<PAGE> 1
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED SEPTEMBER 30, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[LOGO]
the highest level of current income with capital gain as a
second objective
KEMPER HIGH YIELD FUND
". . . High yield bonds were one of the few places that
bond investors achieved positive returns. . . ."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
TERMS TO KNOW
9
PORTFOLIO STATISTICS
10
PORTFOLIO OF INVESTMENTS
21
FINANCIAL STATEMENTS
23
NOTES TO
FINANCIAL STATEMENTS
27
FINANCIAL HIGHLIGHTS
29
REPORT OF
INDEPENDENT AUDITORS
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1999 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 4.12
CLASS B 3.26
CLASS C 3.30
LIPPER HIGH CURRENT YIELD FUNDS CATEGORY AVERAGE* 4.84
</TABLE>
- --------------------------------------------------------------------------------
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
*LIPPER ANALYTICAL SERVICES, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES IN
NET ASSET VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF
SALES CHARGES; IF SALES CHARGE HAD BEEN INCLUDED, RESULTS MAY HAVE BEEN LESS
FAVORABLE.
HIGH YIELD BONDS INVOLVE GREATER RISK TO PRINCIPAL THAN HIGHER QUALITY BONDS,
AND THAT IS WHY THIS FUND IS DESIGNED FOR AGGRESSIVE LONG TERM INVESTING.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
AS OF AS OF
9/30/99 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER HIGH YIELD FUND
CLASS A $7.23 $7.68
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND
CLASS B $7.22 $7.67
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND
CLASS C $7.24 $7.69
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD 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 #147 of 302 funds #172 of 302 funds #170 of 302 funds
- --------------------------------------------------------------------------------
5-YEAR #37 of 101 funds #68 of 101 funds #66 of 101 funds
- --------------------------------------------------------------------------------
10-YEAR #13 of 54 funds N/A N/A
- --------------------------------------------------------------------------------
15-YEAR #3 of 27 funds N/A N/A
- --------------------------------------------------------------------------------
20-YEAR #3 of 21 funds N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ONE-YEAR INCOME: $0.7710 $0.7077 $0.7109
- --------------------------------------------------------------------------------
SEPTEMBER DIVIDEND: $0.0635 $0.0585 $0.0585
- --------------------------------------------------------------------------------
ANNUALIZED DISTRIBUTION
RATE+: 10.54% 9.72% 9.70%
- --------------------------------------------------------------------------------
SEC YIELD+: 10.92% 10.62% 10.63%
- --------------------------------------------------------------------------------
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE 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. YIELD AND DISTRIBUTION RATES ARE HISTORICAL AND WILL FLUCTUATE.
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR INCOME FUNDS STYLE BOX
- --------------------------------------------------------------------------------
[MATURITY QUALITY DIAGRAM]
Source: Morningstar, Inc., Chicago, IL 312-696-6000. The Income Funds Style Box
placement is based on a fund's average effective maturity or duration and the
average credit rating of the bond portfolio.
PLEASE NOTE THAT STYLE BOXES DO NOT REPRESENT AN EXACT ASSESSMENT OF RISK AND DO
NOT REPRESENT FUTURE PERFORMANCE. THE FUND'S PORTFOLIO CHANGES FROM DAY TO DAY.
A LONGER-TERM VIEW IS REPRESENTED BY THE FUND'S MORNINGSTAR CATEGORY, WHICH IS
BASED ON ITS ACTUAL INVESTMENT STYLE AS MEASURED BY ITS UNDERLYING PORTFOLIO
HOLDINGS OVER THE PAST THREE YEARS. MORNINGSTAR HAS PLACED KEMPER HIGH YIELD
FUND IN THE HIGH YIELD BOND CATEGORY. PLEASE CONSULT THE PROSPECTUS FOR A
DESCRIPTION OF INVESTMENT POLICIES.
<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 AND
HANDLES ALL OF THE TRADING ACTIVITY FOR THE FUNDS. RESIS HOLDS A BACHELOR'S
DEGREE IN FINANCE FROM MICHIGAN STATE UNIVERSITY.
[MCNAMARA PHOTO]
MICHAEL MCNAMARA JOINED THE ORGANIZATION IN 1972, AND IS A MANAGING DIRECTOR. HE
IS ALSO CO-LEAD PORTFOLIO MANAGER OF KEMPER HIGH YIELD FUND AND DIRECTS ALL
FIXED-INCOME RESEARCH AT SCUDDER KEMPER INVESTMENTS. HE EARNED AN MBA FROM
LOYOLA UNIVERSITY.
[DOYLE PHOTO]
DAN DOYLE HAS BEEN INVOLVED WITH KEMPER HIGH YIELD FUND IN BOTH RESEARCH AND
TRADING SINCE 1986 AND IS A SENIOR TRADER FOR THE FUND. DOYLE RECEIVED HIS
M.B.A. FROM THE UNIVERSITY OF CHICAGO.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
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 HIGH YIELD FUND'S MANAGEMENT TEAM DISCUSSES THE MARKET AND HOW THEY
POSITIONED THE FUND 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 Fund
returned considerably better than that benchmark, gaining 4.12 percent. (Class A
shares unadjusted for any 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.
+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. In October 1998, the 30-year Treasury
yielded just 4.87 percent.
That's when the Federal Reserve decided to step in. Concerned that
5
<PAGE> 6
PERFORMANCE UPDATE
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 that 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 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 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 an 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 THE 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 FUND 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 fund has 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.
As I said, we are typically relatively 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, the fund's returns for the year
ended in the middle of the pack. Our 4.12 percent return for the 12-month period
was slightly less than the Lipper High Yield Fund Average return of 4.84
percent.
6
<PAGE> 7
PERFORMANCE UPDATE
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.
* THE 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.
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 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
AVERAGE ANNUAL TOTAL RETURNS*
FOR THE PERIODS ENDED SEPTEMBER 30, 1999 (ADJUSTED FOR THE MAXIMUM SALES
CHARGE)
<TABLE>
<CAPTION>
LIFE OF
1-YEAR 5-YEAR 10-YEAR CLASS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEMPER HIGH YIELD FUND CLASS A -0.55% 7.63% 9.30% 10.84% (since 1/26/78)
................................................................................................................................
KEMPER HIGH YIELD FUND CLASS B 0.44 7.54 N/A N/A (since 5/31/94)
................................................................................................................................
KEMPER HIGH YIELD FUND CLASS C 3.30 7.72 N/A N/A (since 5/31/94)
................................................................................................................................
