<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
ANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED SEPTEMBER 30, 2000
The highest level of current income
KEMPER HIGH YIELD FUND
"... Concern over the effect of Federal Reserve Board interest rate hikes, weak
investor demand and a jittery stock market contributed to a setback for
high-yield bonds during fiscal year 2000. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
7
PERFORMANCE UPDATE
9
TERMS TO KNOW
11
PORTFOLIO STATISTICS
12
PORTFOLIO OF INVESTMENTS
21
FINANCIAL STATEMENTS
24
FINANCIAL HIGHLIGHTS
26
NOTES TO FINANCIAL STATEMENTS
31
REPORT OF INDEPENDENT AUDITORS
AT A GLANCE
KEMPER HIGH YIELD FUND TOTAL RETURNS
FOR THE YEAR ENDED SEPTEMBER 30, 2000 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
LIPPER HIGH CURRENT
KEMPER HIGH YIELD KEMPER HIGH YIELD YIELD FUNDS
KEMPER HIGH YIELD FUND CLASS A FUND CLASS B FUND CLASS C CATEGORY AVERAGE*
------------------------------ ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
-1.88 -2.68 -2.66 -0.02
</TABLE>
PERFORMANCE IS HISTORICAL AND INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL
GAINS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH CHANGING MARKET
CONDITIONS, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN
ORIGINAL COST.
TOTAL RETURN MEASURES NET INVESTMENT INCOME AND CAPITAL GAIN OR LOSS FROM
PORTFOLIO INVESTMENTS, ASSUMING REINVESTMENT OF ALL DIVIDENDS. DURING THE PERIOD
NOTED, SECURITIES PRICES FLUCTUATED. FOR ADDITIONAL INFORMATION SEE THE
PROSPECTUS, STATEMENT OF ADDITIONAL INFORMATION AND FINANCIAL HIGHLIGHTS AT THE
END OF THIS REPORT.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
9/30/00 9/30/99
.........................................................
<S> <C> <C> <C> <C>
KEMPER HIGH YIELD FUND CLASS A $6.34 $7.23
.........................................................
KEMPER HIGH YIELD FUND CLASS B $6.33 $7.22
.........................................................
KEMPER HIGH YIELD FUND CLASS C $6.35 $7.24
.........................................................
</TABLE>
KEMPER HIGH YIELD FUND RANKINGS
AS OF 9/30/00
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER HIGH CURRENT YIELD FUNDS CATEGORY*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
....................................................................................
<S> <C> <C> <C> <C> <C>
1-YEAR #284 of 352 funds #291 of 352 funds #290 of 352 funds
....................................................................................
5-YEAR #76 of 127 funds #97 of 127 funds #96 of 127 funds
....................................................................................
10-YEAR #13 of 54 funds n/a n/a
....................................................................................
20-YEAR #3 of 21 funds n/a n/a
....................................................................................
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. RETURNS AND NET ASSET
VALUE FLUCTUATE. SHARES ARE REDEEMABLE AT CURRENT NET ASSET VALUE, WHICH MAY BE
MORE OR LESS THAN ORIGINAL COST.
*LIPPER, 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 REVIEW
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF SEPTEMBER 30, 2000.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
...............................................................................................
<S> <C> <C> <C> <C> <C>
ONE-YEAR INCOME: $0.7720 $0.7160 $0.7170
...............................................................................................
SEPTEMBER DIVIDEND: $0.0780 $0.0588 $0.0588
...............................................................................................
ANNUALIZED
DISTRIBUTION RATE+: 12.02% 11.15% 11.11%
...............................................................................................
SEC YIELD+: 12.28% 11.91% 11.92%
...............................................................................................
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON SEPTEMBER 30, 2000. DISTRIBUTION
RATE SIMPLY MEASURES THE LEVEL OF DIVIDENDS AND IS NOT A COMPLETE MEASURE OF
PERFORMANCE. THE SECURITIES AND EXCHANGE COMMISSION YIELD IS NET INVESTMENT
INCOME PER SHARE EARNED OVER THE MONTH ENDED SEPTEMBER 30, 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.
<TABLE>
<S> <C>
YOUR FUND'S STYLE
[MORNINGSTAR EQUITY STYLE BOX]
MORNINGSTAR INCOME FUNDS STYLE BOX(TM)
Source: Morningstar, Inc., Chicago, IL,
312-696-6000. The Income Funds Style Box(TM)
placement is based on a fund's average
effective maturity or duration and the average
credit rating of the bond portfolio.
PLEASE NOTE THAT STYLE BOXES DO NOT REPRESENT
AN EXACT ASSESSMENT OF RISK AND DO NOT
REPRESENT FUTURE PERFORMANCE. THE FUND'S
PORTFOLIO CHANGES FROM DAY TO DAY. A
LONGER-TERM VIEW IS REPRESENTED BY THE FUND'S
MORNINGSTAR CATEGORY, WHICH IS BASED ON ITS
ACTUAL INVESTMENT STYLE AS MEASURED BY ITS
UNDERLYING PORTFOLIO HOLDINGS OVER THE PAST
THREE YEARS. MORNINGSTAR HAS PLACED KEMPER
HIGH YIELD FUND IN THE HIGH YIELD BOND CATE-
GORY. PLEASE CONSULT THE PROSPECTUS FOR A
DESCRIPTION OF INVESTMENT POLICIES.
</TABLE>
<PAGE> 3
ECONOMIC OVERVIEW
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER:
Times have been good. During the first half of 2000, the global economy grew
faster than it has in over a decade. All regions participated. The United
States, of course, was still powering ahead. The growth rate in Europe was
nearly 4 percent. Asia fed off an electronics boom and a revitalized China.
South America got a boost from an improved credit rating. New money pumped up
energy producers from Mexico to the Middle East.
Now for the bad news, which is that the best news is probably behind us.
Global growth peaked in the spring, and in the United States, at least, the
slowdown was abrupt. After 6 percent growth in the year ending June 30, the
economy grew at a rate of just 2.7 percent during the summer. It seems that
expensive energy, currency volatility and more widespread profit problems, are
bringing the exuberant global economy, including the United States, to heel.
Let's explore these factors in more detail.
OIL, OIL, TOIL AND TROUBLE
Although oil prices have receded somewhat, everyone's still jittery, and with
good reason: Of the seven recessions since World War II, six were preceded by a
spike in crude oil prices.
Oil prices have already been strong enough for long enough to crimp growth,
and they're biting the rest of the world even harder than the United States. But
there are two factors working to our advantage. First, oil prices are still
historically low. Oil is slightly more than $30 per barrel today, but it peaked
at over $75 per barrel back in 1980 (stated in today's dollars). Second, our
dependence on oil has decreased: The United States uses only roughly half as
much oil to produce a unit of GDP as it did thirty years ago. This gives us hope
that the economy can escape recession this time around.
What would make us worry more? Outright energy shortages or a political
crisis. If either happens, the odds of a recession occurring would rise steeply.
People panic or become excessively cautious when they have to fret. Can I fill
up my oil tank? Will there be a war? Their loss of confidence can be much more
devastating than price increases alone.
CURRENCY CONCERNS
Currency turmoil is a second danger to the economy. Central bankers have
intervened to halt the euro's decline, and they're right that the euro is
fundamentally undervalued. But intervention is a hazardous game. Let's hope they
don't convince the markets that the euro should rise a lot very quickly. A
suddenly weak dollar might make Europeans think about selling all those American
stocks and bonds they've been buying, and would greatly complicate the Fed's
inflation fight.
BUSINESS: BIG PLANS BUT PROFIT DISAPPOINTMENTS
Profit warnings escalated late this summer, and we believe there's fire amid
that smoke.
Sure, businesses have had a voracious appetite for money -- and until very
recently, corporate treasurers were finding it easily: Banks increased business
lending by 10.8 percent in the past year. Bond markets have suddenly become a
lot more picky, especially for low-quality credits, but money is still available
for investment grade borrowers. Capital goods orders reflect executives'
enthusiasm -- they've been accelerating since early in the year, and in
September were up more than 20 percent compared to a year ago.
Still, we expect total capital spending to slow, from this year's estimated 14
percent to 12.5 percent in 2001. The reason? A profit squeeze is about to take
some of the edge off executives' animal spirits.
We've always been more cautious than Wall Street about 2001 profits, and our
forecast hasn't changed. Profits are likely to be flat to down next year for
several reasons. First, the growth slowdown will make it harder to keep up the
productivity gains that have kept labor costs under control. Second, interest
expense will surge thanks to higher rates and all that new debt. Third,
depreciation costs are escalating. And finally, the excessively weak euro and
higher oil costs will sap earnings.
3
<PAGE> 4
ECONOMIC OVERVIEW
ECONOMIC GUIDEPOSTS
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND
SHAREHOLDER DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR
DEFLATION, CREDIT EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON
MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR
INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE
10-YEAR TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES.
THE OTHER DATA REPORT YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (10/31/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
-------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 5.70 6.00 6.10 4.50
Prime rate (2) 9.50 9.00 8.25 8.25
Inflation rate (3)* 3.50 3.80 2.60 1.40
The U.S. dollar (4) 11.30 1.10 -0.90 1.10
Capital goods orders (5)* 22.70 13.30 4.70 8.60
Industrial production (5)* 5.70 5.40 3.50 3.70
Employment growth (6) 1.80 2.50 2.30 2.50
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
*DATA AS OF 9/30/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
SAVING GRACES: FISCAL POLICY AND CONSUMER SPENDING
While growth has peaked and is now slowing, we can be thankful that growth
probably won't slow too much, thanks in part to a more stimulative fiscal policy
and consumer spending.
