<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MARCH 31, 2000
Kemper High Yield Opportunity Fund
Kemper High Yield Fund II
KEMPER HIGH YIELD FUNDS
"... We focused on larger, more liquid
bond issues and on companies with relatively
solid cash flow and proven management. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
TERMS TO KNOW
8
PORTFOLIO STATISTICS
10
PORTFOLIO OF INVESTMENTS
25
FINANCIAL STATEMENTS
28
FINANCIAL HIGHLIGHTS
32
NOTES TO FINANCIAL STATEMENTS
AT A GLANCE
KEMPER HIGH YIELD OPPORTUNITY FUND
TOTAL RETURNS
FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 2000 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER HIGH YIELD KEMPER HIGH YIELD LIPPER HIGH CURRENT YIELD
KEMPER HIGH YIELD OPPORTUNITY FUND CLASS A OPPORTUNITY FUND CLASS B OPPORTUNITY FUND CLASS C FUNDS CATEGORY AVERAGE*
------------------------------------------ ------------------------ ------------------------ -------------------------
<S> <C> <C> <C>
-0.51 -0.94 -0.93 1.09
</TABLE>
KEMPER HIGH YIELD FUND II
TOTAL RETURNS
FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 2000 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER HIGH YIELD FUND KEMPER HIGH YIELD FUND LIPPER HIGH CURRENT YIELD
KEMPER HIGH YIELD FUND II CLASS A II CLASS B II CLASS C FUNDS CATEGORY AVERAGE*
--------------------------------- ---------------------- ---------------------- -------------------------
<S> <C> <C> <C>
0.53 0.15 0.15 1.09
</TABLE>
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
3/31/00 9/30/99
.........................................................
<S> <C> <C> <C> <C>
KEMPER HIGH YIELD OPPORTU-
NITY FUND CLASS A $7.85 $8.33
.........................................................
KEMPER HIGH YIELD OPPORTU-
NITY FUND CLASS B $7.85 $8.33
.........................................................
KEMPER HIGH YIELD OPPORTU-
NITY FUND CLASS C $7.85 $8.34
.........................................................
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
3/31/00 9/30/99
.........................................................
<S> <C> <C> <C> <C>
KEMPER HIGH YIELD FUND II
CLASS A $8.35 $8.76
.........................................................
KEMPER HIGH YIELD FUND II
CLASS B $8.35 $8.77
.........................................................
KEMPER HIGH YIELD FUND II
CLASS C $8.35 $8.77
.........................................................
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE PERFORMANCE.
INVESTMENT RETURNS AND PRINCIPAL VALUE FLUCTUATE, SO THAT SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
HIGH YIELD BONDS INVOLVE A GREATER RISK TO PRINCIPAL AND INCOME THAN HIGHER
QUALITY BONDS, AND THAT IS WHY THIS FUND IS DESIGNED FOR AGGRESSIVE LONG TERM
INVESTING.
KEMPER HIGH YIELD OPPORTUNITY FUND
RANKINGS AS OF 3/31/00*
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> <C> <C>
1-YEAR #301 of 349 funds #318 of 349 funds #315 of 349 funds
..........................................................................................
</TABLE>
KEMPER HIGH YIELD II FUND
RANKINGS AS OF 3/31/00*
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> <C> <C>
1-YEAR #231 of 349 funds #249 of 349 funds #249 of 349 funds
..........................................................................................
</TABLE>
*LIPPER ANALYTICAL SERVICES, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES IN
NET ASSET VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF
SALES CHARGES: IF SALES CHARGES HAD BEEN INCLUDED, RESULTS MAY HAVE BEEN LESS
FAVORABLE.
DIVIDEND AND YIELD REVIEW
THE FOLLOWING TABLES SHOW PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE
FUNDS AS OF MARCH 31, 2000.
<TABLE>
<CAPTION>
KEMPER HIGH YIELD
OPPORTUNITY FUND CLASS A CLASS B CLASS C
...............................................................................................
<S> <C> <C> <C> <C> <C>
SIX-MONTH INCOME: $0.446 $0.4109 $0.4111
...............................................................................................
MARCH DIVIDEND: $0.071 $0.0655 $0.0655
...............................................................................................
ANNUALIZED
DISTRIBUTION RATE+: 10.85% 10.01% 10.01%
...............................................................................................
SEC YIELD+: 10.21% 9.85% 9.67%
...............................................................................................
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD
FUND II CLASS A CLASS B CLASS C
...............................................................................................
<S> <C> <C> <C> <C> <C>
SIX-MONTH INCOME: $0.462 $0.4293 $0.4293
...............................................................................................
MARCH DIVIDEND: $0.077 $0.0719 $0.0719
...............................................................................................
ANNUALIZED
DISTRIBUTION RATE+: 11.07% 10.33% 10.33%
...............................................................................................
SEC YIELD+: 10.57% 10.30% 10.28%
...............................................................................................
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON MARCH 31, 2000. DISTRIBUTION RATE
SIMPLY MEASURES THE LEVEL OF DIVIDENDS AND IS NOT A COMPLETE MEASURE OF
PERFORMANCE. THE SEC YIELD IS NET INVESTMENT INCOME PER SHARE EARNED OVER THE
MONTH ENDED MARCH 31, 2000, SHOWN AS AN ANNUALIZED PERCENTAGE OF THE MAXIMUM
OFFERING PRICE ON THAT DATE. THE SEC YIELD IS COMPUTED IN ACCORDANCE WITH THE
STANDARDIZED METHOD PRESCRIBED BY THE SECURITIES AND EXCHANGE COMMISSION. YIELDS
AND DISTRIBUTION RATES ARE HISTORICAL AND WILL FLUCTUATE.
<PAGE> 3
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.
ECONOMIC OVERVIEW
DEAR KEMPER FUNDS SHAREHOLDER,
As spring moves along towards summer, there isn't much to complain about. For
all the yammering about the "new" economy, the old economy is doing pretty well.
Consumers may hanker for a new GPS handset or a Palm Pilot, but they lust after
a suburban mansion with a garage big enough to hold their luxury car and SUV --
and state and local governments are laying old-fashioned asphalt almost as fast
as businesses are building the information superhighway. Satisfying both old and
new desires got the economy off to a fast start in the new century -- GDP growth
rose at an annual rate of more than 5 percent in the first quarter. Even with a
modest slowdown possible in the second half, growth for the year 2000 is likely
to be close to 5 percent.
So everyone is happy, right? Well, almost everyone. Consumers seldom have felt
so confident; businesspeople seldom have behaved so expansively. But there's
still one grump: Federal Reserve Board Chairman Alan Greenspan, who's become
increasingly worried that rapid growth will bring on inflation.
Despite Greenspan's attempt to slow spending by raising interest rates,
consumers are still splurging, and they show no signs of stopping. We know this
because shoppers are buying the big-ticket items they usually purchase early in
a cycle -- items such as personal computers, mobile phones, jewelry, fancy
kitchen appliances, exercise equipment and big boats.
Why are consumers still buying despite Greenspan's attempts to slow their
splurging? There are three answers: deflation, wealth and easy credit.
Falling prices have made big-ticket items almost irresistible. Since 1997,
prices of kitchen appliances have fallen 4.5 percent, TVs and VCRs 16 percent
and sporting equipment 6.5 percent. Even auto showrooms no longer produce
sticker shock, and drivers have responded with gusto, buying a record 16.9
million cars and light trucks in 1999. 2000 is likely to be the first year in
which automotive sales top 17 million.
Some of that spending has been made possible by stock market gains: Wall
Street has handed out windfalls to almost anyone holding equities in the past
few years. But consumers who don't own stocks are also spending, thanks to a
decade of debt. Young, poor or new to America? In the 1990s, it didn't matter;
lenders still loved you. While high-income families have been borrowing less,
those lower on the income scale have been borrowing more.
But it's not just consumers that Greenspan is concerned about; businesses are
splurging as well. During 1999, businesses increased spending on computers and
peripherals by 35 percent and spending on communications equipment by 25 percent
(both after adjusting for price declines). Far from slowing down this year, we
expect investment in these two categories to accelerate -- to 40 percent growth
for computers and 30 percent growth for communications equipment.
And just like consumers, businesses are borrowing to buy. You may think that
with booming sales, entrepreneurs are cash-rich. But while 1999 saw economy-wide
earnings jump 10 percent and profits of Standard and Poor's (S&P) 500 companies
leap nearly 14 percent, internal cash covered less than 84 percent of capital
spending. With the exception of 1998, that's the lowest on record. Last year
alone, corporate debt shot up by more than 11 percent to $560 billion. New
economy companies are no exception; they have more debt than most people
realize, issuing more than half of all convertible bonds.
All this debt could cause problems. Although we've increased our 2001
inflation outlook to nearly 3 percent -- an entire percentage point higher than
our prediction three months ago -- we're not particularly worried about
inflation. It's the heavy borrowing we're concerned about. Debt continues to
exceed income growth, and when Greenspan succeeds in slowing the economy with
higher interest rates (which he will succeed in doing), all of the debt American
consumers and businesses are taking on could be tricky to handle. Private
financial obligations must be paid with personal income and corporate profits.
When the economy slows, personal income stagnates and corporate profits often
fall -- which makes it harder to pay off those debts. Consumers and businesses
may have to sell their assets to pay off the debt, and they may risk going into
default.
That being the case, a gradual economic slowdown may be in everyone's best
interest. But "gradual" is the key. Both the old and new economy have a lot
riding on the Fed's ability to rein in growth softly and smoothly, because
abrupt slowdowns encourage consumers and businesses to sell assets -- and
perhaps risk bankruptcy -- to pay off debt, as described above.
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 (3/31/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.00 6.10 5.20 5.60
Prime rate (2) 9.00 8.25 7.75 8.50
Inflation rate (3)* 3.70 2.60 1.80 1.40
The U.S. dollar (4) 1.10 -0.90 -0.50 4.10
Capital goods orders (5)* 10.10 4.70 5.50 11.50
Industrial production (5)* 5.10 3.50 3.10 5.30
Employment growth (6) 2.30 2.20 2.30 2.60
</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 2/29/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
A gradual slowdown seems to be what the Fed is seeking, but for all of
Greenspan's semi-tough talk, some indicators suggest that monetary policy has
actually been lax. Broad money and credit creation have vastly exceeded economic
activity since 1995, and no central bank can allow that to continue indefinitely
without creating inflation. If we begin to see higher core inflation, the Fed
will have to deal with all that money it's created in a less gradualist
manner -- and that could get tricky. Financial turmoil accompanied each of the
Fed's last two efforts to slow the economy down. In 1994, there was a bond
market meltdown that resulted in a Mexican debt crisis. After a more timid Fed
tightening in 1997, crises in Asia were followed by problems with Russian debt,
Brazilian debt and a large American hedge fund. We don't think this is a
coincidence: The global debt market is so vast and interconnected that it's
highly vulnerable to a rise in the cost of its basic raw material -- short-term
funds.
Let's hope, then, that the Fed can slow the economy without upsetting the
financial applecart, because that could affect everyone. After all, the old
economy and the new economy are wedded in many ways. Much of the money that
flows to IPOs is available because mature industries have borrowed to carry out
mergers and share buybacks. Old economy companies are the biggest customers of
new economy products. And e-commerce sites are all about moving traditional
goods over old-fashioned highways. Despite a lot of talk about old and new,
we're all in this economy together.