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND CLASS A
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class A shares from 12/31/79 to
9/30/99
<TABLE>
<CAPTION>
SALOMON BROTHERS LONG-
KEMPER HIGH YIELD FUND TERM HIGH YIELD BOND
CLASS A1 INDEX+ CONSUMER PRICE INDEX++
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
12/31/79 9554.00 10000.00 10000.00
12/31/86 27061.00 25270.00 14402.00
12/31/93 60112.00 56641.00 18993.00
9/30/99 89140.00 96463.00 21820.00
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND CLASS B
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class B shares from 5/31/94 to
9/30/99
<TABLE>
<CAPTION>
SALOMON BROTHERS LONG-
KEMPER HIGH YIELD FUND TERM HIGH YIELD BOND
CLASS B1 INDEX+ CONSUMER PRICE INDEX++
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00
10005.00 10160.00 10149.00
12/31/95 11640.00 13141.00 10400.00
13095.00 14174.00 10753.00
12/31/97 14470.00 16688.00 10936.00
14528.00 18233.00 11112.00
9/30/99 14388.00 17982.00 11356.00
</TABLE>
[LINE GRAPH]
- --------------------------------------------------------------------------------
KEMPER HIGH YIELD FUND CLASS C
- --------------------------------------------------------------------------------
Growth of an assumed $10,000 investment in Class C shares from 5/31/94 to
9/30/99
<TABLE>
<CAPTION>
SALOMON BROTHERS LONG-
KEMPER HIGH YIELD FUND TERM HIGH YIELD BOND
CLASS C1 INDEX+ CONSUMER PRICE INDEX++
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00
10032.00 10160.00 10149.00
12/31/95 11677.00 13141.00 10400.00
13139.00 14174.00 10753.00
12/31/97 14523.00 16688.00 10936.00
14588.00 18233.00 11112.00
9/30/99 14542.00 17982.00 11356.00
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURNS AND
PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH
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 ADJUSTMENT FOR THE APPLICABLE CONTINGENT
DEFERRED SALES CHARGE (CDSC) AS FOLLOWS: 1-YEAR, 3%; 5-YEAR, 1%; SINCE
INCEPTION, 0 PERCENT AND FOR CLASS C SHARES NO ADJUSTMENT FOR SALES CHARGE.
THE MAXIMUM CDSC FOR CLASS B SHARES IS 4%. FOR CLASS C SHARES, THERE IS A 1%
CDSC ON CERTAIN REDEMPTIONS WITHIN THE FIRST YEAR OF PURCHASE. SHARE CLASSES
INVEST IN THE SAME UNDERLYING PORTFOLIO. AVERAGE ANNUAL TOTAL RETURNS REFLECT
ANNUALIZED CHANGE WHILE TOTAL RETURN REFLECTS AGGREGATE CHANGE. DURING THE
PERIODS NOTED, SECURITIES PRICES FLUCTUATED. FOR ADDITIONAL INFORMATION, SEE
THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION AND THE FINANCIAL
HIGHLIGHTS AT THE END OF THIS REPORT.
(1)PERFORMANCE INCLUDES REINVESTMENT OF DIVIDENDS AND ADJUSTMENT FOR THE MAXIMUM
SALES CHARGE FOR CLASS A SHARES AND THE CONTINGENT DEFERRED SALES CHARGE IN
EFFECT AT THE END OF THE PERIOD FOR CLASS B SHARES. WHEN REVIEWING THE
PERFORMANCE CHART, PLEASE NOTE THAT THE INCEPTION DATE FOR THE SALOMON
BROTHERS LONG-TERM HIGH YIELD BOND INDEX IS JANUARY 1, 1980. AS A RESULT, WE
ARE NOT ABLE TO ILLUSTRATE THE LIFE OF CLASS PERFORMANCE (SINCE JANUARY 26,
1978) FOR THE KEMPER HIGH YIELD FUND CLASS A SHARES. IN COMPARING THE
PERFORMANCE OF THE FUND WITH 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 BAL 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
PORTFOLIO COMPOSITION*
KEMPER HIGH YIELD FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 9/30/99 ON 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
BONDS 97% 93%
- --------------------------------------------------------------------------------
CASH AND EQUIVALENTS 1 3
- --------------------------------------------------------------------------------
TREASURIES 1-3 YEARS -- 2
- --------------------------------------------------------------------------------
PREFERRED AND COMMON STOCK 2 2
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/99 ON 9/30/98
QUALITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 9/30/99 ON 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA-A -- 2%
- --------------------------------------------------------------------------------
BBB 1% --
- --------------------------------------------------------------------------------
BB 13 11
- --------------------------------------------------------------------------------
B 71 74
- --------------------------------------------------------------------------------
OTHER 15 13
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/99 ON 9/30/98
YEARS TO MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ON 9/30/99 ON 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH AND EQUIVALENTS -- 3%
- --------------------------------------------------------------------------------
1-10 97% 90
- --------------------------------------------------------------------------------
11-20 3 5
- --------------------------------------------------------------------------------
OVER 20 -- 2
- --------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
ON 9/30/99 ON 9/30/98
- --------------------------------------------------------------------------------
* PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER HIGH YIELD FUND
Portfolio of Investments at September 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
CORPORATE BONDS--96.1% AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER
DISCRETIONARY--13.3% Advantica Restaurant Co., 11.250%,
01/15/2008 $ 34,035 $ 29,610
AFC Enterprises, 10.250%, 05/15/2007 20,380 19,921
AMF Bowling Worldwide, Inc., Step-up
Coupon, 0% to 03/15/2001, 12.250% to
03/15/2006 20,291 11,921
AMF Bowling, Inc, 10.875%, 06/15/2006 31,837 23,161
Avis Rent A Car, 11.000%, 05/01/2009 26,420 27,080
Avondale Mills, 10.250%, 05/01/2006 21,391 18,610
Boca Resorts Inc., 9.875%, 04/15/2009 11,365 10,513
Carrols Corporation, 9.500%, 12/01/2008 8,290 7,047
Cinemark USA, Inc., 8.500%, 08/01/2008 18,860 14,711
Cinemark USA, Inc., Series D, 9.625%,
08/01/2008 3,680 3,165
Circus Circus Enterprises, Inc., 9.250%,
12/01/2005 7,720 7,720
Cole National Group Inc., 9.875%,
12/31/2006 13,086 11,189
Cole National Group Inc., 8.625%,
08/15/2007 12,420 10,184
(a)Color Tile, Inc., 10.750%, 12/15/2001 20,480 205
Eldorado Resorts, 10.500%, 08/15/2006 17,981 18,431
Finlay Enterprises, Inc., 9.000%,
05/01/2008 6,990 6,378
Finlay Fine Jewelry Co., 8.375%, 05/01/2008 13,250 12,223
Galey & Lord, Inc., 9.125%, 03/01/2008 13,850 3,463
Guitar Center Management, 11.000%,
07/01/2006 17,980 17,800
Harvey's Casino Resorts, 10.625%,
06/01/2006 14,770 15,361
Hedstrom Corp., 10.000%, 06/01/2007 11,240 9,498
Herff Jones, Inc., 11.000%, 08/15/2005 21,710 23,040
Hines Horticulture, Inc., 11.750%,
10/15/2005 12,183 13,036