Fiscal policy is likely to be more stimulative. Of course, most economists
agree that the last thing this pumped-up economy needs is another shot of
stimulants -- too much stimulus, after all, is widely believed to cause
inflation. But economists weren't running for office; politicians were. And
inflation risk was about the last thing on the mind of either candidate in the
heat of election campaigning. They wanted to win votes, and the time-tested way
to do so was to make promises. Although we didn't have the name of the winner as
of press time, neither candidate seems to be planning a lot of fiscal
restraint -- but the good news is that neither candidate's plan is likely to be
enacted until 2002 at the earliest.
Second, consumers continue to spend, spend, spend. The personal savings rate
keeps falling, from an already low 2.2 percent last year to a nearly invisible
0.1 percent this year. Critics of this admittedly squishy statistic claim it
doesn't adequately capture households' growing wealth. As it turns out, however,
the average American not only doesn't save much, but he's not getting wealthier
in leaps and bounds, either.
Net worth for the median family where the head of the household is over 45
(and where thoughts are presumably beginning to turn to retirement), rose less
than $13,000 between 1995 and 1998. That's less than a 12 percent gain during
the same three years the stock market nearly doubled and the market value of
owner-occupied homes jumped 21 percent. Why didn't the average family get richer
in that time? Because they were borrowing and spending like crazy. House values
were up 21 percent -- but mortgage debt rose even faster, by 25 percent!
Consumers' profligacy worries many financial professionals. Some people aren't
saving enough for retirement because they have inflated expectations of future
investment returns. Other people aren't saving enough for retirement because
they don't realize just how much money they'll need. Either way, people aren't
saving.
Still, no one wants consumers to change their profligate ways too fast. After
all, hearty consumer spending is a prime reason America's growth has stayed on a
fast track so far. Most economists would like to see shoppers be a bit more
moderate -- but only a bit. If Americans suddenly turned thrifty, the economy
would lurch into reverse.
4
<PAGE> 5
ECONOMIC OVERVIEW
Luckily, there's little chance of that happening, unless lenders get cold
feet. So far, they're hot to trot. In the past year, mortgage lending by banks
rocketed nearly 17 percent while loans to consumers jumped 10 percent. Brokers
are selling the loans banks don't want on their balance sheets to mortgage pools
and the asset-backed securities market, where eager non-bank lenders are
snapping them up. In the past year, these markets provided $625 billion of new
credit, a leap of more than 12 percent.
With so much money at their disposal, consumers didn't stay out of the
shopping centers and restaurants for long. Consumer spending growth jumped up to
4.5 percent in the summer, and we expect it to stay well above 3 percent through
2001.
OMINOUS SIGNS?
Decelerations are always tricky, to be sure. But barring some unexpected
shock, overall economic growth should to pop back into the 3.5 percent to 4
percent range in 2001. Why? Borrowing costs a little more than it did last year,
but money is still freely available for most borrowers. Capital goods orders are
strong, so there's a lot of life left in business spending. Shoppers are a
little pickier, but they're still more interested in visiting the mall than in
filling their piggy banks. And after the election, no matter who wins, fiscal
policy is likely to be more stimulative than it has been for years. The price to
pay will likely be a rise in core inflation (inflation excluding food and
energy). We expect it to hit 3 percent next year, up from its recent rate of 2.5
percent. We believe we'll make it safely through 2001, but investors should keep
their hands on the wheel and their eyes peeled.
Sincerely,
Kemper Distributors, Inc.
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 NOVEMBER 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.
5
<PAGE> 6
ECONOMIC OVERVIEW
[INTENTIONALLY LEFT BLANK]
6
<PAGE> 7
PERFORMANCE UPDATE
[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. RESIS HOLDS A
BACHELOR'S DEGREE IN FINANCE FROM MICHIGAN STATE UNIVERSITY.
[DOYLE PHOTO]
DAN DOYLE IS A PORTFOLIO MANAGER OF KEMPER HIGH YIELD FUND. A CERTIFIED
FINANCIAL ANALYST, HE HAS BEEN INVOLVED WITH KEMPER HIGH YIELD FUND IN BOTH
RESEARCH AND TRADING SINCE 1986 AND IS A PORTFOLIO MANAGER OF KEMPER HIGH YIELD
FUND II AND KEMPER HIGH YIELD OPPORTUNITY FUND. DOYLE RECEIVED HIS M.B.A. FROM
THE UNIVERSITY OF CHICAGO.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS, AND SHOULD NOT BE CONSIDERED A RECOMMENDATION OF ANY SPECIFIC
SECURITY.
WHILE LONG-TERM GOVERNMENT BONDS PERFORMED WELL DURING THE PAST 12 MONTHS,
HIGH-YIELD BONDS DID NOT. THROUGHOUT THE YEAR, PRESERVING CAPITAL WAS THE
OVERRIDING MARKET CHALLENGE AS THE DYNAMICS OF TELECOM-RELATED FINANCING
WEAKENED AND U.S. ECONOMIC GROWTH MODERATED. BELOW, LEAD PORTFOLIO MANAGER HARRY
RESIS DISCUSSES HOW THE FUND PERFORMED IN THIS ENVIRONMENT.
Q HOW DID THE HIGH-YIELD MARKET BEHAVE AND KEMPER HIGH YIELD FUND PERFORM
DURING THE 12 MONTHS ENDED SEPTEMBER 30, 2000?
A It was not a pleasant year for high-yield bonds and was a disappointing
time for the fund. Concern over the effect of Federal Reserve Board interest
rate hikes, weak investor demand and a jittery stock market contributed to a
setback for high-yield bonds during fiscal year 2000. Preserving capital was the
overriding market challenge as the dynamics of telecom-related financing
weakened and U.S. economic growth moderated.
Kemper High Yield Fund's decline of 1.88 percent for the 12-month period ended
September 30, 2000 (Class A shares, unadjusted for a sales charge) was worse
than the average 0.02 percent drop of its peers as measured by Lipper, Inc. The
unmanaged Chase US/Canada High Yield Bond Index rose 0.50 percent for the same
period. The fund focused exclusively on bonds issued by U.S.-based companies,
which did not do as well as certain high-yield emerging market bonds. Some of
the fund's peers had overseas bonds in their portfolios in an effort to boost
return. We preferred a less risky approach to help preserve capital over the
long term and maintain high income potential.
HIGH-YIELD BOND YIELDS (YIELD-TO-WORST) VS. 10-YEAR TREASURIES
SEPTEMBER 30, 1995 TO SEPTEMBER 30, 2000
[BAR GRAPH]
<TABLE>
<CAPTION>
MERRILL LYNCH HIGH YIELD MASTER
INDEX* TEN YEAR TREASURIES
------------------------------- -------------------
<S> <C> <C>
9/95 9.000/95 6.182
9.933 6.020
9.835 5.741
9.762 5.572
9.539 5.580
9.611 6.098
9.796 6.327
9.849 6.670
9.861 6.852
9.989 6.711
10.009 6.794
9.912 6.943
9/96 9.595 6.703
9.629 6.339
9.418 6.044
9.385 6.418
9.407 6.494
9.100 6.552
9.665 6.903
9.561 6.718
9.240 6.659
9.055 6.500
8.572 6.010
8.797 6.339
9/97 8.580 6.102
8.716 5.831
8.691 5.874
8.600 5.741
8.352 5.505
8.378 5.622
8.391 5.654
8.549 5.671
8.679 5.552
8.812 5.446
8.819 5.494
10.180 4.976
9/98 10.276 4.420
10.970 4.605
10.088 4.714
10.304 4.648
10.192 4.651
10.416 5.287
10.365 5.242
9.912 5.348
10.328 5.622
10.518 5.780
10.470 5.903
10.813 5.970
9/99 10.952 5.877
11.116 6.024
10.943 6.191
11.021 6.442
11.459 6.665
11.548 6.409
11.922 6.004
12.252 6.212
12.563 6.272
12.283 6.031
12.344 6.031
12.312 5.725
9/00 12.603 5.801
</TABLE>
*THE MERRILL LYNCH HIGH YIELD MASTER INDEX IS AN UNMANAGED GROUP OF LOWER
QUALITY BONDS THAT VARY IN MATURITY AND QUALITY.
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.
7
<PAGE> 8
PERFORMANCE UPDATE
Q WILL YOU DESCRIBE HOW KEMPER HIGH YIELD FUND WAS POSITIONED DURING THE
PERIOD?
A During the past 12 months, higher-quality, lower-yielding bonds within the
high-yield market outperformed bonds with lower ratings and higher risk. Since
the start of calendar year 2000, we aggressively sought to upgrade the quality
of the fund's portfolio. We succeeded in cutting the percentage of unrated bonds
nearly in half compared with September 30, 1999 (see Quality), and we
substantially increased the percentage of the portfolio with BB ratings and
higher. Overall, we focused on a smaller number of larger, more liquid bond
issues, and on companies with relatively solid cash flow and proven management.
Our repositioning efforts weren't enough to overcome the negative market
forces at work. One source of anxiety was the size of the distressed high-yield
bond market. As of September 30, 2000, debt trading at or below 50 percent of
par (face value) grew to $43.6 billion from $17.7 billion a year ago, according
to Chase Securities. Many bonds issued by telecom companies took a pounding
during the past year after quarterly sales and profits did not live up to
expectations. Overall, rising oil prices, a weak euro (which made the goods of
domestic companies that export more expensive for Europeans to buy) and higher
operating costs put pressure on high-yield bond issuers' cash flow.
Another reason for the high-yield market's weakness was anemic investor
demand. The lure of potentially higher returns from equity investments,
particularly technology stocks, prompted some investors to liquidate high-yield
holdings and redeploy assets. From January to September 2000, investors
liquidated $4.4 billion from high-yield mutual funds, compared with a $4.9
billion net inflow of new investments for the first nine months of 1999,
according to Chase Securities.
Q STOCKS HAVE BEEN VOLATILE DURING THE PAST 12 MONTHS. HISTORICALLY,
HIGH-YIELD BONDS HAVE HELPED TEMPER EQUITY PORTFOLIO VOLATILITY. DID THIS HAPPEN
IN FISCAL YEAR 2000?