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 MAY 8, 2000, 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
[HARRY RESIS PHOTO]
HARRY RESIS JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1988 AND IS A MANAGING
DIRECTOR. HE IS ALSO LEAD PORTFOLIO MANAGER OF KEMPER HIGH YIELD FUND, KEMPER
HIGH YIELD FUND II AND KEMPER HIGH YIELD OPPORTUNITY FUND AND HANDLES ALL OF THE
TRADING ACTIVITY FOR THE FUNDS. RESIS HOLDS A BACHELOR'S DEGREE IN FINANCE FROM
MICHIGAN STATE UNIVERSITY.
[DAN DOYLE PHOTO]
DAN DOYLE IS A PORTFOLIO MANAGER OF KEMPER HIGH YIELD OPPORTUNITY FUND. A
CERTIFIED FINANCIAL ANALYST, HE HAS BEEN INVOLVED WITH KEMPER HIGH YIELD FUND IN
BOTH RESEARCH AND TRADING SINCE 1986 AND IS A SENIOR TRADER FOR THE FUND. DOYLE
RECEIVED HIS M.B.A. FROM THE UNIVERSITY OF CHICAGO.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON THE MARKET AND OTHER
CONDITIONS.
ALTHOUGH THE YIELD-TO-MATURITY OF MANY HIGH-YIELD BONDS WAS MORE THAN DOUBLE
THAT OF COMPARABLE-MATURITY TREASURIES AS OF MARCH 31, PORTFOLIO MANAGER HARRY
RESIS SAYS IT MAY BE A WHILE BEFORE THE HIGH-YIELD MARKET CAN STAGE A STRONG,
SUSTAINED REBOUND. RESIS DISCUSSES HIS POSITIONING OF THE FUNDS SINCE SEPTEMBER
AND OFFERS HIS VIEW ON WHAT'S AHEAD FOR THE BALANCE OF FISCAL YEAR 2000.
Q HOW DID THE HIGH-YIELD MARKET BEHAVE AND THE FUNDS PERFORM DURING THE
FIRST HALF OF FISCAL YEAR 2000?
A On an absolute basis, the returns from high-yield bonds were unattractive
for the six months ended March 31, 2000. The total return of the unmanaged
Merrill Lynch High Yield Master Index, a group of lower-rated bonds that vary in
quality, was -0.30 percent for the period. The price component of the index fell
4.61 percent. For many high yield investors, preserving capital was a challenge
as income did not offset losses in principal value.
For the six months ended March 31, Kemper High Yield Fund II provided a
positive return of 0.53 percent, outperforming the index (for Class A shares at
net asset value). Kemper High Yield Opportunity Fund's return was -0.51 percent
for the period (for Class A shares at net asset value). Kemper High Yield
Opportunity Fund's weaker performance resulted from a more concentrated
portfolio and modestly greater exposure to high-yield bonds issued by smaller
companies in commodity-oriented and highly regulated sectors that did not retain
their value as well as the overall high-yield market.
One reason for the high-yield market's weakness was anemic investor demand.
This past autumn and winter, the lure of potentially higher returns from equity
investments, particularly technology stocks, prompted some investors to
liquidate high yield holdings and redeploy assets. As the U.S. economy enjoyed
the best of times, some investors behaved as if high-yield bonds faced the worst
of times. However, after a strong fourth quarter in calendar year 1999, many
stocks suffered a sharp retreat in the early months of 2000. In fact, in January
and February, high yield bonds outperformed the unmanaged Standard & Poor's 500
index.
Q COULD YOU DESCRIBE HOW THE FUNDS WERE POSITIONED DURING THE PERIOD?
A In a difficult environment, we believed success depended on not losing
sight of the fact that the fundamental underpinnings of the high-yield debt
market were sound. Since mid-1999, bond default rates dropped and commodity
prices rebounded, helping many "old economy" companies meet debt payments.
During the period, we focused primarily on high-yield securities; on larger,
more liquid bond issues; and on companies with relatively solid cash flow and
proven management.
Throughout calendar year 1999, we reduced the number of holdings in each fund,
eliminating weak, less liquid securities. As shown in the Credit Quality table,
we reduced the percentage of Kemper High Yield Opportunity Fund's portfolio
invested in unrated bonds from 7 percent in September to 3 percent as of
5
<PAGE> 6
PERFORMANCE UPDATE
March 31. We also increased our positioning in closed-end equity, preferred
stock and convertible securities to 12 percent as of March 31 from 4 percent six
months earlier. We believed these securities were undervalued and had
exceptionally attractive yields. Within Kemper High Yield Fund II, we held a
position in Treasury notes, and this helped the fund outperform its benchmark
during the first half of fiscal year 2000.
Q HOW DID HIGH-YIELD BONDS PERFORM RELATIVE TO OTHER TYPES OF BONDS?
A Yields in the high-yield market have increased dramatically since
September 1999 as the difference in yield, or spread, between 10-year Treasuries
and high-yield bonds widened to more than 630 basis points (6.3 percent). Given
that 10-year Treasury bonds yielded 6.02 percent as of March 31, 2000,
high-yield bonds offered double the yield of government bonds for investors
willing to assume additional risk.
Strong economic growth prompted the Federal Reserve to raise its short-term
interest rate target three times since September by a total of 75 basis points
(0.75 percent) to 6.00 percent. This past winter, the government also announced
a buyback plan for 30-year Treasuries. These two events decreased the
attractiveness of intermediate-term (two to 10-year) bonds. Along with
high-yield bonds, prices of intermediate, investment- grade corporate bonds and
other non-Treasury debt generally fell.
The fund's yield rose during the first half of fiscal 2000, but like the rest
of the market, we struggled to preserve principal. Health care bonds were a
particularly weak sector due to changes in government reimbursement policies.
Bonds issued by small companies also did not fare as well as bonds issued by
large, established corporations.
Q WHAT HAS BEEN THE HISTORICAL EXPERIENCE OF THE HIGH-YIELD BOND MARKET
DURING PERIODS OF STOCK MARKET WEAKNESS?
A For seven times since October 1987, high-yield bonds outperformed the
Standard & Poor's 500 index during months when the S&P 500 declined 5 percent or
more. While we can't say this pattern will continue, we believe that high-yield
bonds deserve a place in a well-balanced portfolio now more than ever. After
five years of strong equity market performance, many investors have portfolios
that are heavily laden with large-cap stocks. We think it
HIGH-YIELD BOND YIELDS (YIELD-TO-WORST) VS. 10-YEAR TREASURIES
March 31, 1995 to March 31, 2000
[LINE CHART]
<TABLE>
<CAPTION>
MERRILL LYNCH
GLOBAL BOND TEN YEAR
INDICES TREASURIES
------------- ----------
<S> <C> <C>
3/95 10.531 7.196
9.889 6.203
10.079 6.182
9.762 5.572
3/96 9.796 6.327
9.989 6.711
9.595 6.703
9.385 6.418
3/97 9.665 6.903
9.055 6.500
8.580 6.102
8.600 5.741
3/98 8.391 5.654
8.812 5.446
10.276 4.420
10.304 4.648
3/99 10.365 5.242
10.518 5.780
10.952 5.877
11.021 6.442
3/00 11.922 6.004
</TABLE>
SOURCES: BLOOMBERG BUSINESS NEWS, MERRILL LYNCH
INTEREST PAYMENTS AND RETURN OF PRINCIPAL FOR HIGH-YIELD BONDS, UNLIKE
TREASURIES, ARE NOT GUARANTEED BY THE U.S. GOVERNMENT. YIELDS ARE AN AVERAGE OF
BONDS WITH B RATINGS AND A SIMILAR DURATION TO 10-YEAR TREASURIES. HIGH-YIELD
BONDS INVOLVE MORE CREDIT RISK THAN INVESTMENT-GRADE SECURITIES. TREASURY BONDS
HAVE NO CREDIT RISK.
YIELD-TO-WORST IS AN EXPRESSION OF THE CURRENT INCOME POTENTIAL OF A BOND
ASSUMING THE ISSUER WILL CALL OR REFINANCE THE BOND AT THE FIRST AVAILABLE
OPPORTUNITY, WHICH IS USUALLY SPECIFIED WHEN A BOND IS ISSUED.
HIGH-YIELD BOND PERFORMANCE
VS. S&P 500 INDEX
During Months When The S&P 500 Declined 1987 to 2000
[LINE CHART]
<TABLE>
<CAPTION>
MERRILL LYNCH HIGH
YIELD MASTER
S&P 500 INDEX*
------- ------------------
<S> <C> <C>
10/87 -2.67 -21.53
11/87 2.53 -8.24
11/90 -1.95 -6.71
8/90 -3.83 -9.03
8/97 -0.17 -5.60
8/98 -4.32 -14.45
1/00 -0.38 -5.02
</TABLE>
10/87, 11/87, 11/90, 8/90, 8/97, 8/98 AND 1/00
SOURCES: BLOOMBERG BUSINESS NEWS, MERRILL LYNCH
* THE MERRILL LYNCH HIGH YIELD MASTER INDEX IS AN UNMANAGED GROUP OF LOWER
QUALITY BONDS THAT VARY IN MATURITY AND QUALITY.
6
<PAGE> 7
PERFORMANCE UPDATE
would be a mistake for investors to overlook the opportunity to maintain the
diversification that this asset class offers.
Q WHAT'S YOUR OUTLOOK FOR THE HIGH-YIELD MARKET?
A At some point, we believe there is potential for equity-like returns from
high-yield securities and higher bond prices. What we really need is greater
investor interest in the asset class. Overall, several positive trends remain in
place. First, a robust U.S. economy is helping debtors meet their bond
obligations. Second, the default rate for high-yield bonds has been declining
since the end of the second quarter of 1999. And finally, continued stock market
volatility may prompt some investors to revisit fixed-income alternatives.
Q FINALLY, HOW ARE YOU POSITIONING THE PORTFOLIOS FOR THE ROAD AHEAD?
A Within each fund, we are focusing our research efforts in sectors and
companies where we think we have a competitive advantage. We believe maintaining
a more concentrated portfolio of companies we closely monitor is a lot better
than having 400 or 500 holdings, which we think increases the likelihood of
having more holdings go into default. Also, each fund's duration -- or
sensitivity to changes in interest rates -- was slightly lower as of March 31
than at September 30. If the U.S. economy continues to grow at a reasonable
pace, we think this strategy should leave us well positioned to achieve the
funds' objectives.
TERMS TO KNOW
BASIS POINT The movement of interest rates or yields expressed in hundredths of
a percent. For example, an increase in yield from 5 percent to 5.50 percent is
50 basis points.
CREDIT SPREAD The difference in yields between higher-quality and lower-quality
bonds, typically comparing the same types of bonds. For example, if AAA-rated
corporate bonds yield 5 percent, and BBB-rated corporate bonds yield 6 percent,
the credit spread is 1 percent. When the spread becomes less because the higher
yield drops or the lower yield rises, the spread is said to "narrow." When the
opposite occurs, the spread is said to "widen."
DEFAULT Failure of a borrower to pay what is owed when it is owed. The default
rate of high-yield bonds can be measured as the percentage of bond issuers who
are not meeting their obligations at a given point in time.
FEDERAL FUNDS RATE The interest rate that banks charge each other on overnight
loans. The Federal Reserve Board's Open Market Committee sets a target rate to
either make credit more easily available or tighten monetary policy in an
attempt to avoid economic imbalances such as high inflation.
INVERTED YIELD CURVE A market phenomenon in which intermediate-term bonds
(securities with one-to 10-year maturities) have higher income potential and
current yields than long-term bonds (securities with 10-to 30-year maturities).