Hollywood Entertainment Corp., 10.625%,
08/15/2004 11,400 10,488
Hollywood Entertainment Corp., Series B,
10.630%, 08/15/2004 1,150 1,058
Imax Corp., Senior Note, 7.875%, 12/01/2005 8,070 7,505
Imperial Home Decor Group, Inc., 11.000%,
03/15/2008 12,740 6,370
International Game Technology, 8.375%,
05/15/2009 14,580 13,887
Iron Age Holdings Corp., Step-up Coupon, 0%
to 05/01/2003, 12.125% to 05/01/2009 7,350 2,205
Iron Age Holdings Corp., 9.875%, 05/01/2008 13,770 10,603
J. Crew Group, Step-up Coupon, 0% to
10/15/2002, 13.125% to 10/15/2008 29,423 15,447
J. Crew Group, 10.375%, 10/15/2007 20,665 18,908
Krystal Inc., 10.250%, 10/01/2007 10,990 11,045
Mohegan Tribal Gaming Authority, 8.750%,
01/01/2009 18,350 17,983
National Vision Association, Ltd., 12.750%,
10/15/2005 18,770 15,767
Perkins Finance, L.P., 10.125%, 12/15/2007 15,450 15,334
Phillips-Van Heusen Corp., 9.500%,
05/01/2008 11,330 10,480
Pillowtex Corp., 10.000%, 11/15/2006 1,210 823
Pillowtex Corp., 9.000%, 12/15/2007 2,370 1,541
Players International, 10.875%, 04/15/2005 15,075 15,791
Regal Cinemas Inc., 9.500%, 06/01/2008 10,230 6,956
Regal Cinemas, Inc., 8.875%, 12/15/2010 6,220 3,981
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Restaurant Co., Step-up Coupon, 0% to
05/15/2003, 11.250% to 5/15/2008 $ 17,460 $ 9,952
Sealy Mattress Co., Step-up Coupon, 0% to
12/15/2002, 10.875% to 12/15/2007 14,610 9,679
Specialty Retailers, Inc., 8.500%,
07/15/2005 5,145 3,756
Specialty Retailers, Inc., 9.000%,
07/15/2007 19,715 12,026
Station Casinos, Inc., 10.125%, 03/15/2006 9,760 10,028
Station Casinos, Inc., 9.750%, 04/15/2007 8,050 8,171
---------------------------------------------------------------------------------
554,051
- --------------------------------------------------------------------------------------
CONSUMER STAPLES--.6%
Agrilink Foods, Inc., 11.875%, 11/01/2008 3,360 2,991
Dyersburg Corp., 9.750%, 09/01/2007 18,155 6,717
Jafra Cosmetics International, Inc.,
11.750%, 05/01/2008 19,830 17,054
---------------------------------------------------------------------------------
26,762
- --------------------------------------------------------------------------------------
HEALTH--3.0%
ALARIS Medical Systems, Inc., Step-up
Coupon, 0% to 08/01/2003, 11.125% to
08/01/2008 13,730 7,071
Abbey Healthcare Group, Inc., 9.500%,
11/01/2002 19,610 19,022
Dade International, Inc., 11.125%,
05/01/2006 34,700 35,915
MEDIQ Inc., 11.000%, 06/01/2008 9,650 6,755
Magellan Health Services, Inc., 9.000%,
02/15/2008 33,950 29,027
Mariner Post-Acute Network, Inc., Step-up
Coupon, 0% to 11/01/2002, 10.500% to
11/01/2007 58,210 1,164
Mariner Post-Acute Network, Inc., 10.500%,
08/01/2006 26,160 23,675
(a)Vencor, Inc., 9.875%, 05/01/2005 12,850 2,827
---------------------------------------------------------------------------------
125,456
- --------------------------------------------------------------------------------------
COMMUNICATIONS--25.2%
21st Century Telecom Group, Inc., Step-up
Coupon, 0% to 02/15/2003, 12.250% to
02/15/2008 15,320 6,128
Allegiance Telecom, Inc., Step-up Coupon,
0% to 02/15/2003, 11.750% to 02/15/2008 21,130 13,417
Allegiance Telecom, Inc., 12.875%,
05/15/2008 24,440 26,640
American Cellular Corp., 10.500%,
05/15/2008 21,530 22,068
Bresnan Communications Co., Step-up Coupon,
0% to 02/01/2004, 9.250% to 02/01/2009 7,800 5,070
Bresnan Communications Co., 8.000%,
02/01/2009 3,770 3,695
Call-Net Enterprises, Inc., Step-up Coupon
0% to 08/15/2002, 9.27% to 08/15/2007 10,990 6,786
Call-Net Enterprises, Inc., Step-up Coupon,
0% to 05/15/2004, 10.800% to 05/15/2009 8,940 4,470
Call-Net Enterprises, Inc., Step-up Coupon,
0% to 8/15/2003, 8.94% to 8/15/2008 16,230 8,724
Call-Net Enterprises, Inc., 9.375%,
05/15/2009 7,640 6,685
Century Communications Corp., 8.375%,
12/15/2007 8,100 7,614
Comunicacion Cellular, S.A., Step-up
Coupon, 0% to 09/29/2000, 14.125% to
03/01/2005 33,190 18,254
Crown Castle International Corp., Step-up
Coupon, 0% to 11/15/2002, 10.625% to
11/15/2007 31,730 21,894
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C>
Crown Castle International Corp., 9.500%,
08/01/2011 $ 6,400 $ 6,096
Dobson Communication Corp., 11.750%,
04/15/2007 20,600 21,630
Dolphin Telecom, PLC, Step-up Coupon, 0% to
05/15/2004, 14.000% to 05/15/2009 13,860 5,613
Econophone Inc., Step-up Coupon, 0% to
02/15/2003, 11.000% to 02/15/2008 7,880 4,413
Esprit Telecom Group, PLC, 11.500%,
12/15/2007 23,270 23,852
Esprit Telecom Group, PLC, 10.875%,
06/15/2008 10,060 10,161
Global Crossing, Ltd., 9.625%, 05/15/2008 6,425 6,602
Global Telesystems Group, 9.875%,
02/15/2005 10,300 9,270
ICG Holdings, Inc., Step-up Coupon, 0% to
09/15/2000, 13.500% to 09/15/2005 74,655 64,203
IPC Communications Inc., Step-up Coupon, 0%
to 11/01/2001, 10.875% to 05/01/2008 37,310 27,609
Impsat Corp., 12.375%, 06/15/2008 21,990 16,273
Intermedia Communications of Florida, Inc.,
Step-up Coupon, 0% to 05/15/2001, 12.500%
to 05/15/2006 33,120 26,330
Intermedia Communications of Florida, Inc.,
Step-up Coupon, 0% to 07/15/2002, 11.250%
to 07/15/2007 25,885 17,084
Intermedia Communications of Florida, Inc.,
11.250%, 08/01/2006 14,616 16,589
KMC Telecom Holdings, Inc., Step-up Coupon,
0% to 02/15/2003, 12.500% to 02/15/2008 41,100 21,372
KMC Telecom Holdings, Inc., 13.500%,
05/15/2009 13,545 13,274
Level 3 Communications, Inc., 9.125%,
05/01/2008 42,340 38,212
Long Distance Direct Holdings, Inc.,
12.250%, 04/15/2008 16,300 8,476
MGC Communications, 13.000%, 10/01/2004 21,256 18,068
McLeod USA, Inc., Step-up Coupon, 0% to
03/01/2002, 10.500% to 03/01/2007 35,460 27,836
McLeodUSA Inc., 9.250%, 07/15/2007 16,065 16,025
McLeodUSA Inc., 9.500%, 11/01/2008 4,690 4,690
MetroNet Communications Corp., Step-up
Coupon, 0% to 06/15/2003, 9.950% to
06/15/2008 25,235 19,620
MetroNet Communications Corp., Step-up
Coupon, 0% to 11/01/2002, 10.750% to
11/01/2007 10,450 8,569
MetroNet Communications Corp., 12.000%,
08/15/2007 8,280 9,646
MetroNet Communications Corp., 10.625%,
11/01/2008 16,190 18,477
Millicom International Cellular, S.A.,
Step-up Coupon, 0% to 06/01/2001, 13.500%
to 06/01/2006 40,915 29,050
Netia Holdings, Step-up Coupon, 0% to
11/01/2001, 11.250% to 11/01/2007 11,005 6,906
Netia Holdings, 10.250%, 11/01/2007 6,570 5,601
Nextel Communications Inc., Step-up Coupon,
0% to 02/15/2003, 9.950% 02/15/2008 16,030 11,181
Nextel Communications, Inc., Step-up
Coupon, 0% to 10/31/2002, 9.750% to
10/31/2007 4,810 3,403
</TABLE>
12
<PAGE> 13
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C>