A The high-yield market held up better than stocks in January 2000 and
September 2000, two especially weak periods for stocks. In both months, the
unmanaged S&P 500 index fell more than 5 percent whereas the unmanaged Merrill
Lynch High Yield Master index dipped less than 1 percent. 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. We think it would be a mistake for
investors to overlook the opportunity to maintain the diversification that this
asset class offers, especially given the magnitude of volatility we've seen in
stocks since April.
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 nearly 740 basis points (7.4 percent). Given
that 10-year Treasury bonds yielded 5.80 percent as of September 30, 2000,
high-yield bonds offered double the yield of government bonds for investors
willing to assume additional risk.
During the fiscal year, strong economic growth prompted the Federal Reserve to
raise its short-term interest-rate target by 125 basis points (1.25 percent) to
6.50 percent. However, between September 30, 1999, and September 30, 2000,
long-term Treasury bond prices rose, inverting the yield curve for the first
time since the mid-1990s. This past winter, the government announced a buyback
plan for 30-year Treasuries, and this helped support Treasury bond prices for
the balance of the fiscal year.
In calendar year 2000, mortgage interest rates for consumers reached their
highest levels in five years, while housing and related consumer spending
activity remained strong. Oil prices soared past $35 a barrel. Consumer prices
were relatively tame, but as the fiscal year drew to a close, many economists
remained concerned about the inflationary impact of high oil prices and natural
gas shortages. This fear spilled over into the investment-grade corporate bond
market, and high-quality corporate bonds provided relatively weak returns in
this uncertain environment.
U.S. High-Yield Bond Performance By Rating Category
(As of September 2000)
<TABLE>
<CAPTION>
YTD THIRD QUARTER
<S> <C> <C> <C> <C>
BB 4.63% 2.65%
.........................................................
B -1.80 -0.17
.........................................................
CCC -7.23 -1.49
---------------------------------------------------------
</TABLE>
Source: Chase Securities
8
<PAGE> 9
PERFORMANCE UPDATE
Q HOW HAVE HIGH YIELD BONDS PERFORMED HISTORICALLY AFTER A PERIOD OF
INTEREST-RATE INCREASES BY THE FEDERAL RESERVE?
A The last time the Federal Reserve tightened in a big way was six years
ago, when the Fed raised rates six times. The year after
that -- 1995 -- high-yield bonds returned 20.5 percent as measured by the
Merrill Lynch High Yield Master index. Does that mean anything for the future?
While it is possible, we do not believe we will see a repeat of 1995 next year.
However, with many high-yield bonds that we like to buy yielding around 11
percent, that makes for attractive total return potential, especially given the
volatility we've seen in the equity markets.
Q HOW ARE YOU POSITIONING THE PORTFOLIO FOR THE ROAD AHEAD?
A It's possible that a year from now, high-yield bond prices will have
stabilized, and even rebounded, if we have an economic "soft landing" and the
Federal Reserve begins cutting rates. In the meantime, we think the smartest
place to go is bonds rated BB. Since the start of the year, BB-rated issues have
outperformed single Bs by a significant margin. Investors have been punished for
taking credit risk, and all indications are that this environment is likely to
continue. The latest figures from Lehman Brothers show that single Bs have been
defaulting at a 7.64 percent rate this year, compared with just 0.99 percent for
bonds rated BB.
We don't think there is enough of a potential reward to offset the risks of
stepping down in quality. We are prepared to sacrifice a modest amount of yield
to avoid getting caught in a default squeeze that would impair principal. We
think our prudence will be rewarded in the year ahead.
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 6.50 percent is
150 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.
9
<PAGE> 10
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED SEPTEMBER 30, 2000 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR LIFE OF CLASS
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
KEMPER HIGH YIELD FUND CLASS A -6.29% 4.41% 10.74% 10.24% (since 1/26/78)
...........................................................................................................
KEMPER HIGH YIELD FUND CLASS B -5.32 4.36 n/a 5.56 (since 5/31/94)
...........................................................................................................
KEMPER HIGH YIELD FUND CLASS C -2.66 4.53 n/a 5.64 (since 5/31/94)
...........................................................................................................
</TABLE>
KEMPER HIGH YIELD FUND CLASS A
Growth of an assumed $10,000 investment in Class A
shares from 12/31/79 to 9/30/00
[LINE GRAPH]
<TABLE>
<CAPTION>
SALOMON SMITH
BARNEY LONG-TERM
KEMPER HIGH YIELD HIGH YIELD BOND U.S. CONSUMER PRICE DLJ HIGH YIELD
FUND CLASS A1 INDEX* INDEX+ INDEX++
----------------- ---------------- ------------------- --------------
<S> <C> <C> <C> <C>
12/31/79 9551.00 10000.00 10000.00 10000.00
9457.00 9468.00 11252.00 10435.00
10288.00 9848.00 12256.00 11523.00
14343.00 13221.00 12725.00 15705.00
16880.00 16209.00 13207.00 18892.00
18597.00 17745.00 13729.00 20670.00
22902.00 21765.00 14250.00 26600.00
12/31/86 27061.00 25270.00 14407.00 30759.00
29521.00 26426.00 15046.00 32766.00
33783.00 30686.00 15711.00 36512.00
33366.00 30352.00 16441.00 36654.00
29055.00 27748.00 17445.00 34315.00
42674.00 39729.00 17979.00 49328.00
12/31/92 49978.00 47348.00 18501.00 57546.00
60112.00 56641.00 19009.00 67897.00
59048.00 54498.00 19518.00 66516.00
69356.00 70490.00 20013.00 79612.00
78712.00 76032.00 20678.00 89975.00
87772.00 89519.00 21030.00 100971.00
88899.00 21369.00 101536.00
91026.00 98078.00 21943.00 105187.00
9/30/00 87463.00 99953.00 22534.00 104517.00
</TABLE>
KEMPER HIGH YIELD FUND CLASS B
Growth of an assumed $10,000 investment in Class B
shares from 5/31/94 to 9/30/00
[LINE GRAPH]
<TABLE>
<CAPTION>
SALOMON SMITH
BARNEY LONG-TERM
KEMPER HIGH YIELD HIGH YIELD BOND U.S. CONSUMER PRICE DLJ HIGH YIELD
FUND CLASS B1 INDEX* INDEX+ INDEX++
----------------- ---------------- ------------------- --------------
<S> <C> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00 10000.00
9958.00 9878.00 10034.00 10044.00
10000.00 10094.00 10129.00 10087.00
10005.00 10160.00 10149.00 10048.00
10477.00 10980.00 10264.00 10639.00
10958.00 11947.00 10339.00 11273.00
11310.00 12422.00 10386.00 11635.00
11640.00 13141.00 10407.00 12027.00
11910.00 13058.00 10556.00 12287.00
6/30/96 12092.00 13053.00 10624.00 12515.00
12670.00 13469.00 10698.00 13084.00
13095.00 14174.00 10753.00 13592.00
13061.00 14196.00 10847.00 13709.00
13715.00 15140.00 10868.00 14343.00
14281.00 16005.00 10929.00 14996.00
14470.00 16688.00 10936.00 15253.00
14975.00 17355.00 10997.00 15788.00
6/30/98 15050.00 17761.00 11051.00 15888.00
14021.00 17338.00 11092.00 14889.00
14528.00 18233.00 11112.00 15339.00
14895.00 18493.00 11186.00 15675.00
14825.00 18300.00 11268.00 15822.00
14478.00 17982.00 11383.00 15559.00
14755.00 18284.00 11410.00 15890.00
14473.00 17740.00 11607.00 15661.00
14384.00 17925.00 11688.00 15703.00
9/30/00 14089.00 18633.00 11718.00 15789.00
</TABLE>
KEMPER HIGH YIELD FUND CLASS C
Growth of an assumed $10,000 investment in Class C
shares from 5/31/94 to 9/30/00
[LINE GRAPH]
<TABLE>
<CAPTION>
SALOMON SMITH
BARNEY LONG-TERM
KEMPER HIGH YIELD HIGH YIELD BOND U.S. CONSUMER PRICE DLJ HIGH YIELD
FUND CLASS C1 INDEX* INDEX+ INDEX++
----------------- ---------------- ------------------- --------------
<S> <C> <C> <C> <C>
5/31/94 10000.00 10000.00 10000.00 10000.00
9971.00 9878.00 10034.00 10044.00
10027.00 10094.00 10129.00 10087.00
10032.00 10160.00 10149.00 10048.00
10506.00 10980.00 10264.00 10639.00
10989.00 11947.00 10339.00 11273.00
11343.00 12422.00 10386.00 11635.00
11677.00 13141.00 10407.00 12027.00
11948.00 13058.00 10556.00 12287.00
6/30/96 12131.00 13053.00 10624.00 12515.00
12712.00 13469.00 10698.00 13084.00
13139.00 14174.00 10753.00 13592.00
13108.00 14196.00 10847.00 13709.00
13764.00 15140.00 10868.00 14343.00
14349.00 16005.00 10929.00 14996.00
14523.00 16688.00 10936.00 15253.00
15048.00 17355.00 10997.00 15788.00
6/30/98 15124.00 17761.00 11051.00 15888.00
14078.00 17338.00 11092.00 14889.00
14588.00 18233.00 11112.00 15339.00
14957.00 18493.00 11186.00 15675.00
14889.00 18300.00 11268.00 15822.00
14542.00 17982.00 11383.00 15559.00
14820.00 18284.00 11410.00 15890.00
14540.00 17740.00 11607.00 15661.00
14429.00 17925.00 11688.00 15703.00
9/30/00 14156.00 18633.00 11718.00 15789.00
</TABLE>
PERFORMANCE IS HISTORICAL AND INCLUDES
REINVESTMENT OF DIVIDENDS AND CAPITAL
GAINS. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE WITH CHANGING
MARKET CONDITIONS, SO THAT WHEN
REDEEMED, SHARES MAY BE WORTH MORE OR
LESS THAN ORIGINAL COST.