Historically it has occurred during a period of rising short-term interest rates
and been viewed as an indicator of a future economic slowdown.
7
<PAGE> 8
PORTFOLIO STATISTICS
KEMPER HIGH YIELD OPPORTUNITY FUND
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION BY SECTOR* ON 3/31/00
<S> <C> <C> <C>
TELECOMMUNICATIONS 24%
................................................................................
BASIC INDUSTRY 23
................................................................................
CONSUMER CYCLICALS 14
................................................................................
MEDIA 13
................................................................................
CLOSED-END HIGH-YIELD EQUITIES 7
................................................................................
CONSUMER NONCYCLICALS 6
................................................................................
CAPITAL GOODS 6
................................................................................
TRANSPORTATION 2
................................................................................
TECHNOLOGY 1
................................................................................
ENERGY 1
................................................................................
CASH AND EQUIVALENTS 3
--------------------------------------------------------------------------------
100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
QUALITY ON 3/31/00 ON 9/30/99
<S> <C> <C> <C> <C>
BB 8% 12%
................................................................................
B 76 71
................................................................................
BELOW B 13 10
................................................................................
NOT RATED 3 7
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
ON 3/31/00 ON 9/30/99
<S> <C> <C> <C> <C>
AVERAGE MATURITY 6.4 years 6.8 years
--------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
8
<PAGE> 9
PORTFOLIO STATISTICS
KEMPER HIGH YIELD FUND II
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION BY SECTOR* ON 3/31/00
<S> <C> <C> <C>
TELECOMMUNICATIONS 23%
................................................................................
CONSUMER CYCLICALS 19
................................................................................
MEDIA 14
................................................................................
BASIC INDUSTRY 12
................................................................................
CAPITAL GOODS 11
................................................................................
U.S. TREASURIES 8
................................................................................
CONSUMER NONCYCLICALS 4
................................................................................
TECHNOLOGY 3
................................................................................
TRANSPORTATION 1
................................................................................
ENERGY 1
................................................................................
CASH AND EQUIVALENTS 4
--------------------------------------------------------------------------------
100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
QUALITY ON 3/31/00 ON 9/30/99
<S> <C> <C> <C> <C>
AAA 8% --
................................................................................
BBB 1 1%
................................................................................
BB 16 17
................................................................................
B 69 70
................................................................................
BELOW B 6 12
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
ON 3/31/00 ON 9/30/99
<S> <C> <C> <C> <C>
AVERAGE MATURITY 6.9 years 6.9 years
--------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
KEMPER HIGH YIELD OPPORTUNITY FUND
Portfolio of Investments at March 31, 2000 (unaudited)
<TABLE>
<CAPTION>
CORPORATE BONDS--88.5% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
CONSUMER DISCRETIONARY--15.7%
AFC Enterprises, 10.250%, 05/15/2007 $ 510,000 $ 494,700
AMF Bowling, Inc., Step-up Coupon, 0% to
03/15/2001, 12.250% to 03/15/2006 645,000 161,250
Avondale Mills, 10.250%, 05/01/2006 274,000 257,560
Boca Resorts, Inc., 9.875%, 04/15/2009 400,000 364,000
Cole National Group Inc., 8.625%, 08/15/2007 230,000 165,600
Cole National Group Inc., 9.875%, 12/31/2006 60,000 46,800
Guitar Center Management, 11.000%,
07/01/2006 330,000 323,400
Hines Horticulture, Inc., 11.750%,
10/15/2005 450,000 441,000
Hollywood Entertainment Corp., Series B,
10.630%, 08/15/2004 400,000 352,000
J. Crew Group, Step-up Coupon, 0% to
10/15/2002, 13.125% to 10/15/2008 50,000 28,000
J. Crew Group, 10.375%, 10/15/2007 370,000 327,450
Park Place Entertainment, Inc., 9.375%,
02/15/2007 150,000 146,625
Perkins Finance, L.P., 10.125%, 12/15/2007 250,000 242,500
Pillowtex Corp., 9.000%, 12/15/2007 410,000 147,600
Regal Cinemas, Inc., 9.500%, 06/01/2008 500,000 210,000
Restaurant Co., Step-up Coupon, 0% to
05/15/2003, 11.250% to 05/15/2008 190,000 114,000
Sealy Mattress Co., Step-up Coupon, 0% to
12/15/2002, 10.875% to 12/15/2007 670,000 465,650
Specialty Retailers, Inc., 9.000%,
07/15/2007 200,000 10,000
--------------------------------------------------------------------------------
4,298,135
-----------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--.9%
Grove Worldwide LLC, 9.250%, 05/01/2008 115,000 52,900
Jafra Cosmetics International, Inc.,
11.750%, 05/01/2008 190,000 182,400
--------------------------------------------------------------------------------
235,300
-----------------------------------------------------------------------------------------------------------------------
HEALTH--.1%
Mariner Post-Acute Network, Inc., Step-up
Coupon, 0% to 11/01/2002, 10.500% to
11/01/2007 510,000 5,100
Vencor, Inc., 9.875%, 05/01/2005* 55,000 10,450
--------------------------------------------------------------------------------
15,550
-----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--21.6%
21st Century Telecom Group, Inc., Step-up
Coupon, 0% to 02/15/2003, 12.250% to
02/15/2008 240,000 165,600
21st Century Telecom Group, Inc., 13.750%,
02/15/2010 59,000 53,100
Allegiance Telecom, Inc., 12.875%,
05/15/2008 220,000 235,400
Crown Castle International Corp., Step-up
Coupon, 0% to 11/15/2002, 10.625% to
11/15/2007 205,000 141,450
Crown Castle International Corp., 9.500%,
08/01/2011 100,000 91,000
Crown Castle International Corp., Step-up
Coupon, 0% to 08/01/2004, 11.25% to
08/01/2011 90,000 51,975
Esprit Telecom Group, PLC, 10.875%,
06/15/2008 110,000 95,700
Esprit Telecom Group, PLC, 11.500%,
12/15/2007 330,000 293,700
</TABLE>
10 The accompanying notes are an integral part of the financial statements.
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Global Crossing Holdings Ltd., 9.500%,
11/15/2009 $ 240,000 $ 232,200
Global Telesystems Group, 9.875%, 02/15/2005 230,000 186,300
Hermes Europe Railtel BV, 11.500%,
08/15/2007 40,000 37,600
Impsat Corp., 12.375%, 06/15/2008 155,000 136,400
KMC Telecom Holdings, Inc., Step-up Coupon,
0% to 02/15/2003, 12.500% to 02/15/2008 480,000 271,200
KMC Telecom Holdings, Inc., 13.500%,
05/15/2009 220,000 213,400
MGC Communications, 13.000%, 10/01/2004 310,000 325,500
Nextel Communications, Inc., Step-up Coupon,
0% to 02/15/2003, 9.950% to 02/15/2008 110,000 74,800
Nextel Communications, Inc., Step-up Coupon,
0% to 10/31/2002, 9.750% to 10/31/2007 120,000 84,000
Nextel Communications, Inc., 9.375%,
11/15/2009 270,000 249,075
Nextlink Communications, Inc., Step-up
Coupon, 0% to 04/15/2003, 9.450% to
04/15/2008 40,000 23,800
Nextlink Communications, Inc., 10.750%,
11/15/2008 130,000 125,125
Nextlink Communications, Inc., 12.500%,
04/15/2006 80,000 82,400
Primus Telecommunications Group, 11.250%,
01/15/2009 70,000 64,400
Primus Telecommunications Group, 11.750%,
08/01/2004 540,000 518,400
Primus Telecommunications Group, 12.750%,
10/15/2009 10,000 9,700
Rogers Cantel, 9.750%, 06/01/2016 170,000 184,025
SBA Communications Corp., Step-up Coupon, 0%
to 03/01/2003, 12.000% to 03/01/2008 110,000 70,950
Telecorp PCS, Inc., Step-up-Coupon, 0% to
04/15/2004, 11.625 to 04/15/2009 650,000 399,750
Teligent, Inc., 11.500%, 12/01/2007 280,000 252,000
Tritel PCS Inc., Step-up Coupon, 0% to
05/01/2004, 12.75% to 05/15/2009 260,000 159,900
Triton Communications, L.L.C., Step-up
Coupon, 0% to 05/01/2003, 11.000% to
05/01/2008 1,460,000 989,150
U.S. Xchange, L.L.C., 15.000%, 07/01/2008 110,000 81,400
Viatel, Inc., 11.250%, 04/15/2008 55,000 49,775
--------------------------------------------------------------------------------
5,949,175
-----------------------------------------------------------------------------------------------------------------------
FINANCIAL--2.7%
Spectrasite Holdings, Inc., Step-up Coupon,
0% to 04/15/2004, 11.250% to 04/15/2009 500,000 273,750
Spectrasite Holdings, Inc., Step-up Coupon,
0% to 07/15/2003, 12.000% to 07/15/2008 580,000 359,600
Spectrasite Holdings, Inc., 10.750%,
03/15/2010 100,000 96,000
--------------------------------------------------------------------------------
729,350
</TABLE>
The accompanying notes are an integral part of the financial statements. 11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