Nextel Communications, Inc., Step-up
Coupon, 0% to 02/15/1999, 9.750% to
08/15/2004 $ 47,680 $ 48,038
Nextlink Communications, Inc., Step-up
Coupon, 0% to 06/01/2004, 12.250% to
06/01/2009 16,880 9,664
Nextlink Communications, Inc., 12.500%,
04/15/2006 27,230 28,932
Nextlink Communications, Inc., 10.750%,
11/15/2008 22,690 22,690
PTC International Finance, Step-up Coupon,
0% to 07/01/2002, 10.750% to 07/01/2007 21,080 14,545
Pinnacle Holdings, Inc., Step-up Coupon, 0%
to 03/15/2003, 10.000% to 3/15/2008 7,560 4,385
Price Communications Wireless, 9.125%,
12/15/2006 21,710 22,036
Primus Telecommunications Group, 11.750%,
08/01/2004 21,226 20,801
Primus Telecommunications Group, 9.875%,
05/15/2008 2,500 2,187
Primus Telecommunications Group, 11.250%,
01/15/2009 5,560 5,282
RCN Corp., Step-up Coupon, 0% to
07/01/2003, 11.000% to 07/01/2008 10,980 6,560
RCN Corp., 10.000%, 10/15/2007 10,390 10,052
Rogers Cantel, 9.750%, 06/01/2016 28,795 32,754
SBA Communications Corp., Step-up Coupon,
0% to 03/01/2003, 12.000% to 03/01/2008 16,390 9,055
Tele1 Europe BV, 13.000%, 05/15/2009 6,970 6,831
Telecorp PCS, Inc., Step-up Coupon, 0% to
04/15/2004, 11.625% to 04/15/2009 6,710 3,892
Teligent, Inc., Step-up Coupon, 0% to
03/01/2003, 11.500% to 03/01/2008 14,650 7,545
Teligent, Inc., 11.500%, 12/01/2007 15,860 14,433
TriTel Pcs, Inc., Step-up Coupon, 0% to
05/15/2004, 12.750% to 05/15/2009 11,930 6,711
Triton Communications, L.L.C., Step-up
Coupon, 0% to 05/01/2003, 11.000% to
05/01/2008 34,100 22,932
U.S. Xchange, L.L.C., 15.000%, 07/01/2008 13,830 13,968
USA Mobile Communications Holdings, Inc.,
14.000%, 11/01/2004 15,635 12,664
Versatel Telecom, 13.250%, 05/15/2008 11,330 11,160
Versatel Telecom, 13.250%, 05/15/2008 5,960 5,871
Versatel Telecom, 11.875%, 07/15/2009 4,540 4,199
Viatel, Inc., Step-up Coupon, 0% to
04/15/2003, 12.500% to 04/15/2008 23,300 13,630
Viatel, Inc., 11.250%, 04/15/2008 8,810 8,458
Winstar Equipment II, 12.500%, 03/15/2004 13,430 13,665
---------------------------------------------------------------------------------
1,050,516
- --------------------------------------------------------------------------------------
FINANCIAL--1.8%
HMH Properties, 7.875%, 08/01/2008 23,170 20,621
Intertek Finance, PLC, 10.250%, 11/01/2006 13,190 12,530
Kappa Beheer BV, 10.625%, 07/15/2009 11,820 12,175
Ono Finance, PLC, 13.000%, 05/01/2009 6,960 7,308
Spectrasite Holdings, Inc., Step-up Coupon,
0% to 04/15/2004, 11.250% to 04/15/2009 15,800 7,900
Spectrasite Holdings, Inc., Step-up Coupon,
0% to 07/15/2003, 12.000% to 07/15/2008 27,240 14,982
---------------------------------------------------------------------------------
75,516
</TABLE>
13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C>
MEDIA--16.6%
AMFM, Inc., Step-up Coupon, 0% to
02/01/2002, 12.750% to 02/01/2009 $ 25,000 $ 21,500
AMFM, Inc., 9.000%, 10/01/2008 5,570 5,563
AMFM, Inc., 8.000%, 11/01/2008 21,930 20,998
Adelphia Communications Corp., 7.875%,
05/01/2009 4,190 3,803
American Lawyer Media, Inc., Step-up
Coupon, 0% to 12/15/2002, 12.25% to
12/15/2008 6,480 4,082
(a)Australis Holdings, Step-up Coupon 0% to
11/01/2000, 15.000% to 11/01/2002 49,213 492
Australis Holdings, zero coupon, 11/01/2000 1,527 1,172
Avalon Cable Holdings, Step-up Coupon, 0%
to 12/01/2003, 11.875% to 12/01/2008 21,170 13,231
Avalon Cable of Michigan, 9.375%,
12/01/2008 3,070 3,070
Big Flower Press, 8.875%, 07/01/2007 33,580 32,741
CSC Holdings Inc., Senior Note, 7.250%,
07/15/2008 5,500 5,259
CSC Holdings, Inc., 9.250%, 11/01/2005 12,740 12,931
CSC Holdings, Inc., 8.125%, 07/15/2009 5,200 5,229
CSC Holdings, Inc., 8.125%, 08/15/2009 15,156 15,345
CSC Holdings, Inc., 10.500%, 05/15/2016 27,375 29,633
Cablevision Systems Corp., 7.875%,
12/15/2007 4,100 4,080
Century Communications Corp., 9.500%,
03/01/2005 1,920 1,925
Chancellor Media Corp., 8.125%, 12/15/2007 6,070 5,759
Charter Communication Holdings LLC, Step-up
Coupon, 0% to 04/01/2004, 9.920% to
04/01/2011 26,530 15,719
Charter Communication Holdings LLC, 8.250%,
04/01/2007 59,280 55,427
Comcast UK Cable Partners, Ltd., Step-up
Coupon 0% to 11/15/2000, 11.2000% to
11/15/2007 10,225 9,254
Diamond Cable Communications, PLC, Step-up
Coupon, 0% to 12/15/2000, 11.750% to
12/15/2005 14,660 13,267
Diva Systems Corp., Step-up Coupon, 0% to
03/01/2003, 12.625% to 03/01/2008 14,100 3,983
Echostar DBS Corp., 9.250%, 02/01/2006 18,950 18,618
Echostar DBS Corp., 9.375%, 02/01/2009 18,285 18,011
Falcon Holding Group, Step-up Coupon, 0% to
04/15/2003, 9.285% to 04/15/2010 11,375 8,048
Falcon Holding Group LP, 8.375%, 04/15/2010 7,215 7,107
Frontiervision, 11.000%, 10/15/2006 14,450 15,389
Frontiervision Holdings, LP, Step-up
Coupon, 0% to 09/15/2001, 11.875% to
09/15/2007 11,839 10,004
Interep National Radio Sales, Inc.,
10.000%, 07/01/2008 14,790 14,790
Metromedia Fiber Network, Inc., 10.000%,
11/15/2008 22,590 21,799
NTL Communications Corp., Step-up Coupon 0%
to 10/01/2003, 12.375% to 10/01/2008 7,190 4,817
NTL, Inc., Step-up Coupon, 0% to
02/01/2001, 11.500% to 02/01/2006 8,390 7,299
NTL, Inc., 11.500%, 10/01/2008 56,285 60,506
Outdoor Systems, Inc., 9.375%, 10/15/2006 32,270 33,884
Panavision, Inc., Step-up Coupon, 0% to
02/01/2002, 9.625% to 02/01/2006 19,840 10,317
Radio Unica Corp., Step-up Coupon, 0% to
08/01/2002, 11.750% to 08/01/2006 17,880 10,549
</TABLE>
14
<PAGE> 15
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C>
Renaissance Media Group, Step-up Coupon, 0%
to 04/15/2003, 10.000% to 04/15/2008 $ 14,545 $ 10,145
Rogers Cablesystems Ltd., 10.000%,
03/15/2005 8,120 8,709
SFX Entertainment, Inc., 9.125%, 02/01/2008 12,840 12,070
SFX Entertainment, Inc., 9.125%, 12/01/2008 22,600 21,244
Sinclair Broadcasting Group, Inc., 8.750%,
12/15/2007 7,190 6,723
Star Choice Communications, Inc., 13.000%,
12/15/2005 3,850 3,773
TeleWest Communications, PLC, Step-up
Coupon, 0% to 04/15/2004, 9.250% to
04/15/2009 2,370 1,428
TeleWest Communications, PLC, Step-up
Coupon, 0% to 10/01/2000, 11.000% to
10/01/2007 35,833 31,891
TeleWest Communications, PLC, 9.625%,
10/01/2006 13,075 13,173
TeleWest Communications, PLC, 11.250%,
11/01/2008 19,430 20,790
Transwestern Publishing, Step-up Coupon, 0%
to 11/15/2002, 11.875% to 11/15/2008 5,885 4,120
Transwestern Publishing, 9.625%, 11/15/2007 8,650 8,434
United Artists Theatre Circuit, Inc.,
9.750%, 04/15/2008 15,545 3,575
United International Holdings, Step-up
Coupon, 0% to 02/15/2003, 10.750% to
02/15/2008 35,800 21,659
---------------------------------------------------------------------------------