*THE MAXIMUM SALES CHARGE FOR CLASS A
SHARES IS 4.5%. FOR CLASS B SHARES
ADJUSTMENT FOR THE APPLICABLE
CONTINGENT DEFERRED SALES CHARGE
(CDSC) IS AS FOLLOWS: 1-YEAR, 3%; 5-
YEAR, 1%; SINCE INCEPTION, 0%; AND FOR
CLASS C SHARES THERE IS NO ADJUSTMENT
FOR SALES CHARGE. THE MAXIMUM CDSC FOR
CLASS B SHARES IS 4%. FOR CLASS C
SHARES, THERE IS A 1% CDSC ON CERTAIN
REDEMPTIONS WITHIN THE FIRST YEAR OF
PURCHASE.
(1)PERFORMANCE INCLUDES REINVESTMENT OF
DIVIDENDS AND ADJUSTMENT FOR THE
MAXIMUM SALES CHARGE FOR CLASS A
SHARES AND THE CONTINGENT DEFERRED
SALES CHARGE IN EFFECT AT THE END OF
THE PERIOD FOR CLASS B SHARES. WHEN
REVIEWING THE PERFORMANCE CHART,
PLEASE NOTE THAT THE INCEPTION DATE
FOR THE SALOMON SMITH BARNEY LONG-
TERM HIGH YIELD BOND INDEX IS
JANUARY 1, 1980. AS A RESULT, WE ARE
NOT ABLE TO ILLUSTRATE THE LIFE OF
CLASS PERFORMANCE (SINCE JANUARY 26,
1978) FOR KEMPER HIGH YIELD FUND
CLASS A SHARES. IN COMPARING THE
PERFORMANCE OF THE FUND WITH THAT OF
THE SALOMON SMITH BARNEY LONG-TERM
HIGH YIELD BOND INDEX AND THE U.S.
CONSUMER PRICE INDEX, YOU SHOULD
ALSO NOTE THAT THE FUND'S
PERFORMANCE REFLECTS THE MAXIMUM
SALES CHARGE, WHILE NO SUCH CHARGES
ARE REFLECTED IN THE PERFORMANCE OF
THE INDICES.
THE FUND MAY INVEST IN LOWER-RATED
AND NONRATED SECURITIES, WHICH
PRESENT GREATER RISK OF LOSS TO
PRINCIPAL AND INTEREST THAN
HIGHER-RATED SECURITIES.
*THE SALOMON SMITH BARNEY LONG-TERM
HIGH YIELD BOND INDEX IS ON A TOTAL
RETURN BASIS, WITH ALL DIVIDENDS
REINVESTED, AND COMPRISES HIGH-YIELD
BONDS WITH A PAR VALUE OF $50 MILLION
OR HIGHER AND A REMAINING MATURITY OF
10 YEARS OR LONGER RATED BB+ OR LOWER
BY STANDARD & POOR'S CORPORATION OR
BAL OR LOWER BY MOODY'S INVESTORS
SERVICE, INC. THIS INDEX IS UNMANAGED.
SOURCE: SALOMON SMITH BARNEY.
+THE U.S. CONSUMER PRICE INDEX IS A
STATISTICAL MEASURE OF CHANGE, OVER
TIME, IN THE PRICES OF GOODS AND
SERVICES IN MAJOR EXPENDITURE GROUPS
FOR ALL URBAN CONSUMERS. SOURCE:
WIESENBERGER(R).
++THE DLJ HIGH YIELD INDEX DESIGNED TO
MIRROR THE INVESTIBLE UNIVERSE OF U.S.
DOLLAR DENOMINATED HIGH YIELD DEBT
MARKET. SOURCE: DONALDSON, LUFKIN &
JENRETTE.
10
<PAGE> 11
PORTFOLIO STATISTICS
KEMPER HIGH YIELD FUND
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION BY SECTOR* ON 9/30/00
<S> <C> <C> <C>
TELECOMMUNICATIONS 24%
...............................................................................
CONSUMER CYCLICALS 20
...............................................................................
MEDIA 17
...............................................................................
BASIC INDUSTRY 11
...............................................................................
CAPITAL GOODS 9
...............................................................................
CONSUMER NONCYCLICALS 6
...............................................................................
ENERGY 4
...............................................................................
U.S. TREASURIES 2
...............................................................................
COMMON AND PREFERRED STOCK 2
...............................................................................
TRANSPORTATION 2
...............................................................................
CASH AND EQUIVALENTS 3
-------------------------------------------------------------------------------
100%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
YEARS TO MATURITY ON 9/30/00 ON 9/30/99
<S> <C> <C> <C> <C>
1-10 98% 97%
................................................................................
11-20 2 3
--------------------------------------------------------------------------------
</TABLE>
[PIE CHART] [PIE CHART]
<TABLE>
<CAPTION>
QUALITY ON 9/30/00 ON 9/30/99
<S> <C> <C> <C> <C>
AAA TO A 2% --
................................................................................
BBB 6 1%
................................................................................
BB 20 13
................................................................................
B 64 71
................................................................................
BELOW B AND NONRATED 8 15
--------------------------------------------------------------------------------
100% 100%
</TABLE>
*PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
KEMPER HIGH YIELD FUND
Portfolio of Investments at September 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
REPURCHASE AGREEMENTS--0.3% AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
State Street Bank and Trust Company,
6.480%, to be repurchased at $9,118,281
on 10/02/2000(b)
(Cost $9,115,000) $ 9,115,000 $ 9,115,000
---------------------------------------------------------------------------
<CAPTION>
U.S. TREASURY OBLIGATIONS--1.8%
<S> <C> <C> <C> <C> <C>
U.S. Treasury Bonds:
15.750%, 11/15/2001 22,000,000 24,210,340
14.000%, 11/15/2011 23,000,000 32,142,500
---------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $56,292,344) 56,352,840
---------------------------------------------------------------------------
<CAPTION>
CORPORATE BONDS--93.8%
<S> <C> <C> <C> <C> <C>
CONSUMER DISCRETIONARY--13.1%
AFC Enterprises, 10.250%, 05/15/2007 22,680,000 22,566,600
AMF Bowling, Inc:
10.875%, 06/15/2006 33,642,000 7,401,240
Step-up Coupon, 0% to 03/15/2001, 12.250%
to 03/15/2006 20,291,000 4,058,200
Advantica Restaurant Co., 11.250%,
01/15/2008 5,396,934 2,995,298
Avondale Mills, 10.250%, 05/01/2006 21,391,000 20,321,450
Cinemark USA, Inc.:
8.500%, 08/01/2008 19,710,000 7,686,900
Series D, 9.625%, 08/01/2008 700,000 301,000
Circus Circus Mandalay Resort Group,
6.450%, 02/01/2006 3,640,000 3,208,005
Color Tile, Inc., 10.750%, 12/15/2001* 20,480,000 204,800
Eldorado Resorts, 10.500%, 08/15/2006 17,981,000 18,160,810
Finlay Enterprises, Inc., 9.000%,
05/01/2008 4,380,000 4,007,700
Finlay Fine Jewelry Co., 8.375%,
05/01/2008 15,694,000 14,438,480
Florida Panthers, 9.875%, 04/15/2009 18,775,000 18,117,875
FRD Acquisition, 12.500%, 07/15/2004 2,350,000 869,500
Galey & Lord, Inc., 9.125%, 03/01/2008 8,880,000 5,638,800
Guitar Center Management, 11.000%,
07/01/2006 19,500,000 18,817,500
Harvey's Casino Resorts, 10.625%,
06/01/2006 19,470,000 20,248,800
Hines Horticulture, Inc., 11.750%,
10/15/2005 12,183,000 12,000,255
HMH Properties Inc.:
8.450%, 12/01/2008 1,600,000 1,528,000
7.875%, 08/01/2008 36,410,000 33,497,200
Hollywood Entertainment Corp., 10.630%,
08/15/2004 5,000,000 3,850,000
Horseshoe Gaming Holdings, 8.625%,
05/15/2009 5,720,000 5,619,900
Horseshoe Gaming LLC, 9.375%, 06/15/2007 2,430,000 2,423,925
Imperial Home Decor Group, Inc., 11.000%,
03/15/2008* 12,740,000 127,400
International Game Technology, 8.375%,
05/15/2009 15,010,000 14,672,275
Krystal Inc., 10.250%, 10/01/2007 10,190,000 7,642,500
MGM Grand, Inc., 9.750%, 06/01/2007 27,270,000 28,156,275
MGM Mirage, Inc., 8.500%, 09/15/2010 17,900,000 17,542,000
</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>
Mandalay Resort Group, 9.500%, 08/01/2008 $ 3,700,000 $ 3,764,750
Mandalay Resort Group, 10.250%,
08/01/2007 8,600,000 8,858,000
Mohegan Tribal Gaming Authority, 8.750%,
01/01/2009 18,550,000 18,364,500
National Vision Association, Ltd.,
12.750%, 10/15/2005 23,240,000 9,296,000
Park Place Entertainment, Inc., 9.375%,
02/15/2007 18,090,000 18,361,350
Perkins Finance, L.P., 10.125%,
12/15/2007 11,550,000 10,857,000
Restaurant Co., Step-up Coupon, 0% to
05/15/2003, 11.250% to 05/15/2008 21,780,000 10,890,000
Sealy Mattress Co.:
Step-up Coupon, 0% to 12/15/2002,
10.875% to 12/15/2007 14,610,000 10,847,925
9.875%, 12/15/2007 6,400,000 6,208,000
Specialty Retailers, Inc.:
8.500%, 07/15/2005 5,145,000 205,800
9.000%, 07/15/2007* 19,715,000 20
Station Casinos, Inc.:
9.750%, 04/15/2007 8,050,000 8,070,125
10.125%, 03/15/2006 7,330,000 7,458,275
---------------------------------------------------------------------------
409,284,433
------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--1.0%
Dyersburg Corp., 9.750%, 09/01/2007* 18,155,000 1,452,400
Grove Worldwide LLC, 9.250%, 05/01/2008 12,580,000 1,509,600
Jafra Cosmetics International, Inc.,
11.750%, 05/01/2008 20,920,000 20,083,200
US Can Corporation, 12.375%, 10/01/2010 8,470,000 8,639,400
---------------------------------------------------------------------------