MEDIA--13.0%
AMFM, Inc., Step-up Coupon, 0% to
02/01/2002, 12.750% to 02/01/2009 $ 110,000 $ 97,900
AMFM, Inc., 8.000%, 11/01/2008 330,000 325,875
AMFM, Inc., 9.000%, 10/01/2008 100,000 99,750
American Lawyer Media, Inc., 9.750%,
12/15/2007 330,000 304,425
Avalon Cable Holdings LLC, Step-up coupon,
0% to 12/01/2003, 11.875% to 12/01/2008 200,000 126,000
CSC Holdings, Inc., 8.125%, 08/15/2009 54,000 52,785
CSC Holdings, Inc., 9.250%, 11/01/2005 100,000 101,500
CSC Holdings, Inc., 10.500%, 05/15/2016 60,000 64,200
Charter Communication Holdings LLC, 8.250%,
04/01/2007 350,000 313,250
Charter Communications Holdings LLC, Step-Up
Coupon, 0% to 04/01/2004, 9.92% to
04/01/2011 380,000 209,000
Charter Communications Holdings LLC,
10.000%, 04/01/2009 100,000 96,000
Diamond Cable Communications, PLC, Step-up
Coupon, 0% to 02/15/2002, 10.750% to
02/15/2007 200,000 152,000
Diamond Cable Communications, PLC, Step-up
Coupon, 0% to 12/15/2000, 11.750% to
12/15/2005 50,000 46,500
NTL Communications Corp., Step-up Coupon 0%
to 10/01/2003, 12.375% to 10/01/2008 50,000 32,750
NTL, Inc., 11.500%, 10/01/2008 255,000 260,100
Panavision, Inc., Step-up Coupon, 0% to
02/01/2002, 9.625% to 02/01/2006 370,000 188,700
Renaissance Media Group, Step-up Coupon, 0%
to 04/15/2003, 10.000% to 04/15/2008 130,000 84,500
Star Choice Communications, Inc., 13.000%,
12/15/2005 50,000 50,750
TeleWest Communications, PLC, Step-up
Coupon, 0% to 10/01/2000, 11.000% to
10/01/2007 95,000 88,588
TeleWest Communications, PLC, 9.625%,
10/01/2006 80,000 78,400
TeleWest Communications, PLC, 11.250%,
11/01/2008 140,000 143,500
Transwestern Publishing, Step-up Coupon, 0%
to 11/15/2002, 11.875% to 11/15/2008 310,000 223,200
Transwestern Publishing, 9.625%, 11/15/2007 340,000 325,550
United International Holdings, Step-up
Coupon, 0% to 02/15/2003, 10.750% to
02/15/2008 170,000 112,200
--------------------------------------------------------------------------------
3,577,423
-----------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--.4%
Spincycle, Inc., Step-up Coupon, 0% to
05/01/2001, 12.750% to 05/01/2005 350,000 105,000
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
DURABLES--1.1%
Airxcel, 11.000%, 11/15/2007 350,000 304,500
--------------------------------------------------------------------------------
</TABLE>
12 The accompanying notes are an integral part of the financial statements.
<PAGE> 13
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
MANUFACTURING--16.7%
Agriculture, Mining and Chemicals, Inc.,
10.750%, 09/30/2003 $ 90,000 $ 68,400
Berry Plastics Corp., 12.250%, 04/15/2004 330,000 325,050
Consumers International, 10.250%, 04/01/2005 200,000 126,000
GS Technologies, 12.000%, 09/01/2004 210,000 113,400
GS Technologies, 12.250%, 10/01/2005 370,000 196,100
Gaylord Container Corp., 9.750%, 06/15/2007 270,000 243,000
Gaylord Container Corp., 9.875%, 02/15/2008 50,000 40,500
Graham Packaging Co., Step-up Coupon, 0% to
01/15/2003, 10.750% to 01/15/2009 260,000 137,800
Grove Holdings LLC, 05/01/2010 128,170 6,409
Grove Holdings LLC, Step-up Coupon, 0% to
05/01/2003, 11.625% to 05/01/2009 80,000 7,200
Huntsman Package, 11.750%, 12/01/2004 200,000 200,000
NL Industries, Inc., Senior Note, 11.750%,
10/15/2003 710,000 727,750
Plainwell, Inc., 11.000%, 03/01/2008 320,000 80,000
Printpack, Inc., 10.625%, 08/15/2006 330,000 316,800
Riverwood International Corp., 10.875%,
04/01/2008 1,040,000 967,200
SF Holdings Group, Inc., Step-up Coupon, 0%
to 03/15/2003, 12.750% to 03/15/2008 470,000 250,275
Spinnaker Industries, 10.750%, 10/15/2006 50,000 41,000
Tenneco Automotive, Inc., 11.625%,
10/15/2009 340,000 331,500
Texas Petrochemicals, 11.125%, 07/01/2006 500,000 415,000
--------------------------------------------------------------------------------
4,593,384
-----------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--1.3%
PSINet, Inc., 11.000%, 08/01/2009 200,000 196,000
PSINet, Inc., 11.500%, 11/01/2008 150,000 148,500
--------------------------------------------------------------------------------
344,500
-----------------------------------------------------------------------------------------------------------------------
ENERGY--.5%
Key Energy Services, Inc., 14.000%,
01/15/2009 100,000 108,500
RAM Energy, 11.500%, 02/15/2008 80,000 39,200
--------------------------------------------------------------------------------
147,700
-----------------------------------------------------------------------------------------------------------------------
METALS AND MINERALS--9.2%
Euramax International, PLC, 11.250%,
10/01/2006 660,000 643,500
MMI Products, Inc., 11.250%, 04/15/2007 540,000 545,400
Metal Management, Inc., 10.000%, 05/15/2008 870,000 643,800
Metals USA, Inc., 8.625%, 02/15/2008 235,000 211,500
Renco Steel Holdings Co., Series B, 10.875%,
02/01/2005 480,000 427,200
Republic Technologies International,
13.750%, 07/15/2009 260,000 65,000
--------------------------------------------------------------------------------
2,536,400
-----------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--2.9%
Del Webb Corp., 9.750%, 01/15/2008 330,000 272,250
Dimac Corp., 10/01/2008 120,000 1,200
Lennar Corp., 7.625%, 03/01/2009 100,000 85,000
Standard Pacific Corp., 8.000%, 02/15/2008 100,000 87,000
Standard Pacific Corp., 8.500%, 04/01/2009 200,000 170,000
Toll Corp., 8.000%, 05/01/2009 100,000 86,000
Toll Corp., 8.125%, 02/01/2009 100,000 87,000
--------------------------------------------------------------------------------
788,450
-----------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.7%
Travelcenters America, 10.250%, 04/01/2007 500,000 475,000
--------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE> 14
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
UTILITIES--.7%
Azurix Corp, 10.750%, 02/15/2010 $ 100,000 $ 98,000
Azurix Corp., 10.375%, 02/15/2007 100,000 99,000
--------------------------------------------------------------------------------
197,000
--------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $27,760,645) 24,296,867
--------------------------------------------------------------------------------
<CAPTION>
BOND INVESTMENT PORTFOLIOS--7.0% SHARES
<S> <C> <C> <C> <C> <C>
CIM High Yield Securities 46,000 241,500
Colonial Intermediate 45,000 239,063
Corporate High Yield Fund 26,000 242,125
Debt Strategies Fund II 30,000 211,875
High Yield Income Fund 45,000 233,438
Managed High Income 31,000 255,750
Morgan Stanley High Yield Fund 22,000 253,000
Putnam Managed High Yield 25,000 248,438
--------------------------------------------------------------------------------
TOTAL BOND PORTFOLIOS
(Cost $1,963,193) 1,925,189
--------------------------------------------------------------------------------
<CAPTION>
CONVERTIBLE PREFERRED STOCKS--.3%
<S> <C> <C> <C> <C> <C>
COMMUNICATIONS--.3%
TELEPHONE COMMUNICATIONS--.3%
World Access, Inc 67 66,330
--------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $106,904) 66,330
--------------------------------------------------------------------------------
<CAPTION>
PREFERRED STOCKS--1.6%
<S> <C> <C> <C> <C> <C>
COMMUNICATIONS--.9%
CELLULAR TELEPHONE--.6%
Dobson Communications, PIK 171 172,710
--------------------------------------------------------------------------------
TELEPHONE COMMUNICATIONS--.3%
Nextel Communications, Inc., PIK 91 81,558
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
FINANCIAL--.3%
REAL ESTATE--.3%
Crown American Realty Trust 2,210 82,046
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
MANUFACTURING--.4%
CONTAINERS AND PAPER--.2%
SF Holdings Group, Inc., PIK 10 46,530
--------------------------------------------------------------------------------
MACHINERY AND COMPONENTS--.2%
Eagle-Picher Holdings, Inc. 20 56,000
--------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost $579,356) 438,844
--------------------------------------------------------------------------------
<CAPTION>
COMMON STOCKS--2.6%
<S> <C> <C> <C> <C> <C>
CONSUMER DISCRETIONARY--.7%
HOTELS AND CASINOS--.6%
Harrah's Entertainment, Inc 10,000 185,625
--------------------------------------------------------------------------------
SPECIALTY RETAIL--.1%
Hollywood Entertainment Corp 2,000 16,125
--------------------------------------------------------------------------------
COMMUNICATIONS--.2%
TELEPHONE AND
COMMUNICATIONS--.2%
21st Century Telecom Group, Inc., Warrants* 50 12,500
KMC Telecom Holdings, Inc., Warrants* 160 1,600
Star Choice Communications, Warrants* 1,158 7,817
Tele1 Europe Holding AB--ADR* 1,761 33,679
--------------------------------------------------------------------------------
55,596
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C> <C> <C> <C>
FINANCIAL--.2%
OTHER FINANCIAL COMPANIES--.2%
Ono Finance PLC, Warrants* 360 $ 54,000
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--.1%
COMMERCIAL SERVICES--.1%
United Rentals, Inc 1,000 17,250
--------------------------------------------------------------------------------
CONSUMER SERVICES
Spincycle, Inc., Warrants* 350 4
--------------------------------------------------------------------------------
PRINTING AND PUBLISHING
American Banknote Corp., Warrants* 100 1
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
MANUFACTURING--.8%
CONTAINERS AND PAPER--.8%
Gaylord Container Corp. 22,500 143,438
SF Holdings Group, Inc., Series C, Warrants* 131 1
Smurfit-Stone Container Corp. 5,000 84,684
--------------------------------------------------------------------------------
228,123
-----------------------------------------------------------------------------------------------------------------------
METALS AND MINERALS--.6%
STEEL AND METALS--.6%
Metals USA, Inc. 24,000 159,000
Republic Technologies International,
Warrants* 260 3
--------------------------------------------------------------------------------
159,003
-----------------------------------------------------------------------------------------------------------------------
CONSTRUCTION
BUILDING PRODUCTS
Waxman Industries, Inc. 18,000 6,300
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $823,496) 722,027
--------------------------------------------------------------------------------
TOTAL INVESTMENTS PORTFOLIO--100%
(Cost $31,233,594)(a) $27,449,257
--------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
* 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.
(a) The cost for federal income tax purposes was $31,233,594. At March 31, 2000,
net unrealized depreciation for all securities bases on tax cost was
$3,784,337. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of value over tax cost of
$319,836 and aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over value of $4,104,173.
The accompanying notes are an integral part of the financial statements. 15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
KEMPER HIGH YIELD FUND II
Portfolio of Investments at March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
REPURCHASE AGREEMENTS--1.7%
State Street Bank and Trust Company,
6.05%, 4/3/2000, to be repurchased at
$2,394,206**
(Cost $2,393,000) $2,393,000 $ 2,393,000
----------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCIES--7.9%
U.S. Treasury Bond,
13.750%, 08/15/2004 3,000,000 3,815,610
U.S. Treasury Bond,
15.750%, 11/15/2001 4,000,000 4,553,120
U.S. Treasury Note,
6.000%, 08/15/2009 3,000,000 2,962,020
----------------------------------------------------------------------------
(Cost $11,442,065) 11,330,750
----------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS -- U.S. $
DENOMINATED--0.9%
Kappa Beheer BV,
10.625%, 07/15/2009
(Cost $1,309,750) 1,280,000 1,273,600
----------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CORPORATE BONDS--89.2%