693,335
- --------------------------------------------------------------------------------------
SERVICE INDUSTRIES--3.6%
Coinmach Corp., 11.750%, 11/15/2005 57,160 60,089
Doskocil Manufacturing Co., 10.125%,
09/15/2007 4,070 1,832
ImPac Group, Inc., 10.125%, 03/15/2008 22,800 20,349
Integrated Electrical Services, Inc.,
9.375%, 02/01/2009 17,890 17,398
Kindercare Learning Centers Inc., 9.500%,
02/15/2009 28,470 26,904
La Petite Academy, Inc., 10.000%,
05/15/2008 14,170 11,903
Spincycle, Inc., Step-up Coupon, 0% to
05/01/2001, 12.750% to 05/01/2005 26,295 3,944
Verio, Inc., 11.250%, 12/01/2008 7,695 7,907
---------------------------------------------------------------------------------
150,326
---------------------------------------------------------------------------------
DURABLES--2.6%
Accuride Corp., 9.250%, 02/01/2008 9,785 9,149
Airxcel, 11.000%, 11/15/2007 13,290 13,157
BE Aerospace, Inc., 9.500%, 11/01/2008 8,770 8,638
DeCrane Aircraft Holdings, Inc., 12.000%,
09/30/2008 15,830 15,830
Fairchild Corp., 10.750%, 04/15/2009 15,890 13,506
L-3 Communications Corp., 10.375%,
05/01/2007 7,220 7,491
Transdigm, Inc., 10.375%, 12/01/2008 16,280 15,629
United Rentals, Inc., 9.250%, 01/15/2009 20,170 19,313
United Rentals, Inc., 9.000%, 04/01/2009 6,520 6,145
---------------------------------------------------------------------------------
108,858
---------------------------------------------------------------------------------
MANUFACTURING--16.5%
AEP Industries Inc., 9.875%, 11/15/2007 550 514
American Standard Companies, Inc., 9.250%,
12/01/2016 210 210
</TABLE>
15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C>
Atlantis Group, Inc., 11.000%, 02/15/2003 $ 25,355 $ 25,735
BPC Holdings Corp., 12.500%, 06/15/2006 12,240 11,444
Berry Plastics Corp., 12.250%, 04/15/2004 20,499 20,704
Consolidated Container Capital, Inc.,
10.125%, 07/15/2009 5,240 5,240
Consumers International, 10.250%,
04/01/2005 15,150 14,468
Day International Group, Inc., 11.125%,
06/01/2005 22,045 22,541
Delco Remy International, 10.625%,
08/01/2006 22,195 21,862
Doman Industries, Ltd., 8.750%, 03/15/2004 7,420 5,380
Doman Industries, Ltd., 9.250%, 11/15/2007 8,010 5,367
Eagle-Picher Holdings, Inc., 9.375%,
03/01/2008 12,260 10,973
Foamex, L.P., 13.500%, 08/15/2005 17,810 17,454
Fonda Group, 9.500%, 03/01/2007 15,720 13,676
GS Technologies, 12.000%, 09/01/2004 13,795 9,657
GS Technologies, 12.250%, 10/01/2005 16,830 11,613
Gaylord Container Corp., 9.750%, 06/15/2007 19,750 18,763
Gaylord Container Corp., 9.875%, 02/15/2008 25,265 21,917
Golden Northwest Aluminum, Inc., 12.000%,
12/15/2006 5,970 6,164
Graham Packaging Co., Step-up Coupon, 0% to
01/15/2003, 10.750% to 01/15/2009 7,840 5,018
Graham Packaging Co., 8.750%, 01/15/2008 8,730 8,163
Grove Holdings LLC, Step-up Coupon, 0% to
05/01/2003, 11.625% to 05/01/2009 4,070 733
Grove Investors, PIK, 14.500%, 05/01/2010 9,566 2,391
Hayes Wheels International, Inc., 11.000%,
07/15/2006 23,070 23,704
Huntsman Package, 11.750%, 12/01/2004 36,635 37,734
Knoll Inc., 10.875%, 03/15/2006 21,384 23,736
Millar Western Forest Products, Ltd.,
9.875%, 05/15/2008 18,470 17,777
Motors and Gears, Inc., 10.750%, 11/15/2006 9,190 8,914
NL Industries, Inc. , Senior Note, 11.750%,
10/15/2003 52,814 54,398
Neenah Corp., 11.125%, 05/01/2007 12,290 11,307
Plainwell, Inc., 11.000%, 03/01/2008 18,460 14,260
Printpack, Inc., 9.875%, 08/15/2004 4,870 4,760
Printpack, Inc., 10.625%, 08/15/2006 22,640 20,716
Riverwood International Corp., 10.250%,
04/01/2006 9,390 9,273
Riverwood International Corp., 10.625%,
08/01/2007 13,041 13,041
Riverwood International Corp., 10.875%,
04/01/2008 64,430 60,564
SF Holdings Group, Inc., Step-up Coupon, 0%
to 03/15/2003, 12.750% to 03/15/2008 18,340 7,886
Spinnaker Industries, 10.750%, 10/15/2006 26,340 21,862
Stone Container Corp., 12.250%, 04/01/2002 6,170 6,201
Stone Container Corp., 10.750%, 10/01/2002 2,915 3,002
Stone Container Corp., 11.500%, 08/15/2006 7,800 8,229
Terex Corp., 8.875%, 04/01/2008 17,940 16,864
Terex Corp., 8.875%, 04/01/2008 5,230 4,916
Terra Industries, Inc., 10.500%, 06/15/2005 8,175 4,251
Terra Industries, 10.750%, 09/30/2003 24,185 12,093
</TABLE>
16
<PAGE> 17
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C>
Texas Petrochemicals, 11.125%, 07/01/2006 $ 10,800 $ 8,964
U.S. Can Corp., 10.125%, 10/15/2006 27,679 28,094
Venture Holdings, 11.000%, 06/01/2007 2,240 2,190
---------------------------------------------------------------------------------
684,723
- --------------------------------------------------------------------------------------
TECHNOLOGY--1.6%
Cherokee International Corp., 10.500%,
05/01/2009 7,770 7,168
PSINet, Inc., 10.000%, 02/15/2005 3,900 3,725
PSINet, Inc., 11.500%, 11/01/2008 16,620 16,786
PSINet, Inc., 11.000%, 08/01/2009 27,010 26,470
Viasystems, Inc., 9.750%, 06/01/2007 15,910 13,722
---------------------------------------------------------------------------------
67,871
- --------------------------------------------------------------------------------------
ENERGY--3.0%
Benton Oil & Gas Co., 11.625%, 05/01/2003 19,985 14,189
Continental Resources, Inc., 10.250%,
08/01/2008 21,840 18,018
Gulfmark Offshore, Inc., 8.750%, 06/01/2008 9,100 8,327
Key Energy Services, Inc., 14.000%,
01/15/2009 7,780 8,305
Ocean Energy, Inc., 10.375%, 10/15/2005 15,095 15,887
Ocean Energy, Inc., 9.750%, 10/01/2006 4,495 4,630
Pen Holdings, Inc., 9.875%, 06/15/2008 9,460 8,987
Pride International, Inc., 10.000%,
06/01/2009 7,590 7,742
R&B Falcon Corp., 11.000%, 03/15/2006 7,910 8,286
R&B Falcon Corp., 9.500%, 12/15/2008 17,570 16,779
RAM Energy, 11.500%, 02/15/2008 8,250 3,960
Stone Energy Corp., 8.750%, 09/15/2007 12,740 12,485
---------------------------------------------------------------------------------
127,595
- --------------------------------------------------------------------------------------
METALS & MINERALS--3.0%
Euramax International, PLC, 11.250%,
10/01/2006 14,265 14,264
MMI Products, Inc., 11.250%, 04/15/2007 13,810 13,948
Metal Management, Inc., 10.000%, 05/15/2008 18,625 13,038
Metals USA Inc., 8.625%, 02/15/2008 18,160 16,798
Renco Steel Holdings Co., Series B,
10.875%, 02/01/2005 32,220 26,582
Republic Tech International, 13.750%,
07/15/2009 25,880 24,586
Wells Aluminum Corp., 10.125%, 06/01/2005 20,506 20,352
---------------------------------------------------------------------------------
129,568
- --------------------------------------------------------------------------------------