31,684,600
------------------------------------------------------------------------------------------------------------------------
HEALTH--2.8%
Dade International, Inc., 11.125%,
05/01/2006 32,980,000 10,223,800
MEDIQ, Inc., 11.000%, 06/01/2008* 4,850,000 242,500
Magellan Health Services, Inc., 9.000%,
02/15/2008 30,390,000 20,665,200
Mariner Post-Acute Network, Inc.:
Step-up Coupon, 0% to 11/01/2002,
10.500% to 11/01/2007* 58,210,000 291,050
10.500%, 08/01/2006 26,160,000 24,852,000
Tenet Healthcare Corp., 9.250%,
09/01/2010 29,160,000 30,508,650
Vencor, Inc., 9.875%, 05/01/2005* 10,520,000 1,578,000
---------------------------------------------------------------------------
88,361,200
------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--23.5%
Allegiance Telecom, Inc., 12.875%,
05/15/2008 24,310,000 24,796,200
Call-Net Enterprises, Inc.:
Step-up Coupon, 0% to 05/15/2004,
10.800% to 05/15/2009 3,940,000 1,182,000
Step-up Coupon, 0% to 8/15/2003, 8.940%
to 08/15/2008 2,525,000 808,000
9.375%, 05/15/2009 8,680,000 3,906,000
Century Communications Corp., 8.375%,
12/15/2007 8,100,000 7,047,000
Communicacion Cellular, S.A., Step-up
Coupon, 0% to 09/29/2000, 14.125% to
03/01/2005 33,190,000 25,888,200
</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>
Crown Castle International Corp.:
Step-up Coupon, 0% to 11/15/2002,
10.625% to 11/15/2007 $ 9,840,000 $ 7,724,400
9.500%, 08/01/2011 6,400,000 6,144,000
10.750%, 08/01/2011 8,550,000 8,678,250
Step-up Coupon, 0% to 08/01/2004, 11.25%
to 08/01/2011 7,270,000 4,798,200
Dobson Communications Corp., 10.875%,
07/01/2010 4,940,000 4,791,800
Esprit Telecom Group, PLC: 10.875%,
06/15/2008 10,060,000 4,627,600
11.500%, 12/15/2007 23,270,000 10,704,200
FairPoint Communications, 12.500%,
05/01/2010 14,270,000 13,913,250
Global Crossing Holdings Ltd., 9.500%,
11/15/2009 30,150,000 29,999,250
Global Telesystems Group,
9.875%, 02/15/2005 5,000,000 2,200,000
Hermes Europe Railtel BV, 11.500%,
08/15/2007 2,420,000 1,113,200
ICG Holdings, Inc., Step-up Coupon, 0% to
09/15/2000, 13.500% to 09/15/2005 44,660,000 9,825,200
Impsat Corp., 12.375%, 06/15/2008 21,990,000 16,492,500
Intermedia Communications of Florida,
Inc.:
Step-up Coupon, 0% to 05/15/2001,
12.500% to 05/15/2006 21,080,000 19,920,600
Step-up Coupon, 0% to 07/15/2002,
11.250% to 07/15/2007 25,885,000 21,613,975
KMC Telecom Holdings, Inc.:
Step-up Coupon, 0% to 02/15/2003, 12.500%
to 02/15/2008 44,960,000 15,286,400
13.500%, 05/15/2009 17,275,000 10,883,250
Level 3 Communications, Inc.:
11.000%, 03/15/2000 5,000,000 4,750,000
11.250%, 03/15/2010 7,080,000 6,726,000
MGC Communications, 13.000%, 10/01/2004 21,256,000 17,429,920
McLeod USA, Inc., 9.250%, 07/15/2007 16,065,000 14,940,450
MetroNet Communications Corp.:
Step-up Coupon, 0% to 11/01/2002,
10.750% to 11/01/2007 10,450,000 9,287,438
Step-up Coupon, 0% to 06/15/2003,
9.950%, 06/15/2008 25,235,000 21,008,138
10.625%, 11/01/2008 16,190,000 17,869,713
12.000%, 08/15/2007 8,280,000 9,335,700
Metromedia Fiber Network, Inc., 10.000%,
11/15/2008 16,540,000 15,299,500
Millicom International Cellular, S.A.,
Step-up Coupon, 0% to 06/01/2001,
13.500% to 06/01/2006 36,525,000 31,776,750
Nextel Communications, 9.375%, 11/15/2009 51,720,000 50,879,550
Nextlink Communications, Inc. :
10.750%, 11/15/2008 955,000 892,925
12.500%, 04/15/2006 27,230,000 26,685,400
PTC International Finance:
Step-up Coupon, 0% to 07/01/2002,
10.750% to 07/01/2007 16,630,000 11,641,000
11.250%, 12/01/2009 3,700,000 3,700,000
Price Communications Wireless, 9.125%,
12/15/2006 21,710,000 22,144,200
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Primus Telecommunications Group:
11.250%, 01/15/2009 $ 5,560,000 $ 2,780,000
11.750%, 08/01/2004 21,226,000 11,674,300
12.750%, 10/15/2009 7,410,000 3,779,100
Rogers Cantel, 9.750%, 06/01/2016 43,135,000 46,370,125
SBA Communications Corp., Step-up Coupon,
0% to 03/01/2003, 12.000% to 03/01/2008 16,390,000 12,210,550
Spectrasite Holdings, Inc.:
Step-up Coupon, 0% to 04/15/2004,
11.250% to 04/15/2009 26,430,000 14,470,425
Step-up Coupon, 0% to 07/15/2003,
12.000% to 07/15/2008 32,540,000 22,452,600
10.750%, 03/15/2010 2,240,000 2,128,000
Telecorp PCS, Inc.:
Step-up-Coupon, 0% to 04/15/2004,
11.625 to 04/15/2009 8,310,000 5,609,250
10.625%, 07/15/2010 10,070,000 10,170,700
Teligent, Inc.:
Step-up Coupon, 0% to 03/01/2003,
11.500% to 03/01/2008 9,970,000 2,791,600
11.500%, 12/01/2007 17,030,000 7,493,200
Tritel PCS Inc., Step-up Coupon, 0% to
05/01/2004, 12.75% to 05/15/2009 19,580,000 13,118,600
Triton Communications, L.L.C., Step-up
Coupon, 0% to 05/01/2003, 11.000% to
05/01/2008 21,060,000 15,795,000
Versatel Telecom:
11.875%, 07/15/2009 4,540,000 3,949,800
13.250%, 05/15/2008 11,330,000 10,197,000
13.250%, 05/15/2008 4,400,000 3,960,000
Viatel, Inc., Step-up Coupon, 0% to
04/15/2003, 12.500% to 04/15/2008 6,100,000 1,586,000
Voicestream Wireless Corp., 10.375%,
11/15/2009 24,420,000 26,434,650
---------------------------------------------------------------------------
733,681,059
------------------------------------------------------------------------------------------------------------------------
MEDIA--19.5%
AMFM, Inc.:
Step-up Coupon, 0% to 02/01/2002,
12.750% to 02/01/2009 25,000,000 23,968,750
8.000%, 11/01/2008 21,930,000 22,176,713
Adelphia Communications Corp., 9.375%,
11/15/2009 9,350,000 8,602,000
AES Corp., 9.375%, 09/15/2010 21,410,000 21,624,100
American Lawyer Media, Inc., Step-up
Coupon, 0% to 12/15/2002, 12.250% to
12/15/2008 6,480,000 4,325,400
Australis Holdings:
Step-up Coupon 0% to 11/01/2000,
15.000% to 11/01/2002* 49,213,000 492,130
Zero coupon, 11/01/2000 1,527,070 1,145,303
Avalon Cable Holdings LLC, Step-up
coupon, 0% to 12/01/03, 11.875% to
12/01/2008 21,170,000 14,395,600
CSC Holdings, Inc.:
8.125%, 08/15/2009 15,156,000 14,852,880
8.125%, 07/15/2009 5,200,000 5,096,000
9.250%, 11/01/2005 12,740,000 12,867,400
10.500%, 05/15/2016 27,375,000 29,565,000
Century Communications Corp., 9.500%,
03/01/2005 1,920,000 1,804,800
</TABLE>
The accompanying notes are an integral part of the financial statements. 15
<PAGE> 16
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Chancellor Media Corp., 8.125%,
12/15/2007 $ 6,070,000 $ 6,130,700
Charter Communications Holdings LLC,
8.250%, 04/01/2007 51,710,000 46,539,000
Comcast UK Cable Partners, Ltd., Step-up
Coupon 0% to 11/15/2000, 11.2000% to
11/15/2007 10,225,000 9,688,188
Diamond Cable Communications, PLC,
Step-up Coupon, 0% to 12/15/2000,
11.750% to 12/15/2005 14,660,000 13,780,400
Echostar DBS Corp.:
9.250%, 02/01/2006 21,930,000 21,546,225
9.375%, 02/01/2009 11,485,000 11,255,300
Exodus Communications, Inc., 11.625%,
07/15/2010 10,740,000 10,847,400
Flextronics International, 9.875%,
07/01/2010 8,810,000 9,052,275
Frontiervision LP, 11.000%, 10/15/2006 14,450,000 14,450,000
Interep National Radio Sales, Inc.,
10.000%, 07/01/2008 17,440,000 15,434,400
NTL Communications Corp., 11.875%,
10/01/2010 2,840,000 2,779,650
NTL, Inc., 11.500%, 10/01/2008 56,285,000 54,877,875
Outdoor Systems, Inc., 9.375%, 10/15/2006 32,270,000 33,439,788
Panavision, Inc., Step-up Coupon, 0% to
02/01/2002, 9.625% to 02/01/2006 19,840,000 4,960,000
PSINet, Inc.:
10.000%, 02/15/2005 2,520,000 1,612,800
11.000%, 08/01/2009 21,390,000 13,689,600
11.500%, 11/01/2008 18,080,000 11,932,800
Renaissance Media Group, Step-up Coupon,
0% to 04/15/2003, 10.000% to 04/15/2008 14,545,000 9,745,150
Rogers Cablesystems Ltd., 10.000%,
03/15/2005 8,120,000 8,566,600
SFX Entertainment, Inc.:
9.125%, 02/01/2008 12,840,000 13,417,800
9.125%, 12/01/2008 22,600,000 23,617,000
Sinclair Broadcasting Group, Inc.,
8.750%, 12/15/2007 7,190,000 6,722,650
Star Choice Communications, Inc.,
13.000%, 12/15/2005 3,850,000 4,235,000
TeleWest Communications, PLC:
Step-up Coupon, 0% to 10/01/2000,
11.000% to 10/01/2007 35,309,000 33,808,368
9.625%, 10/01/2006 4,910,000 4,468,100
11.250%, 11/01/2008 19,430,000 18,944,250
Transwestern Publishing:
Step-up Coupon, 0% to 11/15/2002,
11.875% to 11/15/2008 5,885,000 4,531,450
9.625%, 11/15/2007 8,650,000 8,628,375
United International Holdings, Step-up
Coupon, 0% to 02/15/2003, 10.750% to
02/15/2008 35,400,000 23,718,000
United Pan-Europe Communications,
10.875%, 11/01/2007 8,040,000 6,994,800