<S> <C> <C> <C> <C> <C>
CONSUMER DISCRETIONARY--16.0%
AFC Enterprises, 10.250%, 05/15/2007 1,570,000 1,522,900
AMF Bowling, Inc, 10.875%, 06/15/2006 60,000 22,200
AMF Bowling, Inc., Step-up Coupon, 0% 1,000,000 250,000
to 03/15/2001, 12.250% to 03/15/2006
Advantica Restaurant Co., 11.250%, 440,000 288,200
01/15/2008
Avis Rent A Car, 11.000%, 05/01/2009 1,470,000 1,455,300
Avondale Mills, 10.250%, 05/01/2006 1,060,000 996,400
Boca Resorts, Inc., 9.875%, 04/15/2009 1,860,000 1,692,600
Cole National Group Inc., 8.625%,
08/15/2007 400,000 288,000
Cole National Group Inc., 9.875%,
12/31/2006 300,000 234,000
Eldorado Resorts, 1,000,000 980,000
10.500%, 08/15/2006
Finlay Enterprises, Inc., 9.000%,
05/01/2008 355,000 317,725
Finlay Fine Jewelry Co., 8.375%,
05/01/2008 250,000 225,000
Galey & Lord, Inc.,
9.125%, 03/01/2008 1,170,000 421,200
Guitar Center Management, 11.000%,
07/01/2006 1,732,000 1,697,360
Harvey's Casino Resorts, 10.625%,
06/01/2006 540,000 545,400
Hines Horticulture, Inc., 11.750%, 1,355,000 1,327,900
10/15/2005
Hollywood Entertainment Corp.,
Series B, 10.630%, 08/15/2004 1,530,000 1,346,400
Horseshoe Gaming Holdings, 8.625%,
05/15/2009 430,000 392,375
Horseshoe Gaming LLC, 9.375%,
06/15/2007 850,000 809,625
</TABLE>
16 The accompanying notes are an integral part of the financial statements.
<PAGE> 17
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
International Game Technology, 8.375%,
05/15/2009 $ 440,000 $ 396,000
J. Crew Group, Step-up Coupon, 0% to
10/15/2002, 13.125% to 10/15/2008 830,000 464,800
J. Crew Group, 10.375%, 10/15/2007
580,000 513,300
Krystal Inc., 10.250%, 10/01/2007
930,000 853,275
Mohegan Tribal Gaming Authority,
8.750%, 01/01/2009 1,770,000 1,668,225
National Vision Association, Ltd.,
12.750%, 10/15/2005 450,000 157,500
Park Place Entertainment, Inc., 7.875%,
12/15/2005 220,000 202,400
Park Place Entertainment, Inc., 9.375%,
02/15/2007 690,000 674,475
Perkins Finance, L.P., 10.125%,
12/15/2007 1,390,000 1,348,300
Pillowtex Corp., 9.000%, 12/15/2007
120,000 43,200
Pillowtex Corp., 10.000%, 11/15/2006
70,000 25,200
Regal Cinemas, Inc., 9.500%, 06/01/2008
790,000 331,800
Restaurant Co., Step-up Coupon, 0% to
05/15/2003, 11.250% to 05/15/2008 30,000 18,000
Sealy Mattress Co., Step-up Coupon, 0%
to 12/15/2002, 10.875% to 12/15/2007 925,000 642,875
Specialty Retailers, Inc., 8.500%,
07/15/2005 430,000 116,100
Specialty Retailers, Inc., 9.000%,
07/15/2007 750,000 37,500
Station Casinos, Inc., 10.125%,
03/15/2006 630,000 631,575
----------------------------------------------------------------------------
22,937,110
----------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--.2%
Grove Worldwide LLC, 9.250%, 05/01/2008 450,000 207,000
Jafra Cosmetics International, Inc.,
11.750%, 05/01/2008 100,000 96,000
----------------------------------------------------------------------------
303,000
----------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
HEALTH--0.1%
ALARIS Medical Systems, Inc., Step-up
Coupon, 0% to 08/01/2003, 11.125% to
08/01/2008 400,000 126,000
Mariner Post-Acute Network, Inc.,
Step-up Coupon, 0% to 11/01/2002,
10.500% to 11/01/2007 800,000 8,000
----------------------------------------------------------------------------
134,000
----------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--22.3%
21st Century Telecom Group, Inc.,
Step-up Coupon, 0% to 02/15/2003,
12.250% to 02/15/2008 270,000 186,300
Allegiance Telecom, Inc., 12.875%,
05/15/2008 935,000 1,000,450
Call-Net Enterprises, Inc., Step-up
Coupon, 0% to 05/15/2004, 10.800% to
05/15/2009 200,000 92,000
Call-Net Enterprises, Inc., 9.375%,
05/15/2009 170,000 130,900
</TABLE>
The accompanying notes are an integral part of the financial statements. 17
<PAGE> 18
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Crown Castle International Corp.,
Step-up Coupon, 0% to 11/15/2002,
10.625% to 11/15/2007 $ 380,000 $ 262,200
Crown Castle International Corp.,
9.000%, 05/12/2011 60,000 53,400
Crown Castle International Corp.,
9.500%, 08/01/2011 1,000,000 910,000
Crown Castle International Corp.,
Step-up Coupon, 0% to 08/01/2004,
11.25% to 08/01/2011 160,000 92,400
Dolphin Telecom PLC, Zero coupon,
05/15/2009 2,000,000 800,000
Esprit Telecom Group, PLC, 11.500%,
12/15/2007 450,000 400,500
Global Crossing Holdings Ltd., 9.500%,
11/15/2009 1,150,000 1,112,625
Global Telesystems Group, 9.875%,
02/15/2005 1,040,000 842,400
Hermes Europe Railtel BV, 11.500%,
08/15/2007 150,000 141,000
ICG Holdings, Inc., Step-up Coupon, 0%
to 09/15/2000, 13.500% to 09/15/2005 1,565,000 1,478,925
IPC Communications, Inc., Step-up
Coupon, 0% to 11/01/2001, 10.875% to
05/01/2008 970,000 843,900
Intermedia Communications of Florida,
Inc., Step-up Coupon, 0% to
05/15/2001, 12.500% to 05/15/2006 670,000 613,050
KMC Telecom Holdings, Inc., Step-up
Coupon, 0% to 02/15/2003, 12.500% to
02/15/2008 1,310,000 740,150
KMC Telecom Holdings, Inc., 13.500%,
05/15/2009 1,010,000 979,700
Leval 3 Communications, Inc., Step-up
Coupon, 0% to 12/01/2003, 10.500% to
12/01/2008 250,000 138,750
Level 3 Communications Inc., 11.250%,
03/15/2010 320,000 304,000
Level 3 Communications, Inc., 9.125%,
05/01/2008 700,000 603,750
MGC Communications, 13.000%, 10/01/2004 749,000 786,450
McLeod USA, Inc., 9.250%, 07/15/2007 900,000 846,000
MetroNet Communications Corp., Step-up
Coupon, 0% to 11/01/2002, 10.750% to
11/01/2007 100,000 87,000
MetroNet Communications Corp., Step-up
Coupon, 0% to 06/15/2003, 9.950% to
06/15/2008 1,610,000 1,288,000
Metromedia Fiber Network, Inc.,
10.000%, 11/15/2008 810,000 777,600
Millicom International Cellular, S.A.,
Step-up Coupon, 0% to 06/01/2001,
13.500% to 06/01/2006 1,700,000 1,411,000
Netia Holdings, 10.250%, 11/01/2007 580,000 513,300
Nextel Communications, Inc., Step-up
Coupon, 0% to 02/15/2003, 9.950% to
02/15/2008 110,000 74,800
</TABLE>
18 The accompanying notes are an integral part of the financial statements.
<PAGE> 19
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Nextel Communications, Inc., Step-up $1,120,000 $ 823,200