CONSTRUCTION--3.5%
Building Materials Corp., 8.000%,
12/01/2008 9,135 8,358
Congoleum Corp., 8.625%, 08/01/2008 16,500 13,530
Del Webb Corp., 9.750%, 01/15/2008 16,130 14,598
Desa International, 9.875%, 12/15/2007 8,100 5,265
Dimac Corp., 12.500%, 10/01/2008 21,510 10,755
Forecast Group, L.P., 11.375%, 12/15/2000 14,620 14,510
Fortress Group, 13.750%, 05/15/2003 14,080 9,152
Hovnanian Enterprises, Inc., 9.750%,
06/01/2005 6,315 5,810
Hovnanian Enterprises, Inc., 9.125%,
05/01/2009 11,790 10,729
Kevco, Inc., 10.375%, 12/01/2007 14,080 7,744
Nortek, Inc., 9.875%, 03/01/2004 11,615 11,383
</TABLE>
17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C>
Nortek, Inc., 9.125%, 09/01/2007 $ 15,600 $ 15,132
Nortek, Inc., 8.875%, 08/01/2008 6,430 6,108
Ryland Group, Inc., 8.250%, 04/01/2008 14,950 13,904
---------------------------------------------------------------------------------
146,978
- --------------------------------------------------------------------------------------
TRANSPORTATION--1.8%
Petro Stopping Centers, 10.500%, 02/01/2007 25,150 24,899
TFM, S.A. de C.V., 10.250%, 06/15/2007 17,350 14,921
Trans World Airlines, Inc., 11.375%,
03/01/2006 12,140 7,709
Transtar Holdings, Inc., Step-up Coupon, 0%
to 12/15/1999, 13.375% to 12/15/2003 10,100 9,898
Travelcenters America, 10.250%, 04/01/2007 16,380 16,134
---------------------------------------------------------------------------------
73,561
---------------------------------------------------------------------------------
CORPORATE BONDS TOTAL
(Cost $4,489,870) 4,015,116
---------------------------------------------------------------------------------
<CAPTION>
CONVERTIBLE BONDS--0.8%
CONSUMER DISCRETIONARY
Corporate Express, Inc., 4.500%, 07/01/2000 34,629 34,110
(Cost $33,217)
---------------------------------------------------------------------------------
<CAPTION>
NUMBER OF
PREFERRED STOCKS--1.90% SHARES VALUE
<S> <C> <C>
COMMUNICATIONS--.7%
CELLULAR TELEPHONE--.3%
Dobson Communications, PIK, preferred 12,061 10,855
- -------------------------------------------------------------------------------------
TELEPHONE/
COMMUNICATIONS--.4%
21st Century Telecom Group, Inc., preferred 3,496 1,748
Nextel Communications, Inc., PIK, preferred 16,581 16,083
- -------------------------------------------------------------------------------------
17,831
FINANCIAL--.3%
REAL ESTATE
Crown American Realty Trust, preferred 354,060 14,605
- -------------------------------------------------------------------------------------
MEDIA--.5%
BROADCASTING &
ENTERTAINMENT
Sinclair Capital, preferred 210,400 21,093
- -------------------------------------------------------------------------------------
MANUFACTURING--.3%
CONTAINERS &
PAPER--0.0%
(a)SF Holdings Group, Inc., PIK, preferred 491 1,375
- -------------------------------------------------------------------------------------
MACHINERY/COMPONENTS
CONTROLS--.3%
(a)Eagle-Picher Holdings, Inc., preferred 1,750 8,050
- -------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ENERGY--.1%
OIL & GAS PRODUCTION Clark USA, PIK, preferred 48,951 $ 3,010
------------------------------------------------------------------------------
PREFERRED STOCKS TOTAL
(Cost $88,851) 76,819
------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS--.6%
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS--.3%
TELEPHONE/
COMMUNICATION (a)21st Century Telecom Group, Inc.,
Warrants 2,850 570
(a)Benedek Communications Corp., Warrants
(expire 07/01/2007) 90,000 180
(a)Communicacion Cellular, S.A., Warrants 30,800 1,602
(a)Econophone, Inc., Warrants 19,865 1,569
(a)Intelcom Group, Inc., Warrants 67,617 1,082
(a)Intermedia Communications of Florida,
Inc., Warrants 16,300 1,471
(a)KMC Telecom Holdings, Inc., Warrants 23,900 96
(a)Long Distance Direct Holdings, Inc.,
Warrants (expire 04/13/2008) 16,300 33
MGC Communications 97,655 2,027
(a)MetroNet Communications Corp., Warrants
(expire 08/15/2007) 8,280 679
(a)Primus Telecommunications Group,
08/01/2004 13 261
(a)Tele1 Europe BV, Warrants (expire
05/15/2009) 6,970 453
(a)Versatel Telecom, Warrants 17,290 2,161
Viatel, Inc 54,205 1,602
------------------------------------------------------------------------------
13,786
- ------------------------------------------------------------------------------------------------------------------------
MEDIA--.1%
CABLE TELEVISION
(a)Diva Systems Corp., Warrants (expire
03/01/2008) 42,300 338
(a)Star Choice Communications, Inc.,
Warrants (expire 12/15/2005) 233,916 561
(a)UIH Australia Pacific, Inc., Warrants 14,150 425
------------------------------------------------------------------------------
1,324
- ------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--.2%
CONTAINERS & PAPER
Gaylord Container Corp. 1,353,034 9,641
------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
ENERGY--0.0%
OIL/GAS TRANSMISSION--0.0%
(a)Empire Gas Corp., Warrants 31,795 3
------------------------------------------------------------------------------
OILFIELD
SERVICES/EQUIPMENT--0.0%
(a)Key Energy Services, Inc., Warrants 7,780 156
------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--0.0%
MISCELLANEOUS
(a)Bar Technologies, Warrants 9,370 187
------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES
COMMON STOCKS--.6% OR PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSTRUCTION--0.0%
BUILDING MATERIALS--0.0% (a)Waxman Industries, Inc., Warrants 800,453 $ 32
------------------------------------------------------------------------------
HOMEBUILDING--0.0%
(a)Capital Pacific Holdings, Warrants
(expire 12/31/2049) 54,431 27
------------------------------------------------------------------------------
COMMON STOCKS TOTAL
(Cost $11,531) 25,157
------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
MONEY MARKET INSTRUMENTS--.6% (b)Repurchase agreement with State Street
Bank and Trust Company, dated 9/30/99,
5.260% due 10/01/1999
(Cost $1,466) $ 1,466 $ 1,466
------------------------------------------------------------------------------
Federal National Mortgage Association,
5.200%, 10/01/1999
(Cost $25,000) 25,000 25,000
------------------------------------------------------------------------------
TOTAL MONEY MARKET
INVESTMENTS--.6%
(Cost $26,466) 26,466 26,466
------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost $4,649,935) $4,177,668
------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security, in the case of a bond, generally denotes that
issuer has defaulted on the payment of principal or interest or has filed
for bankruptcy.