---------------------------------------------------------------------------
610,330,020
------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--3.3%
Avis Rent A Car, 11.000%, 05/01/2009 18,350,000 19,955,625
Coinmach Corp., 11.750%, 11/15/2005 51,760,000 51,889,400
</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>
Kindercare Learning Centers, Inc.,
9.500%, 02/15/2009 $18,100,000 $ 16,742,500
La Petite Academy, Inc., 10.000%,
05/15/2008 12,320,000 7,515,200
Spincycle, Inc., Step-up Coupon, 0% to
05/01/2001, 12.750% to 05/01/2005 26,295,000 7,888,500
---------------------------------------------------------------------------
103,991,225
------------------------------------------------------------------------------------------------------------------------
DURABLES--1.6%
Airxcel, 11.000%, 11/15/2007 7,485,000 4,790,400
DeCrane Aircraft Holdings, Inc., 12.000%,
09/30/2008 13,840,000 12,732,800
Fairchild Corp., 10.750%, 04/15/2009 7,830,000 6,342,300
United Rentals, Inc. :
9.000%, 04/01/2009 5,660,000 5,207,200
9.250%, 01/15/2009 23,180,000 21,615,350
---------------------------------------------------------------------------
50,688,050
------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--16.9%
Agriculture, Mining and Chemicals, Inc.,
10.750%, 09/30/2003 24,185,000 16,445,800
Atlantis Group, Inc., 11.000%, 02/15/2003 25,355,000 20,030,450
BPC Holdings Corp., 12.500%, 06/15/2006 13,915,509 10,714,942
Berry Plastics Corp., 12.250%, 04/15/2004 20,499,000 19,269,060
Consumers International, 10.250%,
04/01/2005 15,150,000 5,151,000
Day International Group, Inc., 11.125%,
06/01/2005 22,087,000 21,755,695
Delco Remy International, 10.625%,
08/01/2006 22,195,000 21,751,100
Eagle-Picher Holdings, Inc., 9.375%,
03/01/2008 12,260,000 10,175,800
Flowserve Corporation, 12.250%,
08/15/2010 7,080,000 7,292,400
Foamex, L.P., 13.500%, 08/15/2005 17,810,000 14,782,300
Fonda Group, 9.500%, 03/01/2007 15,720,000 13,047,600
GS Technologies:
12.000%, 09/01/2004 13,795,000 1,379,500
12.250%, 10/01/2005 16,830,000 1,683,000
Gaylord Container Corp.: 9.750%,
06/15/2007 20,600,000 14,420,000
9.875%, 02/15/2008 6,185,000 2,164,750
Grove Holdings LLC:
Step-up Coupon, 0% to 05/01/2003,
11.625% to 05/01/2009* 3,865,000 38,650
14.500%, 05/01/2010 11,030,139 110,301
Hayes Wheels International, Inc.,
11.000%, 07/15/2006 23,070,000 21,916,500
Huntsman Package, 11.750%, 12/01/2004 36,635,000 37,092,938
Knoll, Inc., 10.875%, 03/15/2006 13,301,000 13,567,020
Millar Western Forest Products, Ltd.,
9.875%, 05/15/2008 5,100,000 4,692,000
Motors and Gears, Inc., 10.750%,
11/15/2006 8,390,000 8,138,300
NL Industries, Inc. , Senior Note,
11.750%, 10/15/2003 42,034,000 42,454,340
Neenah Corp., 11.125%, 05/01/2007 10,520,000 8,258,200
Plainwell, Inc., 11.000%, 03/01/2008 18,460,000 3,692,000
Printpack, Inc.: 9.875%, 08/15/2004 6,280,000 6,185,800
10.625%, 08/15/2006 22,640,000 21,847,600
</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>
Riverwood International Corp.: 10.250%,
04/01/2006 $ 8,105,000 $ 8,064,475
10.625%, 08/01/2007 16,081,000 16,161,405
10.875%, 04/01/2008 49,915,000 45,672,225
SF Holdings Group, Inc., Step-up Coupon,
0% to 03/15/2003, 12.750% to 03/15/2008 23,110,000 12,017,200
Stone Container Corp.: 10.750%,
10/01/2002 2,915,000 2,958,725
11.500%, 08/15/2006 7,800,000 8,034,000
12.250%, 04/01/2002 6,170,000 6,231,700
Tenneco Automotive, Inc., 11.625%,
10/15/2009 25,510,000 16,198,850
Terex Corp.: 8.875%, 04/01/2008 16,760,000 15,084,000
8.875%, 04/01/2008 5,230,000 4,707,000
Terra Industries, Inc., 10.500%,
06/15/2005 8,175,000 5,232,000
Texas Petrochemicals, 11.125%, 07/01/2006 10,800,000 9,180,000
U.S. Can Corp., 10.125%, 10/15/2006 28,889,000 30,911,230
---------------------------------------------------------------------------
528,509,856
------------------------------------------------------------------------------------------------------------------------
ENERGY--3.0%
Chesapeake Energy Corp., 9.625%,
05/01/2005 7,120,000 7,084,400
Continental Resources, Inc., 10.250%,
08/01/2008 17,300,000 15,916,000
EOTT Energy Partners, 11.250%, 11/01/2009 450,000 477,000
Key Energy Services, Inc., 14.000%,
01/15/2009 7,780,000 8,869,200
Nuevo Energy, 9.375%, 10/01/2010 3,410,000 3,410,000
Pen Holdings, Inc., 9.875%, 06/15/2008 7,870,000 5,902,500
Pride International, Inc., 10.000%,
06/01/2009 17,025,000 17,791,125
R&B Falcon Corp.: 9.500%, 12/15/2008 5,320,000 5,745,600
11.000%, 03/15/2006 6,320,000 7,268,000
Stone Energy Corp., 8.750%, 09/15/2007 12,740,000 12,612,600
Triton Energy, Ltd., 8.875%, 10/01/2007 8,900,000 8,900,000
---------------------------------------------------------------------------
93,976,425
------------------------------------------------------------------------------------------------------------------------
METALS & MINERALS--1.6%
MMI Products, Inc., 11.250%, 04/15/2007 9,410,000 9,198,275
Metal Management, Inc., 10.000%,
05/15/2008 21,680,000 2,168,000
Metals USA, Inc., 8.625%, 02/15/2008 19,850,000 15,086,000
Renco Steel Holdings Co., Series B,
10.875%, 02/01/2005 28,530,000 18,544,500
Republic Technologies International,
13.750%, 07/15/2009 29,690,000 5,938,000
---------------------------------------------------------------------------
50,934,775
------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--4.7%
Congoleum Corp., 8.625%, 08/01/2008 20,770,000 12,462,000
Del Webb Corp., 9.750%, 01/15/2008 6,210,000 5,775,300
Dimac Corp., 12.500%, 10/01/2008* 21,510,000 215,100
Forecast Group, L.P., 11.375%, 12/15/2000 14,620,000 14,620,000
Fortress Group, 13.750%, 05/15/2003 14,080,000 7,462,400
Hovnanian Enterprises, Inc.:
9.125%, 05/01/2009 11,790,000 10,669,950
9.750%, 06/01/2005 6,315,000 5,620,350
Lennar Corp., 9.950%, 05/01/2010 21,790,000 22,334,750
</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>
Nortek, Inc.:
9.125%, 09/01/2007 $15,600,000 $ 14,742,000
9.875%, 03/01/2004 15,675,000 15,126,375
Series A, 8.875%, 08/01/2008 6,430,000 5,947,750
Ryland Group, Inc.,
8.250%, 04/01/2008 14,950,000 13,156,000
Standard Pacific Corp.:
8.000%, 02/15/2008 3,400,000 3,102,500
8.500%, 04/01/2009 6,760,000 6,371,300
Toll Corp. :
7.750%, 09/15/2007 2,280,000 2,143,200
8.000%, 05/01/2009 2,830,000 2,674,350
8.125%, 02/01/2009 1,400,000 1,319,500
8.750%, 11/15/2006 3,180,000 3,148,200
---------------------------------------------------------------------------
146,891,025
------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.6%
Petro Stopping Centers, 10.500%,
02/01/2007 25,150,000 21,880,500
Transtar Holdings, Inc., Step-up Coupon,
0% to 12/15/1999, 13.375% to 12/15/2003 10,100,000 10,276,750
Travelcenters America, 10.250%,
04/01/2007 16,380,000 16,502,850
---------------------------------------------------------------------------
48,660,100
------------------------------------------------------------------------------------------------------------------------
UTILITIES--1.2%
Azurix Corp.:
10.375%, 02/15/2007 7,435,000 6,765,850
10.750%, 02/15/2010 16,680,000 14,845,200
Calpine Corp:
7.750%, 04/15/2009 8,730,000 8,279,008
8.625%, 08/15/2010 6,890,000 6,869,675
---------------------------------------------------------------------------
36,759,733
---------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $3,645,857,535) 2,933,752,501
---------------------------------------------------------------------------
FOREIGN BONDS--U.S.$ DENOMINATED--1.8%
AES Corporation, 11.500%, 08/30/2010 7,130,000 7,539,975
Dolphin Telecom PLC, Zero coupon,
05/15/2009 13,860,000 2,633,400
Euramax International, PLC, 11.250%,
10/01/2006 15,405,000 13,402,350
Federal Republic of Brazil, 14.500%,
10/15/2009 10,000,000 11,050,000
Kappa Beheer BV, 10.625%, 07/15/2009 5,850,000 6,010,875
TFM, S.A. de C.V., 10.250%, 06/15/2007 17,350,000 15,962,000
---------------------------------------------------------------------------
TOTAL FOREIGN BONDS--U.S. $ DENOMINATED
(Cost $65,920,083) 56,598,600
---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE> 20
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
FOREIGN BONDS--U.S.$ DENOMINATED--1.8%
<S> <C> <C> <C> <C> <C>
<CAPTION>
COMMON STOCKS--0.5% SHARES VALUE
<S> <C> <C> <C> <C> <C>
AT&T Canada Inc.* 28,392 $ 865,956
Gaylord Container Corp.* 1,353,034 2,283,245
ICG Communications, Inc.* 67,617 29,582