Coupon, 0% to 09/15/2002, 10.650% to
09/15/2007
Nextel Communications, Inc., 9.375%,
11/15/2009 1,250,000 1,153,125
Nextlink Communications, Inc., Step-up
Coupon, 0% to 06/01/2004, 12.250% to
06/01/2009 1,000,000 570,000
Nextlink Communications, Inc., 10.750%,
11/15/2008 1,000,000 962,500
PTC International Finance, Step-up
Coupon, 0% to 07/01/2002, 10.750% to
07/01/2007 400,000 280,000
PTC International Finance, 11.250%,
12/01/2009 130,000 132,600
Price Communications Wireless, 9.125%,
12/15/2006 800,000 776,000
Primus Telecommunications Group,
11.250%, 01/15/2009 280,000 257,600
Primus Telecommunications Group,
11.750%, 08/01/2004 770,000 739,200
Primus Telecommunications Group,
12.750%, 10/15/2009 200,000 194,000
Rogers Cantel Inc., 8.800%, 10/01/2007 500,000 483,750
SBA Communications Corp., Step-up
Coupon, 0% to 03/01/2003, 12.000% to
03/01/2008 520,000 335,400
Telecorp PCS, Inc., Step-up-Coupon, 0%
to 04/15/2004, 11.625% to 04/15/2009 1,690,000 1,039,350
Teligent, Inc., Step-up Coupon, 0% to
03/01/2003, 11.500% to 03/01/2008 625,000 337,500
Teligent, Inc., 11.500%, 12/01/2007 610,000 549,000
Tritel PCS Inc., Step-up Coupon, 0% to
05/01/2004, 12.750% to 05/15/2009 1,540,000 947,100
Triton Communications, LLC, Step-up
Coupon, 0% to 05/01/2003, 11.000% to 2,760,000 1,869,900
05/01/2008
United Pan-Europe Communications,
10.875%, 11/01/2007 780,000 748,800
Versatel Telecom, 11.875%, 07/15/2009 140,000 137,200
Versatel Telecom, 13.250%, 05/15/2008 250,000 256,250
Viatel, Inc., Step-up Coupon, 0% to
04/15/2003, 12.500% to 04/15/2008 1,000,000 550,000
Voicestream Wireless Corp., 10.375%
11/15/2009 1,400,000 1,400,000
----------------------------------------------------------------------------
32,053,025
----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 19
<PAGE> 20
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
FINANCIAL--4.6%
Carlyle High Yield Partners, 12.240%,
05/31/2007 $1,000,000 $ 950,000
HMH Properties, 7.875%, 08/01/2008 2,760,000 2,304,600
Intertek Finance, PLC, 10.250%, 670,000 569,500
11/01/2006
Spectrasite Holdings, Inc., Step-up
Coupon, 0% to 04/15/2004, 11.250% to
04/15/2009 1,530,000 837,675
Spectrasite Holdings, Inc., Step-up
Coupon, 0% to 07/15/2003, 12.000% to
07/15/2008 2,460,000 1,525,200
Spectrasite Holdings, Inc., 10.750%,
03/15/2010 400,000 384,000
----------------------------------------------------------------------------
6,570,975
----------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
MEDIA--14.4%
AMFM, Inc., Step-up Coupon, 0% to
02/01/2002, 12.750% to 02/01/2009 300,000 267,000
AMFM, Inc., 8.000%, 11/01/2008
900,000 888,750
Adelphia Communications Corp., 7.875%
to 05/01/2009 540,000 459,000
Adelphia Communications Corp., 9.375%,
11/15/2009 410,000 385,400
American Lawyer Media, Inc., Step-up
Coupon, 0% to 12/15/2002, 12.250% to
12/15/2008 2,150,000 1,365,250
Avalon Cable Holdings LLC, Step-up
Coupon, 0% to 12/01/03, 11.875% to
12/01/2008 600,000 378,000
CSC Holdings, Inc., 8.125%, 07/15/2009 1,600,000 1,564,000
CSC Holdings, Inc., 9.250%, 11/01/2005 1,300,000 1,319,500
Chancellor Media Corp., 8.125%,
12/15/2007 250,000 247,500
Charter Communication Holdings LLC,
8.250%, 04/01/2007 1,170,000 1,047,150
Charter Communications Holdings LLC,
Step-up Coupon, 0% to 04/01/2004,
9.92% to 04/01/2011 1,670,000 918,500
Charter Communications Holdings LLC,
10%, 04/01/2009 420,000 403,200
Diamond Cable Communications, PLC,
13.250%, 09/30/2004 450,000 481,500
Echostar DBS Corp., 9.250%, 02/01/2006 820,000 779,000
Echostar DBS Corp., 9.375%, 02/01/2009 720,000 676,800
Interep National Radio Sales, Inc.,
10.000%, 07/01/2008 1,500,000 1,342,500
NTL Communications Corp., Step-up
Coupon, 0% to 10/01/2003, 12.375% to
10/01/2008 2,300,000 1,506,500
Outdoor Systems, Inc., 8.875%,
06/15/2007 900,000 912,375
Renaissance Media Group, Step-up
Coupon, 0% to 04/15/2003, 10.000% to
04/15/2008 1,600,000 1,040,000
Rogers Cablesystems Ltd., 10.000%,
03/15/2005 500,000 525,000
SFX Entertainment, Inc., 9.125%,
12/01/2008 1,000,000 997,500
</TABLE>
20 The accompanying notes are an integral part of the financial statements.
<PAGE> 21
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
TeleWest Communications, PLC, Step-up
Coupon, 0% to 10/01/2000, 11% to
10/01/2007 $ 600,000 $ 559,500
TeleWest Communications, PLC, 9.625%,
10/01/2006 500,000 490,000
TeleWest Communications, PLC, 11.250%,
11/01/2008 750,000 768,750
Transwestern Publishing, 9.625%,
11/15/2007 1,000,000 957,500
United International Holdings, Step-up
Coupon, 0% to 02/15/2003, 10.750% to
02/15/2008 570,000 376,200
----------------------------------------------------------------------------
20,656,375
----------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--3.7%
Allied Waste Industries, 7.625%,
01/01/2006 360,000 295,200
Coinmach Corp., 11.750%, 11/15/2005 720,000 720,000
ImPac Group, Inc.,
10.125%, 03/15/2008 500,000 415,000
Integrated Electrical Services, Inc.,
9.375%, 02/01/2009 740,000 621,600
Kindercare Learning Centers, Inc.,
9.500%, 02/15/2009 1,380,000 1,242,000
La Petite Academy, Inc., 10.000%,
05/15/2008 680,000 414,800
Spincycle, Inc., Step-up Coupon, 0% to
05/01/2001, 12.750% to 05/01/2005 500,000 150,000
Verio, Inc., 10.625%, 11/15/2009 520,000 501,800
Verio, Inc., 11.250%, 12/01/2008 1,020,000 999,600
----------------------------------------------------------------------------
5,360,000
----------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
DURABLES--2.3%
Airxcel, 11.000%, 11/15/2007 830,000 722,100
DeCrane Aircraft Holdings, Inc., 230,000 202,400
12.000%, 09/30/2008
Fairchild Corp., 10.750%, 04/15/2009 590,000 318,600
Transdigm, Inc., 10.375%, 12/01/2008 1,150,000 897,000
United Rentals, Inc.,
9.000%, 04/01/2009 70,000 61,250
United Rentals, Inc.,
9.250%, 01/15/2009 1,200,000 1,065,000
----------------------------------------------------------------------------
3,266,350
----------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--13.6%
Agriculture, Mining and Chemicals,
Inc., 10.750%, 09/30/2003 440,000 334,400
BPC Holdings Corp., 12.500%, 06/15/2006 133,000 119,700
Berry Plastics Corp.,
12.250%, 04/15/2004 1,500,000 1,477,500
Consolidated Container Capital, Inc.,
10.125%, 07/15/2009 2,650,000 2,590,375
Consumers International, 10.250%,
04/01/2005 1,400,000 882,000
Delco Remy International, 10.625%,
08/01/2006 455,000 443,625
Eagle-Picher Holdings, Inc., 9.375%,
03/01/2008 600,000 510,000
Fonda Group, 9.500%, 03/01/2007 650,000 539,500
</TABLE>
The accompanying notes are an integral part of the financial statements. 21
<PAGE> 22
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
GS Technologies, 12.000%, 09/01/2004 $2,200,000 $ 1,188,000
Gaylord Container Corp., 9.750%,
06/15/2007 1,320,000 1,188,000
Gaylord Container Corp., 9.875%,
02/15/2008 160,000 129,600
Graham Packaging Co., Step-up Coupon,
0% to 01/15/2003, 10.750% to
01/15/2009 700,000 371,000
Grove Holdings LLC, Step-up Coupon, 0%
to 05/01/2003, 11.625% to 05/01/2009 40,000 3,600
Huntsman Package, 11.750%, 12/01/2004 350,000 350,000
Millar Western Forest Products, Ltd.,
9.875%, 05/15/2008 910,000 864,500
NL Industries, Inc., Senior Note,
11.750%, 10/15/2003 200,000 205,000
Plainwell, Inc., 11.000%, 03/01/2008 400,000 100,000
Printpack, Inc., 9.875%, 08/15/2004 1,570,000 1,515,050
Printpack, Inc., 10.625%, 08/15/2006 250,000 240,000
Riverwood International Corp., 10.250%,
04/01/2006 30,000 29,100
Riverwood International Corp., 10.625%,
08/01/2007 50,000 49,000
Riverwood International Corp., 10.875%,
04/01/2008 2,600,000 2,418,000
SF Holdings Group, Inc., Step-up
Coupon, 0% to 03/15/2003, 12.750% to
03/15/2008 490,000 260,925
Spinnaker Industries, 10.750%,
10/15/2006 80,000 65,600
Stone Container Corp., 10.750%,
10/01/2002 500,000 512,500
Stone Container Corp., 11.500%,
08/15/2006 440,000 453,200
Tenneco Automotive, Inc., 11.625%,
10/15/2009 1,390,000 1,355,250
Terex Corp., 8.875%, 04/01/2008 470,000 411,250
Terex Corp., 8.875%, 04/01/2008 500,000 437,500
Texas Petrochemicals, 11.125%,
07/01/2006 500,000 415,000
U.S. Can Corp., 10.125%, 10/15/2006 100,000 105,000
----------------------------------------------------------------------------
19,564,175
----------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--1.1%
PSINet, Inc., 10.000%, 02/15/2005 40,000 37,400
PSINet, Inc., 11.000%, 08/01/2009 810,000 793,800
PSINet, Inc., 11.500%, 11/01/2008 830,000 821,700
----------------------------------------------------------------------------
1,652,900
----------------------------------------------------------------------------
</TABLE>
22 The accompanying notes are an integral part of the financial statements.
<PAGE> 23
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
ENERGY--0.9%
Continental Resources, Inc., 10.250%,
08/01/2008 $ 50,000 $ 44,250
Key Energy Services, Inc., 14.000%,
01/15/2009 170,000 184,450
Pen Holdings, Inc., 9.875%, 06/15/2008 470,000 399,500
Pride International, Inc., 10.000%,
06/01/2009 350,000 343,000
R&B Falcon Corp., 9.500%, 12/15/2008 210,000 201,600
R&B Falcon Corp., 11.000%, 03/15/2006 120,000 125,400
----------------------------------------------------------------------------
1,298,200
----------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--4.9%
Euramax International, PLC, 11.250%,
10/01/2006 1,110,000 1,082,250
MMI Products, Inc., 11.250%, 04/15/2007 1,510,000 1,525,100
Metal Management, Inc., 10.000%,
05/15/2008 1,750,000 1,295,000
Metals USA, Inc., 8.625%, 02/15/2008 500,000 450,000
Renco Steel Holdings Co., Series B,
10.875%, 02/01/2005 1,100,000 979,000
Republic Technologies International,
13.750%, 07/15/2009 1,140,000 285,000
Wells Aluminum Corp., 10.125%,
06/01/2005 1,400,000 1,505,000
----------------------------------------------------------------------------
7,121,350
----------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--3.7%
Congoleum Corp., 8.625%, 08/01/2008 1,810,000 1,520,400
Del Webb Corp., 9.750%, 01/15/2008 100,000 82,500
Dimac Corp., 10/01/2008 600,000 6,000
Forecast Group, L.P., 11.375%,
12/15/2000 100,000 100,000
Hovnanian Enterprises, Inc., 9.750%,
06/01/2005 1,200,000 1,056,000
Lennar Corp., 7.625%, 03/01/2009 140,000 119,000
Nortek, Inc., 9.875%, 03/01/2004 1,510,000 1,415,625
Standard Pacific Corp., 8.000%,
02/15/2008 100,000 87,000
Standard Pacific Corp., 8.500%,
04/01/2009 200,000 170,000
Toll Corp., 8.000%, 05/01/2009 200,000 172,000
Toll Corp., 8.125%, 02/01/2009 100,000 87,000
Toll Corp., 7.75%, 09/15/2007 80,000 68,800
Toll Corp., 8.75%, 11/15/2006 70,000 64,400
U.S. Home Corp., 8.875%, 02/15/2009 410,000 401,800
----------------------------------------------------------------------------
5,350,525
----------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.0%
Transtar Holdings, Inc., Step-up
Coupon, 0% to 12/15/1999, 13.375% to
12/15/2003 450,000 462,375
Travelcenters America, 10.250%,
04/01/2007 970,000 921,500
----------------------------------------------------------------------------
1,383,875
----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 23
<PAGE> 24
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
UTILITIES--0.4%
Azurix Corp, 10.750%, 02/15/2010 $ 340,000 $ 333,200
Azurix Corp., 10.375%, 02/15/2007 290,000 287,100
----------------------------------------------------------------------------
620,300
----------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $142,948,122) 128,272,160
----------------------------------------------------------------------------
<CAPTION>
COMMON STOCKS--0.3% SHARES
<S> <C> <C> <C> <C> <C>
COMMUNICATIONS--0.2%
TELEPHONE/COMMUNICATIONS
Tele1 Europe Holding AB--ADR* 15,323 293,053
--------------------------------------------------------------------------------------------------------------------------
FINANCIAL--0.1%
OTHER FINANCIAL COMPANIES
Ono Finance PLC, Warrants* 650 97,500
--------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--0.0%
MISCELLANEOUS CONSUMER
Spincycle, Inc., Warrants* 500 5
--------------------------------------------------------------------------------------------------------------------------
DURABLES--0.0%
AEROSPACE
Decrane Holdings Co., Warrants* 260 0
--------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--0.0%
CONTAINERS & PAPER
SF Holdings Group, Inc.* 98 1
--------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--0.0%
STEEL & METALS
Republic Technologies International,
Warrants* 1,140 11
--------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $284,742) 390,570
----------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost $158,377,679) (a) $143,660,080
----------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
* Non-income producing security
** Repurchase Agreements are fully collateralized by U.S. Treasury or Government
Securities.
(a) The cost for federal income tax purposes was $158,377,679. At March 31,
2000, the net unrealized depreciation for all securities based on tax cost
was $14,717,599. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess value over tax cost of
$776,232, and aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over value of $15,493,831.
PIK denotes that interest or dividend is paid in kind.