(b) 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 $4,652,674 for federal income tax purposes
at September 30, 1999, the gross unrealized appreciation was $60,695, the gross
unrealized depreciation was $535,701 and the net unrealized depreciation on
investments was $475,006.
See accompanying Notes to Financial Statements.
20
<PAGE> 21
FINANCIAL STATEMENTS
STATEMENT OF ASSETS & LIABILITIES
AS OF SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investment securities, at value, (cost $4,649,935) $4,177,668
- --------------------------------------------------------------------------
Cash 37
- --------------------------------------------------------------------------
Receivable for:
Investments sold 5,730
- --------------------------------------------------------------------------
Interest 112,464
- --------------------------------------------------------------------------
Fund shares sold 4,157
- --------------------------------------------------------------------------
TOTAL ASSETS 4,300,056
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------
Payable for:
Investments purchased 1,402
- --------------------------------------------------------------------------
Fund shares redeemed 12,092
- --------------------------------------------------------------------------
Accrued management fee 1,685
- --------------------------------------------------------------------------
Other accrued expenses 3,482
- --------------------------------------------------------------------------
Total liabilities 18,661
- --------------------------------------------------------------------------
NET ASSETS, AT VALUE $4,281,395
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income 7,390
- --------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
securities (472,267)
- --------------------------------------------------------------------------
Accumulated net realized loss (193,917)
- --------------------------------------------------------------------------
Paid-in capital 4,940,189
- --------------------------------------------------------------------------
NET ASSETS, AT VALUE $4,281,395
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
NET ASSETS VALUE
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($2,945,459 / 407,622 shares outstanding) $7.23
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $7.57
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge)
per share ($1,144,514 / 158,523 shares outstanding) $7.22
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge)
per share ($176,339 / 24,365 shares outstanding) $7.24
- --------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price
($15,083 / 2,089 shares outstanding) $7.22
- --------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------
INVESTMENT INCOME
- -------------------------------------------------------------------------
Dividends $ 8,668
- -------------------------------------------------------------------------
Interest 539,714
- -------------------------------------------------------------------------
548,382
- -------------------------------------------------------------------------
Expenses:
Management fee 25,773
- -------------------------------------------------------------------------
Services to shareholders 11,647
- -------------------------------------------------------------------------
Trustees' fees and expenses 117
- -------------------------------------------------------------------------
Custodian and transfer agent and other related expenses 9,301
- -------------------------------------------------------------------------
Reports to shareholders 992
- -------------------------------------------------------------------------
Auditing 93
- -------------------------------------------------------------------------
Legal 27
- -------------------------------------------------------------------------
Registration fees 103
- -------------------------------------------------------------------------
Distribution fees 11,359
- -------------------------------------------------------------------------
Other 261
- -------------------------------------------------------------------------
Expenses 59,673
- -------------------------------------------------------------------------
NET INVESTMENT INCOME 488,709
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
- -------------------------------------------------------------------------
Net realized gain (loss) from:
Investment securities (143,275)
- -------------------------------------------------------------------------
Futures 5,309
- -------------------------------------------------------------------------
(137,966)
- -------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the
period on investment securities (123,742)
- -------------------------------------------------------------------------
Net gain loss on investment transactions (261,708)
- -------------------------------------------------------------------------
NET INCREASE DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 227,001
- -------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
PERIOD ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
- -----------------------------------------------------------------------------------------------
Operations:
Net investment income $ 488,709 471,713
- -----------------------------------------------------------------------------------------------
Net realized gain (loss) (137,966) 99,384
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) (123,742) (603,298)
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 227,001 (32,201)
- -----------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income (483,961) (477,479)
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from fund share
transactions (245,907) 354,640
- -----------------------------------------------------------------------------------------------
Increase (decrease) in net assets (502,867) (155,040)
- -----------------------------------------------------------------------------------------------
Net assets at beginning of year 4,784,262 4,939,302
- -----------------------------------------------------------------------------------------------
Net assets at end of year $4,281,395 4,784,262
- -----------------------------------------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT INCOME $ 7,390 4,903
- -----------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND The Kemper High Yield Fund (the "fund"), a
diversified series of Kemper High Yield Series,
which is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an
open end, management investment company organized
as a Massachusetts business trust.
The fund offers multiple classes of shares. Class A
shares are offered to investors subject to an
initial sales charge. Class B shares are offered
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are offered without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares 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 the fund have
equal rights with respect to voting subject to
class specific arrangements.
The 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 the 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.
REPURCHASE AGREEMENTS. The fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
FUTURES CONTRACTS. A futures contract is an
agreement between a buyer or seller and an
established futures exchange or its clearinghouse
in which the buyer or seller agrees to take or make
a delivery of a specific amount of a financial
instrument at a specified price on a specific date
(settlement date). During the
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
period, the fund purchased interest rate futures to
manage the duration of the portfolio. In addition,
the Fund 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
percentage of the face value indicated in the
futures contract. Subsequent payments ("variation
margin") are made or received by the fund dependent
upon the daily fluctuations in the value of the
underlying security and are recorded for financial
reporting purposes as unrealized gains or losses by
the fund. When entering into a closing transaction,
the fund will realize a gain or loss equal to the
difference between the value of the futures
contract to sell and 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. The fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies and to distribute
all of its taxable income to its shareholders.
Accordingly, the fund paid no federal income taxes
and no federal income tax provision was required.
In addition, from November 1, 1998 through
September 30, 1999 the fund incurred approximately
$97,478,000 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.