Intermedia Communications Inc.* 60,886 1,796,137
SF Holdings Group, Inc.* 6,176 30,880
Tele1 Europe Holding AB - ADR* 122,760 1,104,840
World Access, Inc.* 11,693 8,652,524
---------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $24,290,210) 14,763,164
---------------------------------------------------------------------------
<CAPTION>
PREFERRED STOCKS--1.6% SHARES VALUE
<S> <C> <C> <C> <C> <C>
Crown American Realty Trust 328,260 12,630,310
Dobson Communications, PIK 13,633 12,542,360
Eagle-Picher Holdings, Inc. 1,750 3,937,500
Nextel Communications, Inc., PIK 876 840,956
SF Holdings Group, Inc., PIK 557 2,228,000
Sinclair Capital 210,400 19,356,800
---------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost $66,783,576) 51,535,926
---------------------------------------------------------------------------
<CAPTION>
WARRANTS*--0.2% SHARES VALUE
<S> <C> <C> <C> <C> <C>
American Banknote Corp. 16,850 168
Australis Holdings 49,523 0
Bar Technologies 9,370 187,400
Benedek Communications Corp. 90,000 180,000
Capital Pacific Holdings 54,431 27,216
Communicacion Cellular, S.A. 30,800 308,000
Decrane Holdings Co. 15,830 0
Econophone Inc. 19,865 1,390,550
Empire Gas Corp. 31,795 3,180
Gulf States Steel 29,670 297
KMC Telecom Holdings, Inc. 23,900 95,600
Ono Finance PLC 6,960 626,400
Primus Telecommunications Group 13,050 71,775
Republic Technologies International 29,690 297
Spincycle, Inc. 26,295 263
Star Choice Communications 233,916 1,988,286
UIH Australia Pacific, Inc. 14,150 212,250
Waxman Industries, Inc. 800,453 8,000
---------------------------------------------------------------------------
TOTAL WARRANTS
(Cost $5,516,353) 5,099,682
---------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost $3,873,775,101)(a) $3,127,217,713
---------------------------------------------------------------------------
</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 interest or has filed for bankruptcy.
(a) The cost for federal income tax purposes was $3,882,057,109. At September
30, 2000, net unrealized depreciation for all securities based on tax cost
was $754,839,396. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess of market value over tax
cost of $37,836,382 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$792,675,778.
(b) Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
PIK denotes that interest or dividend is paid in kind.
20 The accompanying notes are an integral part of the financial statements.
<PAGE> 21
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
As of September 30, 2000
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $3,873,775,101) $3,127,217,713
------------------------------------------------------------------------------
Cash 5,045,888
------------------------------------------------------------------------------
Receivable for investments sold 19,812,694
------------------------------------------------------------------------------
Interest receivable 94,098,003
------------------------------------------------------------------------------
Receivable for Fund shares sold 1,994,555
------------------------------------------------------------------------------
TOTAL ASSETS 3,248,168,853
------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased 26,403,505
------------------------------------------------------------------------------
Payable for Fund shares redeemed 13,101,546
------------------------------------------------------------------------------
Accrued management fee 1,381,513
------------------------------------------------------------------------------
Other accrued expenses and payables 1,885,152
------------------------------------------------------------------------------
Total liabilities 42,771,716
------------------------------------------------------------------------------
NET ASSETS, AT VALUE $3,205,397,137
------------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income $ 4,395,050
------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (746,557,388)
------------------------------------------------------------------------------
Accumulated net realized gain (loss) (393,049,281)
------------------------------------------------------------------------------
Paid-in capital 4,340,608,756
------------------------------------------------------------------------------
NET ASSETS, AT VALUE $3,205,397,137
------------------------------------------------------------------------------
NET ASSET VALUE AND OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($2,276,521,754 / 358,910,410 outstanding shares of
beneficial interest, $.01 par value, unlimited number of
shares authorized) $6.34
------------------------------------------------------------------------------
Maximum offering price per share (100/95.50 of $6.34) $6.64
------------------------------------------------------------------------------
CLASS B SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($792,225,581
/ 125,068,742 outstanding shares of beneficial interest,
$.01 par value, unlimited number of shares authorized) $6.33
------------------------------------------------------------------------------
CLASS C SHARES
Net asset value, offering and redemption price (subject to
contingent deferred sales charge) per share ($124,359,159
/ 19,583,229 outstanding shares of beneficial interest,
$.01 par value, unlimited number of shares authorized) $6.35
------------------------------------------------------------------------------
CLASS I SHARES
Net asset value, offering and redemption price per share
($12,290,643 / 1,940,608 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares
authorized) $6.33
------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 21
<PAGE> 22
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended September 30, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 9,445,958
-----------------------------------------------------------------------------
Interest 460,070,503
-----------------------------------------------------------------------------
Total income 469,516,461
-----------------------------------------------------------------------------
Expenses:
Management fee 20,715,587
-----------------------------------------------------------------------------
Services to shareholders 6,158,648
-----------------------------------------------------------------------------
Custodian fees 124,206
-----------------------------------------------------------------------------
Distribution services fees 8,651,266
-----------------------------------------------------------------------------
Administrative services fees 8,706,110
-----------------------------------------------------------------------------
Auditing 53,082
-----------------------------------------------------------------------------
Legal 589,298
-----------------------------------------------------------------------------
Trustees' fees and expenses 189,537
-----------------------------------------------------------------------------
Reports to shareholders 690,697
-----------------------------------------------------------------------------
Registration fees 53,884
-----------------------------------------------------------------------------
Other 179,473
-----------------------------------------------------------------------------
Total expenses, before expense reductions 46,111,788
-----------------------------------------------------------------------------
Expense reductions (324,601)
-----------------------------------------------------------------------------
Total expenses, after expense reductions 45,787,187
-----------------------------------------------------------------------------
NET INVESTMENT INCOME 423,729,274
-----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments (203,505,803)
-----------------------------------------------------------------------------
Futures 692,422
-----------------------------------------------------------------------------
(202,813,381)
-----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on investments (274,290,388)
-----------------------------------------------------------------------------
Net gain (loss) on investment transactions (477,103,769)
-----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ (53,374,495)