24 The accompanying notes are an integral part of the financial statements.
<PAGE> 25
FINANCIAL STATEMENTS
STATEMENT OF ASSETS & LIABILITIES
as of March 31, 2000 (Unaudited)
<TABLE>
<CAPTION>
HIGH YIELD HIGH YIELD
OPPORTUNITY FUND FUND II
<S> <C> <C>
ASSETS
Investments in securities, at value (cost $31,233,594 and
$158,377,679, respectively) $27,449,257 143,660,080
------------------------------------------------------------------------------------------------
Receivable for investments sold 372,157 692,645
------------------------------------------------------------------------------------------------
Interest receivable 783,898 3,917,243
------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 29,607 503,128
------------------------------------------------------------------------------------------------
TOTAL ASSETS 28,634,919 148,773,096
------------------------------------------------------------------------------------------------
LIABILITIES
Due to custodian bank 206,020 1,558,041
------------------------------------------------------------------------------------------------
Payable for investments purchased 213,708 279,814
------------------------------------------------------------------------------------------------
Payable for Fund shares redeemed 250,689 423,475
------------------------------------------------------------------------------------------------
Accrued management fee 16,667 163,235
------------------------------------------------------------------------------------------------
Other accrued expenses and payables 65,607 429,921
------------------------------------------------------------------------------------------------
Total liabilities 752,691 2,854,486
------------------------------------------------------------------------------------------------
NET ASSETS, AT VALUE $27,882,228 145,918,610
------------------------------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income $ 92,961 460,356
------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (3,784,337) (14,717,599)
------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) (3,362,447) (3,631,187)
------------------------------------------------------------------------------------------------
Paid-in capital 34,936,051 163,807,040
------------------------------------------------------------------------------------------------
NET ASSETS, AT VALUE $27,882,228 145,918,610
------------------------------------------------------------------------------------------------
NET ASSET VALUE AND OFFERING PRICE
CLASS A SHARES
Net assets applicable to shares outstanding $11,368,459 53,614,271
------------------------------------------------------------------------------------------------
Outstanding shares of beneficial interest, $.01 par value,
unlimited number of shares authorized 1,450,913 6,417,815
------------------------------------------------------------------------------------------------
Net asset value and redemption price per share $7.84 8.35
------------------------------------------------------------------------------------------------
Maximum offering price per share (100/$95.50 of net asset
value) $8.21 8.74
------------------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $13,627,205 68,502,670
------------------------------------------------------------------------------------------------
Outstanding shares of beneficial interest, $.01 par value,
unlimited number of shares authorized 1,738,813 8,200,217
------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share $7.84 8.35
------------------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $ 2,886,564 23,801,669
------------------------------------------------------------------------------------------------
Outstanding shares of beneficial interest, $.01 par value,
unlimited number of shares authorized 368,035 2,849,030
------------------------------------------------------------------------------------------------
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share $7.84 8.35
------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 25
<PAGE> 26
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended March 31, 2000 (Unaudited)
<TABLE>
<CAPTION>
HIGH YIELD HIGH YIELD
OPPORTUNITY FUND FUND II
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 100,425 283,475
----------------------------------------------------------------------------------------------
Interest 1,978,323 8,847,065
----------------------------------------------------------------------------------------------
Total income 2,078,748 9,130,540
----------------------------------------------------------------------------------------------
Expenses:
Management fee 113,997 506,986
----------------------------------------------------------------------------------------------
Services to shareholders 34,502 53,165
----------------------------------------------------------------------------------------------
Custodian and accounting fees 2,683 38,835
----------------------------------------------------------------------------------------------
Distribution services fees 74,602 368,462
----------------------------------------------------------------------------------------------
Administrative services fees 41,010 195,003
----------------------------------------------------------------------------------------------
Auditing 14,003 8,750
----------------------------------------------------------------------------------------------
Legal 4,941 7,500
----------------------------------------------------------------------------------------------
Trustees' fees and expenses 19,531 9,000
----------------------------------------------------------------------------------------------
Reports to shareholders 8,418 29,994
----------------------------------------------------------------------------------------------
Registration fees 33,375 65,084
----------------------------------------------------------------------------------------------
Other 1,054 25,259
----------------------------------------------------------------------------------------------
Total expenses, before expense reductions 348,116 1,308,038
----------------------------------------------------------------------------------------------
Expense reductions (1,168) (502,640)
----------------------------------------------------------------------------------------------
Total expenses, after expense reductions 346,948 805,398
----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,731,800 8,325,142
----------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments (1,498,606) (2,370,860)
----------------------------------------------------------------------------------------------
Futures -- (29,803)
----------------------------------------------------------------------------------------------
(1,498,606) (2,400,663)
----------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period on:
Investments (318,428) (5,417,599)
----------------------------------------------------------------------------------------------
Net gain (loss) on investment transactions (1,817,034) (7,818,262)
----------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ (85,234) 506,880
----------------------------------------------------------------------------------------------
</TABLE>
26 The accompanying notes are an integral part of the financial statements.
<PAGE> 27
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
HIGH YIELD OPPORTUNITY FUND HIGH YIELD FUND II
-------------------------------------- -------------------------------------
FOR THE PERIOD
SIX MONTHS SIX MONTHS NOVEMBER 30, 1998
ENDED YEAR ENDED (COMMENCEMENT OF
MARCH 31, 2000 ENDED MARCH 31, 2000 OPERATIONS) TO
(UNAUDITED) SEPTEMBER 30, 1999 (UNAUDITED) SEPTEMBER 30, 1999
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 1,731,800 3,483,242 8,325,142 8,183,014
-----------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on
investment transactions (1,498,606) (1,847,005) (2,400,663) (1,230,523)
-----------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) on investment
transactions during the
period (318,428) (681,495) (5,417,599) (9,300,374)
-----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting from
operations (85,234) 954,742 506,880 (2,347,883)
-----------------------------------------------------------------------------------------------------------------
Distributions to
shareholders:
From net investment income
Class A (813,557) (1,673,668) (3,053,565) (3,322,069)
-----------------------------------------------------------------------------------------------------------------
Class B (793,817) (1,411,189) (3,550,952) (3,693,281)
-----------------------------------------------------------------------------------------------------------------
Class C (186,759) (306,844) (1,259,768) (1,318,586)
-----------------------------------------------------------------------------------------------------------------
From net realized gains
Class A -- (83,318) -- --
-----------------------------------------------------------------------------------------------------------------
Class B -- (77,491) -- --
-----------------------------------------------------------------------------------------------------------------
Class C -- (15,014) -- --
-----------------------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 7,609,049 26,623,273 31,783,710 186,210,485
-----------------------------------------------------------------------------------------------------------------
Reinvestment of
distributions 1,314,256 4,857,110 3,998,116 4,476,964
-----------------------------------------------------------------------------------------------------------------
Cost of shares redeemed (16,414,703) (18,305,608) (36,516,289) (26,095,152)
-----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets from Fund share
transactions (7,491,398) 13,174,775 (734,463) 164,592,297
-----------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
assets (9,370,765) 10,561,993 (8,091,868) 153,910,478
-----------------------------------------------------------------------------------------------------------------
Net assets at beginning of
period 37,252,993 26,691,000 154,010,478 100,000
-----------------------------------------------------------------------------------------------------------------
Net assets at end of period $ 27,882,228 37,252,993 145,918,610 154,010,478
-----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 27
<PAGE> 28
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLES INCLUDE SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
THE PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
CLASS A
FOR THE PERIOD
OCTOBER 1,
SIX MONTHS 1997
ENDED (COMMENCEMENT OF
MARCH 31, YEAR ENDED OPERATIONS) TO
KEMPER HIGH YIELD 2000 SEPTEMBER 30, SEPTEMBER 30,
OPPORTUNITY FUND (UNAUDITED) 1999 1998
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 8.33 8.89 9.50
---------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .42(a) .88(a) .70
---------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.46) (.54) (.60)
---------------------------------------------------------------------------------------------------------------
Total from investment operations (.04) .34 .10
---------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.45) (.85) (.67)
---------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions -- (.05) (.04)
---------------------------------------------------------------------------------------------------------------
Total distributions (.45) (.90) (.71)
---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.84 8.33 8.89
---------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) (.51)** 3.55 .59**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 11,368 17,223 12,249
---------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.49* 1.53 1.27*
---------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.49* 1.53 1.27*
---------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 10.39* 9.64 8.31*
---------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 97* 98 169*
---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
FOR THE PERIOD
SIX MONTHS OCTOBER 1, 1997
ENDED (COMMENCEMENT OF
MARCH 31, YEAR ENDED OPERATIONS) TO
2000 SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) 1999 1998
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.33 8.89 9.50
---------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .40(a) .80(a) .63
---------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.48) (.54) (.61)
---------------------------------------------------------------------------------------------------------------
Total from investment operations (.08) .26 .02
---------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.41) (.77) (.59)
---------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions -- (.05) (.04)
---------------------------------------------------------------------------------------------------------------
Total distributions (.41) (.82) (.63)
---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.84 8.33 8.89
---------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) (.94)** 2.73 (.18)**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 13,627 16,646 12,222
---------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 2.35* 2.40 2.03*
---------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 2.35* 2.40 2.03*
---------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 9.53* 8.77 7.55*
---------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 97* 98 169*
---------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 29
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
FOR THE PERIOD
OCTOBER 1,
SIX MONTHS 1997
ENDED (COMMENCEMENT OF
MARCH 31, YEAR ENDED OPERATIONS) TO
2000 SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) 1999 1998
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.34 8.89 9.50
---------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .41(a) .80(a) .62
---------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.50) (.53) (.60)
---------------------------------------------------------------------------------------------------------------
Total from investment operations (.09) .27 .02
---------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.41) (.77) (.59)
---------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions -- (.05) (.04)
---------------------------------------------------------------------------------------------------------------
Total distributions (.41) (.82) (.63)
---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.84 8.34 8.89
---------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B) (.93)** 2.39 (.18)**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net asset, end of period ($ in thousands) 2,887 3,384 2,220
---------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 2.36* 2.38 2.03*
---------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 2.36* 2.38 2.03*
---------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 9.53* 8.78 7.55*
---------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 97* 98 169*
---------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Not annualized
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of any sales charges.
29
<PAGE> 30
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLES INCLUDE SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
THE PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
CLASS A
FOR THE PERIOD
NOVEMBER 30,
SIX MONTHS 1998
ENDED (COMMENCEMENT OF
MARCH 31, OPERATIONS) TO
2000 SEPTEMBER 30,
KEMPER HIGH YIELD II (UNAUDITED) 1999
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 8.76 9.50
--------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .49(a) .72(a)
--------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.44) (.70)
--------------------------------------------------------------------------------------------------------
Total from investment operations .05 .02
--------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.46) (.76)
--------------------------------------------------------------------------------------------------------
Total distributions (.46) (.76)
--------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.35 8.76
--------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B)(C) .53** .19**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 53,614 57,029
--------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.21* 1.59*
--------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .56* .39*
--------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 11.16* 10.24*
--------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 65* 79*
--------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
FOR THE PERIOD
NOVEMBER 30,
SIX MONTHS 1998
ENDED (COMMENCEMENT OF
MARCH 31, OPERATIONS) TO
2000 SEPTEMBER 30,
(UNAUDITED) 1999
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 8.77 9.50
--------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .45(a) .68(a)
--------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.44) (.71)
--------------------------------------------------------------------------------------------------------
Total from investment operations .01 .03
--------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.43) (.70)
--------------------------------------------------------------------------------------------------------
Total distributions (.43) (.70)
--------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.35 8.77
--------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B)(C) .15** (.43)**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 68,503 70,802
--------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.93* 2.19*
--------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.31* 1.00*
--------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 10.42* 9.63*
--------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 65* 79*
--------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 31
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
FOR THE PERIOD
NOVEMBER 30,
SIX MONTHS 1998
ENDED (COMMENCEMENT OF
MARCH 31, OPERATIONS) TO
2000 SEPTEMBER 30,
(UNAUDITED) 1999
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 8.77 9.50
--------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .45(a) .68(a)
--------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.44) (.71)
--------------------------------------------------------------------------------------------------------
Total from investment operations .01 .03
--------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.43) (.70)
--------------------------------------------------------------------------------------------------------
Total distributions (.43) (.70)
--------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.35 8.77
--------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B)(C) .15** (.43)**
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 23,802 26,179
--------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.94* 2.25*
--------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.31* 1.00*
--------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 10.40* 9.63*
--------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 65* 79*
--------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Not annualized
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of any sales charges.
(c) Total return would have been lower had certain expenses not been reduced.
31
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1
SIGNIFICANT
ACCOUNTING POLICIES Kemper High Yield Opportunity Fund is a diversified
series of Kemper High Yield Series, and Kemper High
Yield Fund II, a diversified series of Kemper
Income Trust are registered under the Investment
Company Act of 1940, as amended (the "1940 Act"),
as open end management investment companies
organized as Massachusetts business trusts.