At September 30, 1999, the fund had a net tax basis
capital loss carryforward of approximately
$90,019,000 which may be applied against any
realized net taxable capital gains of each
succeeding year until fully utilized or until
September 30, 2003 ($46,033,000) or September 30,
2004 ($6,237,000) or September 30, 2007
($37,749,000), the respective expiration dates.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made monthly.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, the fund may periodically make
reclassifications among certain of its capital
accounts without impacting the net asset value of
the fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual
24
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
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.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper), and pays a monthly investment
management fee of 1/12 of the annual rate of .58%
of the first $250 million of average daily net
assets declining to .42% of average daily net
assets in excess of $12.5 billion. The fund
incurred a management fee of $25,773,000 for the
year ended September 30, 1999, of which $1,685,000
is unpaid.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The 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 $660,000, of which $40,000 was paid by KDI
to affiliates.
For services under the distribution services
agreement, the fund pays KDI a fee of .75% of
average daily net assets of Class B and Class C
shares pursuant to separate Rule 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 year ended September 30, 1999 are
$14,462,000, of which $752,000 is unpaid.
ADMINISTRATIVE SERVICES AGREEMENT. The fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of fund accounts the firms
service. Administrative services fees paid by the
fund to KDI for the year ended September 30, 1999
are $11,647,000, of which $1,196,000 is unpaid.
Additionally, $39,000 was paid by KDI to
affiliates.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the fund. Under the agreement,
KSvC received shareholder services fees of
$6,567,000 for the year ended September 30, 1999.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. For the year ended September 30,
1999, the fund made no payments to its officers and
incurred trustees' fees of $117,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended September 30, 1999, investment
transactions (excluding short term instruments) are
as follows (in thousands):
<TABLE>
<S> <C>
Purchases $3,882,790
Proceeds from sales 4,249,884
</TABLE>
25
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1999 1998
-------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 220,716 $ 1,686,406 175,709 $1,448,862
-------------------------------------------------------------------------------------
Class B 79,949 609,883 96,842 810,635
-------------------------------------------------------------------------------------
Class C 24,395 187,139 19,096 163,577
-------------------------------------------------------------------------------------
Class I 4,011 30,630 8,956 61,720
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 26,427 201,825 25,177 210,714
-------------------------------------------------------------------------------------
Class B 8,976 68,240 8,726 73,008
-------------------------------------------------------------------------------------
Class C 1,462 11,187 1,217 10,192
-------------------------------------------------------------------------------------
Class I 276 2,109 344 3,282
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
SHARES REDEEMED
Class A (289,812) (2,223,310) (201,412) (1,666,803)
-------------------------------------------------------------------------------------
Class B (78,710) (603,232) (68,856) (573,586)
-------------------------------------------------------------------------------------
Class C (23,782) (182,866) (12,712) (106,155)
-------------------------------------------------------------------------------------
Class I (4,409) (33,918) (11,152) (80,801)
-------------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 20,032 154,200 23,396 197,625
-------------------------------------------------------------------------------------
Class B (20,049) (154,200) (23,428) (197,630)
-------------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $ (245,907) $ 354,640
-------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 LINE OF CREDIT The fund and several Kemper funds (the
"Participants") shares 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.
26
<PAGE> 27
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------------------
CLASS A
----------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 7.68 8.50 8.23 8.01 7.74
- ----------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .78 .76 .76 .76 .83
- ----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.46) (.81) .31 .23 .20
- ----------------------------------------------------------------------------------------------------------------
Total from investment operations .32 (.05) 1.07 .99 1.03
- ----------------------------------------------------------------------------------------------------------------
Less distributions from net investment income .77 .77 .80 .77 .76
- ----------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 7.23 7.68 8.50 8.23 8.01
- ----------------------------------------------------------------------------------------------------------------
TOTAL RETURN 4.11% (.95) 13.69 13.00 14.10
- ----------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
Expenses .96% .89 .88 .88 .90
- ----------------------------------------------------------------------------------------------------------------
Net investment income 10.15% 9.09 9.18 9.45 10.74
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------
CLASS B
-------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $7.67 8.49 8.22 8.00 7.73
- --------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .71 .68 .69 .69 .76
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.45) (.80) .31 .23 .20
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations .26 (.12) 1.00 .92 .96
- --------------------------------------------------------------------------------------------------------------------
Less distributions from net investment income .71 .70 .73 .70 .69
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $7.22 7.67 8.49 8.22 8.00
- --------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 3.26% (1.82) 12.72 12.02 13.09
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------------------------
Expenses 1.78% 1.76 1.76 1.77 1.77
- --------------------------------------------------------------------------------------------------------------------
Net investment income 9.33% 8.22 8.30 8.56 9.87
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 28
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------
CLASS C
-------------------------------------
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------
Net asset value, beginning of year $7.69 8.52 8.24 8.02 7.75
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .72 .69 .70 .69 .77
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.46) (.82) .31 .23 .20
- --------------------------------------------------------------------------------
Total from investment operations .26 (.13) 1.01 .92 .97
- --------------------------------------------------------------------------------
Less distribution from net investment
income .71 .70 .73 .70 .70
- --------------------------------------------------------------------------------
Net asset value, end of year $7.24 7.69 8.52 8.24 8.02
- --------------------------------------------------------------------------------
TOTAL RETURN 3.30% (1.89) 12.88 12.06 13.13
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
Expenses 1.73% 1.71 1.71 1.71 1.71
- --------------------------------------------------------------------------------
Net investment income 9.38% 8.27 8.35 8.62 9.93
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------
CLASS I
-------------------------------------------------
YEAR ENDED SEPTEMBER 30, DECEMBER 29, 1994
----------------------------- TO SEPTEMBER 30,
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 7.68 8.50 8.23 8.01 7.55
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .82 .76 .78 .78 .66
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.48) (.78) .31 .23 .39
- --------------------------------------------------------------------------------------------
Total from investment operations .34 (.02) 1.09 1.01 1.05
- --------------------------------------------------------------------------------------------
Less distribution from net investment
income .80 .80 .82 .79 .59
- --------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.22 7.68 8.50 8.23 8.01
- --------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.36% (.66) 13.96 13.32 14.37
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------
Expenses .62% .60 .62 .61 .61
- --------------------------------------------------------------------------------------------
Net investment income 10.49% 9.38 9.44 9.72 10.70
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -----------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $4,281,395 4,784,262 4,939,302 4,096,939 3,527,954
- -----------------------------------------------------------------------------------------------------
Portfolio turnover rate 67% 92 91 102 99
- -----------------------------------------------------------------------------------------------------
</TABLE>
NOTE: 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 and September 30, 1998.
- --------------------------------------------------------------------------------
TAX INFORMATION
- --------------------------------------------------------------------------------
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Kemper Fund account, please call 1-800-621-1048.
28
<PAGE> 29
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER HIGH YIELD FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper High Yield Fund as of
September 30, 1999, and the related statements of operations for the year then
ended and changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the fiscal periods since 1995.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
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 Kemper
High Yield Fund at September 30, 1999, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the fiscal periods
since 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 16, 1999
29
<PAGE> 30
NOTES
30
<PAGE> 31
NOTES
31
<PAGE> 32
TRUSTEES&OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
JOHN W. BALLANTINE MARK S. CASADY HARRY E. RESIS, JR.
Trustee President Vice President
LEWIS A. BURNHAM PHILIP J. COLLORA LINDA J. WONDRACK
Trustee Vice President and Vice President
Secretary
DONALD L. DUNAWAY MAUREEN E. KANE
Trustee JOHN R. HEBBLE Assistant Secretary
Treasurer
ROBERT B. HOFFMAN CAROLINE PEARSON
Trustee ANN M. MCCREARY Assistant Secretary
Vice President
DONALD R. JONES BRENDA LYONS
Trustee MICHAEL A. MCNAMARA Assistant Treasurer
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
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.
KHYF - 2 (11/23/99) 1094300
