
assets under the agreement.
34
<PAGE> 35
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------
CLASS A
-------------------------------------
YEAR ENDED YEAR ENDED
KEMPER HIGH YIELD SEPTEMBER 30, SEPTEMBER 30,
OPPORTUNITY FUND 1999 1998(A)
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------
Net asset value, beginning of year $8.89 9.50
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .88 .70
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.54) (.60)
- --------------------------------------------------------------------------------
Total from investment operations .34 .10
- --------------------------------------------------------------------------------
Less dividends:
Distributions from net investment income .85 .67
- --------------------------------------------------------------------------------
Distributions from net realized gain .05 .04
- --------------------------------------------------------------------------------
Total dividends .90 .71
- --------------------------------------------------------------------------------
Net asset value, end of year $8.33 8.89
- --------------------------------------------------------------------------------
TOTAL RETURN 3.55% .59
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS ANNUALIZED
- --------------------------------------------------------------------------------
Expenses 1.53% 1.27
- --------------------------------------------------------------------------------
Net investment income 9.64% 8.31
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------
CLASS B
--------------------------------------
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998(A)
- --------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------
Net asset value, beginning of year $8.89 9.50
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .80 .63
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.54) (.61)
- --------------------------------------------------------------------------------
Total from investment operations .26 .02
- --------------------------------------------------------------------------------
Less dividends:
Distributions from net investment income .77 .59
- --------------------------------------------------------------------------------
Distributions from net realized gain .05 .04
- --------------------------------------------------------------------------------
Total dividends .82 .63
- --------------------------------------------------------------------------------
Net asset value, end of year $8.33 8.89
- --------------------------------------------------------------------------------
TOTAL RETURN 2.73% (.18)
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------
Expenses 2.40% 2.03
- --------------------------------------------------------------------------------
Net investment income 8.77% 7.55
- --------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 36
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------
CLASS C
--------------------------------------
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998(A)
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------
Net asset value, beginning of year $8.89 9.50
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .80 .62
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.53) (.60)
- --------------------------------------------------------------------------------
Total from investment operations .27 .02
- --------------------------------------------------------------------------------
Less dividends:
Distributions from net investment income .77 .59
- --------------------------------------------------------------------------------
Distributions from net realized gain .05 .04
- --------------------------------------------------------------------------------
Total dividends .82 .63
- --------------------------------------------------------------------------------
Net asset value, end of year $8.34 8.89
- --------------------------------------------------------------------------------
TOTAL RETURN 2.39% (.18)
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------
Expenses 2.38% 2.03
- --------------------------------------------------------------------------------
Net investment income 8.78% 7.55
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998(A)
- ----------------------------------------------------------------------------
<S> <C> <C>
Net assets at end of period (in thousands) 37,253 26,691
- ----------------------------------------------------------------------------
Portfolio turnover rate (annualized) 98% 169
- ----------------------------------------------------------------------------
</TABLE>
(a) Commencement of operations on October 1, 1997
36
<PAGE> 37
FINANCIAL HIGHLIGHTS
KEMPER HIGH YIELD FUND II 10 MONTHS ENDED SEPTEMBER 30, 1999(B)
<TABLE>
<CAPTION>
- ------------------------------------------------ ------------------- ------------------- -------------------
PER SHARE OPERATING PERFORMANCE CLASS A CLASS B CLASS C
- ------------------------------------------------ ------------------- ------------------- -------------------
<S> <C> <C> <C>
Net asset value, beginning of period $9.50 9.50 9.50
- ------------------------------------------------ ------------------- ------------------- -------------------
Income from investment operations:
Net investment income .72 .68 .68
- ------------------------------------------------ ------------------- ------------------- -------------------
Net realized and unrealized loss (.70) (.71) (.71)
- ------------------------------------------------ ------------------- ------------------- -------------------
Total from investment operations .02 (.03) (.03)
- ------------------------------------------------ ------------------- ------------------- -------------------
Less distributions from net investment income .76 .70 .70
- ------------------------------------------------ ------------------- ------------------- -------------------
Net asset value, end of period 8.76 8.77 8.77
- ------------------------------------------------ ------------------- ------------------- -------------------
TOTAL RETURN (NOT ANNUALIZED) .19% (.43) (.43)
- ------------------------------------------------ ------------------- ------------------- -------------------
<CAPTION>
- ------------------------------------------------ ------------------- ------------------- -------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------ ------------------- ------------------- -------------------
Expenses .39% 1.00 1.00
- ------------------------------------------------ ------------------- ------------------- -------------------
Net investment income 10.24% 9.63 9.63
- ------------------------------------------------ ------------------- ------------------- -------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------ ------------------- ------------------- -------------------
Expenses 1.59% 2.19 2.25
- ------------------------------------------------ ------------------- ------------------- -------------------
Net investment income 9.04% 8.44 8.38
- ------------------------------------------------ ------------------- ------------------- -------------------
</TABLE>
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -----------------------------------------------------------------------
Net assets at end of period 154,010
- -----------------------------------------------------------------------
Portfolio turnover rate (annualized) 79%
- -----------------------------------------------------------------------
</TABLE>
(b) Commencement of operations on November 30, 1998. Scudder Kemper Investments,
Inc. has agreed to temporarily waive its management fee and absorb certain
operating expenses of the fund. The other ratios to average net assets are
computed without this expense waiver or absorption.
NOTE FOR BOTH FUNDS: Total return does not reflect the effect of any sales
charges. Per share data was determined based on average shares outstanding
during the year ended September 30, 1999.
- --------------------------------------------------------------------------------
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.
37
<PAGE> 38
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER HIGH YIELD OPPORTUNITY FUND
KEMPER HIGH YIELD FUND II
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper High Yield Opportunity Fund
and Kemper High Yield Fund II, as of September 30, 1999, 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 Funds' 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, 1999, 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 Kemper High Yield Opportunity Fund and Kemper High Yield Fund II at September
30, 1999, the results of their operations, 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 17, 1999
38
<PAGE> 39
NOTES
39
<PAGE> 40
TRUSTEES&OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
JOHN W. BALLANTINE MARK S. CASADY LINDA J. WONDRACK
Trustee President Vice President
LEWIS A. BURNHAM PHILIP J. COLLORA MAUREEN E. KANE
Trustee Vice President and Assistant Secretary
Secretary
DONALD L. DUNAWAY CAROLINE PEARSON
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
ROBERT B. HOFFMAN BRENDA LYONS
Trustee ANN M. MCCREARY Assistant Treasurer
Vice President
DONALD R. JONES
Trustee MICHAEL A. MCNAMARA
Vice President
THOMAS W. LITTAUER
Trustee and Vice President KATHRYN L. QUIRK
Vice President
SHIRLEY D. PETERSON
Trustee ROBERT C. PECK, JR.
Vice President
CORNELIA SMALL
Trustee HARRY E. RESIS, JR.
Vice President
WILLIAM P. SOMMERS
Trustee
</TABLE>
<TABLE>
<S> <C>
.............................................................................................
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
.............................................................................................
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 219557
Kansas City, MO 64121
.............................................................................................
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02109
.............................................................................................
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
.............................................................................................
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
.............................................................................................
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 (11/23/99) 1094290