-----------------------------------------------------------------------------
</TABLE>
22 The accompanying notes are an integral part of the financial statements.
<PAGE> 23
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 423,729,274 488,708,705
----------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (202,813,381) (137,965,895)
----------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions during the period (274,290,388) (123,741,501)
----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (53,374,495) 227,001,309
----------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income
Class A (306,495,286) (341,058,994)
----------------------------------------------------------------------------------------------
Class B (102,175,078) (122,442,895)
----------------------------------------------------------------------------------------------
Class C (16,302,384) (18,351,826)
----------------------------------------------------------------------------------------------
Class I (1,748,480) (2,107,052)
----------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 1,658,624,078 2,668,257,234
----------------------------------------------------------------------------------------------
Reinvestment of distributions 237,396,152 283,361,413
----------------------------------------------------------------------------------------------
Cost of shares redeemed (2,491,922,516) (3,197,526,043)
----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions (595,902,286) (245,907,396)
----------------------------------------------------------------------------------------------
Increase (decrease) in net assets (1,075,998,009) (502,866,854)
----------------------------------------------------------------------------------------------
Net assets at beginning of period 4,281,395,146 4,784,262,000
----------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $4,395,050 and $7,390,468,
respectively) $ 3,205,397,137 4,281,395,146
----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 23
<PAGE> 24
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLES INCLUDE SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $7.23 7.68 8.50 8.23 8.01
------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .77(a) .78(a) .76(a) .76 .76
------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.89) (.46) (.81) .31 .23
------------------------------------------------------------------------------------------------
Total from investment operations (.12) .32 (.05) 1.07 .99
------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.77) (.77) (.77) (.80) (.77)
------------------------------------------------------------------------------------------------
Total distributions (.77) (.77) (.77) (.80) (.77)
------------------------------------------------------------------------------------------------
Net asset value, end of period $6.34 7.23 7.68 8.50 8.23
------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (B) (1.88) 4.11 (.95) 13.69 13.00
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) 2,277 2,945 3,304 3,463 2,909
------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .93 .96 .89 .88 .88
------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .92 .96 .89 .88 .88
------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 11.10 10.15 9.09 9.18 9.45
------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 52 67 92 91 102
------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $7.22 7.67 8.49 8.22 8.00
------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .71(a) .71(a) .68(a) .69 .69
------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.88) (.45) (.80) .31 .23
------------------------------------------------------------------------------------------------
Total from investment operations (.17) .26 (.12) 1.00 .92
------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.72) (.71) (.70) (.73) (.70)
------------------------------------------------------------------------------------------------
Total distributions (.72) (.71) (.70) (.73) (.70)
------------------------------------------------------------------------------------------------
Net asset value, end of period $6.33 7.22 7.67 8.49 8.22
------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (B) (2.68) 3.26 (1.82) 12.72 12.02
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) 792 1,145 1,292 1,317 1,099
------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.78 1.78 1.76 1.76 1.77
------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.77 1.78 1.76 1.76 1.77
------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 10.24 9.33 8.22 8.30 8.56
------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 52 67 92 91 102
------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $7.24 7.69 8.52 8.24 8.02
----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .72(a) .72(a) .69(a) .70 .69
----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.89) (.46) (.82) .31 .23
----------------------------------------------------------------------------------------------------------------------
Total from investment operations (.17) .26 (.13) 1.01 .92
----------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.72) (.71) (.70) (.73) (.70)
----------------------------------------------------------------------------------------------------------------------
Total distributions (.72) (.71) (.70) (.73) (.70)
----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.35 7.24 7.69 8.52 8.24
----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (B) (2.66) 3.30 (1.89) 12.88 12.06
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) 124 176 171 125 58
----------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.77 1.73 1.71 1.71 1.71
----------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.76 1.73 1.71 1.71 1.71
----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 10.25 9.38 8.27 8.35 8.62
----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 52 67 92 91 102
----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS I
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $7.22 7.68 8.50 8.23 8.01
---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .80(a) .82(a) .76(a) .78 .78
---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions (.90) (.48) (.78) .31 .23
---------------------------------------------------------------------------------------------------------------------
Total from investment operations (.10) .34 (.02) 1.09 1.01
---------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.79) (.80) (.80) (.82) (.79)
---------------------------------------------------------------------------------------------------------------------
Total distributions (.79) (.80) (.80) (.82) (.79)
---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.33 7.22 7.68 8.50 8.23
---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (B) (1.60) 4.36 (.66) 13.96 13.32
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) 12 15 17 35 31
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .64 .62 .60 .62 .61
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .63 .62 .60 .62 .61
---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 11.40 10.49 9.38 9.44 9.72
---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 52 67 92 91 102
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of sales charges.
25
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES Kemper High Yield Fund (the "Fund") is diversified
series of Kemper High Yield Series (the "Trust"),
which is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an
open-end, management investment company organized
as a Massachusetts business trust.
The Fund offers multiple classes of shares. Class A
shares are offered to investors subject to an
initial sales charge. Class B shares are offered
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are offered without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares are offered to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of the Fund have
equal rights with respect to voting subject to
class specific arrangements.
The Fund's financial statements are prepared in
accordance with accounting principles generally
accepted in the United States 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. Securities which are
traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on
the exchange on which the security is traded most
extensively. If no sale occurred, the security is
then valued at the calculated mean between the most
recent bid and asked quotations. If there are no
such bid and asked quotations, the most recent bid
quotation is used. Securities quoted on the Nasdaq
Stock Market ("Nasdaq"), for which there have been
sales, are valued at the most recent sale price
reported. If there are no such sales, the value is
the most recent bid quotation. Securities which are
not quoted on Nasdaq but are traded in another
over-the-counter market are valued at the most
recent sale price, or if no sale occurred, at the
calculated mean between the most recent bid and
asked quotations on such markets. If there are no
such bid and asked quotations, the most recent bid
quotation shall be asked.
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.
26
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
Money market instruments purchased with an original
maturity of sixty days or less are valued at
amortized cost.
All other securities are valued at their fair value
as determined in good faith by the Valuation
Committee of the Board of Trustees.
REPURCHASE AGREEMENTS. The Fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
FUTURES CONTRACTS. A futures contract is an
agreement between a buyer or seller and an
established futures exchange or its clearinghouse
in which the buyer or seller agrees to take or make
a delivery of a specific amount of a financial
instrument at a specified price on a specific date
(settlement date). During the period, the Fund 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. The Fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies and to distribute
all of its taxable income to its shareholders.
Accordingly, the Fund paid no federal income taxes
and no federal income tax provision was required.
At September 30, 2000, the Fund had a net tax basis
capital loss carryforward of approximately
$211,125,000 which may be applied against any
realized net taxable capital gains of each
succeeding year until fully utilized or until
September 30, 2003 ($46,033,000) or September 30,
2004 ($6,237,000) or September 30, 2007
($37,749,000) or September 30, 2008 ($121,106,000),
the respective expiration dates. In addition, from
November 1, 1999 through September 30, 2000 the
Fund incurred approximately $173,642,000 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, 2001.
27
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made monthly.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the Fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital
accounts without impacting the net asset value of
the Fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual 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.
--------------------------------------------------------------------------------
2 PURCHASES AND SALES
OF SECURITIES For the year ended September 30, 2000, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $1,952,490,390
Proceeds from sales 2,608,059,093
--------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper). The Fund pays a monthly
investment management fee of 1/12 of the annual
rate of .58% of the first $250 million of average
daily net assets declining to .42% of average daily
net assets in excess of $12.5 billion. The Fund
incurred a management fee of $20,715,587 for the
year ended September 30, 2000, which was equivalent
to an annualized effective rate of .53%.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The 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 year ended September 30,
2000 are $413,070.
For services under the distribution services
agreement, the 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 Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the year ended September 30, 2000 are
$12,039,762, of which $595,099 is unpaid at
September 30, 2000.
ADMINISTRATIVE SERVICES AGREEMENT. The Trust has an
administrative services agreement with Kemper
Distributors, Inc. (KDI). For providing information
and administrative services to shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets. KDI in turn has
various
28
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
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 paid by the Fund to
KDI for the year ended September 30, 2000 are
$8,706,110, of which $651,540 is unpaid at
September 30, 2000.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of
$5,450,505 for the year ended September 30, 2000 of
which $350,986 is unpaid at September 30, 2000.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the year ended September 30,
2000, the Fund made no payments to its officers and
incurred trustees' fees of $189,537 to independent
trustees.
--------------------------------------------------------------------------------
4 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 163,593,331 $ 1,129,906,529 220,715,377 $ 1,686,405,480
-----------------------------------------------------------------------------------------
Class B 47,696,031 328,388,625 79,949,454 609,882,550
-----------------------------------------------------------------------------------------
Class C 15,442,641 106,807,169 24,394,873 187,139,209
-----------------------------------------------------------------------------------------
Class I 2,098,090 14,713,880 4,010,745 30,630,024
-----------------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 25,289,367 173,334,908 26,426,040 201,825,296
-----------------------------------------------------------------------------------------
Class B 7,731,653 53,031,831 8,975,843 68,240,173
-----------------------------------------------------------------------------------------
Class C 1,351,062 9,287,824 1,462,149 11,187,155
-----------------------------------------------------------------------------------------
Class I 253,791 1,741,589 276,170 2,108,789
-----------------------------------------------------------------------------------------
SHARES REDEEMED
Class A (248,955,466) (1,712,408,411) (289,812,007) (2,223,309,916)
-----------------------------------------------------------------------------------------
Class B (77,589,585) (534,169,265) (78,710,000) (603,232,381)
-----------------------------------------------------------------------------------------
Class C (21,574,940) (149,076,967) (23,782,312) (182,865,557)
-----------------------------------------------------------------------------------------
Class I (2,500,242) (17,459,998) (4,409,042) (33,918,218)
-----------------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 11,362,516 78,807,875 20,032,269 154,199,971
-----------------------------------------------------------------------------------------
Class B (11,292,805) (78,807,875) (20,048,704) (154,199,971)
-----------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
FROM CAPITAL SHARE
TRANSACTIONS $ (595,902,286) $ (245,907,396)
-----------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
5 EXPENSE OFF-SET
ARRANGEMENTS The 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 year ended September 30, 2000,
the Fund's custodian and transfer agent fees were
reduced by $62,086 and $262,515, respectively under
these arrangements.
29
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6 LINE OF CREDIT The Fund and several Kemper Funds (the
"Participants") share in a $750 million revolving
credit facility with Chase Manhattan Bank 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 based on net assets,
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.
30
<PAGE> 31
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER HIGH YIELD FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper High Yield Fund, as of
September 30, 2000, the related statements of operations and changes in net
assets, and the financial highlights for each of the fiscal periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of September 30, 2000, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
High Yield Fund at September 30, 2000, the results of its operations, the
changes in its net assets and the financial highlights for each of the fiscal
periods indicated therein, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
Chicago, Illinois
November 15, 2000
31
<PAGE> 32
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
Chairman, Trustee and LINDA J. WONDRACK
Vice President Vice President
SHIRLEY D. PETERSON MAUREEN E. KANE
Trustee Assistant Secretary
WILLIAM P. SOMMERS
Trustee
</TABLE>
<TABLE>
<S> <C>
.............................................................................................
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
.............................................................................................
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 219557
Kansas City, MO 64121
.............................................................................................
CUSTODIAN & STATE STREET BANK AND TRUST COMPANY
TRANSFER AGENT 225 Franklin Street
Boston, MA 02109
.............................................................................................
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
.............................................................................................
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
</TABLE>
[KEMPER FUNDS LOGO] Long-term investing in a short-term world(SM)
Printed in the U.S.A. on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Fixed Income Fund prospectus.
KHYF - 2 (11/25/00) 1124130
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