Each Fund offers multiple classes of shares. Class
A shares are offered to investors subject to an
initial sales charge. Class B shares are offered
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are offered without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I (none issued as of
March 31, 2000) 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.
Each Fund's financial statements are prepared in
accordance with generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Investments are stated at value
determined as of the close of regular trading on
the New York Stock Exchange. 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 Funds may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Funds through their
custodian or sub-custodian bank, receive 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
32
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
seller agrees to take or make a delivery of a
specific amount of a financial instrument at a
specified price on a specific date (settlement
date). During the period, the Kemper High Yield
Fund II purchased interest rate futures to manage
the duration of the portfolio. In addition, the
Kemper High Yield Fund II also sold interest rate
futures to hedge against declines in the value of
portfolio securities.
Upon entering into a futures contract, the Fund is
required to deposit with a financial intermediary
an amount ("initial margin") equal to a certain
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 the futures contract to buy.
Futures contracts are valued at the most recent
settlement price.
Certain risks may arise upon entering into futures
contracts, including the risk that an illiquid
secondary market will limit the Fund's ability to
close out a futures contract prior to the
settlement date and that a change in the value of a
futures contract may not correlate exactly with the
changes in the value of the securities or
currencies hedged. When utilizing futures contracts
to hedge, the Fund gives up the opportunity to
profit from favorable price movements in the hedged
positions during the term of the contract.
FEDERAL INCOME TAXES. Each Fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies and to distribute
all of its taxable income to its shareholders.
Accordingly, the Fund paid no federal income taxes
and no federal income tax provision was required.
In addition, for the Kemper High Yield Opportunity
Fund from November 1, 1998 through September 30,
1999 the Fund incurred approximately $1,543,000 of
net realized capital losses. As permitted by tax
regulations, the Fund intends to elect to defer
these losses and treat them as arising in the
fiscal year ended September 30, 2000. The Kemper
High Yield II Fund incurred approximately
$1,200,000 of net realized capital losses post
October 31, 1998. As permitted by tax regulations,
the Fund intends to elect to defer these losses and
treat them as arising in the fiscal year ended
September 30, 2000.
At September 30, 1999, the Kemper High Yield
Opportunity Fund had a net tax basis loss
carryforward of approximately $274,000, which may
be applied against any realized net taxable gains
of each succeeding year until fully utilized or
until September 30, 2007, the respective expiration
dates, whichever occurs first.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made monthly.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the Fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net invest-
33
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
ment income (loss) and net realized gain (loss) on
investment transactions for a reporting period may
differ significantly from distributions during such
period. Accordingly, each Fund may periodically
make reclassifications among certain of its capital
accounts without impacting the net asset value of
the Fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Dividend income is recorded on
the ex-dividend date. Realized gains and losses
from investment transactions are recorded on an
identified cost basis. All discounts are accreted
for both tax and financial reporting purposes.
EXPENSES. Expenses arising in connection with a
specific Fund are allocated to that Fund. Other
Trust expenses are allocated between the Funds in
proportion to their relative net assets.
--------------------------------------------------------------------------------
2
PURCHASES AND
SALES OF SECURITIES For the six months ended March 31, 2000, investment
transactions (excluding short-term instruments) are
as follows:
<TABLE>
<CAPTION>
HIGH YIELD HIGH YIELD
OPPORTUNITY FUND FUND II
---------------- ----------
<S> <C> <C>
Purchases $16,270,999 50,394,245
Proceeds from sales 23,900,200 47,123,123
</TABLE>
--------------------------------------------------------------------------------
3
TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. Each Fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper). The Funds pay a monthly
investment management fee of 1/12 of the annual
rate of .65% of the first $250 million of average
daily net assets declining to .49% of average daily
net assets in excess of $12.5 billion. Management
fees incurred for the six months ended March 31,
2000 are as follows:
High Yield Opportunity Fund $113,997
High Yield Fund II 163,235 (fee after
expense waiver)
In addition, Scudder Kemper temporarily agreed to
absorb certain operating expenses of the High Yield
Fund II. Under these arrangements, Scudder Kemper
waived and absorbed expenses of $490,857 for the
six months ended March 31, 2000.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. Each Fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the six months ended March
31, 2000 are as follows:
<TABLE>
<CAPTION>
COMMISSIONS RETAINED BY KDI
---------------------------
<S> <C>
High Yield Opportunity Fund $ 2,270
High Yield Fund II 18,529
</TABLE>
For services under the distribution services
agreement, each Fund pays KDI a fee of .75% of
average daily net assets of the 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
34
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS
Class B and Class C shares. Distribution fees and
CDSC received by KDI for the six months ended March
31, 2000 are as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES AND CDSC
RECEIVED BY KDI
--------------------------
<S> <C>
High Yield Opportunity Fund $107,954
High Yield Fund II 483,984
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. Each Fund has an
administrative services agreement with Kemper
Distributors, Inc. (KDI). For providing information
and administrative services to shareholders, each
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets. KDI in turn has
various agreements with financial services firms
that provided these services and pays these firms
based on assets of fund accounts the firms service.
Administrative services fees (ASF) paid for the six
months ended March 31, 2000 are as follows:
<TABLE>
<CAPTION>
ASF PAID BY THE FUND TO KDI
---------------------------
<S> <C>
High Yield Opportunity Fund $ 41,010
High Yield Fund II 195,003
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Funds' transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of each Fund. Under the agreement,
for the six months ended March 31, 2000, KSvC
received shareholder services fees as follows:
<TABLE>
<S> <C>
High Yield Opportunity Fund $21,610
High Yield Fund II 43,218
</TABLE>
FUND ACCOUNTING AGENT. Scudder Fund Accounting
Corporation is responsible for determining the
daily net asset value per share and maintaining the
portfolio and general accounting records of the
Fund. The Kemper High Yield Fund II incurred
accounting fees of $35,000 for the six months ended
March 31, 2000.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Funds are also officers or directors of
Scudder Kemper. For the six months ended March 31,
2000, the Funds made no payments to their officers
and incurred trustees' fees to independent
trustees.
<TABLE>
<S> <C>
High Yield Opportunity Fund $19,531
High Yield Fund II 9,000
</TABLE>
35
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4
CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31, 2000 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 1999
KEMPER HIGH YIELD ------------------------ ------------------------
OPPORTUNITY FUND SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 377,962 $ 3,140,694 1,507,482 $13,484,948
--------------------------------------------------------------------------------
Class B 294,391 2,423,665 1,178,995 10,552,504
--------------------------------------------------------------------------------
Class C 244,031 2,021,469 227,883 2,054,731
--------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 73,241 601,556 183,460 1,638,140
--------------------------------------------------------------------------------
Class B 69,495 569,997 254,355 2,288,867
--------------------------------------------------------------------------------
Class C 17,401 142,703 102,076 930,103
--------------------------------------------------------------------------------
SHARES REDEEMED
Class A (1,071,084) (8,854,289) (1,062,650) (9,528,364)
--------------------------------------------------------------------------------
Class B (620,481) (5,100,763) (747,786) (6,701,325)
--------------------------------------------------------------------------------
Class C (299,302) (2,436,430) (173,662) (1,544,829)
--------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 2,828 23,221 62,017 531,090
--------------------------------------------------------------------------------
Class B (2,828) (23,221) (62,017) (531,090)
--------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $(7,491,398) $13,174,775
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
NOVEMBER 30, 1998
SIX MONTHS ENDED (COMMENCEMENT OF
MARCH 31, 2000 OPERATIONS) TO
(UNAUDITED) SEPTEMBER 30, 1999
KEMPER HIGH ------------------------- -------------------------
YIELD FUND II SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 1,497,317 $ 13,058,342 7,548,250 $ 70,659,914
--------------------------------------------------------------------------------
Class B 1,504,230 13,097,181 8,754,074 81,880,388
--------------------------------------------------------------------------------
Class C 608,229 5,341,571 3,571,130 33,289,183
--------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 186,918 1,617,106 195,727 1,790,143
--------------------------------------------------------------------------------
Class B 185,313 1,603,415 204,561 1,873,918
--------------------------------------------------------------------------------
Class C 89,822 777,595 88,872 812,902
--------------------------------------------------------------------------------
SHARES REDEEMED
Class A (1,807,903) (15,676,670) (1,280,785) (11,806,139)
--------------------------------------------------------------------------------
Class B (1,530,247) (13,297,202) (846,435) (7,732,263)
--------------------------------------------------------------------------------
Class C (835,509) (7,255,801) (677,024) (6,175,750)
--------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 32,784 286,616 42,000 381,000
--------------------------------------------------------------------------------
Class B (32,788) (286,616) (42,000) (381,000)
--------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $ (734,463) $164,592,297
--------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 37
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
5
EXPENSE OFF-SET
ARRANGEMENTS Each Fund has entered into arrangements with its
custodian and transfer agent whereby credits
realized as a result of uninvested cash balances
were used to reduce a portion of the Fund's
expenses. During the period, the High Yield
Opportunity Fund's and High Yield Fund II's
custodian and transfer agent fees were reduced by
$298 and $870, and $1,835 and $9,948, respectively,
under these arrangements.
--------------------------------------------------------------------------------
6
LINE OF CREDIT The High Yield Opportunity Fund may borrow money
for leverage purposes up to a maximum of 20% of the
total assets of the Fund including the amount
borrowed. The agreement is with the Bank of America
and is available through December 18, 2000. At
March 31, 2000 there were no loans outstanding.
The High Yield Fund II and several Kemper Funds
(the "Participants") share in a $750 million
revolving credit facility for temporary or
emergency purposes, including the meeting of
redemption requests that otherwise might require
the untimely disposition of securities. The
Participants are charged an annual commitment fee
which is allocated pro rata among each of the
Participants. Interest is calculated based on the
market rates at the time of the borrowing. The Fund
may borrow up to a maximum of 33 percent of its net
assets under the agreement.
37
<PAGE> 38
NOTES
38
<PAGE> 39
NOTES
39
<PAGE> 40
TRUSTEES&OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
JOHN W. BALLANTINE MARK S. CASADY CAROLINE PEARSON
Trustee President Assistant Secretary
LEWIS A. BURNHAM PHILIP J. COLLORA BRENDA LYONS
Trustee Vice President and Assistant Treasurer
Secretary
LINDA C. COUGHLIN
Trustee JOHN R. HEBBLE
Treasurer
DONALD L. DUNAWAY
Trustee ANN M. MCCREARY
Vice President
ROBERT B. HOFFMAN
Trustee KATHRYN L. QUIRK
Vice President
DONALD R. JONES
Trustee HARRY E. RESIS, JR.
Vice President
THOMAS W. LITTAUER
Trustee and Vice President LINDA J. WONDRACK
Vice President
SHIRLEY D. PETERSON
Trustee MAUREEN E. KANE
Assistant Secretary
WILLIAM P. SOMMERS
Trustee
</TABLE>
<TABLE>
<S> <C>
.............................................................................................
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
.............................................................................................
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 219557
Kansas City, MO 64121
.............................................................................................
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02109
.............................................................................................
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
.............................................................................................
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
.............................................................................................
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
</TABLE>
[KEMPER FUNDS LOGO] Long-term investing in a short-term world(SM)
Printed in the U.S.A. on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Fund prospectus.
KHYFS - 3 (5/25/00) 1111820
